News Excerpt
The government has temporarily lifted restrictions imposed on businesses to avail GST credit for February to August, a move that would help businesses tide over tight economic conditions following the outbreak of the novel coronavirus.
Previous to this, Centre had notified changes to the goods and services tax (GST) rules, lowering the input tax credit to 10% from 20% of eligible credit.

Pre-Connect
•    Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.
•    Goods and Services Tax (GST) is an integrated tax system where every purchase by a business should be matched with a sale by another business. This makes flow of credit across an entire supply chain a seamless process.

How does ITC work
Example 1: When a trader sells a good to consumers, he collects GST based on the HSN of the goods sold and the place of destination. Let us assume that the MRP of the good is INR 1000 and the rate of applicable GST is 18%. The consumer will, therefore, pay a total of INR 1180 for the good which includes a GST of INR 180.
Without ITC, the trader will have to pay INR 180 to the government. With ITC, the trader can reduce the total tax that it will have to pay the government. Let us assume that the cost of the good in the hands of the trader is INR 825. This includes INR 125 as GST. The trader can claim INR 125 as ITC and reduce his original tax liability of INR 180 by this amount. In other words, the trader will need to pay only INR 55 (INR 180 – INR 125) to the government.

Example 2:
 
PEPPER IT WITH
GST Portal,GSTR 2A,TDS
IGST, GST Council
Conditions for claiming ITC
    It has a GST-compliant invoice
    Its supplier has uploaded the invoice to the GSTN(Goods and service tax Network)
    Its supplier has paid GST to the government
    Returns have been filed
A business under composition scheme cannot avail the input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.
Composition Scheme is a simple and easy scheme under GST for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs. 1.0 crore.
HSN stands for Harmonized System of Nomenclature which was developed by the World Customs Organization (WCO) with the vision of classifying goods all over the World in a systematic manner. HSN contains six digit uniform code that classifies 5,000+ products and which is accepted worldwide.

Analytica
PROS
    Avoid the challenge of ‘tax on tax’: The term ‘Input’ means any goods other than capital goods used or intended to be used by you in the course or furtherance of your business.  The taxes paid on the inward supply of inputs, capital and services are called input taxes. These may include Integrated GST, Central GST, State GST or UT GST. Therefore, ITC means deducting the tax paid on inputs from the tax payable on the final output by you as a registered taxable person.
    Impact on Taxpayers: A complex tax structure before the implementation of GST resulted in a multiplicity of taxes and most importantly cascading of taxes. The cascading effect did not allow you to set-off taxes paid on inputs against output tax payable on goods and services or vice versa. Moreover, taxes paid in one state were not available for set-off against taxes payable in other states. Hence, GST was implemented
o    To consolidate multiple indirect tax levies into a single tax and
o    To allow setting-off taxes throughout the value chain. That is to claim the input tax credit.

CONS
    There could be a possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim tax credit.
    As much as 80% of the total GST liability is being settled by ITC and only 20% is deposited as cash.
    Under the present dispensation, there is no provision for real time matching of ITC claims with the taxes already paid by suppliers of inputs.
    Currently there is a time gap between ITC claim and matching them with the taxes paid by suppliers. Hence, there is a possibility of ITC being claimed on the basis of fake invoices.

Way Forward
Once the new return filing system becomes operational, it would become possible for the department to match the ITC claims and taxes paid on a real time basis. The revenue department would analyse the large number of ITC claims to find out if they are genuine or based on fake invoices and take corrective action.