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Input Tax Credit(ITC)
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Input decrease under GST:
Definition:
ITC is the abbreviation for Input Tax Credit under GST. ITC may be a mechanism for preventing tax cascading. In layman’s terms, tax cascading is “tax on tax.” Under the present system of taxation, the credit of taxes levied by the Central Government can’t be used to offset State Government taxes, and the other way around . one of the most significant aspects of the GST system is that the entire supply chain would be subject to GST applied concurrently by the Central and State governments. because the tax levied by the Central or State Governments would fall under the same tax regime, a credit of tax paid at each stage would be available as a set-off against the payment of tax at each successive stage.
Subject to such conditions and restrictions as could also be prescribed and in the manner specified in section 49, every registered person shall be entitled to require credit of input tax charged on any supply of goods or services to the person which is utilized or supposed to be used in the course or furtherance of his business, and therefore the given amount shall be added to the electronic credit ledger of such person.
Only tax paid on supplies that are or would be utilized in the course or furtherance of the registered person’s business is eligible for a tax credit. In section 2(17) of the Act of CGSTof 2017, the term “business” is defined. At each stage, a credit for the tax paid at an earlier stage is granted. for instance , A provides goods to B, which then provides goods to C. B will receive the input decrease for A’s tax payment, C will receive the credit for B’s tax payment, and so on.
Repeal of Central and State Acts after the Implementation of GST:
The indirect taxes imposed by the federal and state governments on the sale of products , services, or both would be consolidated into one tax. the main taxes and levies that will be combined or subsumed under the GST regime are as follows:
| Central Taxes | State Taxes |
|---|---|
| Central Excise duty | State VAT / Sales Tax |
| Additional duties of excise | Central Sales Tax |
| Excise duty levied under Medicinal & Toilets Preparation Act | Purchase Tax |
| Additional duties of customs (CVD & SAD) | Entertainment Tax (other than those levied by local bodies) |
| Service Tax | Luxury Tax |
| Surcharges & Cesses | Entry Tax (All forms) |
| Â | Taxes on lottery, betting & gambling |
| Â | Surcharges & Cesses |
Types of GST & Input Tax Credit Availability:
The following are four types of GSTs in India and how input tax credit is utilized:
CGST:
Central Goods and Services Tax (CGST) on intra-state or intra-union territory without legislative supply of products or services or both. Also referred to as Central Tax.
SGST:
State Goods and Services Tax (SGST), also referred to as State Tax, levied on intrastate sales of products or services.
UTGST:
The Union Territory Goods and Services Tax on intra-union territory supply of products or services.
IGST:
Integrated Goods and Services Tax, also mentioned as Integrated Tax, on the interstate supply of products or services or both. Integrated tax will take place of the present Countervailing Duty (CVD) and Special Additional Duty (SAD) levied on imports of goods.
Utilization of Input Tax Credit:
The utilization of the input tax credit is depicted in the following table:
| Credit of | To be utilised first for payment of | May be utilised further for payment of |
|---|---|---|
| CGST | CGST | IGST |
| SGST/UTGST | SGST/UTGST | IGST |
| IGST | IGST | GGST, then SGST/UTGST |
Aspects techniques of Input Tax Credit:
The credit of CGST can’t be used to pay SGST/UTGST, and therefore the credit of SGST/UTGST cannot be used to pay CGST. Any registered person may claim a credit for tax paid on the inward supply of products , services, or both used or intended to be used for business purposes. a number of the technical facets and prerequisites of the Input Tax Credit scheme are as follows:
- He has a tax invoice or other tax-related document.
- He has obtained the merchandise or services. There also are "bill to ship" scenarios included.
- The tax is paid by the supplier.
- He has submitted the shape .
- If the inputs are received in tons, he won't be eligible for the credit until the final lot is received.
- He must pay the supplier the worth of the goods or services along with tax within 180 days of the invoice date; otherwise, the quantity of credit availed by the recipient will be added to his output tax liability, together with interest [rule 2(1) & (2) of ITC Rules]. However, once the payment is formed , the recipient are going to be able to utilize the credit once more. within the event that partial payment has been made, proportional credit are going to be granted.
- No ITC after September of the subsequent fiscal year for which the invoice was issued or the date of filing of the annual return, whichever is earlier.
- Credit available for distribution could also be distributed by the Input Service Distributor (ISD) in the same month it is requested. The merit of CGST, SGST, UTGST, and IGST shall be allocated in accordance with Rule 4(1)(d) of the ITC Rules. ISD is required to issue invoices in accordance with Rule 9(1) of the Invoice Rules.
Aspects techniques of Input Tax Credit:
Restrictions on Input decrease The objective of the Goods and Services Tax is to ensure a continuous flow of credit throughout the supply chain. However, the subsequent situations, as outlined in Section 17 of the 2017 Central GST Act, don’t qualify for input tax credit:
- Goods or services partially used for business: The law specifies that input tax credits may only be claimed for the quantity of input tax paid on goods or services or both used for business purposes. Thus, if goods, services, or both are used partially for business purposes and partially for other purposes, only the quantity of input tax attributable to business purposes will be credited.
- Zero-rated and Exempted Supplies: Where Goods or services or both are used partially for taxable supplies including zero-rated supplies under IGST or under CGST Act, and partly for exempted supplies, only the input tax due to the taxable supplies including zero-rated supplies will be allowed as credit.
- Motor Vehicles and Other Transportation: No input tax credit is available for motor vehicles and other transportation. However, Input decrease will be allowed if the motor vehicle and other conveyance are used for the taxable supply of , transport of passengers, transportation of such vehicles/conveyances or imparting training on driving, flying, and navigating any vehicles or conveyances, or for transportation of such goods.
- Food and beverages, outdoor catering, manicure , health services, cosmetic and plastic surgery: Input decrease is not available on the supply of the aforementioned services, unless an inward supply of products or services or both of a particular category is used by a registered entity to make an external taxable supply of the same group of goods or services or both, or as a component of a taxable composite or mixed supply. Thus, if a caterer uses another caterer's services, Input decrease will be allowed.
- Membership during a club or fitness center: No input tax credit is available for the supply of membership in a club or fitness center.
- Rent-a-cab, life assurance , and health insurance: there's no input tax credit available for the provision of rent-a-cab, life assurance , and insurance services. However, input decrease will be available if the government notifies the services that are mandatory for an employer to give to its employees under any law currently in effect, or if a registered person uses an inward supply of products or services of a particular category to make an external taxable supply of the same category of goods or services, or as a part of a taxable composite supply.
- Travel benefits extended to vacationing employees, like leave and home travel concessions: The input tax credit is inapplicable to travel benefits provided to employees on vacation, like leave and home travel concession.
- Construction services: Input decrease is not available for construction services provided for the construction of an immovable property (other than plant and machinery). However, Input decrease will be allowed when the service is an input for further supply of a construction contract service.
- Construction on own account: Input decrease on goods or services purchased by a person for the construction of immovable property, excluding plant and machinery, isn't permitted.
- Tax paid under the Composition Scheme Input decrease is not allowed if tax has been paid under the composition scheme on the supply of goods or services or both.
- Goods, services, or both acquired by a non-resident taxpayer: Input decrease is not permitted when goods or services are received by a nonresident taxable person; however, input decrease is allowed when goods are imported by such a nonresident taxable person.
- Goods or services or both used for private consumption do not qualify for a tax credit.
- Goods lost, stolen, destroyed, written off, or donated away: Input tax credits are disallowed for goods that are lost, stolen, destroyed, or written off, also as for goods that are given as gifts or free samples.
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