Input Tax Credit under GST – Conditions to Claim in 2023 [Comprehensive Guide]

Input Tax Credit (ITC) is an integral part of the Goods and Services Tax (GST) framework in India. It allows businesses to reduce their tax burden on output supplies by setting off the tax already paid on inputs.

However, ITC is governed by specific conditions and time limits. Businesses must fulfill all requirements to successfully claim ITC and reduce their GST liability.

This comprehensive guide will explore all key aspects of ITC under GST – from eligibility conditions to time limits and ineligible credits. Read on to master ITC and optimize your tax savings!

Introduction

‘Input Tax Credit’ or ‘ITC’ refers to the GST paid by a business on purchases that will be used for furtherance of business activities. ITC helps avoid the cascading effect of taxes.

For example, if a manufacturer pays Rs 100 as GST on raw materials, they can claim the Rs 100 as credit to set off against the GST payable on finished goods.

ITC can be claimed on all business purchases, barring specific exceptions. The key is – the expenses must be used for furthering business activities. ITC cannot be claimed for personal purchases or expenses.

However, businesses cannot arbitrarily claim ITC. Section 16 of the CGST Act lays down specific conditions to be eligible to claim ITC. Further, Section 17(5) lists specific expenses where ITC cannot be claimed.

Meeting the ITC eligibility criteria and conditions accurately is crucial for GST compliance. If found incorrect, it can lead to penalties, interest and loss of ITC. Let’s understand the key rules for ITC claim.

Latest Updates on ITC Rules

Finance Minister Nirmala Sitharaman proposed important changes to ITC provisions in the Union Budget 2023. These tweaks aim to improve compliance and reduce ITC frauds.

Some key ITC amendments proposed in Budget 2023 are:

• If buyer fails to pay the supplier within 180 days, ITC claimed will have to be paid back with interest. This aims to curb fake ITC claims.
• Last date for filing GSTR-1 and GSTR-3B reduced to 3 years from the due date. This blocks revenue leakage via past ITC claims.
• CSR expenses added to the list of ineligible ITC under Section 17(5). Companies cannot claim GST paid on CSR spends.
• ITC proportional to high sea sales made as exempt supply will be ineligible.
• Schedule III amendments related to non-supply transactions will apply retrospectively from July 2017.
• Composition scheme extended to e-commerce operators. However, they cannot claim ITC.

These changes will come into effect once notified by CBIC. Businesses must gear up to incorporate the amendments into their ITC calculations.

Conditions to Claim ITC

Section 16(2) of the CGST Act outlines the key conditions to be eligible for ITC claim. Fulfilling these conditions is mandatory to claim ITC and reduce GST liability.

Let’s examine the key ITC eligibility conditions in detail:

1. Goods/services used for business purposes

This is the fundamental condition. ITC can only be claimed on purchases used to further business activities. Personal and non-business purchases do not qualify for ITC.

For example, a manufacturer can claim ITC on machinery purchased for the factory. But no ITC is allowed on a car purchased for personal use.

2. Possession of tax invoice/debit note/other tax paying document

To claim ITC, businesses must have a valid tax invoice, debit note or other tax paying document for the purchase.

For example, if a business has recorded ITC of Rs. 5,600 in its GSTR-2B for January 2022, but does not possess the purchase invoice, ITC cannot be claimed while filing GSTR-3B.

3. Supplier must upload invoice in GSTR-1 and ITC must reflect in GSTR-2B

The supplier must have uploaded the tax invoice on GST portal in GSTR-1. Only then will it reflect in the recipient’s GSTR-2B.

If the invoice is missing in GSTR-2B, ITC claim will be rejected, even if the business has the purchase invoice. Regularly matching purchases with GSTR-2B is crucial.

4. Receipt of goods/services

Businesses can only claim ITC on purchases after receiving the goods or services. Merely having the invoice is not sufficient – actual receipt is key.

For example, if goods are invoiced in January but received in February, ITC can only be claimed in February’s GSTR-3B, not January’s.

5. Payment of GST returns

ITC can only be claimed if the business has filed its GST returns – mainly GSTR-1 and GSTR-3B. Non-filers cannot claim any ITC.

6. Payment to vendor within 180 days

If payment is not made to the supplier within 180 days of the invoice date, the ITC claimed will have to be paid back with interest. This provision will come into force once notified by CBIC.

7. Ineligible ITC

ITC cannot be claimed on purchases specified under Section 17(5) – like food expenses, luxury cars, etc. We’ll examine this in the next section.

8. Time limit for availment

ITC must be claimed within the prescribed time limits under GST law. Typically, ITC can be claimed till September of next financial year or till filing annual returns – whichever is earlier.

9. No depreciation claimed on tax component

If businesses have claimed depreciation on the tax component of capital goods, credit cannot be claimed on the same amount.

10. Reversal of common credits

If inputs are used for both taxable and exempt supplies, common ITC must be reversed proportionately.

