lipped from: https://taxguru.in/goods-and-service-tax/input-tax-credit-cgst-act-2017.html
What is Input Tax Credit as per CGST Act?.
From the combined reading of sections 2(62) and 2(63) we understand that tax paid in the form of CGST, SGST\UTGST, IGST for procurement of goods or services by a registered person including GST paid under RCM method for import and inward supplies will be called as Input Tax Credit.
What is the difference between availing and utilizing?
When we claim Input Tax Credit by declaring input tax credits in GSTR 3B will be called availing.
When the availed input tax credit is used for the payment of output tax it is called utilization.
What is the prerequisite for availing of the credit as per section 16?
Section 16 of the Central Goods and Services Tax Act, 2017 specifies the conditions for availing of the input tax credit. The prerequisites for availing credit under the section are as follows:
Possession of valid tax invoice: The taxpayer should possess a valid tax invoice or debit note issued by the supplier of goods or services.
Receipt of goods or services: The taxpayer must have received the goods or services.
Tax paid by the supplier: The tax charged on such goods or services should have been paid to the government by the supplier.
Returns filed by him: The recipient must file the required returns, such as GSTR-1 and GSTR-3B, to claim the input tax credit.
What are the restrictions under section 17(5)[Blocked Credit]?
Section 17(5) of the Central Goods and Services Tax Act, 2017 specifically the circumstances under which input tax credit shall not be available to a taxpayer.
The restrictions under this section are as follows:
1. Motor vehicles and other conveyances: ITC Is not available for the purchases of motor vehicles and other conveyances, except when they Are used for making the following taxable supplies:
a. Transportation of passenger
b. Transportation of goods
Note: It is important to note and bifurcate the vehicle maintenance invoices into personal and business purposes to substantiate the ITC availed is relating to business purposes only. The GST-registered person shall not claim the ITC from invoices pertaining to personal vehicle maintenance.
2. Food and beverages, outdoor catering, beauty treatment, health services Cosmetic and plastic surgery, leasing, renting, or hiring of motor vehicles, etc.
3. ITC is not available for the Membership of a club, health, or fitness center.
4. Rent–a–cab, life insurance, and health insurance. But for the following services, the recipient can avail of the ITC:
a. Rent–a–cab: when they are used for providing transportation Services.
b. Life insurance and health insurance: when they are obligatory under any law.
5. ITC is not available for Travel benefits extended to employees on vacation such as leave or Home travel concession (LTC)
Can a dealer dealing in exempt goods claim ITC?
No, a dealer dealing in exempted goods cannot claim Input Tax Credit (ITC). The ITC is available only for goods or services used or intended to be used in the course or furtherance of business, and for which tax has been paid to the government.
Exempted goods are those goods that are exempted from the payment of tax under the CGST Act or any other law for the time being force. Since no tax is paid on such goods, there is no tax credit available to claim.
Eg: If a manufacturer purchases taxable goods and services. Then he manufactures the exempt goods from those taxable goods and services. His outward supply will be an exempt supply. He doesn’t have a GST liability to pay. He can’t claim the input tax credit for the inward supply as the outward supply is exempt.
If he is dealing in partly exempt and partly taxable to what extent credit will be restricted?
If a dealer is dealing in both taxable and exempt supplies, then the Input Tax Credit will be restricted to the extent of inputs and input services used for the purposes of taxable supplies. In other words, the dealer can claim ITC on inputs and input Services used for making taxable supplies only, and not for exempt supplies.
It is important to note that capital goods used for making both taxable and exempt supplies will also be subject to the same restriction, and ITC will be available only to the extent of their use for taxable supplies. Additionally, the dealer needs to maintain separate records of inputs, input services, and capital goods used for taxable and exempt supplies to claim ITC appropriately.
Timeline to avail the credit:
As per CGST Act registered taxpayer is allowed to claim input tax credit (ITC) within a specified time limit. The time limit for availing of ITC is as follows:
The taxpayer can claim ITC up to 30th November following the end of the financial year to which the Credit relates or the date of filing of the annual return, whichever is earlier.
Non-payment to the supplier will lead to the reversal of credit. (Time limit to pay to the creditors)
As per CGST Act, if a registered taxpayer fails to pay the supplier for the goods or services within a period of 180 days from the date of the invoice, the input tax credit (ITC) claimed by the taxpayer on that invoice will be reversed.
