Input Tax Credit (ITC) Provisions in GSTR-4

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The Goods and Services Tax Act was introduced to eliminate the cascading effect of taxes on the people. The salient feature of the act was the provision of the input tax credit (ITC) which is the tax paid by the dealer on his purchases used for the business. This ITC can be used to reduce the GST payable by the taxpayer. This helped avoid double taxation and reduced the burden on not only the taxpayers but the consumers also. ITC can be availed by registered taxpayers under certain conditions. One of the conditions is that the taxpayer should not be registered under the compensation scheme. Let us understand in detail about the provision of input tax credit in GSTR-4 which is a mandatory return which taxpayers registered under the compensation scheme must file every year.

The composition scheme was introduced to make compliance easier for small businesses with a turnover of less than 1.5 crores in a financial year. For north-eastern states, the limit is Rs.75 lakhs. In this scheme the tax rates are lower and filing returns is simpler.  One important feature of the compensation scheme is that the Input tax credit cannot be availed by the taxpayers.  They cannot issue tax invoices, pass on input tax credit to their buyers, or claim input tax credit on their purchases.

Important Points Regarding Input Tax Credit under Composition Scheme

  • The tax paid on inward supply by the composition dealer is not allowed as credit. It can only be treated as expense from the accounting point of view.
  • If the taxpayer has availed input tax credit on the inputs used by him and he avails the composition scheme in the same year, he has to reverse the input tax credit already availed by him. But in case of capital goods, the credit is reduced by 5% per quarter of the year or part thereof from the date of invoice.
  • The customer who buys from a person registered under the composition scheme, does not need to pay tax as businesses registered under the composition are not allowed to collect tax from their customers. So, the ITC claim does not arise.
  • Further a registered person making purchases from a taxable person registered under the composition scheme cannot avail the credit.
  • If the taxpayer switches from composition scheme to normal scheme, the eligible input tax credit on the date of transition will be allowed. He then has to pay tax at normal rates and issue tax invoices from the day he opts out of the composition scheme. He is also required to file an intimation for withdrawal from the scheme in GST CMP-04 within 7 days of such withdrawal.
  • He has to furnish GST ITC-01 containing details of the stock of inputs and semi-finished and finished goods held by him on the date of withdrawal from the composition scheme. This form has to be submitted within 30 days from the date of withdrawal from the scheme, or the date of order passed in form GSTCMP-07. To avail input tax credit on stock lying at the time of the transaction the following conditions, have to be fulfilled:
  • The goods or inputs are intended to be used for making taxable supplies as per GST law.
  • Such goods must be eligible for input tax credit under GST law.
  • The taxpayer should have valid proof of the input tax paid on such goods.
  • The invoices must be issued within 12 months from GST applicable dates.

Read more: Understanding Utilization of Input Tax Credit (ITC) in GSTR-3B

Withdrawal from Compensation Scheme by Official Notice

In case the GST officer has reasons to believe that the registered person was ineligible for registration under the composition scheme, or where there is a contravention in the provisions of the act, he issued a notice to such persons in form GST CMP-05 to show cause within fifteen days of the receipt of such notice as to why he should not be denied the option to pay tax under the composition scheme. Such taxpayers have to reply to the notice in form GST CMP-06. The officer in turn has to issue an order in GST CMP-07 within 30 days of receipt of such reply, wither accepting the reply or denying the option to pay tax from the date of option or from the date of occurrence of the contravention. After withdrawal from the composition scheme, the taxpayer can avail the eligible amount of input tax credit, after filing the required forms.

Penalty for Wrongful Claim

If the GST officer finds that the taxpayer is not eligible to pay tax under the compensation scheme but continues to pay tax under this scheme, then the person is liable to pay tax at normal rate along with a penalty equivalent to the tax payable. In such a situation, the GST official should issue a notice in form GST CMP-05 to the defaulting taxpayer to show cause within fifteen days of the receipt of the notice as to why the option to pay under the compensation scheme should not be denied.  Then the taxpayer has to reply in form GST CMP-06 and the concerned officer has to issue an order under GST CMP-07 within 30 days of such reply.

Frequently Asked Questions

  1. Which is the form to avail input tax credit after the option to pay tax under composition scheme has been denied by the GST officer?

Answer: ITC can be availed by filing a statement in form GST ITC-01, containing the details of the stock of inputs, and inputs contained in semi-finished or finished goods held in stock, on the date on which the option is denied as per order GST CMP-07, within a period of thirty days from the order.

  1. What is the provision for a business in which the turnover crosses the turnover limit of Res.1.5 crores? Will he be allowed to claim input tax credit?

Answer: The day the turnover of the business exceeds the specified limit of Rs.1.5 crores, the taxpayer’s option to pay tax under the composition scheme lapses. But he is allowed to avail input tax credit in respect of the stock of inputs and inputs contained in semi-finished or finished goods held in stock by him and on capital goods held by him on the date of withdrawal and furnish a statement within 30 days of withdrawal containing the details of such stock in form GST ITC-01 in the GST portal.

Related Read: Understanding Tax Liability Calculation in GSTR-3B

Conclusion

Taxpayers registered under the compensation scheme are not allowed to avail the input tax credit as they are out of the credit chain. But if a taxpayer opts out of the compensation scheme or has been found ineligible for registration under the composition scheme and denied the option to pay tax under the scheme, and pay tax under the normal scheme can avail input tax credit after withdrawal from the compensation scheme on prorate basis.  There is penalty for wrongful claim of input tax credit. Therefore, taxpayers should be aware of the provisions pertaining to input tax credit under compensation scheme while filing GSTR-4.

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Vidya Sagar Freelance Writer
Vidya Sagar has post graduate and Law graduate qualifications. She has worked in the finance industry for many years. She is passionate about writing and keen on writing articles related to tax, accounting, audit, and other finance related topics. She likes to simplify complex financial matters to help her readers understand easily. She reads a lot in her spare time and keeps herself updated with the latest financial news. She likes helping people in all their financial and compliance requirements

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