The introduction of the Goods & Services Tax (GST) system in India has made taxes in the country simpler and better. Possibly its most essential feature is the Input tax Credit (ITC) mechanism that aids in preventing cascading taxes and ensures that businesses pay tax on the added value only. This article provides businesses with an understanding of Input Tax Credit accounting under GST.
Understanding ITC Input Tax Credit (ITC)
At its core, Input Tax credit is a benefit that businesses get which credits taxes paid on inputs (purchases) with taxes they collect on outputs (sales). This stops two-fold taxation – whereby the exact same money is taxed several times throughout the supply chain. In other words, it’s just like getting a refund of the taxes you spent on buying for your business.
This system prevents accumulating taxes at each step, making products cheaper and the tax process a lot more equitable.
Essential Conditions to Avail ITC
Businesses must meet various conditions to claim Input Tax Credit under GST:
1. Valid Documentation: The business has to present a valid tax Invoice, debit or credit note or supplementary invoice from the supplier.
2. Goods/Services Receipt: The goods or services for which ITC is claimed must have arrived.
3. Filed Returns: The business should have filed the required returns and especially GSTR-3.
4. Confirmation of Tax Payment: The supplier has to have paid out the proper tax to the government.
5. Matching Invoices: The business must have reconciled its purchase invoices with the supplier uploads.
These conditions make sure genuine ITC claims and prevent tax evasion. Businesses should keep accurate records and reconcile them often with their suppliers’ data on the GST portal.
When Can You Claim ITC?
Businesses may claim Input Tax Credit under different scenarios under the GST system:
1. Following GST Registration: In case a business registers for GST (within 30 days of becoming liable) it can claim ITC on inputs and stock from the morning before tax liability.
2. Voluntary Registration: ITC may be claimed on inputs and stock from the day before approval if there is voluntary GST registration.
3. From Composition to Regular Scheme: With a turnover over Rs. 50 Lakhs, a business can claim ITC on inputs, stock and capital items from the day before the switch.
4. Exempt to Taxable Items: Businesses can claim ITC on related inputs, stock, and exclusively used capital items if previously exempt items become taxable.
5. Business Changes: Unused ITC could be transferred to the new entity in mergers, acquisitions and sales.
6. Mixed Use: For services or products bought for personal use or business, ITC is deductible only on the business portion.
7. Supplies taxable & exempted : ITC is available on just the portion utilised for zero-rated and taxable supplies – not for exempt or reverse charge paid supplies.
These provisions enable businesses to adjust to changing conditions without losing legitimate tax credits.
Handling ITC Denials & Restrictions
In several instances, GST law limits or denies Input Tax Credit:
1. Late GST Registration: There is no ITC on pre-liability inputs following 30 days registration delay.
2. Time Limits: ITC has to be claimed within a year from the invoice date or by specific annual returns.
3. Delayed Payment: ITC is reversed in case payment isn’t made within three months.
4. Specific Items: No ITC on motor vehicles (except in some circumstances) club memberships, food along with beverages, outdoor catering etc.
GST Returns & ITC Reconciliation
Good ITC accounting is essential for GST returns:
1. GSTR-3B: Total ITC reported in monthly summary return.
2. GSTR-2B/2B: Auto-populated forms exhibiting ITC as per suppliers’ invoices.
3. GSTR-9: Annual return combining all liabilities and credits.
Business should reconcile ITC claims with GSTR 2A/2B data. Discrepancies must be resolved by contacting suppliers or making necessary corrections in the books.
ITC & Cash Flow Management
Input Tax Credit could impact a business cash flow in the following manner:
1. Reduced Tax Outflow: Offsetting output tax with ITC means businesses pay less tax out of pocket.
2. Working Capital Relief: Reduced tax payments translate into more money for daily operations.
3. Planning Purchases: In periods of high output tax, timing big purchases to accumulate ITC might help.
4. Excess ITC Management: If ITC consistently exceeds output tax, consider advancing B2C sales or even requesting refunds in case of exports.
Good ITC management could provide a considerable financial cushion particularly for high input cost businesses with high value addition.
Conclusion
Input Tax Credit Accounting under GST is a complicated process taking care of detail, appropriate documentation and understanding of GST provisions. From meeting the basic conditions to handling special cases such as capital goods, mixed-use scenarios or job work, businesses must be meticulous.
