GST Input Tax Credit Reconciliation

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About 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:

  • The input tax credit can be claimed only by a person that has a GST registration and has filed the GSTR 2 returns.
  • The dealer should possess the tax invoice or the debit note that is issued by the supplier of input or the input services.
  • The said goods or services or both should be received.
  • The supplier has made the GST payment that is charged to the government concerning such supply.
  • When the goods are received in installments the input tax credit can be claimed only when the last lot is received.
  • No Input tax credit is allowed if depreciation has been claimed on the tax component of a capital good.

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:

  • An invoice that is issued by the supplier of goods or services
  • 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.
  • A debit note that is issued by the supplier of the tax charged is less than the tax payable concerning such supply.
  • A bill of entry or similar documents is also required to document an integrated tax on imports.
  • An invoice or the credit note that is issued by an input service distributor as per the rules under GST.
  • 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:

  • The Individual must be registered under the GST law.
  • A tax invoice or the debit note that is issued by the registered supplier showing the tax amount.
  • The goods or the service should be received.
  • The supplier should file the returns and pay the tax there on to the government.
  • Where the goods are received in parts or installments, the input tax credit may be claimed on the receipt of the last lot or the installment.
  • Where the input tax credit is included in the cost of the capital goods and the depreciation on the tax is claimed, no input tax credit is allowed.
  • The input tax credit will not be allowed if the same is not been claimed within the prescribed time.

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:

  • Failure to pay the supplier within 180 days from the invoice date.
  • The goods and services whether inputs or capital goods are used for personal purposes.
  • Goods and services utilized for producing or supplying the exempted goods or services.
  • Sale of capital goods or plant and machinery on which the input tax credit was claimed.
  • The credit notes are issued by the input service distributor.
  • The supplies are ineligible under section 17(5) of the Act.
  • A change from the registered regular dealer to composite dealer, where the input tax credit is reversed.
  • The amount that is reversed may be added to the output tax liability in the month in which it is reversed,
  • Interest is to be paid from the date the credit is availed till the date when the amount is reversed and paid.
  • There is no time limit applicable for reclaiming the reversed credit.

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.

  • The liability has been discharged through cash.
  • The goods or services have been used for business purposes.
  • Self-invoicing is done on the purchases as no tax invoice can be issued by the unregistered supplier.

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:

  • 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
  • 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
  • Membership of a club, health, and fitness center
  • Rent a cab, life insurance, health insurance, except where it is statutorily obligatory for an employer to provide such services
  • Travel benefits extended to employees on vacation, such as leave or home travel concession.
  • 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
  • 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.
  • Goods and services on which tax has been paid under composition scheme
  • Goods and services used for personal consumption
  • Goods lost, stolen, written off, or disposed of by way of gift or free samples.
  • Tax paid after detection of fraud, wilful misstatement, or suppression.
  • Tax paid for the release of detained or seized goods.
  • Tax paid for the release of confiscated goods.

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Frequently asked questions

Can GST paid on reverse charge basis be considered as input tax?

Yes. The definition of input tax includes the tax payable under the reverse charge.

What are the condition for availing input tax credit?

Following four conditions are to be satisfied by the registered taxable person for obtaining ITC: is in possession of tax invoice or debit note or such other tax paying documents as may be prescribed; he has received the goods or services or both; the supplier has actually paid the tax charged in respect of the supply to the

  • The taxpayer is in possession of tax invoice or debit note or such other tax paying documents as may be prescribed.
  • The taxpyaer has received the goods or services or both.
  • The supplier has actually paid the tax charged in respect of the supply to the government.
  • The taxpayer has filed the GST return
Can a person take input tax credit without payment of invoice?

Yes, the recipient can take input tax credit. However, the taxpayer would be required to pay the consideration along with tax within 180 days from the date of issue of invoice. This condition is not applicable where tax is payable on reverse charge basis.

What is the time limit for availing GST input tax credit?

A registered person cannot take input tax credit in respect of any invoice or debit note for supply of goods or services after the due date for furnishing the GST annual return. If annual return is filed before the due date, then no change can be made after filing of GST annual return.

Can input tax credit be claimed on lost or damaged goods?

No, a person cannot take input tax credit with respect to goods lost, stolen, destroyed or written off. In addition, input tax credit with respect to goods given as gifts or free samples are also not allowed.

How to avail ITC on goods or services used partly for business?

The input tax credit of goods or services attributable only to the purpose of business can be taken by registered person. 

What happens in case of invoice mismatch during reconciliation?

In case of mismatch, the supplier and recipient would be updated about the mismatch. If the mismatch is not rectified, then the amount will be added to the output liability of recipient in the return for the month succeeding the month in which discrepancy is communicated.

Is input tax credit allowed only after matching?

No, input tax credit is allowed provisionally for two months. The supply details are matched by the system and discrepancies are communicated to concerned supplier and recipient. In case mismatch continues, the ITC taken would be reversed automatically.

Can provisional input tax credit be used for GST payment?

No, provisionally allowed input tax credit can be used only for the payment of self-assessed output tax in the return.

When ITC cannot be availed?

ITC cannot be availed in case of any contract services. The input tax credit cannot be availed on the immovable property except if the services are going to be used for further contract services.

When to avail input tax credit ?

ITC can be availed only to the extent that the purchases and the expenses are for consumption, use, or supply in commercial activities. To claim ITC the expenses or the purchases should be reasonable in quality, nature, cost.

Is it possible to refund the income tax credit?

As per section 54 (3) of the CGST Act,2017 a registered person can claim a refund of the unutilized input tax credit at the end of any credit. A tax period is a period for which the return is required to be furnished. Thus a taxpayer can claim a refund of the unutilized ITC on monthly basis.

How much ITC can be claimed?

A taxpayer can claim ITC to 20% of the eligible ITC that is reported by the supplier in the auto-generated GSTR 2A return.