The cascading effect that lingered under excise, VAT and service tax can be removed in Goods and Services Tax (GST) by allowing an uninterrupted and seamless chain of Input Tax Credit (ITC). ITC is the GST paid by the buyer when purchasing goods or services, and it is reduced from liability payable on outward supplies. In simple words, ITC is the tax that is reduced while paying output tax on sales.
Steps to claim ITC
- First of all, the recipient should be registered under GST to claim ITC and should fulfil ALL the conditions mentioned below:
- The recipient possesses the tax invoice
- The goods or services were received
- The supplier filed the returns
- The supplier paid the tax charged to the government
- When goods are received in instalments, ITC must be claimed only when the last lot is received
- ITC will not be allowed if depreciation has been claimed on the tax component of a capital good
Documents required to claim ITC
- Coming to the documents required for claiming ITC, the registered taxpayer should possess at least one document from the list below:
- Invoice issued by a supplier of goods or services or both
- Invoice issued by the recipient along with proof of payment of tax
- A debit note issued by a supplier
- Bill of entry or similar document in case of imports
- Revised invoice
- Document issued by Input Service Distributor (ISD)
The ITC claim process is crucial in GST return filing. The flow of ITC starts from the supplier’s end from whom the goods or services are purchased. Whenever the supplier uploads invoices in his GSTR-1, it will be reflected in the GSTR-2A and GSTR-2B of the recipient.
It is to be noted that ITC can be claimed only for business purposes and is not available for any goods or services exclusively used for exempt supplies, personal use, or any supplies for which ITC is not available.
In the initial years of GST, the suppliers have not properly uploaded the invoices in GSTR-1, and few taxpayers have not filed the GSTR-1 return at all. Hence, the recipient could not get the ITC in their GSTR-2A, and the invoices missing in GSTR-2A are called missing invoices. However, the recipients claimed ITC on missing invoices without considering GSTR-2A and the GST law. Taking advantage of the situation, few taxpayers claimed the ineligible ITC also.
What is provisional ITC?
To nudge the suppliers to upload invoices, file GSTR-1 and curb the claims of ineligible ITC, the government introduced the concept of provisional ITC via CGST rule 36(4). Provisional ITC refers to ITC, which can be claimed even if ITC is not available in GSTR-2A.
Initially, provisional ITC is restricted to 20% of the eligible ITC available in GSTR-2A. Later, the provisional ITC was reduced to 10%, and recently the government restricted provisional ITC to the extent of 5% only. Hence, as per CGST rule 36(4), a taxpayer filing GSTR-3B can claim provisional ITC only to the extent of 5% of the eligible credit available in GSTR-2B (earlier, GSTR-2A was considered).
In simple words, the total ITC that can be claimed in GSTR-3B is 105% of the eligible ITC appearing in the GSTR-2B of a particular period. So, a taxpayer should cross-check the ITC in GSTR-2A before proceeding to file GSTR-3B. Hence, one should continuously reconcile their ITC using GSTR-2A and follow-up with their suppliers for uploading missing invoices, if any.
What is Rule 86B?
Recently, the government introduced Rule 86B that limits the use of ITC available in the electronic credit ledger for discharging the output tax liability. Rule 86B has an overriding impact on all the other CGST Rules. This rule applies to registered persons with a taxable value of supply (other than exempt supply and zero-rated supply) in a month that is more than Rs.50 lakh. The limit has to be checked every month before filing GSTR-3B.
Rule 86B states that more than 99% of the output tax liability cannot be discharged using input tax credit. However, the department has given few exceptions to this rule, including paying more than Rs.1 lakh income tax or a person who got a refund of more than Rs.1 lakh, government department, public sector undertaking, local authority, or statutory authority etc.
CBIC clarified that 1% is to be calculated on the tax liability but not on the turnover of the respective month. Hence, one should discharge 1% tax liability in cash if he/she does not fall into the exceptions category and performing this task for every GSTIN would be tedious.
Coming to the reporting of ITC, all regular taxpayers must report the amount of ITC in their GSTR-3B. Table 4 of GSTR-3B requires the summary figure of eligible ITC, ineligible ITC and ITC reversed during the tax period.
Hence, while claiming ITC in GSTR-3B, one should possess the required documents and consider GSTR-2B, provisional ITC rules, rule 86B.
by, Archit Gupta, Founder and CEO – ClearTax