Calculate & Claim the most Accurate Input Tax Credit- The Only Guide You Need

Introduction- Input Tax Credit under GST plays a critical role in business taxation as it is the chief aspect that eliminates the cascading effect.

ITC affects businesses directly on a monetary front & hence businesses must make sure to calculate & claim the most righteous amount of ITC.

Claiming ITC can, however, be a difficult & time-consuming task for business accountants & CAs that can require too much attention & sincere work.

This article covers all the important things you need to know about calculating & claiming ITC to avail of maximum ITC for your business.  

What is ITC under GST & How to utilize the Input Tax Credit?

Input Tax Credit or ITC under GST is the component of the GST regime that enables taxpayers to pay the most precise amount of tax on goods or supplies.

ITC is the credit of the tax that you already paid as an input while making goods or services. So, when you sell the finished goods/services, you will not have to pay the same tax twice since you already paid it while manufacturing the goods.

Also Read- GSTR 4 Annual Return- Meaning, Applicability, Due Dates

Here is how the ITC cycle works in GST-

🎯 When you purchase raw material from a supplier, they will declare that sale in their GSTR-1 (sales return) & the same will reflect in your GSTR-2A (purchase return).

🎯 Using this GSTR-2A Reconciliation record you can claim the input tax credit through your GSTR-3B.

🎯 You can claim ITC on any type of inward supply, including exports & supplies liable to Reverse Charge Mechanism. 

🎯 You can also claim the ITC on assets & capital goods if you do not claim the depreciation on the same. 

🎯 However, the government has restricted some cases & transactions for which ITC remains blocked, and become ineligible.

Illustration on working of ITC-

Mr. A purchases cloth material for his fashion business at a 5% GST rate from Mr. B. The total tax that he paid to Mr. B was Rs. 20,000. 

On his finished Fabrics, Mr. A was liable to pay at a 12% GST rate of Rs. 80,000.

Now, when Mr. B declares the sale of the leather material in his GSTR-1 it will reflect in the purchase return GSTR-2A of Mr. A.

Based on this GSTR-2A record, he can claim the amount of Rs. 20,000 that he already paid on the input of the product & adjust it with his tax liabilities while filing form GSTR-3B

After claiming & adjusting the ITC, Mr. A will only have to pay Rs.60,000 as his tax liability for that transaction (in the particular Tax Period).

Note- You cannot utilize the ITC to offset the penalties, late-fees & interests. These liabilities can only be paid in cash & not credits.

Must Read- Difference between GSTR 4 and GSTR 9A- Composition dealer

Utilization of ITC under GST

Now, GST is paid by you in three forms, namely-

IGST- Integrated GST

CGST- Central GST

SGST- State GST

& UTGST- Union Territory GST

As per the rule, specific GST credit can be used to offset a specific GST liability type only. 

For example, CGST credits can only be used to pay CGST liability primarily, and then balance, if any, can be utilized to pay the IGST. So, you cannot utilize the CGST credit to release SGST/UTGST liabilities.    

The following table illustrates all the combinations in which you can utilize your credits-

S. No.Credit typePrimary UtilizationSecondary Utilization
1.CGSTCGSTIGST (cannot be utilized for SGST/UTGST)
2.IGSTIGSTCGST, then SGST/UTGST
3.SGST/UTGSTSGST/UTGSTIGST

Also Read- GSTR 9 and 9C- Things you need to know before filing

Input Tax Credit under GST- A List of 10 Important Rules

There are no such official rules to claiming ITC, but there are certain pointers that you must consider while claiming ITC under GST.

With the help of these pointers, you can claim the most accurate amount of ITC without any glitches & mistakes.

Here is a list of top pointers to consider before claiming Input Tax Credit (ITC) under GST-

  1. 10% ITC Rule- While claiming ITC, you must keep this important rule in mind & calculate the total eligible ITC accordingly.
  2. Eligible ITC- Eligible ITC is the credit as per 100% compliance with the ITC claiming criteria. You must only claim the ITC for which you are eligible as per your accountants & CAs.
  3. Utilization of ITC- The utilization of ITC is discussed in detail in the above section & you must utilize the ITC as per the above rule only (unless stated otherwise).
  4. Ineligible ITC- You must avoid claiming excess or ineligible ITC to dodge legal disputes as you may end up claiming the ITC against which you have not paid the GST or the GST may have not reached the Government. 
  5. Reconciliation & Invoice Matching- Reconciliation should be done very carefully while keeping the invoice matching criteria in mind. The invoices should be matched carefully as per their invoice dates, values, tax values, place of supply, supply from GSTIN, tax period, etc.
  6. Vendor compliance- It is essential to ensure vendor compliance, as the vendor’s GST compliance may affect your ITC calculation & claim according to the 10% provisional ITC Rule. 
  7. Tax Discharge- Ensure that the vendors have paid the GST to the government, as the government may block your ITC based on the same. You can only claim the ITC for GST that has been paid to the Government.
  8. Receipt of Goods/Services- You must receive the complete goods/services in order to claim ITC 
  9. 180 Day Payment Rule Compliance- You must make the entire payment to the vendor within 180 days of the invoice date or you may have to reverse such ITC claimed. 
  10. Possession of Tax Invoice- You must possess the tax invoice and any other supporting documents before claiming the ITC for a particular tax period. 

