The GST law aims at providing seamless Input tax credit to the registered persons, which can be claimed by furnishing details of ITC in GST returns. While the missed ITC could be a loss to an entity, an undue or excess claim of ITC could put an entity to a trap of interest, penalty & litigation. It goes without saying that there could be several errors of understanding, system errors and transactional mistakes around availing, reversing & utilizing input tax credit. It is pertinent for a business to conduct a review and ensure the required treatment around it has been duly made.

Some of the common illustrative errors around treatment of ITC has been provided below for ensuring that the ITC review is effective.

Illustrative errors in availing ITC in GST returns 

1. Availing ITC on goods or services acquired for personal consumption: ITC is available on goods & services procured for furtherance of business. Thus, GST paid on procurements for personal use cannot be taken as ITC.
2. Availing ITC where goods & services aren’t used wholly for furtherance of business: Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to use in business
3. Availing ITC against the exempt supply: Where the goods or services or both are used by the registered person partly for effecting taxable supplies and exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies.
4. Availing ITC where it is specifically prohibited in the law: GST law specifies the situations where one is not eligible to avail the ITC. Following are the most popular instances:

a. A person is not eligible to take input credit on purchase of motor vehicle except for those persons who uses motor vehicle for the following purposes:

-For transportation of goods

-For transportation of passengers

-For imparting training on driving

-Person who makes further supply of vehicles can also take credit

b. Goods and services like Food & beverages, outdoor catering, beauty treatment, health services etc except where these are used by a registered person for making a outward taxable supply

c. Membership of a club, health & fitness centre.

d. Rent a cab, life insurance & health insurance except where these are used by a registered person for making a outward taxable supply

e. Travel benefits extended to employees

f. GST paid on works contract services will be allowed only if the output is also works contract services.

5. Availing ITC on purchases made from unregistered dealer: An unregistered dealer is not allowed to charge & collect GST on supply. There could be instances where an unregistered dealer has charged the GST and same has been availed as ITC by the buyer.

6. Availing ITC on purchases made from a composition dealer: A composition dealer is required to pay a % of its revenue as GST from his own pocket. It is not allowed to charge & collect GST on supply. There could be instances where a composition dealer has charged the GST and same has been availed as ITC by the buyer.

7. Availing ITC on receipt of invoice, without actual receipt of goods or services: One of the preconditions to avail ITC is actual receipt of goods or services. For instance, in case of supply, that are to be received in instalments, ITC can be taken only upon receipt of last instalment of goods.

8. Availing ITC where depreciation under Income tax act is claimed on the GST component on purchase of capital goods: Where the registered person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component.

9. Availing ITC based on an improper document: Having a proper invoice, debit note, or such other tax paying documents is a precondition to avail ITC. The particulars of such documents should be such as defined in the law.

10. Availing ITC after lapse of time: The law prescribes a time limit for availing ITC pertaining to a financial year, which is up to the due date of filing September month return. There has been a series of extension & modification, so this becomes an area to take care of.

11. Error in availing transitional credit: Dealers in the Pre-GST era were entitled to claim transitional GST credit. Credit was available primarily for balance of credit available in Pre-GST law, un-availed credit, credit on stock in hand etc. There are possibilities of claiming the incorrect transitional credit.  

Illustrative errors in reversal of Input tax Credit

1. Non-reversal of ITC where supplier is not paid within 180 days from the Invoice date: Where the supplier is not paid in 180 days, the ITC availed on such supply must be reversed and this could be reinstated once the supplier is paid.
2. Non-reversal of ITC in respect of goods lost, destroyed, stolen, written off or distributed as free samples: ITC can be availed only in respect of those procurement which are furthered into taxable supply. So, the ITC, if availed on the above subjected goods needs to be reversed.
3. Opting for composition scheme: The credit availed by a registered person opting for composition levy shall payback/ reverse the credit on goods or inputs held in stock as on the date of opting for composition.
4. Reversal of credit where supplier did not pay tax to the government: One of the conditions of availing ITC is tax must be paid to the government. If the tax is not paid, Input tax credit will be denied.

Illustrative errors where Input Tax Credit is not claimed

1. ITC on taxes paid on RCM basis: Taxes paid through cash on RCM basis can be availed as ITC in the next month, this could often be missed.
2. Not availing eligible credits in case of exports: Refund of taxes paid on the goods or services could be claimed and also the ITC is available on procurements.
3. Non-availment of ITC on bank charges: ITC on bank charges could be availed as it is not specifically restricted.
4. Migrating from composition to regular scheme: The person moving to the regular scheme can claim the ITC on stocks held. Form ITC-01 has to be furnished within 30 days to claim the credit.

Recommendation

1. A statement of reconciliation of ITC as per books and ITC as claimed in the GST returns should be made & analysed for differences.

2. It is recommended that Reconciliation Statement should also be prepared to match ITC availed in GSTR-3B with ITC shown in GSTR-2A.