Appropriate ITC accounting helps in complying with GST laws and also offers financial advantages. By accurately capturing, reconciling and claiming input tax credits, businesses lower their tax outflows, improve cash flow and improve their fiscal status. Still, the ITC rules are complicated, the demand for frequent reconciliations and also the danger of rejections or reversals need businesses to remain informed and seek professional advice whenever needed.
FAQs
1. What is Input Tax Credit (ITC) under GST & how does it work?
Input Tax credit under GST enables companies to get Credit for GST paid on goods (inputs) versus GST imposed on sales (outputs). It prevents cascading taxes – in which the same money is taxed several times throughout the supply chain.
Here is the way it works:
– You pay GST to your supplier whenever you purchase services or goods for your business.
– You collect GST from customers if you sell your service or product.
– You can deduct the GST you paid on your inputs rather than paying the full GST collected by the government.
– You pay just the difference to the government.
2. What are conditions for claiming ITC under GST?
You may claim Input Tax Credit under GST in case you meet the following requirements :
a. Valid Documentation: You require a legitimate tax invoice, Debit Note, Credit Note or Supplementary Invoice of your supplier.
b. Goods / Services Receipt: You must have received the goods or services that you’re seeking ITC.
c. Filed Returns: You ought to have filed your GST returns – particularly GSTR 3B (a summary return of outward and inward supplies).
d. Confirmation of Tax Payment: Your supplier needs to have paid the tax to the government. You are able to not claim ITC when your supplier hasn’t paid taxes.
e. Matching Invoices: Your purchase invoice details have to match the details your supplier uploaded on the GST portal. Any discrepancies ought to be corrected.
f. Time Limits: You have to claim ITC within the earlier of:
– 1 year from the invoice date.
– Due date for filing September return of the next financial year.
– Date of filing of annual return.
g. Payment to Supplier: You ought to have paid out your supplier within 180 days from the invoice date. In case not, you must reverse the ITC claim and can reclaim it once payment is made.
3. How can I reconcile and also claim ITC for purchases made in various states under GST?
When you buy from various states it is interstate transactions which entice Integrated GST (IGST). This is how to reconcile and also claim ITC:
a. Understanding IGST: You pay IGST for interstate purchases rather than CGST + SGST. IGST may be utilised to offset IGST, SGST or CGST liabilities in that order.
b. Utilisation Order:
– offset IGST liability by using IGST credit first.
– Rest of IGST credit offsets SGST or CGST liabilities.
– In case you have SGST and CGST credits also, use just for respective liabilities.
c. Reconciliation :.
– Download GSTR-2A / 2B from the GST portal displaying ITC as per suppliers’ invoices.
– Match every interstate purchase with GSTR 2A or 2B – missing invoices? Contact the supplier and upload them.
– If there is difference between amounts then resolve with the supplier or even modify your claim.
d. State-wise Tracking:
Maintain state wise purchase registers to track and reconcile inter-state transactions.
e. E-way Bills:
For high value inter-state goods movements, electronic way bills are cross-verified with invoices.
4. What documents are needed to avail ITC under GST and how must they be maintained?
You need these documents to claim Input Tax Credit under GST:
a. Invoice for taxes: The most essential document from your supplier containing all GST details.
b. Debit Note or Credit Note: For value or tax adjustments.
c. Bill of Entry: For imported goods.
d. ISD Invoice: If you’re a part of an Input Service Distributor setup.
e. Self-Invoicing: In case of reverse charge or imports.
To maintain these documents:
– Digital Storage: Scan all documents and store in a structured digital format (supplier, month, type).
– Physical Filing: Keep originals chronological or even alphabetically ordered.
– Invoice Register: Keep a register of key details including invoice number, value, supplier GSTIN, date, GST quantity.
– GST Rates-wise: Group invoices by GST prices for reconciliation.
– Supplier history: Keep a list of all suppliers with GSTIN & compliance history.
– E-way Bills: Link them to respective invoices.
5. Could ITC be claimed on all business expenses or are there any restrictions or exceptions under GST?
No, you can’t get Input Tax Credit for all business expenses under GST. There are significant exceptions and restrictions like on motor vehicles, some memberships and services, etc.
