What is Input Credit and How to Claim it?

Seamless flow of input tax credit from the manufacturer of goods and services to the consumers i.e. across the chain and also across the country is the most fundamental characteristic of GST. In the process of sale and purchase of goods and services by the dealer, when goods/ services are bought, tax is paid while in the sale, tax is collected. Now, the settlement of tax is done periodically where the dealer needs to pay the difference amount of tax to the government. Here, the difference amount is the liability of tax i.e. excess of tax collected on sales over tax paid on purchases. This is how the process of utilization of input tax credit is explained.

How to claim Input Tax Credit under GST

Conditions and process to avail input tax credit on the sale of goods and services have been laid down by the law as described below:

  • Debit or Credit Note/ Supplementary Invoice/ Tax Invoice issued by a registered GST supplier should be in possession with the dealer. If the goods are received in installments or lots then the credit will be given against the tax invoice after the receipt of tax invoice of such last installment or lot.
  • Returns (GSTR 3) should have been filed. It is a distinguishing feature of GST that Input Tax Credit can only be claimed when the tax collected by the supplier has been deposited by the supplier to the government. It means that validation and matching of every claimed Input Tax Credit is done beforehand.
  • Delivery of goods or services should have been made. In cases when any recipient fails to pay the value of service or tax thereon for three months after the issue of invoice and has availed input tax credit on the invoice, such credit will be added to the output tax liability of the recipient along with the interest.
  • Tax charged needs to be paid to the government. Input Tax Credit can only be claimed once tax charged on the purchases has been deposited with the government by the supplier.

Some points on Input Tax Credit

  • One cannot claim Input Tax Credit on purchases which are more than one year old from the date of tax invoice.
  • It is allowed on capital goods.
  • Input tax is not allowed for goods and services which are for personal use.
  • Except for exempted/ negative list, Input Tax Credit can be availed on both goods and services as GST is levied on both of them.

Types of taxes under GST

There are three types of taxes which are charged under GST:

  1. SGST- State GST
  2. CGST- Centre GST
  3. IGST- Integrated GST

Now, let’s suppose Mr. X sells goods to Mr. Y. Hence, Mr. Y will get eligible for claiming credit on purchases based on invoice.

As soon as the sale is done by Mr. X, GSTR 1 will be uploaded by him with the details of invoice, the details of which will be in respect of Mr. Y which will auto populate in GSTR 2A. After this, Mr. Y will upload GSTR 2 with details of inward supply and it will pull out the same data from GSTR 2A.

Now, Mr. Y will accept the details of the purchase made by him, and have been reported correctly by the seller. After this, the “electronic ledger account” will be credited with the amount of tax on purchases of Mr Y which can be adjusted in any future tax output liability of tax.