GST INPUT TAX CREDIT RECONCILIATION

What is input tax credit?

The input tax credit is the central tax (CGST), state tax (SGST), integrated tax (IGST), or cess that is paid by a person and has a GST registration on the supply of goods or services. GST input tax includes the tax that is paid on a reverse charge basis and the IGST charged on the import of goods. But, input tax does not include the tax paid on the composite taxation scheme.

The input tax credit is the tax paid by a business on the purchase and this tax is used to reduce the tax liability when a sale is made. The taxation levy is based on the value that is added at each stage of the supply chain until it reaches the consumer.

The Goods and the Service Tax Act is levied on the goods and the services based on the principle of value addition. To negate the cascading effect of the tax liability that is paid on the procurement of the raw materials, consumables, plants, and machinery, etc. This element of offsetting the tax liability is called the input tax credit.

Every person with a GST registration in the supply chain takes part in control, collects the GST tax, and remitting the amount that is collected. To avoid double taxation and the cascading effect of the tax input credit is provided to set off tax paid on the procurement of the raw materials, consumables, goods, or services that are used in the manufacturing, supply, and sale of goods or services.

The business can achieve neutrality using the input tax credit mechanism in the incidence of tax and ensure that the input tax element is not entering into the cost of production or the cost of supply of goods and services.

Eligibility criteria for Input tax credit

Who can claim input tax credit?

The input tax credit can be claimed by a person who is registered under GST only if he is meeting the conditions that are mentioned below:

Documents required for claiming GST Input tax credit

What documents are required for claiming the GST input tax credit?

As a registered taxable person the input tax credit can be claimed on basis of the following documents:

  1. An invoice that is issued by the supplier of goods or services.
  2. An invoice that is issued by the recipient of the goods and services supplied by an unregistered dealer. Such supply comes under the reverse charge mechanism. This mechanism involves the supplies made by an unregistered person to a registered person.
  3. A debit note that is issued by the supplier of the tax charged is less than the tax payable concerning such supply.
  4. A bill of entry or similar documents is also required to document an integrated tax on imports.
  5. An invoice or the credit note that is issued by an input service distributor as per the rules under GST.
  6. A supply bill by a dealer that is opting for a composition scheme or an exporter or a supplier of the exempted goods.

Basic requisites for claiming the input tax credit

What are the conditions under which Input tax credit can be claimed?

The following requisites are mandatory for claiming the input tax credit under the GST:

Claiming the Input tax credit

How to claim the Input tax credit?

All the regular taxpayers have to report the amount of the in the GSTR 3B.

A taxpayer can claim the input tax credit on the provisional basis in the GSTR 3B up to 20% of the eligible ITC that is reported by the supplier in the auto-generated GSTR 2A return. The taxpayer must cross-check the GSTR 2A figures before proceeding with the GSTR 3B.

Before the 9th of October 2019, a taxpayer was able to claim any amount of the provisional input tax credit. But CBIC has notified that from October 9, 2019, a taxpayer can claim only 20% of the eligible ITC available in the GSTR 2A as the provisional input tax credit.

This means that the amount of input tax credit that is reported in the GSTR 3B will be the total of the actual ITC in the GSTR 2A and the provisional ITC which is 20% of the actual eligible ITC in the GSTR 2A. It is important to match the purchase register with the GSTR 2A becomes very important.

Reversal of Input Tax Credit

The input tax credit can be reversed certain circumstances which are mentioned below:

Availing credit under Reverse Charge Mechanism

How to avail of the credit when the tax has been paid under the Reverse Charge Mechanism?

When the tax has been paid under the Reverse Charge Mechanism the input tax credit may be availed in the same month in which the payment is made provided the following conditions are satisfied.

Reconciliation of Input tax credit

Input tax credit claimed by the person has to match the details that are specified by the supplier in the GST return. In case there is a mismatch the supplier and the recipient will be informed about the discrepancies once the GSTR 3B is filed.

Special cases of Input tax credit

Input tax credit for Capital goods

ITC is not available for capital goods that are used exclusively for making exempted goods and exclusively for personal purposes.

Here, ITC will be allowed only if depreciation has been claimed on the tax component of the capital goods.

Input tax credit on the Job work

A principal manufacturer may send goods for further processing to a job worker. In such cases ITC will be allowed on the goods that are sent to the job worker in these cases:

  • From a principal place of business
  • Directly from the place of supply of the supplier of such goods.

To enjoy the input tax credit the goods must be received back by the principal within 1 year.

The input tax credit that is provided by the Input Service Distributor

An input service distributor can be the head office or a branch office or the registered office of the person who is registered under GST. The input tax credit is collected by the input service distributor on all the purchases that are made and distributed to all the recipients.

Input tax credit on the transfer of business

This is applicable in the case of amalgamations/ mergers and the transfer of business. The transferor will have the available input tax credit which will be passed to the transferee at the time of the transfer of business.

Goods and Services not eligible for Input Tax Credit

Under GST, the input tax credit is not available in respect of the following goods or services:

  1. Motor vehicles, except when they are supplied in the course of business or used for providing taxable services like:
    • Transportation of passengers
    • Transportation of goods
    • Providing training on driving, flying, navigating such vehicles
    • A further supply of such vehicles or conveyance
  2. Supply of goods and services concerning food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where a registered taxable person uses such inward supply of goods or services of a particular category for making an outward taxable supply of the same category of service
  3. Membership of a club, health, and fitness center
  4. Rent a cab, life insurance, health insurance, except where it is statutorily obligatory for an employer to provide such services
  5. Travel benefits extended to employees on vacation, such as leave or home travel concession.
  6. Goods and services received by the principal in the construction of immovable property, other than plant and machinery except where it is an input service for the supply of works contract service
  7. Goods and services received by a taxable person for constructing an immovable property on his account, other than plant and machinery, even when used in the furtherance of business.
  8. Goods and services on which tax has been paid under composition scheme
  9. Goods and services used for personal consumption
  10. Goods lost, stolen, written off, or disposed of by way of gift or free samples.
  11. Tax paid after detection of fraud, wilful misstatement, or suppression.
  12. Tax paid for the release of detained or seized goods.
  13. Tax paid for the release of confiscated goods.