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Input Tax Credit Simplified

The one thing that the current GST regime is going to change is the way we file and receive input tax credit. No matter whether you are a beginner or a running business, in this blog we will explain all questions related to input tax credit.

What is Input Tax Credit

Let’s say I owe my landlord ₹1000, and I had given my friend Ram ₹700 as a loan. Ram has paid the sum of ₹700 that he owed me, to the landlord on my behalf. Now, do I have to pay the landlord entire ₹1000 or the remainder amount of ₹300? No points for guessing, that I will be paying the remainder amount of ₹300 only.

Now, let’s replace me with a buyer, my friend Ram with a supplier and the landlord with the Government. Since, the supplier has paid a sum of ₹700 to the government already the buyer has to pay only the differential amount to the government as his tax liability. This input of ₹700 already paid by the supplier to the government on my behalf is the Input Tax credit (ITC).  Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs.

what is input tax credit

Now, that we have understood what is Input Tax credit (ITC), let’s move forward to understand how to claim it under GST.

Claiming Input Tax Credit under new GST regime

The following conditions are mandatory for claiming ITC:

  1. Buyer must have a tax invoice/ debit note/ credit note issued by a GST registered supplier.
  2. Buyer has received the goods/ services.
  3. Both buyer and supplier must have reconciled their books and filed GSTR-3
  4. The tax charged on the buyer’s purchases has been paid by the supplier to the government in form of cash or adjustment of his input credit. This clause is also referred to as Sequential liability clause i.e. a buyer can get his input credit only when his supplier has paid it.

Important things to remember

  1. Government will not pay any interest on balance of input credit balance to a tax payer.
  2. Whenever, ITC> Output tax a tax payer can carry it forward or claim refund from government
  3. Like current VAT regime, under GST regime ITC is not applicable in B2C scenario where buyer is buying goods for personal use.
  4. Validity of claiming ITC on an invoice is 1 year from date of invoice

Types of GST and claiming ITC

There are 4 types of taxes under GST, i.e.

  1. IGST: Integrated GST
  2. CGST: Central GST
  3. SGST: State GST
  4. UTGST: Union Territory

Now depending on type of the transaction, the type of GST is applied:

  1. Interstate Transaction: IGST
  2. Intrastate Transaction: CGST + SGST

SGST and UTGST are replaceable depending upon whether the billing is happening within a state or within a Union territory.

To avail ITC, a type of GST can be set off with one a typical type of GST. Please refer to the illustration below to see which Output tax credit can be set off with which available Input tax credit.

set off output tax credit with ITC

For example, if Super Industries has ₹50,000 available as Input of CGST, but it has to pay a balance of ₹20,000 as it outward SGST. In this scenario, Super Industries will not be able to set off the available ₹50,000 as SGST. It will have to deposit fresh ₹20,000 to take care of its tax liabilities.

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