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Understanding Input Tax Credit (ITC)

From 1 July, GST would be charged on almost all the goods and services that we consume. There are five different GST rates—0%, 5%, 12%, 18% and 28%—which are prescribed for various goods and services. In the present regime, different taxes are charged at different stages of manufacture and trade of the goods and services. Going forward, almost all these indirect taxes will get subsumed under GST. Further, because of the input tax credit provision, only value additions at various stages will be taxed. Let’s read more about what is input tax credit and how it works.

When you buy a product/service from a registered dealer you pay taxes on purchase, while making sales, tax is collected and periodically the same is adjusted with the tax you already paid at time of purchase and balance liability of tax (tax on sales (minus) tax on purchase) is to be paid to the government. This mechanism is called utilization of input tax credit (tax on purchase adjustment against tax liability on output i.e. sales).

The law has laid down conditions to avail GST input tax credit on supply of goods or services. All of the following conditions need to be satisfied to avail GST Input credit:

  • The dealer should be in possession of Tax Invoice / Debit or Credit Note / Supplementary Invoice issued by a supplier registered under GST Act.
  • The said goods/services have been received.
  • Returns (GSTR-3) have been filed.
  • The tax charged has been paid to the government by the supplier.

“Any registered person can avail credit of tax paid on the inward supply of goods or services or both which is used or intended to be used in the course or furtherance of business,” the provision reads. 

Under the current tax regime, if a retailer purchases a refrigerator to store perishable goods, he is not able to claim credit for tax paid on it. But under GST, he will be able to claim credit for tax paid on new refrigerator when he files his own taxes. 

Similarly, credit could be claimed on tax paid on taking business associates out for lunch, or on goods or service used for corporate social responsibility. There are some exceptions, such as contribution towards employee provident fund and car lease, which are not covered under input tax credit. 

As per Section 16 (15) of the MGL, ITC cannot be taken beyond the month of September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier.

The underlying reasoning for this restriction is that no change in return is permitted after September of next FY. If annual return is filed before the month of September then no change can be made after filing of annual return.

Negative List for ITC

Section 16 (9) of the MGL provides for the negative list 100 with respect to the admissibility of ITC. It has been provided that the ITC on following items cannot be availed:

(a) Motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services—

(i) Transportation of passengers, or

(ii) Transportation of goods, or

(iii) Imparting training on motor driving skills;

(b) goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness center, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/ or services are used primarily for personal use or consumption of any employee;

(c) Goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;

(d) Goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;

(e) Goods and/or services on which tax has been paid under section 8; and

(f) Goods and/or services used for private or personal consumption, to the extent they are so consumed.

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