The Input Tax Credit Edge: Unlocking the Benefits and Avoiding the Pitfalls
Failing to optimize your tax credit claims could cost you big time! About 83% of enterprises have not been able to optimize their tax credit claims correctly. The trend is affecting large enterprises significantly.
Poor tax credit management resulted in a staggering loss of ₹50 crores for a multinational company, and mid-sized businesses weren't spared either. ClearTax's analysis indicates losses ranging between ₹15-20 crore.
In this blog, we will discuss the importance of filing input tax credit correctly and common mistakes you might make, along with the ways to avoid them.
Input Tax Credit – The Concept
The Input Tax Credit is the essence of Goods and Services Tax (GST). The continuous flow of input credit from the manufacture of goods to the end consumer and across states is one of the key reasons why GST is beneficial for the country.
Every registered taxable person may use Input Tax Credit under the Goods and Service Tax regime on all inputs used or planned to be used during or for business advancement, whether for the sale of products or services.
With a few exclusions, Input Tax Credit will also be applicable to capital goods used in conducting business. Conditions to avail of Input Tax Credit under GST:
Possess tax invoice/debit/credit/supplementary invoice issued by the supplier
Receive goods/services
File returns (GSTR 3)
Ensure supplier paid tax charged to government
Complete invoice matching and final Input Tax Credit post reversals
Under the GST system, a registered person can claim the input tax credit for most inputs. However, certain goods and services are not eligible for input tax credit. Let’s elaborate on the exemptions:
Motor vehicles or conveyances
Expenses related to food, beverages, outdoor catering, beauty treatment, health services, and insurance
Expenses relating to membership of a club, health and fitness center, and travel benefits for employees on vacation
Works contract services for the construction of immovable property, goods or services received for the construction of an immovable property, non-resident taxable persons, personal consumption, and lost, stolen, or damaged goods
Goods or services on which tax has been paid under the Composition Scheme and tax paid as interest, penalty, or fine
To claim the input tax credit, it's important that:
the movement of goods is appropriately documented
details on the waybills and e-invoices match accurately
The waybills should include details such as:
names of the consignor and consignee
registration number of the vehicle used for transportation
transporter ID
request for recipient GSTIN, delivery location, goods value, invoice/challan number and date, HSN code, transport document number/goods receipt number, and reasons for transportation.
Similarly, e-invoices should contain the same details along with the HSN code, quantity, and value of the goods. Any discrepancies in the details can result in the rejection of the input tax credit claim. So, it's essential to ensure that the documentation is accurate and matches properly.
Automated invoice matching tools are highly recommended to ensure no mismatch in invoices uploaded by suppliers. At Bookxpert, automated tools streamline the invoicing process, saving time and effort for both suppliers and buyers.
Special Cases of Input Tax Credit
The Input Tax Credit under GST has certain special cases that need to be considered:
Input Tax Credit for Capital Goods
While Input Tax Credit is available for capital goods, it cannot be claimed for capital goods exclusively used for making exempted goods or for non-business purposes. Additionally, if depreciation has been claimed on the tax component of capital goods, Input Tax Credit will not be allowed.
Input Tax Credit on Job Work
If a principal manufacturer sends goods for further processing to a job worker, they can claim credit for the tax paid on the purchase of such goods sent for job work. However, to claim Input Tax Credit, the goods must be received back by the principal within one year (three years for capital goods).
Input Service Distributors
Input Service Distributors collect the input tax credit on purchases made and distribute it to different recipients under different heads, such as:
CGST
SGST/UTGST
IGST
Cess
ISD can be the head office, branch office, or registered office of the registered person under GST.
Amalgamations/Mergers/Transfer of business
Lastly, in cases of amalgamations/mergers/transfer of business, the transferor will have an Input Tax Credit available which will be passed to the transferee at the time of business transfer.
Input Tax Credit Forms
There exist four types of Input Tax Credit Forms, as detailed below:
Input Tax Credit 01
This form is necessary in cases where a person is liable to pay GST and applies for GST registration within 30 days of becoming liable, opts for voluntary registration, opts out of the composition scheme while continuing to be registered as a regular taxpayer, or an exempt supply of goods/services becomes taxable.
Input Tax Credit 02
A registered taxpayer may transfer the matched Input Tax Credit available in the Electronic Credit Ledger to another business entity in case of business transfer by way of sale of business/merger/demerger through the filing of Input Tax Credit declaration in FORM GST Input Tax Credit-02.
Input Tax Credit 03
This form should be filed if one opts for the Composition Scheme or if any taxable supply becomes exempt.
Input Tax Credit 04
The principal must submit FORM GST Input Tax Credit-04 every quarter, providing details of challans in respect of goods dispatched to a job worker or received from a job worker or sent from one job worker to another. This quarterly form must be furnished on or before the 25th day of the month succeeding the quarter.
Reversal of Input Tax Credit of GST
Rule 42 and Rule 43 deal with the reversal of input tax credit. Rule 42 pertains to the non-payment of the supplier. If the taxpayer does not pay the supplier within 180 days from the invoice date, the input tax credit previously availed will be reversed, along with interest.
On the other hand, Rule 43 pertains to the reversal of input tax credit on exempt supplies. If taxpayers make exempt supplies, the input tax credit previously availed on inputs, input services, and capital goods used for such supplies must be reversed.
