In the past few years, a lot of changes have rocked India and GST is definitely one of them. On 1st July 2017, It has constantly been in the news since the time it was introduced. Most of you in business are already well-acquainted with the new tax regime and its features. Let us talk about a feature, which has far-reaching implications than you ever projected. 

Input Tax in the GST Economy

Firstly, input tax is a tax that is included in the cost of raw materials and any kind of goods used for the purpose of manufacturing. In the same manner, a wholesaler pays input tax when he buys goods from the manufacturer. This goes on until the time the goods change hands and are bought by a retailer. 

Input Tax Credit

It means that at the time of paying output tax, you can subtract the tax you paid on inputs and pay the balance to the government. For e.g., You buy raw materials to make cakes in your bakery.  When you purchased the raw materials, you paid an input tax. After you make the final product, i.e. the cake, you add your margin and also add the required amount of tax and sell it to a retail cake shop. When you make the output tax payment to the government, you adjust the tax amount against the tax you paid as input and pay the balance amount. 

Input Tax Credit Claim

In the GST Economy, there is a time limit for claiming the input tax credit. There are different situations pertaining to the same. 

  • You can claim ITC for tax invoices and debit notes which are less than one-year-old. This is a norm.
  • Normally, the last date to file ITC is before filing the valid GST returns for the month of September after the end of the applicable financial year. 
  • The third instance is before filing a relevant annual return. 

This is just one side of the coin. In order to know more about the claiming and reconciliation procedure, you need to know more about the 3 types of taxes. 

Types of GST

  • CGST which is the Central GST is applicable on transactions within the state and the tax is collected by the central government. 
  • SGST the State GST is also applicable to transactions within the state. The tax is collected by the state government. 
  • IGST or the Integrated GST is applicable to transactions between different states and the revenue is shared by both the state government and the central government. 

How to Offset One Against the Other?

You will be surprised to know more about the offsetting qualities of these taxes.

  • You can use the credit from CGST to offset the CGST liability. If any credit is still left, you can adjust it against IGST liability. 
  • In the same manner, you can use SGST credit to offset SGST liability. If there is any credit left, you can further adjust it against IGST liability. 
  • You can use IGST credit to offset IGST liability and if there is any credit leftover, you can apply it towards CGST liability and SGST liability. 

    The reconciliation process consists of matching these transactions with your customer’s and vendor’s transactions. Then, the tax department verifies the transactions from both sides. The GSTIN is used to match the transactions. 

    There are various instances, wherein the tax on the purchase element is higher than the tax on sales. At that instant, the extra input credit is carried forward or claimed as a refund. 

New Proposal to Claim Input Tax Credit

    Recently, the government has proposed that in case there is a mismatch in details or a delay happens from the side of suppliers, input tax claim shall not exceed 20% of the available invoices and debit notes uploaded by suppliers. This will affect the cash flow of firms in a huge manner. 

     The result of such a regulation going live in the future will mean that the buyer has to match the ITC claimed by them with the details the vendor uploads. This will eventually lead to close monitoring of the suppliers. This is a win-win situation for the government. The companies have to take ownership and this again will reduce some of the pressure off the government’s shoulders. 

    Earlier, taxpayers filed GSTR 3B. Then the GSTR -2 A got generated automatically from the seller’s GSTR – 1. Differences, if any could be settled later. This will change the moment this new amendment comes to force. 

    These are just a few of the proposals that are set to change the ITC process. The government is trying to make it more stringent so that no one can take undue advantage. However, many companies who are honest in their dealings might fall prey to such a regulation. Only time will tell, whether such regulations will be worth it for the country as a whole or not.