In 2017, GST came into effect. Many taxes, such as Sales Tax and Value-Added Tax were clubbed together to form the uniform Goods and Service Tax (GST). Many businesses continue to face the lingering effects of using excise, service and value-added taxes. Luckily, all these worries can get alleviated with the help of Input Tax Credit(ITC). When purchasing goods and services, the buyer pays GST as ITC. The amount then gets deducted from the liability payable on other outward supplies. To put it simply, ITC gets deducted while paying the output tax on sales.
Steps to Claim ITC
You can claim ITC as long as you are registered under GST and you fulfil the following conditions:
- You have the tax invoice
- You received either goods or services
- The supplier filed the necessary returns
- The supplier paid the tax they charged to the government
Even if you fulfil all the conditions, there are a few other things you must remember. You can only claim ITC on the last delivery of goods in cases where you receive them in instalments. When an individual claims depreciation of the tax on capital goods, they cannot claim ITC.
What Documents Do I Need to Claim ITC?
Registered taxpayers who want to claim ITC must furnish at least one of the following documents to support their claim:
- The invoice the goods or services supplier provided
- The invoice provided by the recipient, along with proof of tax payment
- A supplier-issued debit note
- For imports, a bill of entry or a similar document
- Revised invoice, wherever necessary
- Documents issued by the Input Service Distributor (ISD)
The ITC claims process plays an important role when a business has to file GST returns. The ITC flow should be tracked right from the supplier. When suppliers upload invoices in GSTR-1, the details automatically get updated in the recipients’ GSTR-2A and GSTR-2B. Remember, only businesses can claim ITC.
What Is Provisional ITC?
To encourage suppliers to promptly and correctly upload their invoices and file GST returns, the government introduced provisional ITC. Under CGST rule 36(4), suppliers can claim ITC under specific circumstances, even when the ITC is unavailable in GSTR-2A.
Initially, the government capped the provisional ITC limit to 20% of the eligible ITC available. Later, the cap was reduced to just 10% and now, it stands at 5%. So, according to the revised CGST rule 36(4), a taxpayer who files GSTR-3B can claim provisional ITC. But, the total amount they can claim should not be more than 5% of the eligible credit available in GSTR-2B.
Since the documents can get confusing, taxpayers must double-check their paperwork and ITC across all documents. Business owners should strive to tally their ITC against their GSTR-2A. If there are any discrepancies, they request the suppliers to upload any missing invoices.
What Is Rule 86B?
The government recently decided to limit the use of ITC in electronic credit ledgers. They introduced Rule 86B specifically for this purpose. The rule limits the use of ITC in electronic credit ledgers to discharge the output tax liability. Rule 86B supersedes all other CGST regulations. Only those registered under GST and have a taxable supply value of more than INR 50 lakhs per month must abide by the rules. While computing the monthly supply value, zero-rated and exempt supply should not be calculated. The supplier should check their monthly limit before they file their GSTR-3B.
Additionally, as per the rule, suppliers cannot pay for more than 99% of their output tax liability as ITC. There are exemptions to the rule. Exemptions include payments for income tax (if valued over INR 1 lakh) and payments made to government departments, local and statutory authorities, public sector undertakings and more.
The CBIC made a few clarifications regarding the calculation of the tax liability. They said that the 1% must be calculated only on the tax liability. It should not include the turnover for the given month. If a supplier does not fall under the exemptions category, they can discharge the 1% liability in cash. But, performing this task for every single GSTIN will be tedious.
Although it seems complicated, ITC can make the entire GST process quicker and easier. Taxpayers must remember to report their ITC amount in their GSTR-3B.
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