The time limit of 180 days is calculated from the date of the invoice issued by the supplier. If the taxpayer fails to pay the supplier within this time limit, the ITC claimed on that invoice will be added to the output tax liability of the taxpayer in the month immediately following the expiry of the 180-day period.
It is important to note that the ITC reversal provisions are applicable only when the payment is not made to the supplier within 180 days from the date of the invoice. If the payment is made after the expiry of 180 days, the ITC cannot be reversed.
To avoid ITC reversal, it is advisable for taxpayers to make timely payments to their suppliers and ensure that all the necessary documentation is maintained. In case of any delay in payment, the taxpayer should take appropriate steps to rectify the situation and make the payment within the stipulated time frame.
It is pertinent to note that the delayed payment to the MSME registered person will also attract interest on delayed payment under MSME Act. And the most important amendment in the Income tax act,1961 in the finance act 2023 is if any default in the payment to the MSME registered person, such expenses or purchase value will be added to the profit and gains from the business and profession of the defaulting purchaser. Hence the purchaser is liable for the payment of income tax on the whole of the expenses which is not paid to the MSME registered person.
Relevance of GSTR 2b in claiming the credit:
GSTR-2B is a GST return that is generated automatically for registered taxpayers based on the details furnished by the suppliers in their GSTR-1, GSTR-5, and GSTR-6. It provides a summary of the Input Tax Credit (ITC) available to a taxpayer for a particular tax period.
GSTR-2B is relevant for claiming ITC as it provides important information about the tax paid by the supplier and the tax credit available to the recipient. It also includes details of invoices that have been uploaded by the supplier during the tax period and any changes made to them.
Taxpayers can use GSTR-2B to reconcile their purchases with the supplies made by their vendors and ensure that they have not missed out on any eligible ITC. It also helps in identifying any errors in the invoices, which can be rectified before the deadline for filing the returns.
Scrutiny of the return by the department for matching GSTR 3B vs GSTR 2A/2B(section 61 )
Section 61 as per CGST ACT 2017 empowers the tax authorities to scrutinize the returns filed by taxpayers for any errors. In particular, the department may examine the information furnished in the GSTR-3B return and compare it with the details available in the GSTR-2A return.
GSTR-2A/2B is an autofill return that is generated for each registered taxpayer based on the details provided by their suppliers in their GSTR-1 return. It contains details of all the invoices uploaded by the supplier during the tax period, including any amendments made to them.
By comparing GSTR-3B and GSTR-2A/2B, the department can ensure that taxpayers have correctly reported their purchases and claimed the correct amount of Input Tax Credit (ITC). This helps in preventing any misuse or fraud related to ITC.
In case of any mistakes Or differences between GSTR-3B and GSTR-2A/2B, the department may issue a notice to the taxpayer and seek an explanation. The taxpayer may be required to provide supporting documents and correct any errors or differences. Failure to do so may result in the disallowance of the ITC claimed, forcing of penalties, and in extreme cases, even cancellation of the taxpayer’s registration.
Interest under section 50 for the wrong availment
Section 50 of the CGST Act, 2017 provides for the payment of interest on the amount of tax that is paid after the due date. The interest is calculated from the due date of payment till the date of actual payment.
In case a registered taxpayer has wrongfully availed Input Tax Credit (ITC) that they are not entitled to under the provisions of the CGST Act, the tax authorities may issue a notice to the taxpayer and demand the payment of the tax amount along with interest. The interest rate is specified under section 50 and is currently 18% per annum.
The interest amount is calculated from the date when the ITC was wrongly availed till the date of payment of the tax amount. The taxpayer may also be liable to pay a penalty in addition to the interest, depending on the severity of the offense.
How to maximize Input tax credit?
To maximize ITC under the CGST Act, businesses can follow these tips:
a. Ensure Proper Documentation: To claim ITC, it is essential to maintain proper documentation such as valid tax invoices, bills, and receipts as well as ensure that suppliers have correctly filed their GST returns. Follow up with the supplier if he failed to file the GSTR1 on time.
b. Verify GSTIN: Before purchasing goods or services from any supplier, businesses should verify their GST number to ensure that they are registered under GST and eligible to issue tax invoices.
c. Regularly reconcile ITC: Businesses should reconcile the ITC claimed with the details available in their GST returns and correct any differences or mistakes, to avoid future disputes with tax authorities.
d. Avail ITC within the Order Time Limit: The ITC claim should be availed within the prescribed time limit, which is November of the following year, or the date of filing of annual returns, whichever is earlier.
Article By : Swathi Kulal, Intern @ NRSR & Co, Manipal