One of the more significant reforms in India is Goods and Services Tax (GST). What’s noteworthy is that it removed the cascading effects of the tax-on-tax system, which had plagued the indirect tax structure of India before GST.
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An essential component of this new tax structure is the input tax credit under GST. But many taxpayers struggle to understand how it works. In this article, we will help you obtain a fundamental understanding of input tax credit under GST.
Right from what it is to how to calculate input tax credit, the right time to claim it, and more, we will discuss everything you need to know about input credit.
What is Input Tax Credit Under GST?
Input tax credit under GST, or GST credit, means you can deduct the amount already paid on inputs from the amount payable on output. When a registered person pays tax on any supply of services or goods or both, then the GST charges are known as Input Tax.
The concept of the input tax credit is not entirely new. It also existed under the pre-GST indirect tax regime, but its scope has increased now.
Earlier, when making any interstate sales, the seller could not obtain credit on the central sales tax. Thus, the seller would incorporate it in the cost, which resulted in higher prices. Whereas, with GST, a seller can claim the credit on input tax.
For example, you are a manufacturer, and you paid a tax of INR 500 on the purchase of raw materials, and the tax payable on the final product is INR 600. You can claim input credit to the extent of INR 500, and you will only need to deposit the differential amount of INR 100 as tax.
How to Claim GST Credit?
You must fulfill certain conditions to claim the input credit under GST.
- You must be registered under GST
- All your suppliers need to be GST compliant too
- You can claim GST credit only if the goods or services are used for business purposes
- You must have a supporting document, such as a tax invoice of purchase, a debit note, or a supplementary invoice issued by a registered dealer to claim the input credit
- You can request the GST credit, only when you have already received the goods and services, or both
- The government will match and validate every input credit claim. You can claim input credit only if the tax charged on your purchase has been deposited or paid to the government by the supplier.
- The supplier must also have filed the return from his/her end to enable to you make the claim
- You can claim GST credit on exports and zero-rated taxable supplies
- The tax must be paid through cash ledger or electronic credit
There is a possibility that you might have unclaimed input credit. When your input tax is higher than the tax on the sale, you are allowed to carry it forward or claim a refund in such cases. In simple terms, there are two scenarios:
- Tax on output > tax on inputs
In such a case, you pay only the difference while filing the return.
- Tax on inputs > tax on output
In such a case, you can either claim a refund or carry it forward.
Documents Required to Claim Input Credit
Each applicant must possess the following documents to claim their input tax credit:
- A GST-compliant invoice from the supplier for the supply of the goods and services
- A supplier-issued debit note if the taxable amount or the amount of tax payable as shown on the bill is less than the actual amount owed on such supplies
- A bill of entry for imported goods
- A bill of supply from the supplier for exempted goods and services or for paying GST under the composition scheme. It is not required if the value of goods and services is less than INR 200.
- The document issued by the Input Service Distributor (ISD) for the distribution of credit as per the GST invoice rules
All the above documents must meet the GST invoice rules. You must furnish the documents while filing the GSTR-2 form. Failing to do so will lead to the rejection of your claim, and you may have to resubmit the request.
You cannot claim GST credit on fraudulent cases involving any misstatements or willful suppression of facts that have led to short-payment or non-payment of tax, an excessive refund, or reclaiming GST credit that has already been utilized.
How to Utilize GST Credit?
To understand how you can use GST credit, you must acquaint yourself with the different types of taxes under GST.
There are three such types:
- IGST – Integrated GST
- SGST – State GST
- CGST – Centre GST
IGST is charged for the inter-state supply of goods or services. CGST and SGST apply to intra-state supplies. Now let’s understand how you can avail the GST credit.
Mr. X is a seller, and Mr. Y is a buyer. Therefore, Mr. Y is eligible to claim the credit on the purchase. The following is the process:
Firstly, Mr. X uploads all the details of the tax invoices he has issued while filing his GSTR-1 return. The relevant information relating to Mr. Y gets auto-updated in Mr. Y’s GSTR-2A.
When Mr. Y files his GSTR-2 return, the data from his GSTR-2A will be available there. Mr. Y will then accept that the details of the purchase and the report made by the seller are correct. After that, the tax on all purchases will reflect in the ‘Electronic Credit Ledger’ of Mr. Y. He can then either choose to get a refund or adjust it against future output tax liability.
However, while making tax payments, the tax input credit can be utilized in the following manner:
- When input credit is received from CGST, you can use the amount when you pay IGST but not SGST.
- When input credit is received from SGST, you can use the amount to pay for IGST but not CGST.
- When input credit is received from IGST, you can first use the amount to pay for CGST. If you still have any GST credit left, you can then use it to pay for SGST.
What is the Time Limit to Use GST Credit?
Taxpayers must use the GST credit within a specified period. There are three possible situations wherein you can claim input credit for semi-finished goods or stock or finished goods (held on the immediately preceding day).
- When a person registers voluntarily, he or she can claim input credit on the registration day itself.
- When a registered taxpayer stops paying taxes under the composition levy scheme, he or she can claim the credit from the day when he is liable to pay tax normally u/s 7.
- If a person has applied for registration or is granted registration or is liable to register, he or she can claim it from the day when he or she is liable to pay taxes.
Please note that you only claim input credit in all the above situations within one year from when the tax invoice was issued. In other cases, as per Sec 16 of the CGST Act, 2017, input credit must be claimed within the following timeframes:
- For any invoice or debit note for a financial year, the due date to claim input tax credit is the due date for filing the return under Section 39 for September following the end of the fiscal year. The due date for filing the September return is October 20 of the following month; or
- You can claim the input tax credit while furnishing the annual return, whichever is earlier.
To make it simple, let’s look at an example:
Let’s say; you have an invoice dated 5/11/2019. Suppose that you file your annual return on November 10, 2020. The due date for filing the September 2020 return under Section 39 will be October 20, 2020. In this case, you must avail of the input tax credit by October 20, 2020.
Also, please note that if you file the annual return before the due date of the return for September, no modifications are possible after submitting the annual return.
When you claim input credit, the bottom line is that it brings down the overall tax payable on the product. Therefore, if you make it a point to claim input credit in a timely and efficient manner, the amount you save on tax payments can lower your product or service price, which may eventually help you gain more customers.
We hope this guide will be helpful in simplifying the complications of GST credit.
Editor’s note: This article was originally published in July 2019 and has been updated for comprehensiveness.