10% Provisional ITC for Mismatched/Missing Invoices

You can claim Input Tax Credit in GSTR-3B that auto-populates in your GSTR-2A from your supplier’s GSTR-1.

But what happens if the supplier does not declare or wrongly declares the invoices of their sale return- GSTR-1?

In such cases, you can still claim the credits, but it will be called Provisional Credit instead of Input Tax Credit (ITC). 

Earlier taxpayers were allowed to claim 100% PC if the recipient had all the valid supporting documents, however, this has been capped by the GSTN to a smaller percentage since December 2019.

This rule is called the 10% provisional credit rule as per which, for any missing invoices in their GSTR-2A, a taxpayer can only claim 10% of the actual eligible ITC.

Here is an illustration to understand the same better-

If Mr. A is eligible for an ITC worth Rs. 50,000 as per their purchase record, but only for Rs. 35,000 as per their GSTR-2A (auto-populated from the supplier’s GSTR-1), then he will be allowed to claim ITC as per the following formula-

A= Actual Eligible ITC= Rs. 35,000

B= Provisional Credit= 10% of 35,000 = Rs. 3500

C= Total ITC that Mr. A can claim= A+B= 35,000 + 3500

D= Rs. 38,500 

Also Read- A Complete Guide to GSTR 3B Return

How to Claim Maximum Input Tax Credit

Now that you are aware of what ITC is, how it works, the calculation of the ITC amount & the ITC rules, you are all set to claim the ITC.

All businesses can claim the input tax credit via form GSTR-3B.

Table 4 of GSTR-3B is dedicated to the calculation & claiming ITC & you can declare all the ITC related details in this table.

But the key to claiming maximum ITC is the right calculation which comes from the precise reconciliation of the GSTR-2A & Purchase data.  Here the best GSTR-2A Reconciliation tool can help businesses to handle ITC.

You must keep in mind the 10 rules of ITC & the calculation formulas that are mentioned in the above sections, most of your work in ITC will be accurate just by following these.

Further, here is how you can claim maximum Input Tax Credit (ITC)-

  1. Identify your eligibility for ITC in transactions, and claim only the eligible ITC.
  2. Missing, mismatched & Unmatched Invoices- While reconciliation you will come across the three types of invoices, for each case, your ITC claim status will change with each scenario- 
  • Missing Invoices- 10% Provisional ITC of the eligible ITC
  • Mismatched Invoices- If matched later or by making minor changes, then full ITC if the invoices remain mismatched even then, then no ITC
  • Unmatched Invoices- No ITC
  • The ITC Rules- As mentioned in the above section, you must follow the ITC rules carefully in order to claim maximum & eligible ITC only.
  1. Time limit- You cannot claim ITC for any time period after the September of the following FY as per rules. Hence it is essential to claim ITC within the defined timeline  
  2. ITC Utilization criteria- The same is mentioned in the section above & you must only utilize your ITC as per the said rule unless stated otherwise.  
  3. The process for claiming ITC is, you first reconcile the GSTR-2A data with your purchase registers & then calculate the ITC you want to claim. You then declare & furnish this detail in Table 4 of your GSTR-3B & claim the ITC there accordingly. It may look like a small & clear process, but the reconciliation bit itself can be a pile of work.
  4. Since Reconciliation plays such a vital role in ITC here are some reconciliation tips for you-
  • HSN Codes- HSN Code mismatch in invoices can cost you your ITC, so ensure to match & enter correct 8/6/4 digit HSN codes in invoices.
  • Vendor Compliance- While matching the invoices ensure to identify & notify the incompliant vendors to file their returns on time.
  • Supplies from small businesses- Even in the case of small businesses, the tax payment is a monthly activity, whereas, tax filing may be a quarterly activity, in such cases, you can only claim the ITC when the vendors file their GST returns.
  • Place of supply mismatch- One of the common big error that causes you to claim incorrect ITC is the mismatch in place of supply, say because of different GTINs. For such cases, you can reconcile on a PAN level using GSTHero’s Advanced Reconciliation Tool.  

Conclusion

A thorough reconciliation is an ultimate key to claiming maximum & eligible (correct/valid) Input Tax Credit.

As easy as it sounds, reconciliation is in fact not an easy task even for a huge accounting team, especially when the data volume increases in the case of large businesses.

It can get tedious & consume time & effort to match such a high volume of invoices & even so, the reconciliation may contain some flaws.

Such flaws can cause monetary loses in 2 forms-

  1. Excess ITC- claiming more ITC than eligible can lead to legal disputes
  2. Deficient ITC- claiming less ITC than you are eligible for is like losing the credits that you are eligible for.

To avoid these errors & claim maximum & correct ITC one must ensure to reconcile their data efficiently.

Businesses can take the help of GSPs in such aspects & one such relevant GSP is GSTHero.

GSTHero is an authorized GSP that provides software solutions & services to businesses to comply better with GST & its aspects, in the most effective & productive way.

GSTHero’s Advance Reconciliation Tool is the best tool to deal with ITC & Reconciliation under GST, with its advanced filters, custom data configuration options, auto-match options, vendor communication feature, automation of data population & more.

GSTHero will eliminate your efforts & reduce your time & effort investment while delivering precise results so you can claim maximum eligible ITC for your business.

Compiled by- 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.

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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.

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