What is ITC-GST? Who can claim ITC? And who cannot?

What is ITC-Input Tax Credit?

Input credit means at the time of paying tax on output, you'll reduce the tax you have got already paid on inputs and pay the balance amount.

Here’s how-

When you buy a product or services from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the number of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) needs to be paid to the govt. This mechanism is named utilization of input tax credit.

For example- you're a manufacturer: a. Tax payable on output (FINISHED PRODUCT) is Rs.450 b. Tax paid on input (PURCHASE) is Rs.300 c. you'll claim INPUT CREDIT of Rs 300 and you simply got to deposit Rs 150 in taxes.

Who can claim ITC?

ITC are often claimed by an individual registered under GST on condition that he fulfills ALL the conditions as prescribed.

1. The supplier should be in possession of tax invoice
2. The said goods/services are received
3. Returns are filed.
4. The tax charged has been paid to the govt. by the supplier.
5. When goods are received in installments ITC may be claimed only if the last lot is received.
6. No ITC are going to be allowed if depreciation has been claimed on tax component of a capital good

Special cases of ITC

1. ITC for Capital Goods:

ITC is accessible for capital goods under GST.

However, ITC isn't available for- i. Capital Goods used exclusively for creating exempted goods ii. Capital Goods used for non-business (personal) purposes. Note: ITC will not going to be allowed if depreciation has been claimed on tax component of capital goods.

2. ITC on job work:

A principal manufacturer may send goods for further processing to employment worker. for example, a shoe manufacturing company sends semi-finished shoes (upper part) to job workers who will fit the soles. In such a situation the principal manufacturer are going to be allowed to require credit of tax paid on the purchase of such goods sent on job work.

ITC are going to be allowed when goods are sent to job worker in both the cases:

• From principal’s place of business
• Directly from the place of supply of the supplier of such goods or services

However, to enjoy ITC, the products sent must be received back by the principal within 1 year (3 years for capital goods).

3. ITC Provided by Input Service Distributor (ISD):

An input service distributor (ISD) are often the top office (mostly) or a branch office or registered office of the registered person under GST. ISD collects the input tax credit on all the purchases made and distributes it to their all the recipients (branches) under various heads like CGST, SGST/UTGST, IGST or cess.

4. ITC on Transfer of Business:

This applies in cases of amalgamations/mergers/transfer of business. The transferor will have available ITC which can be passed to the transferee at the time of transfer of business.

Who cannot claim ITC?

A person who is registered under composition scheme in GST cannot claim ITC.

Cases when ITC isn't available under GST

1. Automobiles & conveyances:

ITC isn't available for automobiles used to transport persons, having a seating capacity of less than or up to 13 persons (including the driver).

Further, ITC isn't available on vessels and aircraft.

For example, XYZ & Co. buys a car for his or her business. They can't claim ITC on a similar.

Exceptions to ITC on motor vehicles/vessels/aircrafts

ITC are going to be available when the vehicle is used for creating taxable supplies by the subsequent.

a) Supply of other vehicles or conveyances, vessels or aircrafts.

If you're within the business of supplying cars then ITC are going to be available.

For example, a dealer purchases a car for Rs.50 lakh plus 14 lakh GST (ignoring cess calculations). A similar car was later sold for 70 lakhs together with Rs.19.60 lakh GST. Since he's a dealer, he can claim ITC of 14 lakhs and pay only Rs.5.60 lakhs (19.60 – 14).

b) Transportation of passengers

If you're providing transportation of passengers then ITC are going to be allowed on the vehicle purchased.

For example, Indian Tours purchased a bus for inter-city transport of passengers. ITC is accessible.

c) Imparting training on the driving, flying, navigating such vehicles or conveyances or vessels or aircraft, respectively.

A school bought a car to provide training to their students, the school can claim ITC on the GST paid on the car.

d) Transportation of products

ITC are going to be allowed on automobiles (and other conveyances) used to transport goods from one place to a different. However, this is often concerning other transporters and not goods transport agencies (GTA).

2. Food, beverages, club memberships and others:

ITC isn't for the availability of following goods or services or both:

• Food and beverages
• Outdoor catering
• Beauty treatment
• Health services
• Cosmetic and cosmetic surgery

However, ITC are going to be available if the category of inward and outward supplies are same or the component belongs to a mixed or composite supply under GST.

