GST and Input Tax Credit – Minimising the Cascading Effect
The implementation of the Goods and Services Tax (GST) in 2017 marked a significant stride towards achieving the objective of a streamlined and straightforward taxation system. A key facet contributing to the effectiveness of GST is the incorporation of Input Tax Credit (ITC) provisions.
Conceived with the aim of establishing a progressive tax framework, GST’s inherent design incorporates features that exemplify it as a ‘Progressive’ and ‘Uniform’ rate of taxation. Among these features, the utilisation and availability of Input Tax Credit, to reduce the cascading effect, stands out as one of the most rewarding and justified components.
GSTR 2B – An Overview
GSTR 2B serves as an auto-drafted statement tailored for regular taxpayers on a monthly basis.
Form GSTR 2B, an evolution following the introduction of the GSTR-2A form, wasn’t intended to entirely supplant its predecessor. While the two forms may bear a resemblance, notable distinctions exist between GSTR 2A and GSTR 2B. This article aims to shed light on these disparities and provide a comprehensive understanding of Form GSTR 2B in the GST framework.
GSTR 2B is an auto-generated statement generated every month.
Recipient’s GSTR-2B is generated based on the details furnished by the suppliers in their GSTR-1, GSTR-5 or GSTR-6.
GSTR-2B, as compared to the GSTR-2A form, is a read-only statement and cannot be edited by the taxpayers.
GSTR-2B is generated and is available only after the 12th of every month.
GSTR 2B download is available in both Excel and JSON formats.
Scraping of 5% additional ITC – Major Developments over time
On 29th December 2021, the Central Goods and Services Tax Rule 36(4) was amended to remove the 5% additional ITC over and above ITC appearing in GSTR-2B. From 1st January 2022, businesses can avail ITC only if it is reported by the supplier in GSTR-1/ IFF and it appears in their GSTR-2B.
Further, from 1st January 2022, ITC claims are allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the Central Goods and Services Tax Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.
GSTR-1 and GSTR-2B
If your suppliers have completed their GSTR 1 return filing accurately and before the 12th day, your ITC for the month will reflect in the GSTR2B auto-generated statement.
Input Tax Credit in GST
In pursuit of the objectives of Goods and Services Tax, one key aim was to eliminate the cascading tax effect present in excise, VAT, and service tax. GST facilitates the claiming of Input Tax Credit (ITC) without restrictions based on the supplier’s location, thereby simplifying the process of buying and selling goods.
Tax Credit refers to the tax amount paid upon receiving goods or services, treated as a current asset in financial statements. This amount is utilised to offset tax liabilities, excluding tax payable under Reverse Charge Mechanism (RCM). It cannot be utilised for interest, penalty, fees, or any other amounts due under the Act and is credited in the month of invoice receipt.
Prerequisites to claim GST ITC
Registration under GST Law is mandatory.
A tax invoice or debit note from the registered supplier, displaying the tax amount, is required.
Receipt of goods or services is a prerequisite.
The supplier must have filed returns and paid the corresponding tax to the government.
ITC may be claimed upon receiving the final lot or instalment for goods received in parts.
If input tax credit is included in the capital goods’ cost with claimed depreciation, no additional ITC is allowed.
Input tax credit is time-sensitive and must be claimed within the prescribed time limit.
Documents to support ITC Claim
Tax invoice from a registered supplier.
Debit note for a previously issued tax invoice by the registered supplier.
Invoice from the recipient of goods or services who paid tax under the reverse charge mechanism.
Bill of entry or similar document for imports.
Invoice or credit note from an Input Service Distributor.
Availment of Input Tax Credit where tax is paid Under Reverse Charge Mechanism (RCM)
To avail input tax credit under the reverse charge mechanism, the payment must be made in the same month, subject to the following conditions:
1. Cash must be used to discharge the liability.
2. The goods or services must be used for business purposes.
3. Self-invoicing is necessary for purchases from unregistered suppliers since they cannot issue a tax invoice.
Input tax credit can be claimed against an invoice, debit note, or credit note before the earlier of the following dates:
1. Due date for filing the GST return for the month of September in the next financial year.
2. Date of filing the annual return for that financial year. For FY 17-18, the deadline for claiming ITC was extended to March 2019.
