IG FINANCE

CA Gaurav Kenkre is a CA in practice for the last 11 years. He is a regular speaker at various professional organizations, trade bodies, MNCs and Government bodies. He also writes regularly in local as well as national publications. Besides this he holds various positions in bodies such as ICAI, GCCI, College bodies, Rotary etc.

SIMPLIFYING INPUT TAX CREDITS

By Gaurav Kenkre

G S T l a w h a s r e c e n t l y completed 5 years in India, but some of the startups and new entrepreneurs still have some misconceptions about GST. This column will attempt to simplify some of the common issues around GST. We start with the concept of Input tax Credit.

Question: What is Input Tax Credit?

Answer: The meaning lies in the phrase itself. The first word “input” in simple language refers to any goods or services purchased, in the course or furtherance of business.

Therefore, raw materials, traded goods, stationery, rental expenses, transport charges are all inputs. The next stage is to now understand what “input tax” is: This is basically tax, which you pay on the inputs as above. When we procure any of the above goods or services, if the supplier is registered under GST, he will charge us the GST (i.e. tax). Thus, Input tax is the tax we pay to our supplier, w h e n w e p u r c h a s e goods/services for business Finally, we expand to the full phrase “Input Tax Credit” – The Government allows us (the purchasers) to take “credit” of the “input tax” we pay to our suppliers. In other words, whatever GST we pay to our suppliers, is allowed to be REDUCED from our own GST liability (when we collect GST from our customers). This is so because, our supplier has already collected GST and paid this to the Government. So, the Government is willing to give us (the purchasers), credit of this GST (which we paid to our supplier), which was paid to it by our suppliers.

To summarise again: Input Tax Credit is GST on purchases, which we have paid to our s u p p l i e r , w h i c h w e a r e allowed to reduce from GST we will collect from our customers.

Question: Who can claim Input Tax Credit?

Answer: Any business which is registered under GST can claim Input Tax Credit. The key point to remember here is that only businesses get to claim I n p u t Ta x C r e d i t s . E n d consumers cannot claim this credit. Further, it is important to note that one has to be registered under GST, to claim Input Tax Credit. There are a few specific situations where limited input tax credit can be claimed even for periods prior to GST registration, but they a r e e x c e p t i o n a l circumstances prescribed in law. For an average business, getting registered under GST is a must to claim Input Tax Credits.

Question: Are there any conditions for claiming Input Tax Credits?

Answer: Claiming of Input Tax Credits comes with substantial number of terms and conditions. Few of these, we h a v e a l r e a d y v i s i t e d i . e . goods/purchases used in course or f u r t h e r a n c e o f b u s i n e s s , a n d being a registered entity. The next condition i s t h a t e v e r y purchaser must h a v e a v a l i d document which shows this Input Tax Credit. In most cases this document will be the “Tax Invoice” issued by the supplier. The supplier must issue a Tax Invoice which contains all the clauses as per GST Act and most importantly discloses GST separately. In case of Imports, a Bill of Entry is needed. Next, we revisit one of the earlier points: i.e. we as purchaser are getting credit of Input Tax, only because our supplier has paid it to the Government. To ensure this, there are two conditions: a.The supplier must upload this invoice in his GST returns, with our GST number. By doing so, the invoice will appear in our GST portal. Only if the invoice appears in our portal, we can claim the credit. In the past this condition was slightly relaxed but now it is a very important condition. b.The supplier must also pay to the Government, the GST he has collected from us i.e. the GST which we want to claim Input Tax Credit. He can either pay wholly by cash/bank method or use his own Input Tax Credits to pay it. While this condition may seem logical (i.e. why will the Government give me credit if my supplier has not paid GST), it is very hard to check compliance of, since the supplier may or may not pay GST on time, or correctly. Hence it is very i m p o r t a n t t o c h o o s e compliant suppliers. Suppliers w h o a r e n o t t i m e l y a n d accurate in their compliance will directly affect our Input tax credit and our cashflows! Next, if we want to claim Input Tax Credit, we must ensure that we pay our suppliers within 180 days from date of invoice. This condition is more intended to protect MSME suppliers, however there are some challenges. In some transactions, credit period may itself be more than 180 days. In such cases payment before 180 days may not be made due to contractual reasons. Such situations are currently being litigated. The major conditions relating t o I n p u t Ta x C r e d i t a r e covered above, in the next edition, we shall see some more conditions/restrictions.