Input tax credits are one of the most exciting parts of the new goods-and-services tax system. As long your business registers for the GST, you can claim these credits, and they directly reduce how much GST you owe the government. Best of all, the process is easy. Here’s what you need to know.
What Are Input Tax Credits?
If you buy something for your business and you pay GST on that purchase, you get a credit for the GST you pay. Then, you can use that credit to reduce how much GST you owe to the government. To explain, let’s break down each step of the process with a simple example:
- You spend ₹20,000 on business expenses and you pay ₹2,000 in GST.
- You sell ₹100,000 in supplies to your clients and you collect ₹5,000 in GST.
- When you file your GST return, you owe the government ₹5,000 based on the GST you have collected from your clients.
- But, you also claim a credit worth ₹2,000 — that is the amount of GST you paid on business expenses.
- The government subtracts your ₹2,000 credit from the ₹5,000 you owe.
- That brings your total GST liability down to ₹3,000. That’s the amount you pay the government.
Note that this is a very simplified example. As you will learn below, there are elements that can complicate the issue.
Who Can Claim Input Credits?
To claim ITC, your business must register for GST. As of 2018, you have to register if your business turnover exceeds ₹10 lakh in the Northeastern states or ₹20 lakh in the rest of the country. What if your turnover is under these thresholds but you still want to claim ITC? Luckily, that is not a problem. The government gives all businesses the option to register for GST, and once you’re registered, you can start claiming input credits.
Can Composite Dealers Claim ITC?
If you opt to use the composite scheme, you can’t claim ITC. But, as a trade-off, the composite scheme is simpler and more convenient. As a composite dealer, you don’t have to file as many GST returns, and you don’t have to assess GST on each transaction. Instead, you file quarterly and you pay a set percentage of your total sales. To qualify, your turnover must be over the GST registration threshold but less than ₹1.5 crore.
Can You Claim ITC on All Business Expenses?
There are a few situations where you can’t claim ITC even if the purchase was for your business, including the following:
- Motor vehicles
- Food and beverages
- Outdoor catering
- Beauty treatment
- Health services
- Cosmetic and plastic surgery
- Fitness club memberships
- Rent-a-cab services
- Health and life insurance
- Travel benefits for your employees
- Work contract services for the construction of immovable property
There are a few exceptions. If your business trains drivers or transports passengers or goods, you can claim ITC on vehicle purchases. Similarly, if you purchase beauty creams for a spa, you can claim an ITC related to those purchases as well.
Does the Type of GST Affect ITC?
As you know, there are three main types of GST, and in terms of ITC, they affect each other differently. For transactions in the same state, Central GST and State GST apply. The CGST goes to the central government, while the SGST goes to the state. But for inter-state transactions, Inter-state GST applies. This goes to the central government, which then distributes some of the funds to the state where the supply happened. For instance, if someone in Rajasthan sells something to someone in Punjab, the place of supply is Punjab.
You can use ITC from IGST to reduce your IGST, CGST, and SGST liability. But if you have ITC from CGST, you can only use that against CGST and IGST. Finally, you can only use SGST credits against SGST and IGST.
When Can You Claim ITC?
You can only claim ITC when you actually have the goods in hand or you’ve at least paid for them. Additionally, your supplier must pay the GST they collected from you before you can claim your input credits. To explain, let’s say that you buy some goods from a supplier and you pay ₹2,000 GST. But the supplier never remits that amount to the government. You may have to wait until the supplier makes their GST payment before you can claim your credits.
How Do You File for ITC?
Now that you’ve got the basics, you’re probably wondering how you claim ITC. Essentially, you claim ITC when you file the GSTR2 and GSTR3 returns. The GSTR2 contains a record of your business expenses as well as the GST you’ve paid on each purchase. This return gets automatically filled out based on information your suppliers have submitted to the government, and when you sign into the GST portal, you should be able to access this return. Basically, you just check it over to make sure everything is correct. Then, you make adjustments as needed and remit the form.
Then, a few days later, you complete GSTR3. Again, this is automatically populated using information from your GSTR1 and GSTR2. Note that the GSTR1 contains all your sales and the GST you’ve collected. Then, the GSTR2 has the GST you’ve paid on business purchases which equates to your input credits. Finally, the GSTR 3 puts it all together and shows your final GST liability. As explained above, the formula is essentially GST collected minus GST paid equals your GST owed.
Input credits are possibly one of the most exciting elements of the GST plan. They allow you to avoid cascading taxes, and they help you to save money. When you use accounting software such as QuickBooks, it can help you track your GST, stay on top of your reporting obligations, and collect your input credits.