The Goods and Services Tax (GST) forms a comprehensive indirect taxation structure for India regarding the supply of goods and services. The process under this tax regime is entirely destination based, meaning that taxes are collected at the point of consumption of goods or services. There is a huge potential of alleviation of the tax administration and cascading effect due to GST; however, the businesses end up in situations where taxes are overpaid, hence the process of obtaining refunds or reclaims was introduced.
There are various reasons under the GST regime for a refund, like excess input tax credit (ITC), taxes paid on zero-rated exports, inverted duty structures, and erroneous tax payments. The conditions in the GST system provide possible processes for claiming such refunds as much as possible to prevent businesses from facing any unnecessary financial pain. The clearly laid refund process reduces blockages in working capital and thus contributes to greater liquidity and operational efficiency.
To apply for the refund, businesses are required to make an application on the GST portal with the necessary documents to prove their claims. The government has put forth time limits and automated systems to facilitate faster refunds and minimise the compliance burden. Taxpayers must comply fully with all rules of GST to avoid delays or denials. Refund management is very important as far as cash flow optimization and smooth functioning of operations under GST are concerned.
What is Input Tax Credit (ITC)?
Within the GST framework, the Input Tax Credit (ITC) mechanism allows businesses to credit the taxes paid on inputs, input services, and capital goods used in the course of their business. The mechanism ensures that taxation is applied only on the value added at each stage of the supply chain, thereby negating the reason for tax-on-tax.
Whenever registered businesses buy goods or services, they are subjected to GSTs on those purchases. If such goods and services so purchased are utilized to make taxable supplies, the said business can apply the ITC against its output tax liability. Thus, if a manufacturer has purchased raw materials costing ₹10,000 and finished goods costing ₹15,000, he could claim an ITC of ₹10,000, offsetting that against ₹15,000, leading to an actual GST liability of ₹5,000.
Conditions for Claiming ITC
The taxpayer should meet the following conditions while claiming ITC in the GST Regulations –
- The claimant is required to be a registered taxpayer under GST.
- The goods or services must have been used for business purposes.
- The supplier’s invoice must have been entered into the GST system.
- The claimant must have accepted delivery of the goods or services.
- Lastly, the taxes paid by the supplier must have been deposited with the government.
But in some cases, where ITC cannot be claimed are motor vehicles (unless specified), personal expenses, goods or services used for exempt supplies, etc. Following ITC regulations will thus help businesses effectively alleviate tax burdens and optimize cash flow.
What is Reclaim of Input Tax Credit (ITC)?
Reclaiming input tax credit (ITC) under the Goods and Services Tax (GST) setup means that ITC that was denied earlier for whatever reason, noncompliance being one of them, is now being made available to be reconstructed and thus recovered. Some events necessitate the denial of ITC, like the failure to remit the payment to suppliers within 180 days, using goods or services for the purposes of exempt supplies, and so on. Settling the outstanding amounts with suppliers enters a scenario in which the ITC previously reversed can be recovered by claiming against the tax determinations. The procedure in recovering ITC is crucial for businesses because it mitigates their tax liability and promotes cash flow. The following list describes the major situations in which ITC can be reclaimed:
1. Payment to Supplier made after 180 days
According to the principles of GST, the reversal of ITC arises when the recipient does not make payment to the supplier within 180 days from the date of the invoice, along with tax. The purpose of this is to stem any such ITC misuse in cases where suppliers are not compensated.
To recover ITC, the recipient must make a settlement, including the taxable amount and GST amount, with the supplier subsequent to reversal. This recovery is recorded in the month of such payment by accounting for it in his return (GSTR-3B).
2. Changes in the Use of Goods or Services
Input Tax Credit (ITC) can only be availed for goods or services used in taxable supplies. If it is availed from goods or services not being used in exempt or non-GST supplies (like alcohol, petrol, or electricity) or for personal purposes, the reversal of ITC needs to be.
But if afterward, such goods or services are used for taxable supply, the previously reversed ITC may again be claimed. For example, if a rental house is used for exempt educational purposes and is then let out for taxable purposes, the rent paid on it can be claimed as ITC.
3. Return of the Goods to the Recipient
By doing this, there is a normal reversal of ITC on the purchase as the goods are being returned to the supplier. Mostly, these cases deal with either defective or surplus goods.
If the recipient accepts the returned goods later, ITC can be reclaimed. This involves adjustment of the GST return accordingly.
4. ITC Reversal Due to Erroneous Claims and Badly Done Filing
Errors in the course of GST returns can lead to claims of invalid ITC and necessitate the reversal of such claims. Where tax authorities observe that there was an erroneous claim, then the ITC has to be reversed.
Where a subsequent GST return (say GSTR-3B) rectifies the error, ITC can be reclaimed. It is very important to make proper reconciliation with GSTR-2B (which carries auto-populated ITC data) to avoid future mismatches.
5. Capital Goods (Initially meant for exempt supplies, this class came to be later modified to include taxable supplies)
They get reversed when capital goods, like major machinery, are used only for exempt supplies, making them ineligible for Input Tax Credit, though businesses may use these goods later for taxable activities.