Adhering to these conditions accurately is vital for smooth ITC claims and GST compliance. Non-compliance can attract heavy penalties.

Time Limit to Claim ITC

The GST law prescribes a time limit to claim ITC, to avoid past claims leading to revenue leakage.

As per Section 16(4), the last date for claiming ITC is the earliest of:

• September 30th of the next financial year

Or

• Date of filing Annual Returns (GSTR-9) for that financial year

For example, for FY 2021-22, the last date would be earlier of:

• September 30, 2022

Or

• Date of filing GSTR-9 for 2021-22

If the GSTR-9 is filed on December 31, 2022, the last date for claiming ITC for 2021-22 would be September 30, 2022.

For debit notes, the above time limit applies from the date of the debit note, rather than the original tax invoice. Delayed claims post the time limit will lead to lapse of ITC.

Ineligible ITC

While ITC is available on most business purchases, the GST law expressly prohibits ITC claim on specific expenses through Section 17(5).

Some major categories where ITC is blocked are:

• Motor vehicles used for transportation of persons (e.g. cars)
• Food and beverages
• Health and fitness expenses – gym, yoga, healthcare
• Beauty treatment and cosmetic surgery
• Alcohol and petroleum products
• Outdoor catering and hospitality
• Employee insurance
• Works contract services for construction of immovable property
• Goods/services for personal use
• Corporate Social Responsibility (CSR) expenses

However, there are certain exceptions where ITC may still be claimed on these expenses for furtherance of business.

For instance, ITC can be claimed on –

• Health insurance if mandated by law for employees
• Food or rent-a-cab if provided as a service to customers
• Beauty services if used to provide beauty treatment services

Scrutinizing purchases with the Section 17(5) blocked list is crucial before claiming ITC. Non-compliance can invite penalties.

Special Cases

There are some special cases related to ITC claim that businesses should be aware of:

• Banks and financial institutions cannot claim ITC on inputs or input services
• Goods lost or stolen post-receipt will lead to ITC reversal
• Capital goods need to be tracked for reversals if use changes to non-business
• Partial exemption scenario: ITC common to exempted and taxable supplies will need proportionate reversal
• Insurance/banking companies: Need to reverse ITC on inputs based on taxable turnover ratio
• Mixed supplies: ITC to be reversed basis the taxable portion of mixed supply
• E-commerce operators registered under composition scheme cannot claim ITC

Keeping abreast of special provisions relevant to your business activities is important to accurately compute eligible ITC.

FAQs on ITC

Here are some common FAQs on ITC provisions and compliance:

Q. Can ITC be claimed on capital goods?

Yes, ITC can be claimed on capital goods like machinery and equipment purchased for business use.

Q. What if tax is paid under reverse charge by the recipient?

Even for RCM liability paid, the recipient can claim ITC subject to fulfilling Section 16 conditions.

Q. Is ITC available on job work expenses?

ITC can be claimed by the principal on job work charges paid to the contractor.

Q. Can ITC be claimed if GST is paid through e-cash ledger?

Yes, ITC can be claimed irrespective of the mode of GST payment – cash ledger or credit ledger.

Q. Is ITC allowed on purchases from unregistered dealers?

No, ITC is not allowed on procurement from unregistered dealers. The supplier must be a registered taxpayer.

Q. Can ITC be claimed on pre-registration purchases?

No, ITC cannot be claimed for purchases made prior to obtaining GST registration.

Q. Is there any maximum limit for claiming ITC?

No, there is no upper limit on the amount of ITC that can be claimed, as long as conditions are met.

Q. Can ITC be claimed after the time limit of September 30th?

No, the time limit for ITC claim cannot be extended beyond September 30th. Claim lapses after this date.

Keeping updated on ITC provisions is vital for optimizing GST liability. Businesses are advised to consult a GST expert or Chartered Accountant to ensure compliance.

Conclusion

Input tax credit is invaluable in reducing GST burden for businesses. However, non-compliance with ITC rules can prove costly.

Businesses must ensure all conditions under Section 16 are fulfilled, expenses are scrutinized for ineligibility under Section 17(5) and time limits for claim are met – to avoid penalties.

With Budget 2023 enhancing compliance on ITC, businesses must gear up to incorporate the changes and strengthen processes.

Accurately computing eligible ITC is key to optimizing GST liability for any business. Partnering with a tax expert like Filingwala can help ensure ITC compliance while minimizing tax outgo.

Filingwala is one of India’s top accounting services platforms – assisting over 10,000 businesses with GST registration, filing, accounting and other compliance needs.

Their team of Chartered Accountants and tax experts stay updated with the latest changes to provide* tailored assistance** on ITC, returns, invoices and other areas – ensuring 100% accuracy and compliance.*

To eliminate GST stress and confidently claim your rightful ITC, trust the experts at Filingwala. Visit www.filingwala.com or call 9152666002 today.