What is Input Tax Credit?

With an input credit, you can deduct the tax you have already paid on inputs when paying output taxes. Assume you are a manufacturer. The final product (output) tax you must pay is Rs 450. There is Rs 300 in input tax (PURCHASES) paid. All you have to do is deposit Rs 150 in taxes, and you can claim an INPUT CREDIT of Rs 300.

Input Credit for GST

In case of Input credit mechanism, you are qualified to claim an input credit for the tax you have paid on your purchases if you are a registered GST operator, manufacturer, supplier, agent, aggregator, or any of the aforementioned individuals.

How can you submit a GST input credit claim?

To submit a GST input credit claim:

● It is necessary to obtain a tax invoice (of purchase) or debit note from a registered dealer.

● You were supposed to receive the goods or services.

Note: Upon receipt of the final lot or installment, credit will be granted against the tax invoice in cases where goods are received in lots or installments. Note: The said credit will be added to the recipient’s output tax liability along with interest if he has already accessed input credit based on the invoice and fails to pay the service’s value or tax within 180 days of the invoice’s issue.

● The supplier has deposited or paid the government tax that was assessed on your purchases, either in cash or by claiming input credit.

● The supplier has submitted GST returns.

● The invoice is visible in the recipient’s or buyer’s GSTR-2B after the supplier uploads it to their GSTR-1.

The fact that input credit is only permitted if your supplier has deposited the tax he has collected from you. Therefore, before you can claim any input credit, it must be matched and validated. Therefore, in order for you to be able to claim input credit on purchases, all of your suppliers must also be in GST compliance and paid the tax on output tax liability.

WHAT BLOCK CREDIT MEANS

Under GST, “blocked credit” refers to the supply of goods and services for which the applicable legal provisions have restricted the ability to obtain credit.

Items for which the GST prohibits credit

1. Motor vehicles & conveyances

Vehicles used for passenger transport with a seating capacity of less than or equal to 13 people (including the driver) are not eligible for ITC. ITC is offered, nevertheless, if these cars can accommodate more than 13 people in seats. Additionally, ITC is not accessible on aeroplanes or ships.

For instance, XYZ & Co. purchases a vehicle for their company. On the same, they are unable to claim ITC.

● Passenger transportation

ITC will be permitted on the purchased vehicle if you are offering passenger transport.

For instance, Happy Tours bought a bus to transport people between cities. ITC is accessible.

● Granting instruction in the operation of vehicles, aircraft, boats, and driving, respectively.

A driving school buys a car so that students can receive instruction in it. Regarding the GST paid on the vehicle, the school is eligible to receive an input tax credit.

● Transport of goods

When moving goods from one location to another, automobiles (and other conveyances) will be permitted to use ITC. But this isn’t about goods transport agencies (GTA)—rather, it’s about other transporters.

2. Food, beverages, club memberships and others

The provision of the following products, services, or both is not covered by ITC:

● Food and drink

● Outside food service

● aesthetic care

● Medical services

● Plastic and cosmetic surgery

ITC, however, will be available if the component is part of a mixed or composite supply under GST, or if the category of the outward and inward supply is the same.

The following answers to frequently asked questions about ITC availability for employers:

When paying for broadband and phone bills that are reimbursed during business hours, input tax credits are available.
When directors or employees use their business-related air travel expenses, they may be eligible to claim an input tax credit.
For claims where GST is paid on the premium paid for employee accident insurance, input tax credit is available.
Cabs cannot be rented out for employee commuting using ITC. ITC will be permitted, though, if there is a law or regulation that specifies this requirement by the employer. When companies rent buses with more than 13 seats for the purpose of picking up and dropping off employees, ITC is also permitted.
ITC is not available for purchases made by employees as gifts from their employers.
Expenses incurred for employees’ boarding or lodging that are related to business can be claimed as input tax credits.
If provided in accordance with the Factories Act of 1948 or any other applicable labour law, employees are eligible to receive In-Trade Credits (ITC) for refreshments or canteen services. Furthermore, benefits according to the employment contract are exempt from GST.

