Input tax credit or ITC is a mechanism to avoid cascading of taxes or “tax on tax”. The credit of tax paid at every stage is available as set-off for payment of tax at every subsequent stage. For example, manufacturer requires raw materials or inputs for manufacturing the good. The price of these “inputs” would include the tax paid. While paying the tax on the final product, the manufacturer will reduce the tax amount on his sale by the tax paid on purchase of inputs. He, therefore, actually pays tax on the “value added” over and above the cost of the inputs.
ITC can be claimed by a registered person only if all the conditions are fulfilled. A person without GST registration can neither collect GST from his customers nor can claim any input tax credit of GST paid by him.
Therefore, if the tax payable on a manufactured product is < 500 and the tax paid on the inputs (raw materials, etc.) is < 200, the manufacturer can claim input credit of 200 and only needs to deposit < 300 in taxes. The government gets the correct tax amount of $ 500 (200 paid on inputs plus < 300 paid by the manufacturer) and there is no cascading of taxes. Putting it simply, the tax liability is tax on sales minus tax on purchase. A person opting for the composition scheme cannot claim ITC. Casual taxable person can claim ITC of all inward supplies.
Non-resident taxable person can get ITC only in respect of import of goods and/or services.
Let us consider a manufacturer of utensils:
Input – Raw steel worth $ 1000, GST at 18 per cent = 180, other raw materials < 100, GST at 28 per cent = < 28.
Total input tax paid = 180 + 28 = $ 208. After cost and profit the utensil is sold for $ 2000 plus GST at 18 per cent = < 360. Since input tax of < 208 has already been paid by the manufacturer at the time of purchasing the raw materials. So, he can claim credit of < 118 that he has already paid for inputs. And deposit the difference (output tax less input tax), i.e., < 152 with the government. This credit of tax is available at all subsequent stages.
Distributors and retailers can claim the input tax credit. This will help in bringing down the price of goods or services.
ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT [S. 16(1), (2)]
- Every registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him. The supply should be used/intended to be used in the course or furtherance of his business. This entitlement is subject to prescribed conditions and restrictions and the amount is credited to the electronic credit ledger of such person. ITC can be claimed only when purchases are for business purposes and is not available for goods or services used for personal use, exempt supplies and supplies for which ITC is specifically not available. Therefore, if a retailer purchases a refrigerator to store ice cream, he can claim credit for tax paid on buying the refrigerator. However, if he has purchased the refrigerator for personal use, then he cannot claim credit. Input tax credit is available on all the purchases of office stationery, furniture and AC purchased for office purpose. Tax paid on transportation services can be availed for input tax credit. Credit can be claimed by registered persons for tax paid on airfare for business purposes or on bank charges or on goods or services used for corporate social responsibility or for laptops and mobiles given to employees for use in the course or furtherance of business. Reimbursement of staff expenses is an expense in the course of furtherance of a business. This will bring down the incidence of taxation on businesses which can be passed on to the consumers through lower taxes. (2) ITC cannot be claimed unless the registered person:
(a) is in possession of a tax invoice or debit note issued by a registered supplier;
(b) he has received the goods or services or both;
(c) the tax charged in respect of such supply has been actually paid to the Government; and
(d) he has furnished the prescribed return [GSTR-3].
It is necessary that all the four conditions are satisfied, otherwise ITC cannot be claimed.