If no credit is claimed by the filing deadline of March 2019, the credit will lapse and cannot be claimed through the GSTR 9 annual return. It is essential to note that GSTR 9 cannot be used to claim ITC if it has not been previously claimed in other GST returns.
ITC Claim – Some Special Situations
Important Note:
Taxpayers must note that CBIC has cleared the confusion on whether GST Input Tax Credit should be claimed based on GSTR-2B or GSTR-2A?
CBIC has reiterated that GSTR2B statement will be the definitive and authoritative source to identify your eligible ITC for the month.
Input Tax Credit Set-Off Rules
From 1st July 2019, the GSTN portal has been updated with a new system of ITC utilisation. ITC can be utilised in the manner described below.
IGST credit should be fully utilised first.
In case of CGST liability, CGST credit is to be utilised first and then IGST credit. However, one must take into consideration that no IGST credit is pending.
In case of SGST liability, SGST credit is to be utilised first and then IGST credit. However, one must take into consideration that no IGST credit is pending.
CGST credit cannot be utilised against setting off SGST liability and vice versa, SGST credit cannot be utilised to set off CGST liability.
The main aim while setting off input tax credit against tax liability is to have minimum tax pay-out after complying with all provisions of the act.
GSTIN has specified a time-limit to claim the Input Tax Credit under Goods and Services Tax.
Pursuant to Section 16(4) of the CGST Act 2017, taxpayers are eligible to assert outstanding Input Tax Credits (ITCs) for a specific month until September of the subsequent year or upon filing the annual return GSTR-9 for the relevant financial year in which the credit was availed.
Any pending ITC beyond this timeframe will expire, rendering it ineligible for utilisation towards the settlement of tax obligations.
It is advisable, however, to promptly claim ITC on a monthly basis using the GSTR 2B Reconciliation and GSTR 3B filing processes.
Accountants, particularly those handling intricate transactions like Imports and Special Economic Zone (SEZ) transactions, should be mindful of the prescribed time limit for ITC claims.
Taxpayers must adhere to the following specific rules and conditions when seeking to claim ITC under the Goods and Services Tax (GST) framework.
180 Days Rule:
The buyer of the goods who is claiming the ITC must make the complete payment to the supplier within 180 days from the date of supply in order to claim ITC. If the buyer fails to do so, then their credit availed will be added to their outward tax liability.
Time Limit of claiming ITC
ITC can be claimed by the taxpayer EITHER till the GSTR 1 returns filing of September of the subsequent year OR in the filing of form GSTR 9 annual return.
Possession of Documents
The taxpayer who is willing to take ITC must possess the invoices & other supporting documents with him, such as Debit & Credit Notes under GST.
The receiver of the goods & services must have received the same within 180 days from the date of the invoice.
Input Tax Credit Claim on Capital Goods – Depreciation
You cannot claim ITC on Capital Goods if you have already claimed depreciation on the same. You can opt for either of the two but not both.
Goods Received in Instalments.
In case you are receiving the goods in lots or instalments, then you will only be eligible for ITC when the last & final instalment is received by you.
ITC on Debit Notes Customers can claim ITC based on Debit Notes created against an Invoice.
ITC, in case of Credit Note Generation Using a Credit Note, the supplier can reduce their tax liabilities.
In this case, the recipient will have to reverse the ITC that they have claimed as Credit Notes nullify the transactions.
ITC on Import of Goods:
While claiming ITC on imports, you must furnish the bill of entry & The IGST payment challan.
You must ensure that the GST that you have paid to the supplier reaches the Government via GST returns. If the tax doesn’t reach the Government, you may not be able to claim full ITC on the same.
