Input Tax Credit system under GST regime

Input Tax Credit system under GST

Input tax credit system under GST in layman terms means “the tax that one has paid on the input can be reduced from the tax one will pay on the output.”

What is input tax?

  • Input tax means the central tax (CGST), State tax (SGST), integrated tax (IGST) or Union territory tax (UTGST) charged on supply of goods or services or both made to a registered person. It also includes tax paid on reverse charge basis and integrated tax goods and services tax charged on import of goods. It does not include tax paid under composition levy.
Input Tax Credit system under GST regime

ITC is considered to be the cornerstone of GST. In the previous tax regime there was a non-availability of credit on various parts of supply chain, which led to cascading effect of tax and also increased the price of goods and services. This flaw has been removed under GST and a seamless flow of credit throughout the value chain will be provided which will help reduce the cascading effects of tax which was the main aim of this system.

To avail the benefit of ITC it is required that a person availing such benefit is registered under GST. Section 155 of CGST Act 2017 states that where any person claims that he is eligible for ITC the burden of proof of such claim shall lie on such person.

Section 16 of CGST Act 2017 states the condition and eligibility to obtain ITC which are:

  1. The person should be in possession of the tax invoice or debit note or such other tax paying documents as may be prescribed.
  2. He should have received goods or services or both.
  3. The supplier should have actually paid the tax charged in respect of the supply to the government.
  4. He should have furnished the return under section 39 of the said act.
Input Tax Credit system under GST regime

Availability of the ITC to recipient has been made dependent on payment of tax by supplier. Thus, even if the receiver has paid the amount of tax to the supplier and the goods and/or services so procured are eligible for ITC, no credit will be available, till the tax so collected by the supplier is deposited to the government.

Input tax credit restriction

Under section 17 of the CGST Act 2017 there are mentioned the instances/situation where ITC cannot be availed by the person they are-

  1. Goods or services partly used for business purpose
  2. Zero  rated and exempted supplies
  3. Motor vehicle and other conveyance
  4. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery
  5. Membership of a club, health and fitness centre
  6. Rent-a-cab , life insurance and health insurance