If those capital goods are later used for taxable supplies, then the benefit of ITC can be claimed on the basis of the remaining useful life proportionate over a five year period.
6. ITC Reversal for Supplier’s Non-Filing (Blocked in GSTR-2B)
A reversal is triggered whenever a supplier fails to file a GSTR-1, and then the ITC of the recipient will not be shown in the auto-generated ITC statement GSTR-2B. In such cases, businesses may reverse the ITC if the supplier does not rectify the issue.
ITC Reclaimable Once the supplier submits the GSTR-1 and the invoice ris eflected in GSTR-2B, the recipient becomes entitled to claim the ITC in the subsequent GSTR-3B.
How to Reclaim ITC in GST Portal?
The taxpayers have to go through a well-defined and systematic procedure to establish the input tax credit (ITC) through the GST portal. They need to put into place the right documentation and GST returns for reclaiming credit. Reclaim will be primarily through GSTR-3B: the year end summary return wherein taxpayers declare ITC along with other tax dues.
By following these guidelines, the business will be able to recover its ITC effectively through the GST portal while maximizing benefits to the tax and improving its cash flow as well. Key notes to be considered for recovering ITC:
- Keep proper records- invoices, receipts for payments made, and reconciliation statements – to avoid accepting mistakes. Within the designated period, collect claims associated with input tax credit.
- In this regard, make GSTR-2B and GSTR-3B convergent; dissolution in any of these will separate scrutiny’s lines for notices from the GST department.
- Filing is done at the right time to avoid non-compliance along with penalties.
Step 1: Cause of Reversal of ITC
Before claiming Input Tax Credit (ITC), it is necessary to ascertain the reason for the past reversal. Common causes for ITC reversal include:
- Non-payment to the supplier within 180 days
- Incorrect ITC claim due to non-compliance by the supplier
- Goods/services previously used for exempted supplies are now used for taxable supplies
- ITC reversal due to inaccuracies in GSTR-3B.
Once the issue is sorted out (e.g., either payment to the supplier has been made or the goods are being used for taxable supplies), the ITC can be reclaimed.
Step 2: Ensure that the ITC is Accounted for in GSTR-2B
Before starting an ITC claim, ensure that the eligible ITC is reflected in GSTR-2B (the auto-generated ITC statement).
To know GSTR-2B:
- Log on to the GST Portal: www.gst.gov.in
- Go to ‘Returns Dashboard.’
- Select the Financial Year and the relevant Return Period.
- Check under ‘GSTR-2B,’ which should show that the ITC appears as eligible credits.
The ITC should be appearing in GSTR-2B provided the supplier has filed their GSTR-1 correctly. If the ITC is not there, then the supplier should be contacted for compliance.
Step 3: File the GSTR-3B with the ITC Reclamation
Once confirmed, eligibility Input Tax Credit (ITC) should be entered in GSTR-3B for that month.
Steps for reclaiming ITC in GSTR-3B:
1. Open the GST Portal – www.gst.gov.in.
2. Under ‘Returns, ‘ choose ‘GSTR-3B. ‘
3. Select the respective tax period.
4. Access “ITC Available” in Table 4(A). Enter the ITC being claimed under the correct category:
- CGST and SGST (for intrastate transactions)
- IGST (for inter-state transactions)
- CESS, if applicable.
5. Deduct the ITC amount entered under the ‘ITC Reversed’ section in Table 4(B) if the same was reversed in earlier returns.
6. After making the reclaim adjustments, confirm if the “Net ITC” is identical to the one in Table 4(C).
Step 4: Review and Submit the GSTR-3B
- Reconcile the amounts claimed with the books to avoid differences.
- File the GSTR-3B and any payments therein.
- File by Digital Signature Certificate (DSC) or Electronic Verification Code (EVC) (OTP based verification).
This reclaimed ITC would be credited to the Electronic Credit Ledger, covering the future GST liability with it.
Step 5: Verify ITC Reclamation in the Electronic Credit Ledger
Reclaimed ITC should show in the Electronic Credit Ledger at the end of the GSTR-3B filing.
Procedure to check ITC in Electronic Credit Ledger:
- Services > Ledgers > Electronic Credit Ledger.
- Click on “View Ledger”.
- Reclaimed ITC should be under the appropriate category (IGST, CGST, SGST).
Conclusion
Reclaiming the input tax credit through the GST portal becomes a necessary exercise on the part of the businesses to enjoy tax benefits and sustain a firm cash flow. The taxpayer should accurately identify the cause for reversal, confirm the ITC in the GSTR-2B and report it correctly in their GSTR-3B to claim back the legitimate credits. Regular reconciliation is a must on both the financial records and GST returns, which will eliminate discrepancies and issues with compliance. Ensuring proper documentation and timely filing goes a long way in safeguarding close scrutiny from the tax authorities. With the correct process, businesses can optimize tax liabilities, improve working capital, and ensure seamless compliance with GST for effective financial management.
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