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

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Published Date:  24-08-2023   Author:   vidya-sagar
captainbiz understanding utilization of input tax credit itc in gstr b

The introduction of GST laws in India has transformed the indirect tax system by replacing multiple taxes with a single unified tax structure. Many returns were required to be submitted by all businesses registered under GST, of which GSTR-3B is an important return. It is mandatory to file the return which is a summary of all outward and inward supplies, tax liability etc. Another important component of GSTR-3B is the Inward Tax Credit (ITC), which is the backbone of the GST system, introduced to reduce the burden of tax and ensure a seamless flow of credit throughout the supply chain.

All businesses need to understand the concept of ITC utilization in GSTR-3B and understand its significance to gain maximum benefit of input tax credit and reduce their tax liability. Input tax credit or ITC is a mechanism in which a business can claim credit for the tax paid on inputs during the business, and adjust it in their tax liability, thereby reducing the cascading effect of taxes on the end user or consumer.

What is Input Tax Credit (ITC)?

Businesses have to pay GST on inputs like raw materials, capital goods, and services in the course of their business activities. There is a provision in GSTR-3B for adjusting this tax paid against the GST liability of the taxpayer on their supplies.

Utilization of ITC in GSTR-3B

  • There is a specific order in which the ITC is utilized in GSTR-3B. The credit that is reflected in the electronic credit ledger is first utilized for the payment of liability for integrated GST (IGST). The second credit is utilized for Central GST (CGST) and the balance with State GST (SGST) liabilities. This ensures that the ITC is properly utilized for intra-state and inter-state supplies. One point to be noted is that the residual tax credit from IGST is set off against SGST but the credit available with SGST/UGST cannot be set off against IGST.

Conditions for Claiming ITC

  • Possession of Valid Invoices: The businesses should possess valid tax invoices or debit notes issued by registered suppliers. The invoices must contain the recipient’s, supplier’s, description of goods or services, tax amount etc.
  • Received the Goods or Services: The goods or services should be received. That means that the goods must be delivered by the supplier to the buyer or his representative or authorized personnel.
  • Goods used for Business Purposes: Further the goods or services purchased must be used for business and not for personal purposes.
  • Payment Within Due Date: The buyer must pay for the goods within 180 days of the invoice date.
  • Invoices Matching: ITC can be claimed only if the recipient’s GSTR-2A matches with the recipient’s GSTR-3B. This is to ensure that the ITC claimed by the recipient is genuine and matches with the supplier’s details.
  • Depreciation Claim Not Availed: ITC is allowed only if depreciation is not claimed on the tax component of the capital goods purchased. Businesses can claim either the depreciation amount or ITC. They cannot claim both.
  • Tax Payment: The applicable tax on the supplies has actually been paid to the tax authorities.
  • Filing of GSTR-1: The supplier should have filed their GSTR-1 with details of outward supplies, and it should reflect in the buyer’s GSTR-2A form. This is to ensure that the supplier has reported the supplies and is eligible to claim the ITC.
  • Filing of GSTR-3B: GSTR-3B should be filed within the prescribed due date because delayed filing may result in the ITC not reflecting in the electronic credit ledger for utilization. The buyer must file the GSTR-3B.

Also Read: Role of GST Registration in Income Tax Compliances

Calculation of ITC in GSTR-3B

GST payable = Output GST- Input GST

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Input GST=GST on purchase of raw materials

Output GST=GST on sale of final goods.

For example: A trader purchases goods worth Rs.1000/- and pays 10% tax on it. Then the trader sells the goods at Rs.1500/-, collecting a tax of Rs.150/-. So, he is supposed to pay Rs.150/- to the government. But he has already paid Rs.100/- while purchasing the goods. This Rs.100/- will be allowed as a deduction from the tax payable and he must pay a net of Rs.50/-. But availing ITC is subject to certain conditions.

FAQs

  • What is the last date for deposit of balance tax after claiming ITC?

Answer: The last date for deposit of balance tax after claiming ITC is the 20th of the next month in GSTR-3B.

  • What is the time limit to claim an input tax credit under GST?

Answer: The time limit to claim ITC is earliest of a)30th November of next financial year b) the date of filing the annual return in GSTR-9 relating to that financial year, whichever is earlier.

Related Read: A Comprehensive Guide to GSTR-3B Amendments and Adjustments

Conclusion

One of the essential purposes of the introduction of GST laws was to ensure a seamless flow of credit across the supply chain in the country. Input tax credit (ITC) is a crucial feature that helps in eliminating the cascading effect of taxes on the consumer. All taxpayers have to pay the glance tax after adjusting ITC before filing their GSTR-3B. This feature in GST is beneficial to the suppliers as their tax liability is considerably reduced after adjusting ITC, which in turn reduces the tax burden on the consumer or end user. But there are certain conditions to be followed to claim credit. Therefore, it is important for businesses to know the rules related to availing the benefit of ITC while filing their GSTR-3B.

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Vidya Sagar

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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