Input Tax Credit (ITC) or simply input credit is a type of GST that you pay on goods purchased for the furtherance of business. Calculating ITC can be hassle-free if you know which things to consider and what to exclude. This blog elaborates on how to calculate ITC in GST to help you understand the process. Further, the blog highlights the concept of ITC and other related terms like reversal, reconciliation and eligibility for your convenience.

Understanding Input Tax Credit

Input Tax Credit is the GST that a registered taxpayer pays for the purchase of goods and services for business purposes. It helps reduce output tax liability on outward supplies for a registered person.

For instance, the tax payable on output = ₹500

Tax paid on input = ₹300

Then you can claim an input tax credit of ₹300

₹200 added to output tax liability reduces your tax burden or tax liability for inputs purchased for business operation.

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Eligibility for Claiming ITC

A registered taxable person can claim ITC under GST. However, you must meet all the conditions as follows:

1. The purchaser should have tax invoices or debit note issued instead of an invoice by the supplier.
2. You must receive the goods before claiming ITC.
3. Ensure you have filed the returns before claiming ITC.
4. The supplier has to pay the taxes charged to the government before you claim ITC.
5. If you receive goods in instalments or lots, you need to receive the last lot before claiming ITC.
6. If you have claimed depreciation on the tax component of capital goods, you will not be eligible for ITC claims.
7. When a person is registered under the composition scheme, he/she will not be eligible for claiming input tax credits in respect of the purchases.

Eligible Items for ITC Claims

You can claim ITC for goods and services used for business purposes solely. If you use goods and services for the following purposes, they will not be eligible for ITC claims. Here are the purposes for which you cannot claim ITC on inputs:

1. Inputs used for personal consumption
2. Exempt supplies
3. Supplies for which ITC is unavailable

Calculating Input Tax Credit Under GST

Calculating ITC on goods or services used partly for business purposes can be seamless if you know the process. Here is the process for calculating input tax credit attributable in GST:

Step 1: Calculating Common Credit of Tax Paid

Total input tax related to inputs and input services in a tax period	T
Less: Input tax on inputs and input services that are intended to be used exclusively for a non-business purpose	(T1)
Less: Input tax on inputs and input services that are intended to be used exclusively for exempt supplies	(T2)
Less: Input tax which is ineligible for a tax credit (Blocked credits)	(T3)
ITC Credited to Electronic Credit Ledger	C1
Less: Input tax on inputs and input services that are intended to be used exclusively for taxable supplies including zero-rated supplies	(T4)
Common ITC available for apportionment	C2

Step 2: Credit Attributable to Exempt Supplies

D1= (E/F) x C2

D1 = The input tax credit amount attributable to exempt supplies

E = The aggregate value of exempt goods or services during the tax period

F = The registered person’s state’s total turnover during the tax period

C2 = Common credit available

Step 3: Credit Attributable to Non-Business Activities

D2 = 5% of C2

D2 = The input tax credit amount attributable to non-business purpose

Step 4: Calculating Total Eligible ITC

C3 = C2 – (D1 + D2)

C3 = The eligible input tax credit from the common credit

Steps to Claim ITC

Here is a stepwise guide you need to follow in order to claim ITC under GST:

Step 1: Visit the GST unified portal and log in. Navigate to the ‘Services’ option followed by the ‘Return’ and ‘ITC Form’ options in the drop-down list.

Step 2: Click ‘Prepare Online’ on the GST ITC-01 box and choose the appropriate option.

Step 3: Enter the details to create the invoice like GSTIN, invoice number, date and item details like goods type, description of inputs, unit quantity code, quantity, value and ITC amount claimed before you click on ‘save’.

Step 4: Preview the entered details and click ‘Submit’.

Step 5: You will receive a pop-up alert. Click on it.

Step 6: Enter the information related to the Chartered Accountant like name, date of certificate issuance, membership number and other details.

Step 7: Select the declaration checkbox followed by the authorised signatory from the drop-down menu.

Step 8: The redirected page will show two options; one to proceed with a Digital Signature Certificate (DSC) or to proceed with Electronic Verification Code (EVC). For the former, you need to choose the certificate while for the latter you need to insert the OTP that you receive before you proceed to the final stage of completion.

Step 9: You will receive the Acknowledgement Reference Number (ARN) which you can use to track your claim status.

Reversing Input Tax Credit

There are certain situations that prompt reversal of input tax credit on inputs. Here are the situations when there is an ITC reversal:

1. Non-Payment of Invoice Within 180 Days: If the invoice remains unpaid within 180 days of issuance of invoice, ITC will be reversed as per invoice rules.
2. Credit Note Issued by Seller to Input Service Distributor: If a seller issues a credit note to an Input Service Distributor, there will be a reversal of ITC.
3. Inputs Partly Used for Personal Use: If inputs are partly used for businesses and partly for personal use or any other non-business activities, ITC for the part utilised for personal use will be reversed.
4. Capital Goods Partially Used for Non-Business Purposes and As Exempt Supplies: If you use capital goods for personal use or as exempt supplies, the part that you use for non-business purposes will exhibit a reversal of input tax credit. Thus, you have to bear the cost of capital goods used for personal use.
5. ITC Reversed Is Less Than Required: If the ITC on exempt supplies or goods used for non-business purposes is more than the ITC reversed during the financial year, the difference will add up to your output liability. Further, it will attract interest and you can calculate it after furnishing or filing of return (annual return).

ITC Reconciliation Process

ITC that you claim should match the details that the supplier specifies in his or her GST return. In the case of any mismatch, the GST authorities notify both parties for reconciliation. You can reconcile your ITC claims using a GST return form in case of any mismatch in declarations between the purchaser and the supplier.

Afterword

As you already know how to calculate ITC in GST, you can seamlessly perform calculations for a hassle-free process. Estimating your ITC claim amount beforehand can help reduce your tax liability on outputs. Thus, you can make a lower payment of output tax. Payment of taxes on time can further help you optimise ITC on purchases.

However, ensure you attentively consider parameters like inputs used for non-business purposes to achieve accurate results. This acts as a complete supply chain solution for suppliers.

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