How Will Corporates Be Able to Take Advantage Of The Input Tax Credit System In The GST Era?
Rolled out on the 1st of July, GST has recorded a historic change in India’s tax reforms and has replaced a gamut of indirect central and state levies. This change is not only going to bring about a positive change for FMCG companies but has also managed to remove redundant reforms which critics argued, have blunted economic competitiveness in the country.
One such enormous change is the elimination of cascading effect of taxes which was widely prevalent in the previous regime. With the introduction of input tax credit across the supply chain (from the manufacturing stage till it reaches the consumer) and across state borders, GST will make the transition easy and seamless for companies and businesses when it comes to claiming input tax credit (ITC). Let’s highlight some of the main points of ITC which will help you in comprehending everything you want to know about how corporates stand to gain from ITC under GST.
How is ITC set to benefit companies under GST?
Before we get into the nitty-gritty, here are some rules every organisation must follow in order to claim ITC under GST:
- Any organisation who intends on claiming ITC must have all supporting documents such as tax invoice, debit note, supplementary invoice, etc.
- ITC can be claimed only if the Input Tax has been paid through electronic cash ledger or electronic credit ledger.
- For any goods which are received in lots, ITC can be claimed by that organisation only after they have received the final lot.
Let’s us now dwell into how companies stand to benefit:
- Generally, when a company buys raw materials to manufacture a product, the company is liable to pay tax on it. Moreover, the company also needs to pay tax on the finished good which results in double taxation. Under GST, companies can now reduce this tax incidence by simply paying the remaining tax liability. Moreover, If the tax paid on these inputs work out to be higher than the tax on the output, the excess tax paid can be claimed as a refund. This reduction, in turn, will help lower the final price of products and this benefit can be passed onto consumers via lower prices.
- Automobile and consumer durables manufacturers can now heave a sigh of relief as under GST, for transition provisions, the system now grants them additional time to carry forward input tax credit for 90 days, as opposed to the earlier provision of 60 days.
- Under GST, input tax credit on goods and services not intended to be used “in the course of business” or “for the furtherance of a business” will not be eligible for ITC. It should strictly have been used only for business purposes. This basically means ITC cannot be claimed for goods & services used for personal purposes.
- In order to avoid any potential frauds or revenue leakage for the government, GST rules for claiming input tax credit has been tightened which entail that the buyer cannot claim input tax credit unless the supplier has actually paid the relevant tax or claimed input credit.
- ITC can be claimed only if you are in the receipt of actual goods and services only.
- Under GST, any company entertaining a business customer or associate for lunch, or for that matter any good or service for the purpose of corporate social responsibility, the company will be eligible to claim the credit on tax paid. However, in this case, there are exceptions to the case such as any contribution towards employee provident fund and car lease, which are not covered under ITC.
- Companies can avail ITC on taxable & zero rated supplies such as exports.
- Shareholders of corporates also stand to gain owing to the availability of ITC for goods and services as it will ease up cash flows and which, in turn, will help in boosting better efficiencies for businesses on the whole. Furthermore, owing to ITC, companies also can benefit from better savings and efficient and effective deployment of resources.
- Although rental cabs are still left out of the purview of GST, just as they were under CENVAT, GST does permit ITC for the use of cab services by women for their safety and for physically challenged persons as mandated by law. Similarly, any health or life insurance for those who work in hazardous professions is also applicable.
- For dealers and companies, in case IGST has been paid for goods, a credit of 30 per cent is permitted for those taxed at 18 per cent or above and 20 per cent for items taxed at lower rates.