Input Tax Credit under GST is the process of claiming the credit of taxes paid as an input in the making of goods & services.
Taxpayers can claim the eligible ITC through Return Form GSTR-3B.
As for the ineligible or blocked ITC, if the taxpayers claim it, they will have to reverse it with interest & they may also be liable to notices & penalties in severe cases.
Hence it becomes important for taxpayers to be aware of the blocked or ineligible ITC.
To make the entire concept simple, here is a detailed blog on Blocked Credits. Read till the end to avoid mistakes & friction in Input Tax Credit claiming.
Input Tax Credit under GST & Why is it necessary?
The process of claiming input tax credit or ITC under GST is of high value for a business to ensure that they don’t pay repeated tax for any goods or services.
ITC is nothing but the credit of the tax that the taxpayer paid as an input in a business. He can then adjust this credit to reduce their outward tax liability.
Now, what does this mean?
Let us see what this means with an example to understand better & easier-
Mr. Mehra buys processed & dyed silk yarn worth Rs. 5000 at a GST rate of 5% (Total cost paid- 5250 including GST) for his cloth boutique business.
Since Mr. Sharma is using the material for his business, he can claim the credit of Rs. 250 by mentioning the same in their GSTR-3B.
He then sells his finished goods for Rs. 8000 at a tax rate of 12%, his total tax liability for the same tax period becomes Rs. 960.
Since he already paid Rs. 250 as input tax, he can utilize his credit & reduce that amount while paying the outward tax liability while filing his GSTR-3B for that month.
Meaning he will only have to pay an adjusted amount of Rs. 710 as their outward tax liability.
Now, the major question here is how does ITC work while filing the GST returns?
Here is a simple explanation- First, Mr. Sharma’s supplier will file their GSTR-1 & declare the details of the sale he made to Mr. Sharma in the same.
The details filed by the supplier in their GSTR-1 will reflect in Mr. Sharma’s GSTR-2A.
Mr. Sharma will then file their GSTR-3B using their GSTR-2A & GSTR-1, where he will calculate his actual tax liability, his input tax credits as per GSTR-2A Reconciliation, & then the final adjusted tax liability payable.
What is the ineligibility of ITC under GST?
As per section 17(5) of CGST Act 2017, there is an entire list of cases, goods & services for which the ITC remains blocked, such Credits are called ineligible or blocked credits under GST.
You cannot claim & utilize the credits on specified cases & services such as goods & services bought for personal use.
Taxpayers need to avoid claiming blocked credits to avoid the friction of legal disputes & discrepancies.
Claiming blocked ITC can lead taxpayers to reverse the ITC so claimed along with interest in the preceding tax period, there are also chances of legal notices & scrutiny in extreme cases.
A thorough knowledge & brainstorm of this crucial aspect of ITC is necessary while making a claim.
Cases where the Input Tax Credit Remains blocked
For your understanding, we have listed in brief all the cases mentioned in Section 17(5) that deemed blocked & ineligible credits-
- ITC on purchase of Motor vehicles and conveyances (for personal use, a motor vehicle with seating capacity up to 13 persons, purchase of aircraft & vessels).
- General insurance, servicing, repairs, and maintenance of vehicles & vessels
- Vessels & Aircraft, however, there are a few exceptions where ITC is allowed for the same.
- Supply of food, beverages, club memberships, beauty treatment, surgery, etc for personal use or office parties
- Membership of a club, Gym, Beauty club, health, and fitness center
- Life & Health insurance
- Travel for personal or business purposes, vacations, holidays, etc. where LTA is provided to the employees (unless obligated)
- Leasing, Renting, Hiring Vehicles for other than specified purposes.
- Working Contract (for construction of properties)
- Construction of immovable property for personal use
- Purchase from Composition Scheme Supplier
- Good & Services received by a Non-resident
- Goods & Services for Personal Consumption
- Free Samples, gifts, lost stolen and destroyed goods
- ITC availed by means of a fraud or scam under section 74 of the CGST Act 2017.
- Goods & Services purchased for exempted supplies.
- No ITC on account of detention, seizure, and release of goods and conveyances in transit. (Section 129)
- No ITC allowed on payment of late fees, penalties, interests, etc.
- No ITC on tax paid on account of confiscation of goods or conveyances and levy of penalty (section 130)
Claiming ineligible ITC can lead to legal disputes & notices. Since the government has pre-identified the niche where you should not claim any ITC then you must ensure to keep the same in mind.
You need to have a deep & thorough knowledge of the context.
Additionally, you can also take help from an external source, such as a GSTR-2A Reconciliation software solution like GSTHero.
GSTHero is a Government authorized GST Suvidha Provider that aims to make GST compliance seamless for businesses & tax practitioners.
GSTHero’s Advanced Reconciliation Tool is stacked with features to help you reconcile better & claim 100% accurate & eligible ITC.
One such feature of the tool is to help you avoid claiming ineligible & repetitive ITC this feature will ensure that you claim the most accurate ITC only.
Click on the link below to learn more through a free demo.
About the Author– GSTHero– Making GST Simple! GSTHero is the best GST filing, e-Way Bill Generation & E Invoicing Software in India. GSTHero is a government authorized GST Suvidha Provider. Both Businesses and Tax Practitioners can file GSTR 1, GSTR 3B, GSTR 9 and GSTR 9C with all supporting reports. 1 Click Auto Reconciliation & report-matching feature helps you in claiming up to 100% ITC and finds your GST Defaulting Suppliers. GSTR2A vs GSTR-3B, GSTR-1 vs GSTR-3B, ‘GSTR-1, GSTR-2A & GSTR-3B’ annual report matching is also provided by GSTHero.
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