Can you claim ITC on imported goods?

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Published Date:  27-12-2023   Author:   ateet-sharma
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Table of Contents

Introduction

The import of products and services is a crucial component of global trade and business. And in GST taxation, the imported goods and services are treated as supply. So, the tax liability is computed based on the value of the imported products or services. All the imports are treated as inter-state supplies, so in that case, IGST will be applicable in addition to Basic Customs Duty (BCD).

In this article, we will delve into the further details of ITC on imported goods, compliance considerations, strategies and common challenges.

But before that, let’s understand how the taxes are calculated with an example. Assume the assessable value of an imported article entering India is Rs. 200/-. The basic customs duty rate is 10% ad valorem. The Social Welfare Surcharge is 3%, the Integrated Tax is 18%, and the Compensation Cess is 15%.

Here is how the taxes will be computed:

Particulars Duty
Assessable Value Rs. 200
Basic Customs Duty (10%) Rs. 20
SWS (3% of BCD) Rs. 0.6
Value for Integrated Tax Rs. 220.6
Integrated Tax (18%) Rs. 39.70
Value for Compensation Cess Rs. 220.6
Compensation Cess (15%) Rs. 33.09
Total Duty Rs. 93.40

Importing goods and claiming ITC in GST

Customs laws and GST compliance are two of the many aspects of importing products under GST. Customer clearance is the primary step in the entire process. Secondly, the importers need to pay the IGST i.e. Integrated Goods and Services Tax. The process for claiming the ITC on importing goods is as under:- 

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1.  Registration for GST

      Businesses need to make sure they are registered under GST before beginning the import process. Businesses whose annual turnover exceeds the threshold set forth are required to register.

2.    Clearance of Customs and IGST Payment

      The process of getting customs clearance is important when importing goods. Currently, the assessed value of the imported products is subject to IGST. This fee is collected by customs authorities from importers. 

3.    Filing GST Returns

      Importers must submit information about their import transactions in their regular GST forms. 

4.    Reconciliation of IGST Paid and ITC Claim

      To claim ITC, firms must reconcile the IGST paid at the time of import with the ITC claimed on their GST filings. It is best to address any discrepancies as soon as possible. 

Eligibility for ITC on imported items

Businesses need to comprehend the specifics of this process because importing goods under GST provides a distinct set of eligibility requirements for claiming ITC.

  • GST Registration

GST registration is very important for claiming ITC on imported goods. The importer declares the GST Registration number (GSTIN) in the Bill of Entry. This helps in getting input tax credits for IGST and GST compensation cess. 

  • Save an IEC

      Additionally, importers must have an Import Export Code (IEC) from the Customs Administration. To monitor and control imports and exports, this code is necessary. 

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  • Filing Forms

Also, to claim input tax credit, the importer must file GSTR-2 along with the GST tax invoice and other necessary paperwork.

  • Valid and Properly Arranged Invoices

        GST regulations demand that import-related invoices be legitimate and properly formatted.

Also Read: What Information Do You Need To Report ITC?

Strategies for maximizing ITC on imports

Under the Goods and Services Tax (GST) regime, maximising the Input Tax Credit (ITC) on imports requires a calculated and planned strategy. Companies can use several strategies to maximise their benefits from the ITC on imported goods, including

  • Effective Supply Chain Management

To optimise ITC benefits, strategic supply chain management is essential. To improve efficiency, systems that allow real-time visibility into the supply chain should be implemented.

  • Exemptions and Concessions

It is fundamental to thoroughly examine and comprehend the exemptions and concessions available under the GST structure for imported goods. Businesses should also investigate and take advantage of duty drawback plans made available by the government. These schemes seek to reimburse duties paid on imported goods, hence contributing to increased ITC benefits.

  • Technology Inclusion

Businesses can examine patterns and trends in their import transactions by putting data analytics technologies into practice. Such expertise can help highlight areas that require changes in compliance and ITC optimisation.

  • Strategic Planning for Customs

Accurately classifying and valuing imported goods is essential. ITC claims that are not accurate can result from errors in these areas. Companies that want to maximise classifications and valuations need to work closely with customs specialists. Also, to maximise IGST payments and ensuing ITC claims, businesses should investigate the various techniques of valuation.

Documenting ITC for imported goods

To manage the intricacy of the import process and support ITC claims, extensive and correct paperwork is necessary. Here are the best practices that you must follow for documenting ITC on imported goods-

  •  Bill of Entry and Invoice

Request a full invoice from the supplier. This should contain all pertinent information, including the supplier’s GSTIN, a unique invoice number, a description of the goods, their quantity, value, and any applicable IGST.

  • Shipping documents

Keep all shipment paperwork on file, such as the airway bill, bill of lading, and any other relevant paperwork. In order to claim ITC, these documents are necessary as proof of the actual transfer of goods.

  • Record-Keeping Best Practices

All papers connected with the import of goods should be stored in a centralised, well-organized system. Consider them stored digitally because reduces the need for physical storage, makes retrieval easier, and adds another level of protection. 

  •  Matching Invoices with Goods Received

Implement a Goods Receipt Note (GRN) mechanism to match the actual receipt of products with the details specified in the supplier’s invoice. Perform a three-way match with the purchase order, the supplier’s invoice, and the GRN. 

Compliance considerations for ITC claims on imports 

To ensure transparency and avoid penalties, business needs to fulfil compliance requirements. The following are important compliance requirements for ITC claims on imports:

  •  Accurate GST Return Reporting

Make sure that the necessary GST return forms, such as GSTR-3B and GSTR-1, appropriately reflect import transactions and related information. Give imported items the correct HSN (Harmonized System of Nomenclature) or SAC (Services Accounting Code) codes. 

