How to Claim Input Tax Credit on Business Expenses

The input tax credit provisions under GST are framed with a border perspective to allow the tax credit on all the inward supplies. Now, businesses can claim input tax credit on all the inputs or input services which are “used or intended to be used in the course of, or for furtherance of business”. In simple words, if goods or services are used for the purpose of business, the tax paid on such inward supplies will be allowed as ITC.

This is a boon to businesses compared to erstwhile regime. Previously, the tax credit was allowed only on inputs or input services which were directly linked to output or output services. For example, as a trader, input VAT paid on purchase of goods was available as credit only on making a taxable sale. However, any tax paid on business overheads like advertisement services, maintenance charges, and so on, were not allowed as credit.

The introduction of “Furtherance of Business” as a concept for Input Tax Credit will reduce the cost of operation and directly enhance the profitability of the business. The following are the important aspects to keep in mind, to avail input tax credit on business expenses:

1. Deal only with registered businesses

You will be eligible to avail input tax credit only when you deal with registered businesses. Therefore, it is always recommended to transact with a supplier who is registered.

For certain petty business expenses, you may have to transact from unregistered dealer. Although ITC on such inward supplies is available, it will increase your compliance burden. It will also lead to temporary cash blockage since you are required to pay tax on reverse charge mechanism, and credit is available only after the tax remittance.

2. Tax invoice in company name with GSTIN

Ensure that the tax invoice is raised in the name of the company, and make sure that the GSTIN is mentioned in the tax invoice. This is very crucial because the ITC availability completely depends on the matching of invoice between the supplier and the recipient.

3. Mention the right GSTIN

In case, your business has multistate operation and have multiple registration, ensure that the local state GSTIN is mentioned in the Invoice. For example, you are registered in Karnataka and Maharashtra. For expenses incurred in Maharashtra, provide Maharashtra registration. This is because certain specific business expenses like hotel accommodation, events, food expenses, and so on, are always considered to be intrastate supplies, and CGST+SGST is levied. Considering the existing restriction on cross-state ITC (CGST+SGST) adjustment, mentioning different state GSTIN number will restrict you from availing ITC on such inward supplies.

4. Take care of supplies mentioned in negative List

Although GST allows ITC on all inward supplies, there are certain type of supplies on which input tax credit is not allowed. Ensure that those supplies are identified, and appropriate reversal is done before making ITC claim. Else, you may be asked reverse ITC along with the interest. To know more on the supplies forming part of negative list, please read out blog Your checklist for claiming ITC.

Any lapse in the above mentioned guideline will result into direct loss of ITC to the business. Therefore, businesses need to revisit the procurement policies and incorporate the changes in line with the provisions of GST. By doing this, any loss of ITC can be prevented and leverage on the benefits of tax credit.

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Pugal T & Yarab A

18 Comments

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  • In tally,if we generate Invoice of service the description of goods is mentioned in Format instead of description of service. Can we add details of service in the sale voucher,if not please add in software.

  • Dear Sir, Where and how should we take/ avail credit balance available form our previous VAT return. How to adjust the same? How to enter it in tally? IN GSTR 3B there is no colomn to enter Opening balance.

  • If transporter is GTA (Goods Transport Agency), then RCM is applicable. Otherwise RCM is not applicable. Create Freight Ledger enbled GST and RCM applicable in Direct Expences

  • Recently I had purchased Tally software from our regular dealer he has given me the GST bill and how can I claim the GST and make entry in Tally
    Will the Tally software be the asste for the company or it’ll be expenses

    • You can put tally software in books of accounts as asset and can claim gst paid on tally as itc.
      I further you can claim depriciation of tally @ 15%
      But for income tax purpose you can claim 100% as expence….as softwares are royalty in income tax act…

  • Sir, we have inter state purchase and pay freight charges. The transporter doesn’t include GST on payment.should we pay GST on RCM. Then how to make this entry in tally.

    • Hey surinder first of all change transporters gst details in ledger and mark yes to reverse charge. If it is not showing then mark yes to reverse charge in f12 features and then of transporter. Create a ledger of transport service as expenses. After that enter purchase as accounting invoice.and in tax analysis your rcm will be shown. In features of purchase f12 on gst feature of gst tax analysis. And give print command your self invoice will get printed. Now create another ledger of tax on reverse charge in current assets. And go to journal and click stat adjustment gst inc. Of tax liablity then purchase under reverse charge. After that debit tax on reverse charge and credit igst for interstate transporter or cgst sgst for intrastate transporter. And after that pay gst in bank. And go to payments. Click payment adjustment and select period and recipiet liability and select igst or cgstsgst and record payment. And then go to journal and stat adjust and take input credit by selecting it and purchase under reverse charge. And debit igst or cgstsgst and credit tax on reverse charge. Check your gstr3b and gstr 2.

  • Thanks Sir, Very Nicely explained.
    I have a query regarding NIL Rated Supply. I am manufacturing Bread (Nil Rated). Most of Inwards supply is also Nil Rated (Atta, Maida etc.), some of the inwards supply like Yeast and packing material is having GST. Can I claim ITC on these items.
    Further I am selling waste boxes or polybags, on which i charge GST according to the %age prescribed by the department. Can I adjust the said ITC with the GST Charged on these waste products.

    • If products are used in the course or furtherance of business, ITC will be allowed. In case, of inputs used for exempt supplies , ITC will not be allowed.

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