Common Credit of ITC under GST
Common Credits can only be claimed in the following 2 cases:
Affecting exempted and taxable supplies
Business and non-business related activities
Businesses often utilise the same assets and inputs for both business and personal purposes. For instance, consider Mr. X, who owns a grocery shop. He leases a two-story building, utilising the ground floor for his shop and the first floor as his residence.
The GST input credit on the rent is allowable only to the extent that it is related to his business activities. Additionally, Mr. X has an adjoining piece of land where he cultivates vegetables, selling them in his shop. This shared property serves three distinct purposes: taxable sales, exempted sales (vegetables), and personal use (residence). Although Mr. X can claim GST input credit for expenses related to his business, certain expenditures serve both business and non-business functions.
The GST paid on rent (as it is leased for commercial purposes) represents a shared credit in this scenario.
Ineligible ITC
If taxpayers claim the credits of the following items/services where ITC is not available, they can be liable for penalty and interest as per GST Laws.
Input Tax credit on Capital Goods
Capital Goods only for Personal Use: No ITC available
Capital Goods only for Exempted Sales: No ITC available
Capital Goods only for Normal Taxable Sales- ITC available per usual
Capital Goods for both personal/ exempted and for Normal Sales:
Proportionate ITC eligibility arises depending on the ratio in which the goods are used for personal & business purposes.
ITC can only be claimed on Capital Goods when depreciation has not been claimed on them. Meaning you can either claim ITC or depreciation on Capital Goods.
GSTR-1, GSTR-2A/2B and GSTR-2
The information provided by the supplier in their GSTR-1 will be mirrored in Mr. X’s GSTR-2A/2B, along with GSTR-2, for the corresponding tax period.
Subsequently, Mr. X will complete the filing of GSTR-3B by incorporating data from GSTR-2A/2B and GSTR-2. During this process, he will compute his precise tax liability, consider input tax credits as per GSTR-2A/2B, and arrive at the final adjusted amount of tax payable.
Reversal of Input Tax Credit under GST
Input tax credit may be reversed under the situations mentioned below:
1. Failure to pay supplier within 180 days from the date of invoice.
2. Goods and services whether inputs or capital goods used for personal purpose.
3. Goods and services utilised for producing or supplying exempted goods or services.
4. Sale of capital goods or plant and machinery on which input tax credit was claimed.
5. Credit note issued by input service distributor.
6. Supplies ineligible under section 17(5) of the Act.
7. Transition from registered regular dealer to composite dealer.
Where input tax credit (ITC) is reversed, The amount reversed may be added to output tax liability in the month in which it is reversed and Interest shall be liable to be paid from the date of availing credit till the date when the amount is reversed and paid.
Notably, no time limit shall be applicable for reclaiming the reversed credit.
Reversal of ITC under Rule 37:
You being a recipient, if you fail to pay the invoice amount to the supplier within 180 days the ITC has to be reversed. If part of the invoice is paid the ITC will be reversed on a proportionate basis.
Additional Circumstances leading to ITC reversal:
1. ITC has been availed on ‘blocked credits’ as per Section 17(5) of CGST.
2. Inputs have been used to make a full or partial exempt supply or supply which is not for business purpose or used for personal consumption. (Rule 42 of CGST Rules)
3. Inputs used in goods that were given out as free samples or used in goods that were lost, destroyed, stolen, etc.
4. Cancellation of GST registration or switches to Composition (Rule 44 of CGST Rules)
5. Inputs taken on Capital Goods for supply of wholly exempt goods or taxable and exempt (Rule 43 of CGST Rules)
6. Depreciation under the Income Tax Act has been claimed on the GST component of capital goods.
7. Reversal of 50% of ITC by banking and other financial companies under special provisions.
8. Credit note issued to Input Service Distributor (ISD). (Rule 39 of CGST Rules).
Also, Rule 37A of CGST rules applies when a supplier fails to file GSTR-3B. The receiver must then reverse the ITC claimed on such invoices.
