Eligibility and Conditions for Taking Input Tax Credit (ITC) under GST Act 2017

The Input Tax Credit (ITC) is a fundamental concept under the Goods and Services Tax (GST) regime, allowing registered taxpayers to claim credit for the GST paid on their purchases against their output tax liability. This helps to avoid cascading of taxes and reduce the tax burden on businesses.

Here are the eligibility and conditions for taking ITC under the GST Act, 2017:

Eligibility:

• Registered person: You must be a registered person under the GST Act.
• Tax invoice or debit note: You must possess a tax invoice or debit note issued by a registered supplier for the goods or services purchased.
• Used for business: The goods or services must be used or intended to be used in the course or furtherance of your business. This includes:
  • Goods used for manufacturing, processing, or packaging
  • Goods used for the construction, repair, or maintenance of buildings
  • Services used for providing taxable supplies
  • Capital goods used in the business
• Time limit: You must claim the ITC within the prescribed time limit, which is earlier of:
  • 30th November of the following year
  • Date of filing annual return

Conditions:

• Match with GSTR-2B: The ITC claimed must be reflected in the GSTR-2B (statement of purchases) of the supplier.
• Payment: You must have made the payment towards the goods or services purchased.
• Reverse credit: You must reverse the ITC in case of:
  • Goods returned or used for personal purposes
  • Services not used for business purposes
  • Capital goods disposed of before the expiry of their useful life

Additional points:

• ITC cannot be claimed on certain exempted goods and services, such as motor vehicles, alcoholic beverages, and lottery tickets.
• Special provisions exist for claiming ITC on capital goods, services received from unregistered suppliers, and goods received in instalments

EXAMPLE

State: Tamil Nadu

Business: XYZ Company, a registered regular taxpayer under GST, manufactures and sells furniture.

Purchase: XYZ Company purchases wood from ABC Company, another registered regular taxpayer under GST, for manufacturing furniture.

Invoice: XYZ Company receives a valid tax invoice from ABC Company showing the following details:

• Date of invoice: October 10, 2023
• GSTIN of seller (ABC Company): 33AAAA0000A1Z1
• GSTIN of buyer (XYZ Company): 33BBBB0000B2Z2
• Description of goods: Wood
• Quantity: 100 cubic meters
• Rate per unit: ₹1000
• GST rate: 18%
• Taxable value: ₹100,000
• CGST: ₹9,000
• SGST: ₹9,000
• Total invoice value: ₹118,000

Eligibility for ITC:

XYZ Company is eligible to claim ITC on the GST paid on the purchase of wood subject to fulfilling the following conditions:

1. Registered under GST: XYZ Company needs to be a registered regular taxpayer under GST.
2. Tax invoice or debit note: A valid tax invoice or debit note issued by a registered supplier is required.
3. Goods or services received: The goods or services purchased must be received by XYZ Company.
4. Used for business purposes: The goods or services purchased must be used for business purposes (manufacturing furniture in this case) and not for personal use.
5. Return filed: XYZ Company must have filed the GSTR-3B return for the relevant tax period.
6. Payment of tax: XYZ Company must have paid the GST liability for the relevant tax period.

Conditions for claiming ITC:

XYZ Company can claim ITC only on the CGST and SGST portion of the tax paid on the purchase. The amount of ITC that can be claimed is:

• CGST ITC: ₹9,000
• SGST ITC: ₹9,000

XYZ Company can claim the ITC in the GSTR-3B return for the tax period in which the invoice is received.

Specific points for Tamil Nadu:

• The ITC rules in Tamil Nadu are generally the same as the Central GST rules.
• However, taxpayers in Tamil Nadu should be aware of any specific state-level notifications or amendments that may affect their ITC eligibility or claim process.

FAQ QUESTION

Q1. Who is eligible to claim ITC?

A1. Any registered person under the GST Act is eligible to claim ITC on the tax paid on goods or services used or intended to be used in the course or furtherance of business.

Q2. What are the conditions for claiming ITC?

A2. Four conditions must be met to claim ITC:

1. Tax invoice or debit note: You must possess a valid tax invoice or debit note issued by a GST-registered supplier.
2. Receipt of goods or services: You must have received the goods or services for which ITC is claimed.
3. Use in business: The goods or services must be used or intended to be used in the course or furtherance of business.
4. Compliance with time limit: You must claim ITC within one year from the date of the tax invoice.

