ITC Computation is fundamental for businesses to ensure maximum ITC claim as it can help have more working capital. In this article, we will discuss 4 key aspects of ITC computation. But first, let us start with the basics of ITC…
Input Tax Credit (ITC) means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. And this tax paid on purchases by you can be used as a tax credit against your tax liability.
Rule 36 of CGST
In rule 36 of CGST rule of 2017, documents requirements and conditions for ITC claim are provided. As per rule, the input tax credit shall be availed by a registered person, including the Input Service Distributor, on the basis of any of the following documents, namely:
a) an invoice issued by the supplier of goods or services or both in accordance with the provision of GST law;
b) an invoice issued instead of tax invoice if the amount is less than Rs 200 or in situations where the reverse charge is applicable as per GST law;
c) a debit note issued by a supplier in accordance with the rule of GST law;
d) a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made
there-under for the assessment of integrated tax on imports;
e) an Input Service Distributor invoice or Input Service Distributor credit note or any document issued by an Input Service Distributor in accordance with rule of GST law
(f) ITC doesn’t include the tax paid under the composition levy
ITC claim is not allowed on tax paid in accordance with any order where any demand has been confirmed on account of any fraud, wilful misstatement or suppression of facts.
What is ITC Computation?
ITC computation is subject to the provisions of GST Act and Rules, which also have changed over a period of time. Taxpayers need to comply with all the rules and conditions as per GST Law for computing ITC and reporting the same in GST returns. The basic principles of ITC claim and computation have by and large remained the same since GST was introduced; however, some additional rules have been introduced which influence the amount, periodicity and disclosure of ITC. With respect to ITC computation, the following aspects need special mention.
Here is a quick recap of the key rules and conditions governing ITC computation and reporting:
- Taxpayer should be in possession of the tax invoice or debit note or relevant tax paying documents.
- He should have received the goods and services.
- Payment of such tax is made to the government by the vendor.
- Taxpayer has furnished a return under section 39 i.e. GSTR 3B.
- Payment of invoice to the supplier should be done within 180 days from the date of issue of the invoice.
- No ITC will be allowed if depreciation has been claimed on the tax component of capital goods.
- There is a time limit for claiming ITC which is earlier than the Return filing till 30th November of the next financial year OR the Actual annual return filing for the current financial year.
- Where the goods or services both are used partly for business and non-business purposes, credit attributable to business purposes only can be claimed as ITC.
- Where the goods or services are used for taxable including zero-rated and also for exempt supplies, in such cases credit attributable to taxable supplies including zero-rated supplies only can be claimed
1. Available, Eligible and Ineligible ITC
Subject to the conditions specified in the GST Rules, taxpayers need to determine the purchase transactions on which ITC can be claimed and the corresponding amount of ITC. The invoices available in GSTR 2B and GSTR 2A reflect the data as uploaded by the supplier, which includes invoice details such as invoice number, invoice date, place of supply, invoice value and line item details such as tax rate, and tax amounts. Taking GST data as the benchmark for computing ITC available, the critical data points which determine the eligibility of invoice for ITC purpose are:
- Place of supply, only if same as taxpayers’ state then ITC on such invoice is available
- Counterparty (i.e. vendor) filing status
- If covered under reverse charge
The invoices where the PoS and Taxpayers state are the same, the counterparty has filed returns and it’s a forward charge transaction, implying ITC is available. However, there are some additional factors which also need to be considered.
For determining the eligibility of ITC, some additional information such as the purpose of purchase (for the furtherance of business or otherwise), product or service details (so as to determine if it falls in the negative list for ITC), if depreciation is already claimed etc., is needed. This information is captured either at the time of recording the purchase transaction or while period closure or preparing GST returns.
Hence the ITC computed from GST data needs to be adjusted based on these additional data fields to arrive at an accurate picture.
2. ITC on Reverse Charge
Unlike forward charge transactions, where the tax liability has to be settled by the vendor for the recipient to claim it as ITC, in case of reverse charge it is the recipient who deposits the tax and then claims it as ITC.
This perhaps makes it the only ITC which is fully under your control. While computing the eligible ITC, the conditions stated above are still applicable. Hence, not the entire amount paid as tax liability can be available to be claimed.
3. Reversal of ITC
As the name suggests, there are cases where the ITC claimed earlier needs to be reversed on happening of certain events. The reversal could be on account of excess credit claimed earlier or events such as the use of capital goods for other than business purposes, goods subsequently lost or given away as free samples etc. Along with reversal some of these items could attract interest as well.
From a reporting perspective, the reversal of ITC actually implies that the amount is added to the taxpayer’s output tax liability. Almost all the cases of ITC reversal pertain to internal documentation and processes of taxpayer and cannot be ascertained only on the basis of the GSTR 2A data. Hence, to streamline the reversal process, appropriate checks and balances should be provided in the accounting systems. Some such checks can be highlighting events or setting up alerts in the system for events which need further action for ITC computation and reversal.
4. Effect of Return Amendment on ITC
Many times, there is a genuine need for rectifying errors in the returns filed. However, amendment in the earlier filed data, adds complexity to the ITC computation process. The amendments in the invoices are generally for typographical errors, while for any correction that impacts tax liability either a debit or credit note needs to be issued.
Also Read: Maximize ITC Claim: Here are 4 things you need to do!