GST has been brought into the Indian taxation system for transparency and streamlining. It provides a very special feature, which is called the input tax credit (ITC), which helps reduce the businesses’ tax burden. The benefit of ITC operating companies in claiming credit for tax paid on purchases can reduce overall tax liability, create smoother cash flows, and save themselves.
Let’s discuss what Input Tax Credit is, how businesses are qualified for it, and some of the common challenges faced while claiming ITC under GST. Proper usage of ITC helps significantly save tax amounts and hence helps increase profitability.
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What is an Input Tax Credit?
Under the GST system, an input tax credit is a benefit granted to businesses where taxes paid on goods or services consumed by them in their business operations are credited into the accounts. In short, if you are a businessman and paid GST while purchasing goods or services, its amount may be subtracted from the amount of total GST you owe the government when selling your own goods or services.
For instance, if a manufacturer pays GST when purchasing raw materials, that amount of GST can be set off in the total GST such a manufacturer is liable to pay at the last stage after he has sold the final product.
This mechanism does ensure payment of tax only over the value addition at each stage of production or in the supply chain; hence, avoiding double taxation and reducing the incidence of tax. MSMEs who wish to apply for business loan from lenders are recommended to be GST registered which also qualifies them for the benefits of ITC.
Input Tax Credit Eligibility
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Not all kinds of business or expenses are qualified under Input Tax Credit under GST. There are some conditions that a concern has to fulfill to be qualified for ITC:
- GST registration ─ An MSME owner needs to be registered under the GST system to claim ITC. Only those with a valid GSTIN (GST Identification Number) can avail of ITC.
- Goods or services must be for business purposes ─ ITC can be claimed only if the goods or services purchased are for business purposes. ITC can’t be claimed if the goods or services are personal.
- Valid tax invoice or debit note of the supplier of such goods or services ─ A valid tax invoice or debit note issued by the supplier of such goods or services will be kept for the business. This will be the proof that GST has been paid on it.
- Goods or services for which the GST was paid must have been received ─ Only when the goods or services for which GST was paid have been received by the business, can the ITC be claimed.
- The supplier pays the tax to the government ─ The tax the supplier has paid to the government must be made from the goods or services bought. If a supplier has not paid his tax, then a buyer cannot claim ITC.
- Input Tax Credit must be claimed on given timeframe ─ There is a requirement to make the Input Tax Credit claim within one of the two dates: either the due date of furnishing the GST return for the month of September following the end of the financial year or the date of furnishing the annual return. If in case you missed it, you cannot claim it later.
Major Problems in Availing Input Tax Credit
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While there are many benefits of ITC, most businesses face some drawbacks in its availing. Some of the common drawbacks include the following:
- The mismatch in GSTR forms ─ Every business in the current scenario is bothered by the mismatches of the purchase details reported by a buyer under GSTR-2 and the sales details provided by the supplier under GSTR-1. In case any mismatch happens, then the ITC for the said transaction cannot be claimed by the buyer, which leads to delay and extra efforts in getting the reconciliation of the data.
- Non-compliant suppliers ─ A supplier must have paid the GST to the government to avail the ITC. In that case, if the supplier does not do so, then a buyer would not get any benefit from ITC. Therefore, an added burden on the list of businesses is to verify their suppliers as GST compliant and tax up-to-date.
- Goods and services completely excluded from ITC ─ Not all purchases of the business will attract input tax credit. Purchases of motor vehicles, food and beverages, and personal goods are excluded from ITC. Similarly, services such as health insurance for employees are excluded. Thus, the business must determine when it should recover ITC.
- Complex record keeping ─ To claim ITC, a company needs to maintain invoices and debit notes. In the case of incorrect or incomplete records, it may create hassles in claiming ITC. Also, the large number of suppliers hurts the large company’s ease of keeping track of all the invoices and also ensuring that all are GST-compliant.
- Time-bound claiming of ITC ─ The time constraint to claim ITC is quite strict. If the corporation fails to claim ITC within the stipulated time frame, it loses its right to enjoy that credit. Enterprises need to constantly check their ITC claims and ensure timely submission so that they do not miss the window of time.
- Frequent changes in GST ─ The GST rules keep on changing frequently. This causes stress to businesses when they need to apply their minds in terms of compliance. It makes the process of filing erroneous or confusing, especially if and when eligibility criteria for ITC or the documentation required are changed.
Source: issuu.com
Conclusion
The input tax credit (ITC) is considered one of the most important for businesses in terms of reducing liability and improving cash flow. ITC is designed to enable the deduction of the GST paid by small business owners on their purchases against the GST they owe on sales, thus preventing double taxation and reducing overall tax costs.
However, for businesses to avail of the benefits under ITC, they must ensure that they qualify, so far as the eligibility criteria go GST registration is proper, tax invoices are valid, and suppliers pay tax.
While mismatches of GSTR forms bring with them the inconvenience of suppliers not paying tax, and in the time within which the credit is allowed, proper management and up-to-date record-keeping can go a long way in truly helping businesses unearth the full potential of ITC.
Support for MSMEs is achieved through the role of NBFCs in developing fast and flexible unsecured business loan options for MSMEs. More importantly, easily accessible financing options from NBFCs help MSMEs manage their cash inflows better, especially when ITCs are being delayed or in cases of other financial demands.
The assistance offered by NBFCs to the MSMEs for availing the most favorable source of finance for growth, besides saving tax benefits from the application of the GST Input Tax Credit.
