Guide On Input Tax Credit : Conditions, Limitations and Job-Work

Input Tax  Credit comes into picture when GST is charged on the supply of services or goods when it is supplied to a taxable person. Here, ‘input’ refers to any goods other than capital goods either used or going to be used by an individual during the course of their business. Taxes paid on such an inward supply of both capital and services inputs are called input taxes. Examples of input taxes can include Central GST, Integrated GST, State GST or Union GST. Although the concept of Input Tax Credit existed under the pre-GST category earlier in the form of service tax, excise duty, and VAT, its range has now been expanded under GST. For an individual to avoid the consequence of paying tax on tax, ITC was inculcated into the GST system.

For every kind of business and registered individuals, the conditions to claim Input Tax Credit under GST has become quite critical to settle the tax liability. However, Tax Credit is the spine of GST and a paramount matter of concern. The rules on Input Tax Credit are quite rigid and its approach is specific.
Input Tax Credit can vary based on each state or country as per their rules and laws. Thus, making it non-applicable to all types of inputs.

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What qualifies you to obtain Input Tax Credit?

As a supplier of goods or services:

a.  you should have filed the return u/s 39

b. you must ensure to have all your taxes paid in cash or through the utilization of ITC

c.  you should ensure the receipt of all your supply

d.  you should have invoice or debit note

Also, if you have failed to pay the consideration and tax (other than reverse charge tax), ITC is taken and interest will be added to your output tax liability. This becomes applicable if you have not paid it within 180 days from the date of issue of an invoice. On payment, you are eligible for the ITC again. Post the due date of filing return u/s 39, ITC cannot be taken for the month of September following the end of the FY.

As per the tax component of the cost of capital goods and plant & machinery, ITC will not be allowed. And if the depreciation is claimed on the tax component under the IT Act, then surely ITC will be restricted.
With respect to the Central tax, State tax or Union territory tax, ITC will be applied only after it is made available on the basis of complete utilization of integrated tax.

Limitations on ITC

ITC is curtailed for:

  • certain purposes of business wherein the supply is partly used for business and the rest for something else.
  • banking/financial institution when they will an option to avail 50% of ITC every month and the remaining goes on lapse.
  • businesses where supply is used for effecting partly exempt supplies and partly taxable supplies (inclusive of zero-rated supplies)
  • services of servicing, repair and maintenance of vehicles, general insurance, and vessels or aircraft except when they are used for transportation of goods or making a taxable supply of transportation of passengers or for training purposes such as flying aircraft or navigating such vessels.
  • works contract services or supplies for the construction of an immovable property (other than plant and machinery) except where input service is used for output supply of works contract service.
  • goods stolen, written off, lost, destroyed or disposed of by way of gift or free samples
  • any tax paid u/s 74, 129 and 130
  • supply used for personal consumption
  • travel benefits provided to employees on vacation if the employer is not obligated to provide the same under any law
  • supply received by a non-resident taxable person except on goods imported by him
  • health services, plastic surgery, and beauty treatment
  • supply of outdoor catering services, food, and beverages
  • the renting or hiring or leasing of motor vehicles, vessels, and aircraft (except when used for the purposes specified above, life insurance and health insurance)
  • motor vehicles with 13 persons (including driver) capacity, except when they are used for making a taxable supply of transportation of passengers or for training on driving such vehicles

ITC on Job Work

Here, the chief manufacturer may send goods for further working to their associated job worker. This will be applied when goods are sent to the job worker in case of a. from the chief manufacturer’s workplace and b. directly from the place of supply of the supplier of such goods.
For instance, a cycle manufacturing firm sends partly assembled cycle to job workers and have them fit a part or remaining part of the cycle. In this case, the chief manufacturer will be allowed to take credit of tax paid on the purchase of such goods sent on job work.


Input Tax Credit on Stock

A person or business can avail ITC –

  1.  inputs held in stock and in finished/semi-finished goods held in stock.
  2. on sale, amalgamation, merger, demerger, lease or transfer of the business with specific provisions for transfer of liabilities, ITC which is not taken advantage of, can transfer to the successor.
  3. supply of capital goods or plant and machinery, on which ITC has been taken, an amount equal to the ITC taken on such capital goods or plant and machinery deducted by the tax on the transaction value or dictated percentage points, whichever is higher, will be paid.

ITC on Distributors

An input service distributor (ISD) can be the head of the office or registered office or branch office of the registered person under GST. Under CGST, SGST, UTGST, IGST or cess, the ISD can collect the ITC on all purchases made and distribute it to all the recipients (respective branches).

In winding up, as input credit will be available to the seller at every stage, the ITC expects to reduce the overall taxes charged on the services/products. Also, if the input credit system works adequately, there may be a reduction in cost for the final consumers.

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