ITC Credit eligibility & Rules on ITC credit utilization

By: Diptika Jadhav - 1st February, 2021

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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.

Who is eligible to take Input tax credit (ITC) under SGST & CGST Act?

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)].

What are the documents required for claiming Input Tax Credit by a registered person?

A registered person (including an Input Service Distributor) can claim Input tax credit on the strength of the following conditions:

  1. He must possess a Tax invoice issued by the supplier of goods or services or both or Debit note issued by a supplier
  2. He must have received supply of goods or services or both
  3. He must have paid the tax for it in cash or as input tax as under section 41 of GST Act
  4. He must have filed proper returns under section 39 of GST Act.
How to claim Input Tax Credit (ITC)?

The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:

  1. One must be a registered taxable person.
  2. One can claim Input Tax Credit only if the goods and services received is used for business purposes.
  3. Possession of a tax invoice or debit note or document evidencing payment.
  4. Receipt of goods and/or services.
  5. Goods delivered by supplier to other person on the direction of a registered person against a document of transfer of title of goods.
  6. Where goods are received in lots or installments ITC will be allowed to be availed when the last lot or installment is received.
  7. Failure of the supplier towards supply of goods and/or services within 180 days from the date of invoice, ITC already claimed by recipient will be added to output tax liability and interest to paid on such tax involved. On payment to supplier, ITC will be again allowed to be claimed.
  8. No ITC will be allowed if depreciation has been claimed on the tax component of a capital Good.
  9. Time limit to claim ITC against an Invoice or Debit Note is earlier of below dates: The due date of filing GST Return for September of next Financial year OR Date of filing the Annual Returns relevant for that Financial year.
Items on which credit is not allowed
  1. Motor vehicles and conveyances except the below cases:

    • Such motor vehicles and conveyances are further supplied i.e., sold
    • Transport of passengers
    • Vehicles used for imparting training on driving, flying, navigating such vehicle or conveyances
    • Transportation of goods
  2. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. But if the goods and/or services are taken to deliver the same category of services or as a part of a composite supply, credit will be available.
  3. Sale of membership in a club, health, fitness center.
  4. Rent-a-cab.
  5. Health insurance and life insurance except the following:

    • Government makes it obligatory for employers to provide it to its employees.
    • Goods and/or services are taken to deliver the same category of services or as a part of a composite supply, credit will be available.
    • Travel benefits extended to employees on vacation such as leave or home travel concession.
  6. Works contract service for construction of an immovable property (except plant & machinery or for providing a further supply of works contract service).
  7. Goods and/or services for the construction of an immovable property whether to be used for personal or business use.
  8. Goods and/or services where tax have been paid under composition scheme.
  9. Goods and/or services used for personal use.
  10. Goods or services or both received by a non-resident taxable person except for any of the goods imported by him.
  11. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
  12. ITC will not be available in the case of any tax paid due to non-payment or short tax payment, excessive refund or ITC utilized or availed by the reason of fraud or willful misstatements or suppression of facts or confiscation and seizure of goods.
Rules on ITC Credit Utilization:

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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