Examples-

Ajay Enterprises arranges an office party for their employees. Ajay Enterprises won't be ready to claim ITC on the food & beverages served.

3. Services of general insurance, servicing, repair and maintenance:

No ITC is allowed on services like general insurance, servicing, repair and maintenance in thus far as they relate to automobiles, vessels or aircraft mentioned in (1).

Exceptions to ITC on insurance, repair or maintenance 

Same as exceptions mentioned for motor vehicles/vessels/aircraft

• Where received by a taxable person engaged-
• Within the manufacture of such automobiles, vessels or aircraft; or
• Within the supply of general insurance services in respect of such automobiles, vessels or aircraft insured by him

4. Sale of membership during a club, health, fitnesscentre:

No ITC are going to be allowed on any membership fees for gyms, clubs etc.

Example-

X, a director has taken membership of a club and also the company pays the membership fees. ITC won't be available to the corporate or Mr. X.

5. Rent-a-cab, life insurance, health insurance:

ITC isn't available for rent-a-cab, health insurance and life insurance.

However, the subsequent are exceptions, i.e., ITC is out there for-

a. Any services which are made obligatory for an employer to supply its employee by the Indian Government under any current law effective

For example, assuming the govt passes a rule for all employers to supply mandatory cab services to female staff in night shifts. ABC Ltd. hires a rent-a-cab to supply to transportation to its female staff on night shifts. Then ITC are going to be available to ABC Ltd. on the GST paid to the rent-a-cab service.

b. If the category is same for the inward supply and outward supply or it's a section of the mixed or composite supply

For example, ABC Travels lends out a car to PQR Travels. Then PQR Travels can claim ITC on a similar.

c. leasing, renting or hiring of automobiles , vessels or aircraft with exceptions same as those mentioned for (1).

6. Travel:

ITC isn't available within the case of travel, benefits extended to employees on vacation like leave or home travel concession.

For example,

ABC Ltd. offers a travel package to its employees for private holidays. ITC on GST paid by ABC Ltd. for the vacation package won't be allowed.

ITC are going to be allowed for travel for business purposes.

7. Works contract:

ITC shall not be available for any contract services. ITC for the development of an immovable property can't be availed, except where the input service is used for further work contract services.

For example, 

YZ Contractors are constructing an immovable property. They can't claim any ITC on the works contract. 

However, YZ hires AB Contractors for a little of the works contract. YZ can claim ITC on the GST charged by AB Contractors.

8. Constructing an immovable property on own account:

No ITC is accessible for goods/services for construction of an immovable property on his own account. Though such goods/services are utilized in the course or furtherance of business, ITC won't be available.

But this rule doesn't apply to plant or machinery. ITC is accessible on inputs used to manufacture plant and machinery for own use.

Example-

• Ajay Steel Industries constructs a building for its headquarters. ITC won't be available.
• Ajay Steel Industries also constructs a furnace to manufacture steel. ITC is accessible since it's a plant.

9. Composition Scheme:

No ITC would be available to the one that has made the payment of tax under composition scheme in GST law.

10. No ITC for Non-residents:

ITC can't be availed on goods/services received by a non-resident taxable person. ITC is merely available on any goods imported by him.

11. No ITC for private use:

No ITC are going to be available for the goods/ services used for private purposed and not for business purposes.

12. Free samples and destroyed goods:

No ITC is accessible for goods lost, stolen, destroyed, written off or given off as gift or free samples.

13. No ITC in fraud cases:

 ITC won't be available for any tax paid because of fraud cases which has resulted into –

• Non or short tax payment or
• Excessive refund or
• ITC utilized or
• Fraud cases including fraud or willful misstatements or suppression of facts or confiscation and seizure of products.

14. No ITC on restaurants:

As per Notification No. 46/2017-Central Tax (Rate), dated 14th November 2017, standalone restaurants can charge only 5% GST but cannot enjoy any ITC on the inputs.

However, restaurants as a part of hotels with room tariffs exceeding Rs. 7,500 still continue pay 18% GST and luxuriate in ITC.

McDonald’s charges 5% GST and can't claim any ITC.

Taj’s Grill by the Pool restaurant in Kolkata may be a part of the Taj Bengal hotel then it'll charge 18% GST while enjoying ITC.