Input tax credit is the credit manufacturers receive for paying input taxes towards inputs used in the manufacture of products. Similarly, a dealer is entitled to input tax credit if he has purchased goods for resale. Earlier Input tax credit was available for different indirect taxes, but now, with the new GST scheme it is really important for you to know some pre-requisites before going for input- tax credit under GST.
Talking about the current tax regime, input tax credit is available for VAT and service tax paid on inputs as shown below:
Under the new GST scheme, Input tax credit has been defined as credit of Input GST/Central GST/State GST charged on any supply of goods and or services used or intended to be used in the course or furtherance of business and includes the tax payable under reverse charge. However, in order to claim input tax credit, one needs to be a registered taxpayer of all inputs used or intended to be used in the course of or for furtherance of business.
Conditions for availing ITC under GST
Before going for input tax credit under GST, you need to fulfil certain necessary conditions:
In this article, we will look at the following situations:
Availing Input Tax credit by applying for registration
You can apply for registration under GST in two situations:
- When you are liable to register
- When you voluntarily apply for registration
When you are liable to register
When you apply for registration under GST (on becoming liable to register), you can avail ITC on inputs and inputs contained in semi-finished or finished goods in stock, on the day before the date on which you become liable to pay tax, only if you have:
- Applied for registration within 30 daysfrom the date on which you become liable to register and
- You have been granted registration
Let us understand this with the help of an example:
Suppose you are a manufacturer of a footwear firm and have crossed the threshold limit for registration on 1stOctober 2017. Now if you have stock of raw materials worth Rs. 6,00,000 on this date and have paid GST @ 18% (Rs 1,08,000) on them. You must ensure that you apply for registration within 30 days from 1st October 2017. If not, you will lose ITC of Rs 1,08,000 on the raw materials in stock that you are eligible for.
When you voluntarily apply for registration
Although you have not crossed the threshold limit for registration, provisions of the Law allow you for ‘voluntary registration’. If you voluntarily apply for GST registration, you can avail ITC on inputs and inputs contained in semi-finished or finished goods in stock on the day before you are granted registration.
Let us understand this with the help of an example:
Suppose, you are a dealer of consumer durable products (television, cameras, kitchen appliances etc.) and because of your day to day business operations, you voluntarily apply for registration under GST, even though the threshold limit has not been crossed. Now if you have been granted registration on 10th September 2017 and have consumer durable products worth Rs 4,00,000 in stock, on which GST @ 18% (Rs 72,000) has been paid. You can avail the ITC of Rs 72,000 on the products you have in stock.
What if you leave the Composition Scheme and become a regular dealer?
Under GST, a composition scheme has been introduced which will make compliance with tax laws hassle free for eligible businesses opting for the scheme. This is particularly for small businesses operating in the country. Rate of tax as prescribed will be less than regular GST but not less than 1% of the turnover during the Financial Year. Tax rates under the scheme are expected to be between 1% and 3%. This scheme is primarily aimed to reduce the burden of compliance for small and medium businesses. Also businesses registered for composition scheme need to file returns quarterly (not monthly).
Now, if you are registered under the composition scheme and your aggregate turnover crosses Rs 50 lakhs, you need to move away from the composition scheme and become a regular dealer. When you leave the composition scheme and become a regular dealer, you can then avail ITC on inputs, inputs contained in semi-finished or finished goods in stock, and capital goods on the day before the date on which you become liable to pay tax. The credit on capital goods will be reduced by percentage points, which will be notified accordingly.
Let us understand this with the help of an example:
Suppose you have been registered as a composition dealer under GST and your turnover has now crossed Rs 50 lakhs hence, you have to leave the composition scheme and become a regular dealer now. Now if your turnover has crossed Rs. 50 lakhs on 20th October 2017 and your stock on 19th October 2017 contains the following inputs-
You can avail the full ITC of Rs 99,000 and ITC on capital goods (reduced by the notified percentage points).
What if an exempt good under GST becomes taxable?
If at one point of time you are dealing with goods that are exempt under GST law, then, when these goods (or services) declared as exempt from GST are made taxable, you can avail ITC on the following on the day before the supply becomes taxable:
- Inputs in stock and inputs contained in semi-finished or finished goods in stock, which are relatable to the exempt supply.
- Capital goods exclusively used for the exempt supply. The credit on capital goods will be reduced by percentage points, which will be notified.
Let us understand this with the help of an example:
Suppose you manufacture an exempt good. This exempt good is made taxable on 7th November 2017. You have the following inputs (used to manufacture the exempt good) in stock on 3rd November 2017-
You can avail the full ITC of Rs. 81,000 on the inputs used to manufacture the exempt good which has been made taxable. You can also avail ITC on capital goods exclusively used for the exempt supply, reduced by percentage points, which will be notified accordingly.
If a sale/merger/demerger/amalgamation/lease/transfer of the business occurs, then?
In a merger/sale/transfer etc occurs, then only if there is a specific provision for transfer of liabilities, the unutilized ITC can be transferred to the sold, merged, demerged, or transferred business.
Let us understand this with the help of an example:
Suppose ‘A’ Ltd sold its business to ‘B’ Ltd. At the time of sale, suppose A Ltd had unutilized ITC of Rs. 3,00,000. Also if in the sale agreement, it was agreed that all liabilities and assets of A Ltd will be transferred to B Ltd. In this case, A Ltd can transfer the unutilized ITC of Rs. 3,00,000 to B Ltd.
What if goods or services are used partly for business and partly for other purposes?
In case, goods or services are used partly for business and partly for other than business purposes, ITC can be availed only on the portion used for the purpose of business.
Let us understand this with the help of an example:
Suppose you are a consumer durable goods dealer and you purchased laptops for Rs. 4,00,000 from a manufacturer, on which GST of Rs. 72,000 (@18%) has been paid. Out of the laptops purchased, those worth Rs. 1,00,000 were taken by you for your personal use. The remaining laptops were sold to customers. In this case, ITC can be availed only on the portion used for business, i.e. Rs. 3,00,000. Hence, eligible ITC here is Rs. 54,000 (3,00,000*18%).
When goods are used partly for taxable supplies and partly for exempt supplies
When goods or services are used partly for taxable supplies and partly for exempt supplies, ITC can be availed only on the portion used for making taxable supplies and zero rated supplies. ITC is not allowed on the portion used for making exempt supplies, and supplies where the receiver pays tax by reverse charge mechanism.
Let us understand this with the help of an example:
You are a manufacturer. You purchased raw materials for Rs. 2,00,000, on which GST paid is Rs. 36,000 (@18%). These raw materials have been used partly for manufacturing Item A which is taxable and Item B, which is exempt. The details are shown below-
You can avail ITC of Rs. 21,600 on the portion of raw materials used to manufacture Item A, which is taxable. The ITC of Rs. 14,400 on the portion used to manufacture Item B cannot be availed, as Item B is exempt.
Some other Situations
We at Starters’ CFO can assist you in getting any further knowledge about Input Tax Credit as under GST.
