GST

How to Claim Input Tax Credit (ITC) in GST

by TaxAcumen Team

Understanding the Input Tax Credit (ITC) under the Goods and Services Tax (GST) is important for businesses in order to reduce the tax burden. In order to prevent a cascade of taxes and cash flow restrictions, ITC makes sure that taxes are only applied to the value produced by goods at each level of the supply chain, rather than the combined value. Although claiming input tax credits is a straightforward idea, it does need timely return submission, documented verification, and compliance with and awareness of GST requirements.

What is Input Tax Credit (ITC)?

Input Tax Credit means that the GST paid on purchases or expenditures in the course of one’s business can be deducted against the GST expected to be collected on sales. ITC ensures that tax is payable only on the final value and prevents double taxation of the tax and value addition given to the services or products offered.

Example:

  • You purchase raw materials worth ₹1,00,000 and pay ₹10,000 as GST.
  • You sell finished goods worth ₹1,50,000 and collect ₹15,000 as GST.
  • You can claim ITC of ₹10,000, which means you only pay ₹5,000 GST payable net.

So, ITC reduces tax liability and improves working capital efficiency.

Conditions to Claim ITC

A registered person under GST can claim ITC only when the following conditions are satisfied:

  • The claimant must be registered under GST.
  • Possession of a valid tax invoice or a debit note from a registered supplier.
  • Goods or services are received.
  • The supplier must pay GST to the government.
  • The recipient must file a monthly GST return (GSTR-3B).
  • Payment to the supplier must be made within 180 days from the invoice date.
  • If the goods are received in instalments, ITC can be claimed only after the last lot is received.
  • ITC can only be claimed for a business purpose; personal purchases are not covered.
  • No ITC is permitted if depreciation has been claimed on the GST portion of capital assets.

ITC must also be claimed before:

  • 30th November of the next financial year, or
  • the date of filing the annual return, whichever is earlier.

Provisional ITC (i.e., claiming ITC without the supply having been reported in GSTR-1) was not required to be reported from January 2022.

How to Claim ITC?

The steps of claiming ITC under GST are as follows:

1. Reconciliation of Purchases Data

Match the purchase register with the GSTR-2B containing the invoice details as claimed by the supplier.

2. Verification of documents

Make sure that the tax invoices are valid and the supplier has complied with the GSTR-1 return filing.

3. GSTR-3B filing

In Table 4 of GSTR-3B returns, the eligible ITC, ineligible ITC, reversals and reclaims should all be declared.

4. Reverse Ineligible ITC

If the ITC is no longer available under Section 17(5) of the CGST Act or not claimed through GSTR-2B, then reverse the ITC when filing the GSTR-3B to avoid penalties down the line.

5. Proper Documentation

Keep all relevant invoices, debit notes, bills of entry and documentation if there was an ISD arrangement, all organised properly according to which audit/inspection that you might be facing.

Nowadays, companies use electronic tools that help them match GSTR-2B with purchase registers more accurately, increasing their chances of claiming ITC with minimal manual error or tax department enquiries.

When ITC Cannot Be Claimed

Under Section 17(5) of the CGST Act, businesses can find restrictions on ITC in the following circumstances:

  • Goods or services that are used for personal consumption.
  • Exempt supplies (i.e., supplies that are not taxable under GST).

The items specifically:

  • A motor vehicle when used for personal purposes.
  • Food, beverages, and club memberships (except if required by law).
  • Health or life insurance (except if required by law).
  • Construction of immovable property (i.e., building or office).
  • Goods that have been lost, stolen, destroyed, or gifted.

Conclusion

Businesses that claim ITC under the GST have lower tax liabilities and better cash flow. However, if you wish to claim ITC, you must properly comply with ITC requirements and record and verify purchase data linked to GSTR-2B.

Companies are required to pay their suppliers on schedule and in accordance with GST regulations. In order to comply, businesses must also reverse ineligible ITC. Businesses may prevent errors, receive the full advantages of the ITC, and avoid penalties from tax authorities by using technology and automation to assist them in claiming the credit.