Introduction

Section 2(63) of the Central Goods and Services Tax Act, 2017, defines Input Tax Credit (ITC) as the "credit of input tax." As a cornerstone of India's GST framework, ITC empowers enterprises to deduct taxes remitted on acquisitions (inputs) from their output tax obligations.

This crediting system guarantees taxation solely on the value addition at each phase of the supply network. By doing so, it eliminates the cascading effect of taxes and promotes better tax compliance across the system. However, recent amendments have introduced new conditions and restrictions that businesses need to be aware of to maximize their ITC claims.

What is Input Tax Credit (ITC)?

Input Tax Credit received on Procurement of Goods and Availment of services help the Registered business to offset their Tax Labilities on the supply of Good and Services. The key principle is that tax paid on inputs should be deductible from the tax collected on sales, thus lowering the overall tax liability.

Eligibility Conditions for ITC

In order to avail Input Tax Credit (ITC), a taxpayer needs to fulfill the following prerequisites:

1. The individual or entity should be duly registered under the GST regime.
2. The acquired goods or services must be intended for business-related activities.
3. The supplier must have furnished the invoice details in their GSTR-1 return, and the same must be visible in the recipient’s GSTR-2B.
4. The corresponding tax amount should have been remitted to the government by the supplier.
5. The claimant must hold a valid tax invoice or debit note.

Documents & Forms Required to Claim ITC

A GST-registered taxpayer needs the subsequent records to utilize ITC:

1. A Sales Documents like tax invoice or debit note issued by a GST-registered Suppliers.
2. Bill of Entry (for imports)
3. Documents (Tax Invoice) issued by Input Service Distributor (ISD)
4. Supplier’s Documents like tax invoice required for reverse charge transactions.
5. Payment records as a proof to supplier within 180 days
6. Filing of GSTR-3B & GSTR-2B reconciliation

Cases Where ITC Cannot Be Claimed

A GST- registered Taxpayer or Assesses is not eligible to avail Input Tax Credit under the following Scenarios:

❌ Goods/services used for personal purposes.

❌ Non-business-related expenses.

❌ Motor vehicles (except for transport, training, or business resale).

❌ Expenses related to food and drinks, outdoor catering services, or club membership fees (unless they form part of a taxable outward supply) are not eligible for ITC.

❌ ITC is generally disallowed for works contract services, with an exception when these services are employed for further supplying taxable works contracts.

❌ ITC on composition scheme taxpayers.

❌ Input Tax Credit cannot be claimed on goods that are lost, pilfered, damaged, or disposed of as obsolete or written off.

Input Tax Credit Set-Off Rules

Order of GST Liability Settlement via ITC. The sequence for utilizing GST ITC to offset tax dues is as follows:

1. IGST ITC → First applied against IGST liability, then against CGST & SGST in any ratio or proportion.
2. CGST Input Tax Credit → Can be utilized first to offset CGST liability, and any remaining balance can be applied against IGST, but not SGST.
3. SGST ITC → Can be used against SGST, then IGST (not CGST).
4. Input Tax Credit cannot be applied towards the payment of interest, penalties, or late fee charges.

Latest Amendments in ITC Rules

The government has initiated several revisions to the GST's ITC regulations to bolster clarity and adherence. Some of the key changes are:

1. Restriction on ITC Availment (Rule 36(4))

Previously, taxpayers could avail ITC based on provisional credit even if the supplier had not uploaded invoices. However, as per recent amendments, ITC can now be claimed only when the details are available in GSTR-2B. This amendments ensures that input tax credit is only availed against tax actually paid by the supplier.

2. Input Tax Credit Reversal for Non-Payment to Suppliers of goods or services (Rule 37)

If the recipient or Receiver of Goods or services does not settle the payment to the supplier of goods or services within stipulated times of 180 days from the date of the invoice, the Input Tax Credit availed must be reversed. However, if the payment for the goods or services made later, ITC can be reclaimed by the Recipient or Receiver.

3. Input Tax Credit Related on Corporate Social Responsibility (CSR) Activities

A recent ruling clarifies that ITC on expenses incurred for CSR activities is not eligible under GST. This means businesses cannot claim credit for tax paid on goods or services used for mandatory CSR compliance.

4. ITC Restrictions for Defaulting Suppliers

If a supplier fails to remit the tax, their customers will not be eligible to claim Input Tax Credit on those invoices. This amendment reinforces the need for businesses to deal with compliant vendors and verify their GST filings regularly.

5. Reversal of Input Tax Credit on Exempt and Non-Business Transactions

If goods or services are used partly for exempt supplies or non-business purposes, in that case ITC availed earlier needs to be proportionately reversed as per Rule 42 and Rule 43 of the CGST Rules.

Impact of These Amendments

• Improved Compliance: Businesses must verify that suppliers submit their GST returns promptly and settle the required taxes to prevent losing out on ITC.
• Stricter ITC Claims: The dependency on GSTR-2B for claiming ITC mandates real-time reconciliation of purchase invoices.
• Increased Working Capital Requirements: ITC reversal due to supplier default or delayed payments affects cash flow.
• Best Practices for Businesses
• To navigate these amendments, businesses should:
• Regularly reconcile purchase invoices with GSTR-2B.
• Guarantee prompt payments to vendors to prevent the clawback of ITC.
• Maintain proper records and documents like tax invoices and GST returns.
• Verify supplier’s compliance with GST law and regulations before transactions.

Conclusion

Understanding and complying with the latest ITC rules is essential for businesses to optimize tax benefits and avoid penalties. The government’s tightening of ITC norms aims to enhance transparency and reduce tax evasion. By staying informed and adopting best practices, businesses can effectively manage their Input Tax Credits claims and ensure GST compliances on Timely Manners.

If you require assistance on Input Tax Credit (ITC), Manthan Experts can be your trusted advisor. Contact them at info@manthanexperts.com.to discuss your specific needs and explore how their expertise can benefit your business.