In such situations, it please refer to: Dealing with GSTR-2A vs GSTR-3B Mismatch and other ITC Hurdles: What You Need to Know
In these cases, the Supplier has filed GSTR-1/IFF and credit is visible in GSTR-2A/2B but the Supplier fails to pay taxes to the Government as Tax is paid through GSTR-3B.
If the supplier doesn’t file GSTR-3B up to 30th September of Next Financial Year then Recipient is advised to reverse the ITC claimed earlier. However this reversal is temporary and this can be availed later.
Under Rule 37A, if a supplier doesn’t file GSTR-3B, the recipient must reverse the ITC claimed, impacting cash flows. Compliance checks are key and here not only your compliance, but also your vendor’s compliance too.
Reclaiming ITC reversed earlier: The recipient can reclaim ITC once the supplier files GSTR-3B and the tax along with interest are paid. Timely reversal saves Interest: The registered person will be required to reverse such ITC on or before 30th November of FY following the FY in which such ITC has been availed otherwise interest u/s 50 will get attracted.
Reversal of Input Tax Credit (ITC) under Rule 42 and 43
This involves the treatment of credits related to inputs utilised for exempt supplies or personal consumption. If the credit can be specifically linked to a particular type of supply (taxable, non-taxable, or for personal use), it should be separated from the total ITC to facilitate easy identification.
Taxpayers are required to reverse the ITC amount directly linked to supplies that are non-taxable or used for personal consumption only if it was erroneously claimed. For ITC not specifically attributable to a particular supply but used for both taxable and non-taxable supplies, or supplies for personal consumption, the reversal should be done proportionately based on the extent of non-taxable supplies or supplies used for personal consumption. The remaining ITC is still eligible for claiming.
Reversal of ITC under Rule 44:
The objective of this regulation is to revoke any Input Tax Credit (ITC) claimed by a registered individual if they opt for the composition scheme or if their registration is cancelled for any reason. When it comes to inputs in stock or incorporated in semi-finished and finished goods in inventory, the ITC reversal should be determined proportionately to the invoices associated with the credits taken. For capital goods, the ITC claims will be calculated based on their useful life (in months) and will be pro-rated accordingly.
Reversal of ITC the availment of which is blocked under Section 17(5):
Inputs on goods or services used for personal consumption, inputs on goods which are lost, stolen, destroyed/written off or disposed of by way of gift or free samples, and any ITC availed which is blocked as per Section 17(5) needs to be reversed by the recipient.
GSTN advisory on online compliance pertaining to difference in ITC available in Form GSTR-2B and ITC claimed in Form GSTR-3B/3BQ
Earlier, the CBIC introduced Rule 88B in the CGST Rules, specifying the manner of dealing with the differences in the ITC available in Form GSTR-2B and the ITC availed in Form GSTR-3B, vide Notification No. 38/2023 – Central Tax dated 4 August 2023. In this respect, the GSTN has introduced an online functionality enabling the taxpayers to explain the differences in ITC.
Levy of Interest on reversal of input tax credit wrongly availed but reversed:
Interest, being compensatory in nature, should not be imposed when Input Tax Credit (ITC) is availed but remains unused for settling output liability.
It is an established principle that interest, as a compensatory measure, should only be imposed when there is an actual loss to the revenue. Furthermore, if the subsequently reversed ITC has not been utilised by the taxpayer for paying output tax and only reflects in the electronic credit ledger, it can be argued that the taxpayer has duly fulfilled their tax obligations, and there is no direct loss to the exchequer.
Moreover, the reversal of Input Tax Credit must be accompanied by interest as specified under section 50(1) of the Goods and Services Tax Act, i.e., 18% per annum. The interest calculation starts from the date of the invoice issued by the supplier of the goods or services.
However, this rule does not apply to transactions where tax is payable on a reverse charge basis. It is also clarified that the value of supplies made without consideration, as outlined in Schedule I of the said Act, should be considered paid for the purposes of the second provision to sub-section (2) of section 16 of the Central Goods and Services Tax Act.
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