Everything about Input Tax Credit (ITC) in GST

Input tax credit (ITC) means credit of Input tax i.e. tax levied on input goods, input services or both. Any goods (including capital goods) and any input services used or intended to be used by a provider of goods or services of both in the course of or furtherance of business is eligible for input tax credit.
Section 2(62) of Central Goods and Services Tax Act (CGST Act) defines Input tax as the Goods and Services Tax (GST) charged on any supply of goods or services or both made to the registered person and includes:

  • Integrated GST (IGST) on import of goods or in inter state transactions.
  • Central Goods and Services Tax (CGST).
  • State Goods and Services Tax (SGST).
  • Union Territory Goods and Services Tax (UTGST) paid on procurement within the state.

Tax payable under the provisions of reverse charge of CGST, IGST, SGST, UTGST But does not include the tax paid under composition levy.
So, How to take input tax credit (ITC)?
Every registered taxable person shall be entitled to take credit of input tax charged on goods or services or both supplied to him. It is important to note that ITC is available only if such goods or services or both are used or intended to be used in the course of or furtherance of business.
In case of eligible ITC, the said amount shall be credited to the electronic credit ledger i.e. the input tax credit ledger maintained on the GST portal for each registered taxable person. The recipient of goods or services can avail ITC only if the supplier has deposited GST with the Government.
As per section 2(19) of CGST Act, capital goods means goods, the value of which is capitalised in the books of account of the person claiming the credit and which are used in the course of or furtherance of business.

Capital goods shall include Plant and Machinery such as apparatus, equipment and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes Land, building or any other civil structures, Telecommunication towers, Pipelines laid outside the factory premises

Let’s check out Input tax credit of capital goods
Entire ITC of GST paid on capital goods will be available in the 1st year only (100%) as capital goods fall in the category of “Goods” as defined by the CGST Act.
As per section 16(3) of the CGST Act, if the registered taxable person has claimed depreciation on the tax component of the value of capital goods, ITC on the said tax component shall not be allowed.

For example, Mr.A purchased capital goods worth ₹10 lakh and paid a GST of ₹1.8 lakh. In this case, ITC is available only on ₹10 lakh, thus, he should claim depreciation in income tax only on ₹10 lakh, not on ₹11.8 lakhs.

Where a registered taxable person purchases capital goods and claims the ITC with respect to such purchase but subsequently sells such capital goods, special provisions of section 18 (6) of the CGST Act shall apply.
According to this provision, the registered taxable person shall pay the following amount:
ITC paid on capital goods
Less : % as pecified in the CGST & SGST rules, 2017
Tax on the “Transaction value” of such capital goods determined u/s 15 of CGST Act
Whichever is higher.
As per rule 40(2) of CGST and SGST Rules, 2017, ITC on credit in the case of supply of capital goods and plant and machinery shall be reduced by the ITC at 5% for every quarter or part thereof, from the date of issue of invoice for such capital goods or plant and machinery.
Where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the registered taxable person have option to pay tax on the transaction value of such goods determined u/s 15.

Suppose, Mr. A has a company called ABC Private Limited and he purchased machinery on 1st October 2018 for ₹10 lakh on which GST was paid @18%. He took ITC on the above purchase and used the machine for some time. On 4th November 2019, he sold the machinery for ₹8 lakh.In this case, ABC Private Limited took ITC credit of ₹1.8 lakh in October 2018 and used the machinery for the following quarters: Year 2018 : 1 quarter & Year 2019 : 3 quarters.Thus ABC Private Limited is eligible for ITC @5% per quarter i.e. 25%, therefore, it can retain ₹ 45,000 (25% of ₹1.8 lakh) and pay an amount equal to ₹1.35 lakh (75% of ₹1.8 lakh).Now in order to calculate the transaction value as per section 15, take the sale value of machinery i.e. ₹8 lakh and compute the GST paid on the transaction value @18% i.e. ₹1.44 lakh. Since the amount which is higher of the above is to be paid i.e. ₹1.44 lakh will be payable in GST.

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