HOW TO CLAIM INPUT TAX CREDIT UNDER GST?

Taxes paid at the time of purchase are adjusted with the amount of tax on sales and the balance liability of tax, which is a tax on sales minus tax on purchase has to be paid to the government.

Team Law Community
January 6, 2021

The input tax credit is a tax that is paid by the buyer on the purchase of any goods and services. This mechanism is available to someone who is covered under the GST Act. This means that if you are a manufacturer, supplier, agent, e-commerce operator, or any of the persons registered under GST, then you can claim input credit for tax paid by you on your purchases, In other words, in the input tax credit mechanism When a consumer buys a product or service from a registered supplier, they will pay taxes on the purchase. On selling, the supplier collects the tax. Taxes paid at the time of purchase are adjusted with the amount of tax on sales and the balance liability of tax, which is a tax on sales minus tax on purchase has to be paid to the government.

   To claim an input tax credit under GST, the following requisites are mandatory:

  • You must have possession of a tax invoice or debit note issued by a registered seller. Where goods are received in instalments, the credit will only be availed against the tax invoice when the last bit of instalment of the goods will be received.
  • Goods or services must be received. Suppose a recipient doesn't pay the value of the goods or tax within three months of issuance of invoice and has already availed credit against such an invoice. In that case, the amount will be added to that person's output tax liability along with interest.     
  • The supplier must deposit the amount paid by you as the tax on your purchase to the government via cash or claiming credit input.
  • The supplier must have filed GST returns. One of the reforms of GST is that input credit is allowed to the consumer of a product only when it’s supplier deposits the tax collected from the consumers. So, to claim input credit on purchases, all your suppliers must be compliant with GST as well. Every input credit that is claimed by you is matched and validated before it can be claimed.
  • There is a possibility of having unclaimed input tax credit as when a tax on purchases is higher than the sale tax then such input tax can be carried forward or claim the refund. The government pays no interest on the input tax balance. 
  • The input tax credit is not allowed for goods and services that are for personal use.
  • The input tax credit shall not be given after the GST return has been lodged in September following the end of the financial year in respect of which the invoice relates or after the applicable annual return, whichever is earlier, has been lodged.
  • For purchase invoices that are more than one year old, input credit tax cannot be claimed against such invoices. The period is calculated from the date of issuance of the invoice.
  • Input tax credit (ITC) is allowed on capital goods. ITC can be availed on goods and services since GST is charged on both goods and services. Since GST is charged on both goods and services except the ones that have been exempted.


There are four kinds of documents on which input tax credit can be claimed

  1. an invoice which is issued by the supplier of goods and services
  2. A debit note issued by the supplier in respect of earlier issued invoice tax.
  3. A bill of entry in case of imports and,
  4. A credit note issued by the input service distributor.  

GST consists of three types of taxes which are Central goods and service tax (CGST), integrated goods and service tax (IGST), and State goods and service tax (SGST). CGST and SGST are for intra-state movement. IGST is for inter-state movement. To pay IGST, take input credit tax from IGST, SGST, and CGST. To pay SGST to take input credit tax from IGST and SGST. To pay CGST to take input credit tax from IGST and CGST.   

 Input tax credit mechanism had eradicated the concept of cascading of taxes which means a tax on tax was taking place before this mechanism was introduced. When the credit of taxes levied by the central government is not available as set-off for payment of taxes levied by the state government or when it's the other way round, it amounts to the cascading of taxes. Under this new regime, most of the indirect taxes levied by the central government and the state government on goods and services both will be combined under a single levy. Now, the tax charged by the central and the state government will be a part of the same tax regime. It is an uninterrupted and seamless chain of input tax credit under GST. 

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