Q3. What documents are required to claim ITC?

A3. You need the following documents to claim ITC:

• Tax invoice or debit note
• Bill of entry (for imports)
• Other prescribed tax-paying documents

Q4. Can I claim ITC on goods or services used for personal purposes?

A4. No, you cannot claim ITC on goods or services used for personal purposes. ITC is only allowed for business-related purchases.

Q5. Can I claim ITC on goods or services used for both business and personal purposes?

A5. You can only claim ITC on the proportionate amount of GST paid on goods or services used for business purposes. You must calculate and reverse the ITC attributable to personal use.

Q6. Can I claim ITC on goods or services used for exempt supplies?

A6. No, you cannot claim ITC on goods or services used for exempt supplies. This is because exempt supplies already enjoy 0% GST.

Q7. Can I claim ITC on goods or services held in stock?

A7. Yes, you can claim ITC on the GST paid on goods or services held in stock on the day immediately preceding the date of registration.

Q8. What are the common mistakes businesses make regarding ITC?

A8. Some common mistakes businesses make regarding ITC include:

• Claiming ITC on goods or services not used for business purposes.
• Not maintaining proper documentation.
• Failing to claim ITC within the time limit.
• Not reversing ITC on goods or services used for exempt supplies.
• Not calculating and reversing common credit for goods or services used for both business and personal purposes.

Q9. Where can I find more information about ITC?

A9. Several resources provide information about ITC under the GST Act. Here are a few:

CASE LAWS

The eligibility and conditions for taking input tax credit (ITC) under the GST Act, 2017, are governed primarily by Section 16 and 17 of the Act, along with various case laws interpretating these provisions. Here’s a breakdown:

Eligibility:

• Registered person: Only registered taxpayers under the GST Act can claim ITC.
• Goods or services used for business: The ITC can only be claimed on goods or services used or intended to be used in the course or furtherance of business.
• Valid tax invoice: ITC can only be claimed on purchases made against a valid tax invoice issued by a registered supplier.
• Taxable supply: ITC can only be claimed on the tax component of the invoice, not on the total amount paid.
• Time limit: ITC can be claimed within the specified time limit, usually within two months of the date of the invoice or debit note.

Conditions:

• The ITC cannot be claimed on certain items listed in Section 17(5) of the Act, such as:
  • Motor vehicles used for transporting persons (except those with seating capacity exceeding 13, including driver)
  • Construction of an immovable property (except plant and machinery)
  • Goods and services used for personal consumption or purposes other than business
  • Hospitality services
  • Goods and services received under exempt supplies
• The ITC needs to be reversed in certain situations, such as when the goods are used for non-business purposes, returned to the supplier, or lost.
• The ITC needs to be matched with the corresponding data in the GSTR-2B filed by the supplier.

Case Laws:

Several case laws have been adjudicated by various courts and tribunals regarding the eligibility and conditions for taking ITC. These case laws provide valuable insights and interpretations of the provisions of the GST Act. Here are some key examples:

• M/s. Jindal Poly Films Ltd. vs. Commissioner of Central Tax, Delhi [2019] 12 GST 464 (Delhi High Court): This case held that ITC can only be claimed on the tax component of the invoice, not on the entire value of the goods or services purchased.
• M/s. Essar Steel India Ltd. vs. Union of India [2020] 14 GST 374 (Supreme Court): This case clarified that the ITC cannot be claimed on goods used for construction of an immovable property (except plant and machinery).
• M/s. Mahindra & Mahindra Ltd. vs. Commissioner of Central Tax, Mumbai [2021] 15 GST 139 (Bombay High Court): This case held that ITC can be claimed on the purchase of motor vehicles used for transportation of goods, even if they have a seating capacity of less than 13 persons.

Conclusion:

Understanding the eligibility and conditions for claiming ITC under the GST Act is crucial for businesses to ensure proper compliance and avoid penalties. It’s recommended to stay updated on the latest amendments and case laws to maintain accurate ITC claim practices.

Further Resources:

• Section 16 of the Goods and Services Tax Act, 2017
• Section 17 of the Goods and Services Tax Act, 2017
• Central Board of Indirect Taxes and Customs (CBIC) website for GST updates and circulars
• Website of various High Courts and Supreme Court for case law judgments