ITC full form in GST stands for Input Tax Credit and is a salient feature of GST in India. It allows GST registered businesses to successfully reduce their tax liabilities by claiming credit on taxes paid during the purchase of raw materials or any other to be used in future processes. ITC in GST enhances business efficiency, reduces the cascading burden of taxes, and also enables business to increase cash flow and profitability (i.e., by deducting taxes on input costs). There are some relevant ITC claim rules and business eligibility criteria that must be followed to ensure that a business is able to benefit from this GST feature.

We take a look at its meaning, ITC claim rules, eligibility, and how to claim ITC on taxes already paid.

For more information on Input Tax Credit, visit the GST official website: //www.gst.gov.in/

What is GST Input Tax Credit?

GST Input Tax Credit is a mechanism whereby businesses can claim back taxes already paid on their purchases.

When businesses buy goods/services they have to pay GST (Goods and Services Tax) for production or other purposes. This tax can be claimed back after sales (i.e., supply of final product), thus lowering the final tax liability.

To claim ITC, businesses must adhere to specific rules and meet the eligibility criteria. For instance, to claim tax credits, businesses must hold valid invoices/e-Invoices under GST and file their returns in time.

ITC in GST reduces unnecessary taxes, increases business cash flow, and enables them to stay GST compliant.

ITC full form in GST

The full form of ITC under GST is Input Tax Credit.

How it works? ITC under GST example

Under the GST regime, there are different GST rate slabs based on which goods and services are charged GST. For instance, GST on steel is 18%.

Now a steel furniture manufacturer (for instance, Company S) buys steel worth ₹1 lakh and pays 18% GST on it during purchase (i.e., ₹18,000) taking the purchase price to ₹1,18,000.

After a month, Company S sells the steel furniture at ₹2 lakhs and charges 18% on sales (i.e., ₹36,000), taking the final sale amount to ₹2,36,000.

Under ITC claim rules, Company S can claim the sum paid during purchase of raw materials from the final GST payable. That is:

GST collected (output tax) = ₹36,000 (from sales)

GST paid (input tax) = ₹18,000 (during purchase of raw materials)

Net GST payable = ₹36,000 – ₹18,000 = ₹18,000

This method ensures that taxes are levied only on the value added and not multiple times. This example of ITC claim under GST clearly explains how it lessens tax burdens and encourages compliance.

What are the Input Tax Credit rules?

While the ITC claim example above explains the basics of the ITC mechanism, there are some conditions that businesses must meet and fulfil to be able to claim input credits and use it effectively. We take a look at some of the prominent Input Tax Credit rules in the next section.

• Valid tax invoice: To claim ITC you must have a valid invoice or debit note from a registered business/supplier that authenticates your purchase
• Supplier GST payment: The supplier must have paid their share of GST to the government to ensure compliance and facilitate matching of claims (i.e., GSTR-1 from the supplier, matching GSTR-2B for the buyer)
• Claim upon receipt of goods: Input Tax Credit can only be claimed once the entire batch of goods has been received (i.e., actual purchase and supply)
• Payment terms adherence: The invoice received must be paid within 180 days to be viable for ITC claims and any delay in making payments can lead to reversal of credits claimed (Note: Payment term for MSE businesses is 45 days)
• Timely filing of returns: It goes without saying, but businesses must file their GST returns in time (especially GSTR-3B by the 20^th of the following month/quarter) to be able to claim input tax credits
• Business purpose only: ITC claims can only be made for goods and services purchased for business purposes, i.e., goods and services purchased for personal reasons is outside the scope of ITC under GST
• Exempt supplies: An important Input Tax Credit rule is that it cannot be claimed on any goods/services exempt from GST
• Composition Scheme ineligibility: Any business that has opted for the GST Composition Scheme cannot claim Input Tax Credits

Who is eligible for claiming ITC under GST?

As can be understood, to claim Input Tax Credit from the government, businesses must meet specific guidelines. We take a look at eligibility for ITC claims under GST.