Reverse Charge Mechanism (RCM)
The usual practice is for suppliers of goods or services to bear the tax burden. However, the reverse charge mechanism shifts this responsibility to the recipients of said goods or services, essentially reversing the chargeability.
The reverse charge mechanism only applies to certain types of businesses, such as those involved in the supply of goods and services specified by the CBIC, as set out in section 9(3) of the CGST Act.
Additionally, section 9(4) stipulates that if an unregistered dealer supplies goods to a registered dealer, the recipient is liable to pay the GST directly. This applies to intra-state purchases, where CGST and SGST must be paid under RCM and inter-state purchases.
In the real estate sector, promoters are required to procure inward supplies to the extent of 80% from registered suppliers. If the purchases from registered dealers fall short of 80%, the promoter must pay GST at 18% on the shortfall.
Additionally, promoters must pay GST on a reverse charge basis for TDR or FSI supplied on or after 1st April 2019. Section 9(5) of the CGST Act requires e-commerce operators to pay GST on specified services provided by service providers using their platform. These include:
transportation services
accommodation services
housekeeping services (such as plumbing and carpentering)
If the e-commerce operator has no physical presence in the taxable territory, the operator must appoint a representative to pay the tax.
How Accurate Input Tax Credit Filing Can Drive Your Business Forward
Understanding the conditions for availing of Input Tax Credit is crucial, as it can help you file your Input Tax Credit claims correctly. Avoiding tax penalties is a significant benefit of filing correct Input Tax Credit claims for businesses. And if you're looking to boost your bottom line, claiming the input tax credit should be at the top of your to-do list. Here's why:
Increased Profitability
ClearTax’s survey points towards the inefficiencies in the return filing journey of an enterprise, leading to a significant dip in profitability by up to 8%. By filing the Input Tax Credit correctly, your business can reduce its tax liability, ultimately leading to increased profitability. This means:
more money for investing in business growth and expansion
a competitive advantage for businesses
an edge over their competitors who may not be taking advantage of Input Tax Credit benefits
In business, profitability is the ultimate measure of success. And filing correct Input Tax Credit claims can be a contributory factor to it.
Improved Cash Flow
For business owners, positive cash flow management is not just a goal but a necessity. Proper filing of Input Tax Credit can improve cash flow by allowing your business to claim credit for the tax paid on inputs. This can:
free up cash that can be utilized for business operations or invested in other areas of the company
provide a clear picture of tax liability and cash flow
lead to better cash management, financial forecasting, budget analysis, and decision-making
Eventually, filing Input Tax Credit correctly can help improve budgeting and forecasting, leading to the long-term success of your business.
Compliance with Tax Regulations
Tax compliance protects your business assets and secures your financial future. And accurate Input Tax Credit filing is vital to follow GST compliances. As a result, your business can:
avoid penalties for non-compliance
gain financial security
maintain a positive reputation in the marketplace
Claiming Input Tax Credit is an intelligent move for you if you want increased profits, well-managed cash flows, and tax compliance for your business. So, don't miss out on these benefits – make sure you claim your Input Tax Credit correctly!
Pitfalls of Filing Input Tax Credit (and How to Avoid Them)
Claiming Input Tax Credit is not always a straightforward process. In fact, almost one-third of companies find the process of input tax credit claims extremely laborious and cumbersome. There are several challenges that businesses usually face while filing for Input Tax Credit.
Avoiding these pitfalls in filing Input Tax Credit can help your business optimize its tax credit claims, comply with GST regulations, and avoid penalties. Let’s take a closer look:
Ineligible Purchases
Under the GST law, businesses can claim Input Tax Credit on eligible items only. However, many companies make the mistake of claiming Input Tax Credit on ineligible purchases, which can lead to penalties.
To avoid falling into this trap, your company must be aware of the list of eligible items on which it can claim Input Tax Credit. The business should also have proper systems in place to identify and segregate ineligible purchases. You can opt for outsourced accounting services and invest in an automated tax preparation system, saving your business from unwanted fines.
Uploading Data Inaccurately
Disclosure of the input tax credit under the wrong GST head can significantly affect your business. Even at the time of payment, it occasionally happens that taxes are paid under the wrong heads, interest is paid under the tax head, and so on.
Moreover, it's essential to upload data invoice-wise accurately to avoid any discrepancies between GSTR-1 and GSTR-3B. Unfortunately, once the return is filed, there is no provision to amend it.
So, to avoid this problem, you should be extra careful while entering the data. Take your time and double-check everything before submitting it.
Inaccurate Input Tax Credit
Errors in Goods and Services Tax (GST) registration, incorrect GSTIN numbers, and incorrect input tax amounts for your business can lead to Input Tax Credit claim rejections. So, make sure you don't disclose a higher Input Tax Credit value than you're entitled to, as you won't be able to revise it later. You’ll have to pay interest in the following month's return.
You can seek help from expert bookkeeping services. They can easily calculate the exact difference between your declared Input Tax Credit and the GSTR-2A. That way, you can claim the correct amount and avoid any penalties.
Claim Accurate Input Tax Credit with Expertise!
Don't let the hassle of filing the Input Tax Credit weigh you down! Let the expert team from our accounting and bookkeeping services handle it for you with 100% accuracy. Our tax planning professionals understand the complexities of the Input Tax Credit process and can help you save time and avoid costly mistakes.
Request a demo today and see how we can help you streamline your business operations!