  •  Customs Compliance

Make sure that, throughout the import process, all customs laws and procedures are followed. This involves following valuation procedures, accurately filing customs declarations, and complying with any customs notifications. 

  •  Regular Compliance Audits

To evaluate the company’s compliance with GST requirements and discover areas for improvement, conduct periodic compliance audits either internally or through the assistance of external specialists. 

  •  Understanding Regulatory Changes

Keep track of any modifications to GST laws, customs policies, and other relevant laws regularly. Continuously train staff personnel involved in the import and GST compliance processes.

Also Read: How To Claim ITC On Capital Goods?

Common challenges in claiming ITC on imported items

Challenges occur while claiming ITC and businesses must navigate these issues to maximise their tax benefits and assure compliance. Here are a few common challenges to obtaining Input Tax Credits (ITC) on imported goods:

  • Errors in Documentation

The ability to claim ITC may be hampered by inadequate or wrong documentation, such as incomplete bills of entry, missing invoices, or differences in values. Businesses must guarantee that all necessary documentation is precise, comprehensive, and compliant with the GST laws. 

  • Errors in IGST Calculation

      When IGST is calculated incorrectly at customs clearance, there may be discrepancies between the amount paid and the credit claimed. To find and fix such problems, regular validation and reconciliation procedures are necessary. 

  • System Integration

Companies that use different systems for GST compliance, invoicing, and customs clearance may have difficulties in properly integrating these systems. For correct ITC reporting and claims, this integration is essential.

  • GST Registration and Compliance

      Throughout the entire import procedure, keep your valid GST registration active. It may be difficult to claim ITC and cause non-compliance if you do not have a current GST registration. Also, make sure to immediately update any modifications to the address or business structure that may have an impact on GST details.

  •   Import of Restricted products

In order to prevent difficulties in the ITC process, businesses must be aware of any restrictions on the imports of goods Customs limits on certain goods may limit or prohibit the claiming of ITC. 

Conclusion

To support local businesses, it’s important to have GST on imported goods. This helps local manufacturers and service providers compete better and stay ahead in the market. It’s like a necessary tool for them to keep their edge and succeed. 

Businesses have to overcome a challenging environment to comply with eligibility requirements, maximise ITC benefits, comprehend the particulars of importing goods and accurately report in GST filings. 

Businesses that gain expertise in claiming input tax credits will be cost-efficient as well as will be leading their name as a global player.

Also Read: INPUT TAX CREDIT UNDER GST

Frequently-Asked Questions

1.  What does it mean by Input Tax Credit? 

The input tax credit is the mechanism through which a firm can save taxes. Here the firm pays the tax on purchases and utilises the same to reduce the tax liability on sales. 

2.   What is the GST on the imported goods?

The importer is required to pay IGST on the imported products since they are considered interstate supplies. IGST will be paid in addition to Basic customs duty and the social welfare surcharge at the time of payment.

3.   Under the GST, where is the place of supply for imported goods in India?

         As per Section 11 of the IGST Act, 2017, when it comes to goods brought into India, the point where they are considered supplied is wherever the importer is located. For instance, if an importer is based in Rajasthan, the state of Rajasthan will get the state tax portion of the integrated tax.

4.   How can I pay the IGST?

To the extent that it is available, ITC can be used to pay the IGST; the remaining amount can be paid in cash. There is a hierarchy that is maintained for the payment of IGST utilising credit. However, IGST on imports must be paid in cash only. 

5.  What does the import of goods mean?

The IGST Act, 2017, defines import as bringing goods into India from outside India. All imports will be considered inter-state supplies and will be taxed accordingly. The integrated tax will be imposed in addition to any relevant Customs duties. 

6.    What are the duties and taxes while importing goods?

All imports into India will be subject to four duties and taxes. They are listed below:- 

  • Basic Customs Duty (BCD), 
  • Integrated Goods and Services Tax (IGST)
  • Social Welfare Surcharge 
  • Customs Handling Fee.

7.   Is there a deadline for submitting an ITC claim for imported goods?

In the same tax month that IGST is paid at the time of customs clearance, businesses are eligible to claim input tax credits (ITC) on imported goods. To maximise ITC benefits, timely reconciliation and claim processing are essential.

8.   What is the payment method for import tax?

All import duty and tax payments into India are processed through ICEGATE. You must first create an ICEGATE account. If you already have an ICEGATE account, proceed to the payment steps below:

  • Enter the Import/Export code or login information provided by ICEGATE.
  • Select e-payment.
  • All unpaid challan invoices in your name will be given.
  • Choose the challan you want to pay and a payment method.
  • You will be transferred to the payment portal of the specific bank.
  •  Make the payment.

 Once your import duties are paid, your shipments will smoothly pass through customs and arrive at their destination.

9.   Is it possible for businesses to claim ITC on imported products used for non-business purposes?

No, ITC can only be claimed on business-related goods. Goods used for personal or non-business purposes are not eligible for ITC.

10. In the context of import GST, what is the importance of OIDAR services?

The importer must deposit IGST on a reverse charge basis in order to use OIDAR (Online Information Data Access and Retrieval) services.

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Ateet Sharma

Ateet Sharma is a B.com graduate and has done an MBA in Finance. He has worked majorly in the banking sector for more than 5 years. He has worked for retail banking as well as credit analysis and has worked for banking brands like Axis Bank, DHFL, Capital First, Bajaj Finance etc. He has written articles on varied topics in finance like banking, taxation, insurance, stock markets etc. Ateet likes to listen to music and read books in his free time.

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