Eligibility and Conditions for taking ITC - Sec 16

Eligibility and Conditions for taking ITC - Sec 16

In the GST laws, ITC i.e. Input Tax Credit is a concept through which the businesses offset the tax which they have already paid on the inputs against the tax payable by them on the output supplies. In other terms, it allows businesses to deduct the tax already being paid on inputs purchased from the tax that is owed on the sales. ITC is formulated in such a way that it eradicates the cascading effect of tax, increasing costs for the business and in turn the final consumer. 

Because of ITC, the GST is computed on the net value addition at each stage of supply resulting in a better, transparent, and efficient taxation system. For example, if a manufacturer of textiles purchases raw materials like cotton, yarn, etc., and pays GST on the same, he can deduct this amount from the GST they collect from sales to customers and pay the net amount to the government. 

ELIGIBILITY FOR CLAIMING ITC - SEC 16(1)

ITC can only be claimed by a registered person under the GST laws who also meets all the following conditions:

• The dealer must have received the goods or services
• Returns must have been filled and submitted
• The dealer must have the tax invoice in possession 
• No ITC is to be claimed if depreciation has been claimed on the tax component on capital assets. 
• ITC can only be claimed upon receipt of all shipments if the supply is to be received in installments. 
• The supplier must have paid the tax to the government. 

CONDITIONS FOR CLAIMING ITC - SEC 16(2)

1. Documentary evidence: It is the most basic requirement for claiming ITC and includes tax invoices, bills of entry, and debit notes. The person must ensure that the document complies with the applicable requirements and provisions and has all the needed details. If the supplier does not comply with the same, the ITC may prohibit the purchaser or recipient. 

   It should be noted that in the case of reverse charge, a self-invoice is good enough to be taken as a valid document for availing ITC. 

2. Receipt of goods or services: The goods or services or both must have been received by the recipient. In cases where the supply pertains to the previous month but the actual receipt occurs in the next month, the ITC on these types of supplies is deferred until the following month. Further, if the supply is received by another person on the instruction of the recipient, the supply will be deemed to have been received by the recipient. This scenario is generally referred to as the “Bill to Ship to” model. 

3. Tax to be deposited by the supplier: The supplier must deposit the tax collected from the recipient to the government. This condition makes sure that the recipient ensures that the supplier deposits the tax collected from him to the government. As the recipient is not provided with a mechanism to assure such payment, the recipient can claim ITC contingent on the supplier’s tax payment. 

4. Return submission: The recipient of the supply must submit all the GST returns to claim the ITC. Subsequently, it is important to ensure that the conditions are met for the recipient to claim the ITC.

5. Auto population of the details in the return: ITC eligibility is restricted to the details furnished in the form GSTR 1 as part of the GST compliance to be done monthly. Hence, the recipient can only claim the credit for invoices reflected in their GSTR 2B for the relevant month. This requires taxpayers to perform a reco on a continuous basis to make sure that the invoices in their records correspond to the filings of suppliers. 

6. Ineligible or restricted ITC is not permitted: ITC concerning a supply can be claimed only when such credit has not been restricted as per 17(5) - blocked/ineligible credit. The details of such ITC is communicated through GSTR 2B which contains a list of ineligible ITC also. 

CONDITION WHERE ITC WILL BE DISALLOWED 

1. Payment is to be made within 180 days: As per the second proviso to Sec 16(2), To avoid any repercussions and interest charges, taxpayers must pay their vendors within 180 days of the invoice date. Any failure to pay within the specified time will result in the reversal of ITC. One must note that this condition does not apply to RCM transactions, transactions between unrelated and related parties, or the importation of production. 
2. Depreciation claimed against GST: As per the provisions of Sec 16(3), If depreciation is claimed on the GST value of the capital goods, then no ITC will be allowed as whether the depreciation on GST can be claimed under the Income Tax Act or ITC on GST paid can be availed. 
3. The deadline for claiming ITC against an invoice: As per Sec 16(4) ITC for a particular FY must be claimed by the 30th of November of the next year or the due date of filing annual return, whichever is earlier. Even if all the requirements are fulfilled, any unclaimed ITC after the said deadline will become inaccessible and expire. Hence, the time availability of ITC under GST laws is important for maximizing the incentives and avoiding the losses of eligible credits. 

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