Indirect Tax Structure Before GST
After demonstrating the scenario under the previous indirect structure, you can then explain the scenario under the GST regime. How Raman’s tax structure and payment would turn out to be under GST Regime? How there will be no ‘tax on tax’ situation now. And how Raman will be able to claim an input tax credit under the GST regime?
You can take the help of the example mentioned in the green box above: Suppose Raman supplies goods worth Rs 2,00,000 to Karan, a wholesaler. Karan, further sells the goods to Garv a retailer, for Rs 2,20,000 after minor processing. Finally, Garv sells the goods to Ananya for Rs 2,50,000. GST @18% was applicable.
Now, when Raman supplies goods to Karan, he collects Rs 36,000 from Karan against GST and pays the same to the government. When Karan further sells the goods to Garv, he collects Rs 39,600 as GST from Garv. Since Karan had paid GST on inputs, he can claim an input tax credit of an amount equal to the GST paid on the inputs i.e. Rs 36,000.
The balance Rs 3,600 is paid to the Govt. by Karan. Similarly, when Garv sells goods to Ananya, he collects Rs 45,000 as GST from Garv. Since Garv had paid GST on inputs, he can claim an input tax credit of an amount equal to the GST paid on the inputs i.e. Rs 39,600. The balance Rs 5,400 is paid to the Govt. by Garv. Lastly, Ananya, the consumer pays GST of Rs 45,000 to Garv.
Therefore, you conclude that there is no incidence of tax on any of the interim parties – neither the wholesaler nor the retailer. The reason is that the tax that each of them has paid can be set off against their respective tax liabilities on output. The final incidence of tax is only on the end consumer.
This clearly displays the removal of the cascading effect of taxes in the erstwhile indirect tax regime.
- You can use human figures for Raman, Karan, Garv, and Ananya to illustrate this example.
From there, you can build on the definition and concept of Input Tax Credit Under GST. Say starting with ‘So What Is Input Tax Credit’. Explain the definition, first starting with:
- What Are Inputs?
- Then, What Are Taxes Paid On Inputs?
- And Finally, Explain The Term Input Tax Credit
Then you can start the next section with ‘So How Will Raman Become Eligible For Claiming Input Tax Credit?’. This section will give the following checklist of conditions that Raman or registered taxable persons like Raman need to fulfill in order to claim Input Tax Credit:
- Raman must be registered.
- Raman must be in possession of a tax invoice or a debit note issued by the supplier of inputs or input services.
- Raman must receive the goods or services or both.
- The supplier of inputs must have paid the government GST charged in respect of such a supply.
- Raman should have filed the returns under section 39.
- In case goods are received in lots or installments, ITC can be claimed by Raman when the last lot is received.
- In case Raman has claimed depreciation on the tax part of the cost of capital goods, the ITC on the said tax component shall not be allowed.
- Raman shall not be entitled to take ITC if the same is not claimed within the time limit.
Different icons can be used to demonstrate the conditions that Raman must satisfy in order to claim Input Tax Credit (ITC).
Once Raman becomes eligible for claiming, he needs to have certain documents in place to claim ITC. The next section will give a checklist of documents. :
- An invoice issued by the supplier of goods or services.
- An Invoice issued by the recipient of goods or services in case such supply is made by an unregistered person to a registered person.
- A Debit note issued by the supplier in case the taxable value or tax charged in the invoice is less than taxable value or tax payable in respect of such supply.
- A Bill of Entry or any similar document as required for an integrated tax on imports.
- An Invoice or Credit Note issued by an Input Service Distributor as per the rules under GST.
- A Bill of Supply issued by a dealer opting for composition scheme or an exporter or supplier of exempted goods.
Again different icons can be used to demonstrate the conditions that Raman must satisfy in order to claim Input Tax Credit (ITC).
But, while claiming ITC under GST, Raman has to keep in mind certain scenarios where ITC claimed gets reversed. So you can start the next section with, “But Hey! Raman Need To Be Aware Of Certain Scenarios Where ITC Claimed Under GST Gets Reversed’. All these scenarios should be written keeping Raman into the picture. Say if
- ‘Raman’ Fails To Pay The Supplier within 180 days from the date of issue of invoice by the supplier.
- If Raman Uses Goods And Services For Personal Use
- If Raman Uses Goods And Services For Exempt Supplies
- If Raman Uses Capital Goods For Personal Use
- If Raman Uses Sells Capital Goods And Plant And Machinery
- If Raman Switches From Normal GST To Composite Levy
- If Raman’s Registration Is Cancelled
- If Raman is one of the dealers of Input Service Distributor and a Credit Note Is Issued To Input Service Distributor (ISD), ITC Claimed by Raman Gets Reversed.
- If Raman Claims ITC On Inputs Used For Exempted or Non-Business Purpose More Than ITC Reversed During The Year
- If ITC Reversed by Raman Is More Than The ITC On Inputs Used For Exempted or Non-Business Purpose
Now, once Raman claims ITC, he can utilize the same to meet his output tax liability. Refer to the table above under the Utilization of ITC.
“Raman can first extinguish CGST Liability by first utilizing ITC standing under CGST and then under IGST. He can terminate his SGST liability by first using ITC standing under SGST and then under IGST. Finally, in case Raman has any IGST liability, that can be exhausted by first using ITC standing under IGST, then using ITC existing under CGST and lastly the ITC standing under SGST.
Lastly, Raman needs to reconcile the ITC claimed. Therefore, after the due dates for filing GST returns, the process for ITC matching starts. The online portal of Goods and Services Tax Network (GSTN) carries out the ITC Matching process. All the inward supply details as per GSTR 2 filed by the buyer are matched with outward supplies as per GSTR 1 filed by the supplier.
If the details match, then ITC claimed by Raman is considered valid. In case, there is a mismatch, the changes are reflected in GSTR 3.
If Raman fails to deposit tax on the due date or file return within time, then ITC can be denied. And in case any excess ITC is claimed, it is added back to the tax liability of Raman.