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

When it comes to general insurance, servicing, repair, and maintenance related to the automobiles, boats, or aircraft mentioned in (1), there is no allowable ITC.

ITC exceptions for maintenance, repair, and insurance

● Similar to the exclusions listed for automobiles, boats, and aircraft

● When money obtained by a taxable entity involved in—

● In the production of such automobiles, ships, or aeroplanes; or

● In the provision of general insurance services for such automobiles, ships, or aeroplanes that he has insured.

4. Rent-a-cab, life insurance, health insurance

Rent-a-cab, health insurance, and life insurance are not eligible for ITC. But there are some exceptions, such as the following: ITC is available for

● Any services that the Indian government mandates an employer provide to their workers in accordance with a currently enacted law.

For instance, let’s say the government enacts legislation requiring all employers to offer taxi services to female employees working night shifts. When its female employees work night shifts, ABC Ltd. provides transportation for them by renting a taxi. ABC Ltd. will then be eligible for an input tax credit on the GST that was paid to the taxi service.

● If the category belongs to the mixed or composite supply, or if it is the same for both the outbound and inbound supply.

For instance, XYZ Travels borrows a car from ABC Travels. XYZ Travels can then make an ITC claim for the same.

● Leasing, renting, or hiring of automobiles, boats, or aeroplanes, with the same exclusions as stated under (1)

5. Travel

When it comes to travel and benefits like leave or home travel allowance that are given to employees while they are on vacation, ITC is not available.

For instance, ABC Ltd. provides its workers with a vacation package for personal time off. ITC on the GST that ABC Ltd. paid for the vacation package will not be permitted. ITC is permitted to travel for work-related reasons. To learn more about how the GST affects train and airline fares, please read our article.

6. Works contract

ITC won’t be offered for any services provided under contract. ITC cannot be claimed for building an immovable property unless the input service is used for contract services related to additional work.

XYZ Contractors, for instance, are building an immovable property. On the works contract, they are not eligible to receive any ITC. For a portion of the works contract, though, XYZ employs ABC Contractors. XYZ is entitled to an ITC on the GST that ABC Contractors charged.

7. Constructing an immovable property on own account

For products or services used to build an immovable property on his own account, there is no ITC available. ITC won’t be offered, even if such products or services are utilised to further business. However, the machinery and plant are exempt from this rule. For inputs used to produce machinery and plants for internal use, ITC is offered.

As an illustration

For its headquarters, Ajay Steel Industries builds an office building. ITC won’t be accessible.

In order to make steel, Ajay Steel Industries also builds blast furnaces. Since it’s a plant, ITC is accessible.

8. For individual use

Purchases made for personal use rather than for business purposes are not eligible for ITC. ITC will only be permitted to the extent of business use in accordance with the common credit formula if a portion of the goods or services are used for both personal and business purposes.

9. Free sample and misplaced

If the purchased items are misplaced, stolen, ruined, written off, or distributed as free samples or gifts, ITC is not available. ITC may occasionally have already been claimed at the time of purchase, but when any of the aforementioned circumstances occur, it may later need to be reversed in GSTR-3B.

Expenditure on CSR Initiatives

As per the latest amendments in Budget 2023, expenditure incurred on CSR Initiatives by corporates, wouldn’t be allowed as Input Tax Credit

Final Thoughts

To sum up, blocked credit under GST can significantly affect businesses, especially with regard to cash flow and compliance. Businesses should be aware of the different kinds of credit that can be blocked, the requirements for obtaining blocked credit, and the possible effects on their day-to-day operations. Businesses must keep accurate records, classify purchases accurately, make sure input tax credit is used exclusively for business purposes, keep an eye on changes to the GST law, and carry out routine internal audits in order to reduce the impact of blocked credit. Businesses can maximise their claims for input tax credits, lower their tax obligations, increase cash flow, and boost profitability by doing this. Effective management of blocked credit is crucial for businesses in order to minimise expenses and comply with GST regulations.