Input tax credit is the credit manufacturers receive for paying input taxes towards inputs used in the manufacture of products. A dealer is eligible for input tax credit when he purchases 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, businesses can claim input tax credit for the GST charged on any supply of goods and services they use or intend to use in the course or furtherance of their business activities. This credit includes the tax payable under reverse charge. Businesses must register as taxpayers for all inputs they use or intend to use in the course of or for the furtherance of their business to claim input tax credit.
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 received 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’. When you voluntarily apply for GST registration, you can avail of Input Tax Credit (ITC) on inputs and inputs contained in semi-finished or finished goods in stock on the day before your registration is granted.
Let us understand this with the help of an example:
You voluntarily apply for GST registration for your consumer durable products dealership, even though you have not crossed the threshold limit, due to your day-to-day business operations. If you were granted registration on 10th September 2017 and you have consumer durable products worth Rs 4,00,000 in stock, on which you paid GST @ 18% (Rs 72,000). 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. The scheme aims to reduce the burden of compliance for small and medium businesses, with expected tax rates ranging between 1% and 3%. Also businesses registered for composition scheme need to file returns quarterly (not monthly).
If your aggregate turnover crosses Rs 50 lakhs while you are registered under the composition scheme, you must transition from the composition scheme to 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 reduction in credit on capital goods will be notified accordingly, reducing it by a certain percentage points.
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?
When goods (or services) that were once exempt under GST law become taxable, you can avail Input Tax Credit (ITC) on the following items 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 reduction of the credit on capital goods will be notified, reducing it by a certain percentage points.
Let us understand this with the help of an example:
Suppose you manufacture an exempt good. On 7th November 2017, they made this exempt good taxable. You have the following inputs (used to manufacture the exempt good) in stock on 3rd November 2017-
You can claim the full ITC of Rs. 81,000 on the inputs used to manufacture the exempt good that 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, or transfer, businesses can transfer unutilized Input Tax Credit (ITC) to the acquiring, merging, or receiving entity only if there exists a specific provision for the transfer of liabilities.
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. In the sale agreement, B Ltd agreed to acquire all liabilities and assets from A Ltd. In this case, A Ltd can transfer the unutilized ITC of Rs. 3,00,000 to B Ltd.
In such cases, individuals or businesses utilize goods or services for both business and non-business purposes simultaneously.
Furthermore, you can avail ITC only on the portion used for the business purpose when goods or services are used partly for business and partly for purposes other than 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.
In this case, customers purchased the remaining laptops, and ITC can only claim the portion used for business, which amounts to Rs. 3,00,000. Hence, eligible ITC here is Rs. 54,000 (3,00,000*18%).
When businesses use goods for both taxable and exempt supplies.
You can claim ITC only when you use goods or services partially for taxable supplies and zero-rated supplies, as it applies to the portion used for such supplies and not for exempt supplies. The portion used for making exempt supplies and supplies where the receiver pays tax by the reverse charge mechanism does not allow ITC.
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%). We have used these raw materials partly to manufacture Item A, which is taxable, and Item B, which is exempt. The details are as follows –
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. You cannot avail the 14,400 on the portion used to manufacture Item B, 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.
