GST

GST's Hidden Secrets: Uncovering the Truth about Ineligible Input Tax Credit

Feb 20, 2023

The seamless movement of input credit along the supply chain (from the creation of goods till they are consumed) and across the nation is one of the core components of the GST.

What is input tax credit under GST in India?

Input Tax Credit (ITC) under the Goods and Services Tax (GST) system in India refers to the credit that a taxpayer can claim on the GST paid on inputs (raw materials, goods, or services) used in the course of their business operations. This credit can be used to offset the GST liability on the output (goods or services) that the taxpayer supplies.

In other words, ITC allows businesses to reduce the overall tax burden by eliminating the cascading effect of taxes on taxes. To claim ITC, the taxpayer must have valid GST invoices for the ITC and must have paid or become liable to pay the tax on the output.

Basics of input tax credit under GST in India

Input Tax Credit (ITC) under GST in India refers to the credit that a business can claim for the tax paid on inputs (raw materials, goods, etc.) and input services (transportation, consulting, etc.) used in the course of furtherance of business.

The basic concept behind ITC under GST is to ensure that the tax is not a cost to the business, but is only a tax on the final consumer. The credit is available to a registered taxpayer on the tax paid on inputs and input services and can be used to set off against the GST liability on the output supplies of goods and services.

To claim ITC under GST, a business must meet certain conditions, such as:

  • The business must be registered under GST. To claim ITC, businesses must have valid GST invoices for the inputs and must have paid or become liable to pay tax on the output. The tax invoices must be in the name of the business claiming the credit and must contain all the necessary details such as GSTIN, HSN code, etc.

  • GST ITC can be claimed only on inputs and input services used in the course of business operations and not on capital goods. Capital goods refer to goods used in the production or supply of other goods or services with a useful life of more than one year.

  • The inputs or input services must be used or intended to be used in the course of furtherance of business and must be supported by valid tax invoices or debit notes

  • The GST paid on inputs or input services must be reported in the GST returns filed by the supplier and must be accepted by the recipient

  • The GST paid on inputs or input services must be used in the same financial year,  for the same business, and in the same state.

  • ITC can be claimed only if the inputs have been received within a period of 12 months from the date of invoice or the date of payment whichever is earlier. This means that businesses cannot claim credit for inputs received more than 12 months ago.

  • GST ITC is available only when the input tax credit has not been availed on capital goods, whether new or second-hand. This is to ensure that the credit is not claimed multiple times on the same item.

  • ITC can be availed only if the GST tax on the inputs has been paid or the liability has been discharged. This means that the GST must have been paid to the supplier or the liability must have been discharged through the electronic credit ledger before the credit can be claimed.

Input tax credit can be claimed on a monthly basis when the business files its GST returns, and it can be used to set off against the GST liability on the output supplies of goods and services.

It's important to note that GST laws are subject to change and the eligibility criteria for input tax credits may also change. So it's always good to consult with a GST expert or check the GST laws for the most up-to-date information.

Eligibility Criteria for Input tax credit under GST

To be eligible for input tax credit under GST, the following criteria must be met:

  • The person claiming the input tax credit must be registered under GST.

  • The goods or services for which input tax credit is claimed must have been used or intended to be used in the course of furtherance of business.

  • The input tax credit can only be claimed for GST paid on inputs, input services, and capital goods.

  • The GST paid on the goods or services must not be on account of any exempt supply or non-business use.

  • The person claiming the input tax credit must be in possession of a valid tax invoice or debit note issued by the supplier of the goods or services.

  • The claim for input tax credit must be made within the time limits prescribed by the GST law.

  • The GST paid on the goods or services must have been reported in the GST returns filed by the supplier.

  • The person claiming the input tax credit must be able to provide any additional documents or information as required by the tax authorities.

It's important to note that, GST credit can not be claimed for the GST paid on blocked credit items like Motor vehicles, restaurant services, etc.

Ineligible Input tax credit under GST

There are certain situations where input tax credit (ITC) under GST in India may not be available or may be partially available. 

