The Input Tax Credit Mechanism is one factor that stood out completely when Goods and Services Tax was introduced. The mechanism allows a taxpayer to deduct the tax paid on the inputs when taxes are paid for the output.
This implies that all agents, manufacturers, e-commerce operators, etc. get to claim an amount which is known as input credit. Basically, this means that input credit can be claimed by one for all taxes that were paid as part of various purchases used to create some output.
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The GST Act
Since the GST Act came into effect from July 1, 2017, almost all other indirect taxes that were applied on various goods and services got dissolved. The nation also began to follow the policy “one nation, one tax” from then as GST allowed uniform taxation on most products and services.
The goods that do not get affected by GST include petroleum products, electricity, and alcoholic drinks. These products will follow the previously adopted tax regimes and will be regulated by the respective state governments.
GST Amendment Act 2018
Mr. Piyush Goyal, the Minister of Finance introduced the Central Goods and Services Tax (Amendment) Bill on 7 August 2018. The bill aims to make changes to the 2017 CGST Act. GST on the supply of both goods and services in any state and its collection by the government falls under the provisions of this Act.
Another area in which the Act extends major impact is on the GST composition scheme and its eligibility. The composition scheme originally allowed anyone whose annual turnover is below one crore rupees to settle the GST amount on their turnover. This means that they did not have to pay GST like others on the value of products and services they buy or make use of.
The Amendment Bill which was passed in 2018 stretched the turnover limit to one crore and fifty lakh rupees from one crore rupees. This amendment was possible because the government has the power to increase the annual turnover limit as long as it is subjected to a maximum limit.
The criteria that defined the eligibility of suppliers of various services also changed when the Amendment Bill came into effect. Under the original GST Act, only suppliers of restaurant services are eligible to use the GST composition scheme.
Other suppliers who cater various services were not able to make use of the composition scheme, but since the Amendment Act came into effect those suppliers became eligible under the condition that the supply of the services does not end up in such a way where its value exceeds ten percent of their turnover when the financial year that passed away is considered. If the mentioned turnover is less than five lakh rupees, the value should not exceed five lakhs.
The Bill also introduced provisions that made the GST system foolproof by introducing methods to validate, verify and modify various details. It made registration compulsory for all suppliers including electronic commerce operators. It reiterated that a person who is a Special Economic Zone (SEZ) developer can have multiple registrations.
The bill helped to clearly distinguish between different types of motor vehicles and provided an input tax credit for transportation of aircraft and vessels, but no other goods. It provides clarity on the terms a person can claim the input tax credit. It specifically mentioned that input tax credit won’t be available for employees who are enjoying travel benefits.
Claiming Input Tax
There are certain points to keep in mind which has to be mandatorily followed in order to be eligible to claim an input tax credit under GST.
One has to make sure that he/she has a debit note or the tax invoice of a certain purchase and it has to be issued by a registered dealer. Another important factor is that the supplier should file his/her GST returns, failing which input tax credits cannot be claimed. The tax charged on your various purchases has to be paid by the supplier to the government.
Input credit that is claimed is matched with the amount of tax deposited by suppliers and validated before one has access to it. This means that if one’s suppliers are not GST compliant, he/she will lose the ability to claim input credit.
Types Of Taxes And Input Tax Credit
The input tax credit of CGST can be utilized for the payment of CGST itself and in case there is a balance, it is allowed for the payment of Integrated Goods and Service Tax (IGST) but it cannot be used to clear the amount of State Goods and Service Tax (SGST).
Similarly, credit gained from SGST cannot be used for the payment of CGST but is allowed to be used for the payment of SGST first and then IGST.
In case of the credit of IGST, it can be utilized for the payment of IGST and then it goes for CGST and lastly SGST.
A lesser-known fact about input tax credit is that it is 100% possible to have unclaimed credit. This can happen as sometimes the tax amount that is imposed on purchases end up being high when compared to tax on sale. Apart from that, purchase invoices that are as old as one year do not yield any input tax credit.
The input tax credit can be claimed on capital goods though any service or product labeled for personal use becomes ineligible. Once GST return has been filed at the end of the financial year in September, the input tax credit is not allowed.
To put it in a simpler form, the input tax credit mechanism under GST ensures that everyone benefits from the single tax format and there will be a seamless flow of credit. Under the tax regime which existed before the GST Act got implemented, proper utilization of input tax credit was absent due to the existence of many indirect taxes.
The input tax credit mechanism can be seen as one of the main possible reasons why GST is seen as the preferred form of taxation.
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