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Input Tax Credit (ITC) Under GST in India - Meaning, Eligibility, and Challenges

Input Tax Credit (ITC) under GST in India allows businesses to claim credit for tax paid on purchases to offset their tax liability on sales, thus preventing tax cascading. Eligibility for ITC requires valid invoices, receipt of goods, tax payment by suppliers, and timely filing of GST returns, while certain expenses are blocked from ITC claims. Despite its benefits, businesses face challenges such as matching ITC with supplier returns, delays in refunds, and compliance with frequent rule changes.

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16 views5 pages

Input Tax Credit (ITC) Under GST in India - Meaning, Eligibility, and Challenges

Input Tax Credit (ITC) under GST in India allows businesses to claim credit for tax paid on purchases to offset their tax liability on sales, thus preventing tax cascading. Eligibility for ITC requires valid invoices, receipt of goods, tax payment by suppliers, and timely filing of GST returns, while certain expenses are blocked from ITC claims. Despite its benefits, businesses face challenges such as matching ITC with supplier returns, delays in refunds, and compliance with frequent rule changes.

Uploaded by

kavi priya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Input Tax Credit (ITC) under GST in India:

Meaning, Eligibility, and Challenges


Introduction
One of the most significant features of India's Goods and Services Tax (GST) regime is the
Input Tax Credit (ITC) mechanism. ITC allows businesses to claim credit for the tax paid on
purchases and use it to offset their tax liability on sales. This system prevents the cascading
effect of taxes (tax on tax) and ensures a seamless flow of credit across the supply chain.

While ITC benefits businesses by reducing tax costs, its implementation involves several
compliance requirements and challenges. This article explores the meaning, eligibility, rules,
and challenges associated with ITC under GST in India.

What is Input Tax Credit (ITC)?


Input Tax Credit (ITC) means the credit of GST paid on purchases (inputs, input services, or
capital goods), which can be set off against the GST payable on outward supplies (sales).

For example:

●​ A manufacturer purchases raw materials worth ₹1,00,000 and pays GST of ₹18,000
(18%).
●​ He sells the final product for ₹1,50,000 and charges GST of ₹27,000.
●​ He can claim ITC of ₹18,000 (GST paid on purchases) and pay only ₹9,000 (₹27,000 -
₹18,000) as tax.

Thus, ITC reduces the overall tax burden on businesses and ensures tax is charged only on
the value addition at each stage.

Eligibility Criteria for Claiming ITC


To claim ITC, businesses must meet the following conditions under Section 16 of the CGST
Act, 2017:

1.​ Possession of a Tax Invoice or Debit Note – The taxpayer must have a valid invoice
or debit note issued by a registered supplier.
2.​ Receipt of Goods or Services – ITC can be claimed only after receiving the goods or
services.
3.​ Payment of Tax by the Supplier – The supplier must have paid GST to the government
and filed their GST returns.
4.​ Filing of GST Returns (GSTR-3B) – ITC can be claimed only if the taxpayer has filed
GSTR-3B for the relevant period.
5.​ ITC is not restricted by Rule 86B – ITC cannot be used to pay more than 99% of tax
liability if the taxable turnover exceeds ₹50 lakh (except for certain categories).

Types of Input Tax Credit


ITC is available on different types of purchases:

1. ITC on Inputs

●​ Raw materials, consumables, spare parts, and packing materials used in production.
●​ Example: A furniture manufacturer buys wood and metal; GST paid on these materials
can be claimed as ITC.

2. ITC on Input Services

●​ Services used for business operations, such as rent, legal fees, advertising, or
transportation.
●​ Example: A company pays GST on rent for its office; it can claim ITC on that amount.

3. ITC on Capital Goods

●​ ITC can be claimed on capital goods (machinery, equipment, etc.) used for business
purposes.
●​ Example: A factory buys a machine worth ₹5 lakh and pays ₹90,000 as GST; this
amount can be claimed as ITC.

4. ITC on Reverse Charge Mechanism (RCM)

●​ When tax is paid under Reverse Charge Mechanism (RCM), the recipient can claim
ITC.
●​ Example: Legal services provided by an advocate to a company attract RCM; the
company pays GST and claims ITC.

Items on Which ITC is Not Allowed (Blocked Credit)


Under Section 17(5) of the CGST Act, 2017, ITC cannot be claimed on certain expenses:

Blocked Items Example


Motor vehicles (except for specific A company buying a car for directors cannot claim
cases) ITC.

Food, beverages, and catering ITC not allowed on food expenses for employees.
services

Club memberships and health ITC not available on gym memberships for
services employees.

Works contract services (for ITC blocked for building office infrastructure.
construction)

Personal consumption Goods/services for personal use cannot be


claimed.

Goods lost, stolen, or destroyed If stock is destroyed due to fire, ITC is not allowed.

These restrictions prevent misuse of ITC claims and ensure tax is only credited for
business-related expenses.

Reversal of ITC
There are situations where businesses must reverse ITC, meaning the credit claimed earlier
must be repaid to the government:

1.​ Non-payment to the supplier within 180 days – If the buyer does not pay the supplier
within 180 days, the ITC claimed must be reversed.
2.​ Exempt or Non-GST supplies – If goods/services are used for exempt supplies, ITC
must be reversed.
3.​ Capital goods partly used for personal purposes – If capital goods are used partly for
personal use, proportionate ITC must be reversed.

Challenges in Claiming ITC


Despite its advantages, businesses face several challenges in claiming ITC under GST:

1. Matching of ITC with GSTR-2B

●​ ITC is available only if the supplier files GSTR-1 and the invoice appears in GSTR-2B.
●​ If suppliers fail to file returns on time, businesses lose ITC, leading to higher tax
payments.

2. ITC Restrictions under Rule 36(4)


●​ Businesses can claim only eligible ITC as per GSTR-2B.
●​ Any discrepancy in supplier filing results in denial of ITC.

3. Delay in ITC Refunds

●​ Exporters and businesses under inverted duty structure face delays in ITC refunds,
affecting their cash flow.

4. Frequent Changes in ITC Rules

●​ The government frequently amends ITC rules, making compliance complex for
businesses.

5. ITC Fraud and Fake Invoicing

●​ Some businesses generate fake invoices to claim ITC fraudulently.


●​ The government has introduced e-invoicing and stricter verification to curb fraud.

Recent Updates and ITC Amendments


1. ITC Restricted to GSTR-2B (2022)

●​ ITC can be claimed only if it appears in GSTR-2B.


●​ Taxpayers must reconcile GSTR-2B with purchase records.

2. Stricter ITC Verification (Budget 2023)

●​ ITC claims are now verified more strictly by tax authorities.


●​ Businesses must maintain proper records of invoices.

3. Automated ITC Matching

●​ The GST portal now offers automated matching of ITC with suppliers’ returns.

Conclusion
Input Tax Credit (ITC) is a key feature of GST that helps businesses reduce their tax burden
and improve cash flow. However, claiming ITC requires strict compliance, including timely
filing of returns and matching invoices with GSTR-2B.

To avoid ITC issues, businesses should:


●​ Ensure suppliers file GST returns on time.
●​ Regularly reconcile GSTR-2B with purchase invoices.
●​ Keep proper records of invoices and tax payments.

As the government tightens ITC rules to prevent fraud, businesses must stay updated on ITC
amendments and compliance requirements to fully benefit from GST.

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