Eligibility for claiming ITC in GST:

As per Section 16 of the CGST Act, all GST registered businesses can claim ITC on the purchase of goods/services. Business must have:

• Verified and valid GSTIN and in comply with GST rules
• Debit notes and invoices from the supplier
• Claimed ITC within the specific timeframe
• Received the entire batch of goods (i.e., if the supply is made in batches, claims should be made once the final batch of goods is received and payment made within 180 days)
• Used the goods purchased for business purpose only (unless the goods are listed under GST exempted goods category in which case ITC cannot be claimed)

Ineligibility for claiming ITC under GST

In certain cases, business cannot claim Input Tax Credits and benefit from it. For instance, purchase of GST exempted goods or personal use goods cannot reap the benefits of ITC under GST. Here are some other scenarios of its ineligibility.

• Goods/services purchased for making exempt supplies
• Payments to supplier not cleared within 180 days as per GST laws (Note: ITC reversal might be applicable here)
• Businesses under the Composition Scheme (i.e., paying a fixed GST rate) and those having defaulted on returns filing
• GST that is paid on motor vehicles and other conveyances (Note: There are exceptions to this e.g., passenger transport)
• GST paid on goods and services such as – goods that are destroyed or given as free samples/gifts, club membership fees, outdoor catering services, etc. (Note: There are exceptions in all these cases)

Special cases for ITC claims:

There are some special scenarios where ITC claims under GST have a different treatment.

• Businesses can claim ITC on capital goods (e.g., machinery, equipment) but it should be used for business purpose only and cannot manufacture exempted supplies
• ITC can also be claimed when the buyer/recipient is paying taxes directly to the government under the Reverse Charge Mechanism scheme
• Input Service Distributors (ISDs) can distribute ITC claims across their branches based on their contributions (Note: These must be GST registered)
• If the goods are sent for further job work, ITC can be claimed if the goods are received within a year’s time (3 years for capital goods)

GST forms for ITC claims

To manage Input Tax Credit in GST, there are several forms that a business must be familiar with. These forms are designed for supplier or/and buyers and can facilitate ITC verification, adjustments and utilisation.

Here’s a concise table to understand the different relevant GSTR forms:

Also read: GSTR-2A vs GSTR-2B – Key differences

Steps to claim ITC in GST

To claim ITC in GST, there are specific GSTR forms you will need. We explain the process in a nutshell.

• Submit GSTR-1 detailing your outward supply of goods and informing the GST system of your monthly/quarterly sales
• Check GSTR-2A for details on purchases made and GST paid to ensure ITC eligibility (i.e., review entry details of supplier invoices)
• Reconcile invoice details with your own accounting records to address discrepancies
• File GSTR-3B as a summary of your total tax liabilities and ITC (Note: This data must match GSTR-2A)
• Monitor records and maintain details on future transactions

FAQs

What is ITC in GST with examples?

Input Tax Credit (ITC) in GST is a mechanism where businesses can reduce their tax burdens by claiming credit on GST already paid on purchases. Let’s understand through an example.

For instance, a consulting firm pays ₹10,000 (software services) and ₹22,000 (office rent) as GST every month. It charges its clients ₹50,000 as GST on services during the same period.

During return filing, the final GST payable by the firm would be what remains after deducting outward GST less inward GST, i.e., ₹18,000 (i.e., ₹50,000 – ₹32,000).

GST therefore is paid only on the value added thereby reducing the firm’s overall GST payable.

What is ITC form under GST?

The full form of ITC is Input Tax Credit – a mechanism by which taxpayers can claim credits on tax paid on purchases made ensuring that taxes are levied only on the value added. When it comes to GST return forms, there are several GSTRs that impact ITC, namely – GSTR-1, GSTR-2A and GSTR-2B, and GSTR-3B.

What does ITC mean in tax?

ITC means Input Tax Credit under GST (Goods and Services Tax). This refers to the taxes paid by a taxpayer during purchase of raw materials/services that will be used in production or services for business purposes only. This can be claimed during returns filing to ensure that taxes are levied only once. This naturally reduces the tax burdens on businesses.

*This article is for information only. For more details please visit the official GST website or consult with a GST practitioner or CA or tax consultant for professional advice.