Input tax credit (ITC) is the tax paid by the buyer on purchase of goods or services. Such tax which is paid at the time of purchase when reduced from liability payable on outward supplies is known as input tax credit. In other words, input tax credit is tax reduced from output tax payable on account of sales
Example: Mr. A purchased goods worth Rs. 18,000 on which GST @ 18% was Rs. 3,240. He sold goods worth Rs. 22,000. GST payable @ 18% was Rs. 3,960. Below table calculates net GST payable using the input tax credit.
|Outward GST payable -||Rs. 3,960|
|Less- GST paid on purchases||Rs. 3,240|
|Net GST payable through cash||Rs. 720|
From above, it is clear that Rs 3,240 reduced is input tax credit availed that had been paid on purchases.
A registered taxable person under GST Act who is paying tax due in the course or furtherance of business can claim and avail ITC credited in electronic ledger [Sec. 16(1)].
A registered person (including an Input Service Distributor) can claim Input tax credit on the strength of the following conditions:
The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:
Motor vehicles and conveyances except the below cases:
Health insurance and life insurance except the following:
Rule 88A - Order of utilization of input tax credit
Input tax credit on account of integrated tax shall first be utilised towards payment of integrated tax, and the amount remaining, if any, may be utilised towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order:
Provided that the input tax credit on account of central tax, State tax or Union territory tax shall be utilised towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilised fully.
Section 49 of the CGST Act
Credit of integrated tax has to be utilised first for payment of integrated tax, then Central tax and then State tax, in that order mandatorily. This led to a situation, in certain cases, where a taxpayer has to discharge his tax liability on account of one type of tax (say State tax) through electronic cash ledger, while the input tax credit on account of other types of tax (say Central tax) remains unutilised in electronic credit ledger.
With the new rules in place, it is mandatory to utilise the entire IGST available in electronic credit ledger before utilising ITC on CGST or SGST. The order of setting off ITC of IGST can be done in any proportion and any order towards setting off the CGST or SGST output after utilising the same for IGST output.
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