Some examples of ineligible input tax credits under GST include:

  • ITC is not available for GST paid on inputs or input services that are used for personal consumption, such as the purchase of a vehicle for personal use.
  • Capital goods, it is not available in full in the year of purchase. Instead, it has to be taken in equal instalments over a period of time, which is defined as the useful life of the capital goods.
  • On works contract services, full in the year of purchase, instead, it has to be taken in equal instalments over a period of time, which is defined as the period of the works contract.
  • On inputs or input services that are not used or intended to be used in the course of furtherance of business.
  • On goods or services that are not covered under GST, such as petroleum products and alcohol for human consumption.
  • On goods or services that are taxed at a special rate, such as gold and other precious metals.
  • On goods or services that are not supported by valid tax invoices or debit notes.
  • On goods or services that are not reported in the GST returns filed by the supplier and on goods or services that are not accepted by the recipient.
  • On membership in a club, health, and fitness centre.
  • On goods and/or services where tax has been paid under the composition scheme.

It's important to note that GST laws are subject to change and the ineligible input tax credit criteria may also change. So it's always good to consult with a GST expert or check the GST laws for the most up-to-date information.

GST compliance and ineligible input tax credit

GST compliance is the process of adhering to the rules and regulations set by the Goods and Services Tax (GST) laws in India. It involves registering for GST, filing regular returns, and maintaining proper records and documentation.

Ineligible input tax credit under GST can occur if a business does not comply with the GST laws and regulations. For example, if a business claims input tax credit for goods or services that are not used or intended to be used in the course of furtherance of business, or if they are not supported by valid tax invoices or debit notes, the input tax credit will be considered ineligible.

To avoid ineligible input tax credit, businesses must ensure that they understand and comply with the GST laws and regulations. This includes:

  • Registering for GST and obtaining a GSTIN.
  • Maintaining proper records and documentation, such as invoices, debit notes, and GST returns.
  • Filing regular GST returns and payments on time.
  • Understanding the GST laws and regulations and being aware of changes in the GST laws.
  • Consult with a GST expert or check the GST laws for the most up-to-date information.
  • Keeping track of the GST paid on inputs, input services, and capital goods and ensuring that they are used or intended to be used in the course of furtherance of business.
  • Keeping track of the GST paid on blocked credit items like Motor vehicles, restaurant services, etc and not claiming the credit on them.

By following these steps, businesses can ensure that they are GST-compliant and avoid claiming ineligible input tax credit.

Prevention & Resolution of GST credit fraud

Prevention and resolution of GST credit fraud involve taking measures to ensure compliance with GST laws and regulations, and identifying and addressing any instances of fraud that may occur. 

Some steps that can be taken to prevent and resolve tax credit fraud include

Implementing internal controls and procedures

Businesses should have robust internal controls and procedures in place to ensure compliance with Goods and Services Tax laws and regulations and to detect and prevent fraud.

Maintaining accurate and complete records

Businesses should maintain accurate and complete records, including invoices, debit notes, and GST returns, to ensure that they can claim input tax credit only for tax paid on eligible goods and services.

Conducting regular audits

Businesses should conduct regular audits of their credit claims to ensure that they are compliant with laws and regulations and to identify any instances of fraud.

Verifying the authenticity of invoices

Businesses should verify the authenticity of invoices and debit notes before claiming an input tax credit, to ensure that they are not claiming credit on fake invoices.

Educating employees

Businesses should educate their employees about GST laws and regulations and the importance of compliance, to help prevent fraud and errors.

Using GST Compliant Accounting Software

Businesses can use software that helps in maintaining records, filing returns, and tracking GST Icredit claims, this will help in preventing fraud by providing an overview of the GST credit claimed and used.

Report any suspicious activity or fraud

Businesses should report any suspicious activity or fraud that they identify to the GST authorities, to help prevent and resolve GST credit fraud.

It's important to note that GST credit fraud is a serious offence and can lead to penalties and prosecution. Therefore, businesses must be vigilant and take steps to prevent and resolve GST credit fraud to avoid any legal and financial repercussions.