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How to Claim Input Tax Credit (ITC) under GST – Conditions and restrictions on claiming ITC as per GST rules

By Paras Mehra

( 6.2K Views) June 22, 2017

How to Claim Input tax Credit (ITC) under GST - ITC Rules

1.0 Introduction

Input tax credit (ITC) is said to be the soul of GST. GST is based on one of the main problems of the current taxation system, i.e. cascading effect. Hence, it is imminent that this article is very important under GST regime.

Before going forward, we must understand the few basic definitions which were there in the previous laws as well; however they are defined differently under GST regime.

Input: Input means any goods other than capital goods used or intended to be used by the supplier in the course or furtherance of business; [clause (59) of section 2].

Input Service: Input service means any service used or intended to be used by a supplier in the course or furtherance of business; [clause (60) of section 2].

Capital Goods: Capital Goods means goods, the value of which is capitalized in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business; [clause (19) of section 2].

Important point: The definition of capital goods has been simplified a lot. Earlier, the definition was very ambiguous and subject to litigation regarding what is capital good and what is not.

2.0 Eligibility to claim the ITC under GST rules

Every registered taxable person shall be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

In simple words, the credit of ITC can be claimed if the goods or services received are used or intended to be used in course or furtherance of his business.

However, the claiming the ITC is not as easy as it reads. There are many restrictions and conditions to claim ITC under GST. Hence, let us move forward and under those conditions.

3.0 Conditions to claim ITC under GST rules

The registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services subject to the following conditions;

#Condition no.1 – Valid Tax invoice or debit note or any other valid document

To claim credit under GST, a registered taxable person should be in possession of a tax invoice or debit note issued by a supplier or such other taxpaying document as may be notified by the government.

ITC in case where goods are to be received in lots?

Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or instalment.

#Condition no.2 - He has received the goods and/or services

This has been done to stop the practice of issuing illegitimate invoices just to claim the ITC and reduce the tax liability. Therefore, from now onwards, if you have received the goods or services, then only you are eligible to claim the ITC under GST.

Important point: It shall be deemed that the taxable person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such taxable person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise].

#Condition no.3 – Tax should be paid to the government - Important

This is one of the conditions which shall have a far-reaching impact once GST is notified. It is practically very difficult to verify whether the tax has been paid by the supplier or not. The clause states that the tax charged in respect of such supply has been actually paid to the account of the appropriate Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.

The Supreme Court Judgment nullified by this point

As per Supreme Court, in case of Commissioner of Central Excise, Jalandhar Vs M/s. Kay Kay Industries (SC), Cenvat credit cannot be denied on mere nonpayment by the supplier. Supreme states that where all the conditions as laid down under cenvat credit rules has been complied, then there is no reason why cenvat credit could be denied to the assessee. But now, this principle has been overruled by the government by introducing this point.

Hence, under GST regime, no credit can be availed unless the supplier has actually paid to the account of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply.

#Condition no.4 – If no payment is made to supplier within 180 days

If no payment is made to supplier for goods or services received along with tax within 180 days from the date of invoice, then the registered taxpayer shall be liable to pay an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest.

#Condition no.5 – No ITC if Depreciation claimed

Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961(43 of 1961), the input tax credit shall not be allowed on the said tax component.

#Condition no.6 – No ITC if product is exempted under GST

If you are dealing in exempted goods or goods carrying nil rate of tax, then ITC in respect of those goods shall not be available.

#Condition no.7 – No ITC if Composition benefit is claimed

If you are a dealer who has opted to tax under Composition Scheme, the ITC in respect of goods held in stock shall not be available.

4.0 Non availability of Input Tax Credit (ITC) under GST rules

There are almost 12 cases where ITC of input tax is not allowed to be claimed. Hence, you must learn these 12 cases in order to pay tax under GST correctly.