WeP Resources

Inputs on Input Tax Credit

Inputs on Input Tax Credit

1. What is meant by Input Tax Credit (ITC)?

Input tax credit refers to credit of input tax. Input tax would mean IGST,CGST & SGST charged on inward supply of goods and services including the taxes paid by him on reverse charge basis. Input tax paid to a supplier who is under composition levy is not considered as input tax.

Input tax can relate to input, input services or capital goods. Goods that are capitalized in the books of accounts and intended to be used in the course or furtherance of business are capital goods.

Example:- Computer used by retail restaurant for raising bills is an example of capital good.

A video game console kept in the restaurant for the owner son’s to play while the owner takes break is an example of ineligible capital good even if it is capitalized in the books of account of the restaurant.

Input covers all goods other than capital goods used or intended to be used in the course or furtherance of business and input services any service used or intended to be used in the course or furtherance of business.

2. Who are eligible to avail input tax credit?
  • Registered taxable person
  • Person making zero rated supplies
3. Who are not eligible to avail input tax credit?
  • Supplier availing composition scheme
  • Non-registered taxable person
  • Persons who are not required to be registered viz., agriculturist & person who is exclusively supplying exempt goods or services or supplying goods or services not chargeable to tax
4. What are conditions and restrictions on input tax?

The flow for availing of input tax considering the various restrictions and conditions are given by way of flow chart:-

Step-1:- Are the input goods/services used for personal consumption?
Yes- No Input tax credit can be availed
No- Check for Step-2

Step-2:- Are the goods/services stolen, lost, destroyed, written off or disposed of by way of gift or free samples?
Yes- No Input tax credit can be availed
No- Check for Step-3

Step-3:- Are the inputs/services are used for self-construction of immovable property excluding plant and machinery?
Yes- No input tax credit can be availed
No- Check for Step-4

Step-4:- Are the inputs considered as capital goods in the Books of accounts?
Yes- Check for step-5
No- Check for step-6

Step-5:- Is depreciation availed on the GST component on the capital goods under Income Tax?
Yes- Input tax credit is not available
No- If the capital good is a pipeline or telecommunication tower, then Input tax credit can be availed in the following proportion-

  • 1/3rd in Year-1
  • 2/3rd in Year-2 including Year-1 and
  • balance in Year-3 provided the statutory conditions given in the Note below are satisfied.

For other capital goods, check for step-6

Step-6:- Is it motor vehicle or other conveyance?
Yes- Input tax credit is available provided the outward supply is either supply of such vehicles or transportation of passengers or imparting training on driving, flying, navigating such vehicles and the statutory conditions given in the note are satisfied. Otherwise, it is not available.
No- Check for step-7

Step-7:- Is it supply of food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery?
Yes- Input tax credit is available provided the outward supply is of same category as inward supplyor it is an element of composite or mixed supplyand the statutory conditions given in the note are satisfied. Otherwise not available
No- Check for step-8

Step-8:- Is it membership of club, health and fitness centre?
Yes- Input tax credit is not available
No- Check for step-9

Step-9:- Is it rent-a-cab, life insurance or health insurance?
Yes- Input tax credit is available provided it is statutorily required to be provided by the employer to employees and the statutory conditions given in the note are satisfied. Otherwise, it is not available
No- Check for step-10

Step-10:- Is it travel benefits extended to employees on vacation such as leave or home travel concession?
Yes- No input tax credit can be availed
No- Check for step-11

Step-11:- Is it works contract service used for construction of immovable property other than plant and machinery?
Yes- Input tax credit can be availed provided it is for outward supply of works contract service and the statutory conditions given in the note are satisfied. Otherwise it is not available
No- Input tax credit is available provided the statutory conditions are satisfied.

Note: Statutory conditions:-

  • He is in possession of tax invoice or debit note issued by the taxpayer under the GST law
  • He has received the goods and/or services
  • The supplier of input goods/services has paid the GST and furnished his monthly return
4(a). What are the documentary requirements for claiming input tax credit?

Following documents provide the basis for claiming input tax credit:-

  • Invoice under GST law issued by the supplier of goods or services
  • Invoice issued in respect of GST paid under reverse charge mechanism
  • Debit note issued under GST
  • Bill of entry issued under Customs law
  • Invoice or credit note issued by the Input service distributor

The above documents must contain all the particulars required by the ITC Rules and the relevant information has been uploaded through Return of inward supplies or GSTR-2.

5. How does outward supply influence eligibility for input tax credit?

Eligibility for input tax credit depends on the nature of outward supply. The position is summarised below: 

S No Nature of Outward Supply Entitlement for ITC
1 Only supplies taxable goods and/or services Fully
2 Only supplies zero rated goods and/or services Fully
3 Only supplies exempt goods and/or services Nil
4 Only supplies not taxable goods and/or services Nil
5 Supplies for business and other purposes Only for that portion relating to Business Purpose
6 Supplies for taxable and exempt Only for that portion relating to taxable including zero rated supplies. Exempt supply would include supplies taxable under reverse charge, transactions in securities sale of land excluding specified service and sale of building

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