Registering under GST will allow you to claim tax paid on inputs. Availability of credit can impact your business significantly. Find out more on how to claim credit.
Have you already secured a GST registration? Rejoice, for it makes you eligible to claim input credit.
Understanding input credit
Input credit means being able to offset tax paid to suppliers while paying tax collected from customers. Thus, your tax outgo is reduced by the taxes you have already paid on purchases. This benefit of tax paid on inputs at each stage is available in the subsequent stage.
How does it work?
Perhaps, the biggest reform GST will bring about is this input credit availability. Unavailability of credit for VAT already paid on inputs, while paying central sales tax or service tax has been a pain for businesses. A lot of these issues will resolve as GST comes in to replace about 16-odd types of taxes. GST taxes will take three forms—State GST (SGST), Central GST (CGST), and Integrated GST (IGST). Some of the custom duties will continue in the GST regime, but Countervailing duty (CVD) and Special Additional Duty of customs (SAD) will be replaced by IGST. There are rules for credit between these three GST taxes, but largely, the situation of credit will improve. Also, a one-to-one correlation of tax of a purchase and its corresponding supply is not required. Taxes paid by you are collected in an electronic account. While depositing your tax liability you are allowed a set-off available from this electronic account.
Let’s understand this change with an example. As a service provider, say a chartered accountant, you become eligible to claim GST (VAT in existing regime) paid on goods you purchase for your business. For example, you may purchase a printer, brochures, and an office sign board to further your business, and any tax paid on these will be allowed as credit to you while paying your GST tax dues. This is not possible in the current service tax regime.
Should I register voluntarily to seek credit?
This mechanism of input credit availability is reason enough to seek voluntary GST registration. While this means an increase in compliance filing returns, and doing periodic reconciliations, using an efficient, cloud-based GST software can take this pain away. If you are a business dealing in goods and seeking voluntary registration, you may be worried about input credit claim on existing stocks or unfinished goods. There are rules that can make that possible for you. Where tax (excise duty or VAT) has been paid on inputs or stock available with you on the last day of the old regime, input credit can be claimed on those under GST.
How can I make sure credit is available?
As a business, how can you ensure there is seamless credit?
Firstly, your purchases should have been made from a registered supplier. As soon as you and the supplier agree on the purchase made and your supplier makes payment of the tax he collects from you, you become eligible to claim credit, which means your input credit availability is dependent upon your supplier. Unless he submits a timely return, credit will be unavailable to you.
If your supplier is not registered, you may have to bear the burden of paying tax on the purchase yourself. You will also have to file returns on behalf of your supplier. This is known as reverse charge mechanism. You can still claim credit of this tax you charge and pay yourself.
Businesses who do not undertake inter-state trade and have turnover under Rs 50 lakh can opt for the composition scheme. Under this scheme one can pay a pre-set GST rate. The downside is, they are not allowed to claim any input credit. Also, the tax charged by them cannot be claimed as input tax by those who buy from such composition dealers. This means if you are purchasing from a composition dealer, you cannot claim credit for the composition tax. So, unless you are a B2C dealer, it makes very little sense to opt for the composition scheme.
Besides, the government has outright disallowed certain types of input taxes. Input credit is not allowed on taxes paid on vehicles, except to a vehicle dealer who deals in sale purchase of vehicles and a transporter of passengers, driving training businesses— these can claim credit of tax paid on purchase of vehicles.
Input tax credit is not allowed for food and beverages, outdoor catering, beauty treatments etc. except where you are in the business of these. Say you are a registered restaurant, you can claim credit of input tax on food/beverages purchased. But this may not be allowed if you are a business which is catering food for employees. Similarly, a skin treatment clinic will be eligible to claim input tax on purchases made for beauty treatments they provide, but it may be disallowed for a company that makes purchases to allow makeup facilities for its employees—think hotels. No credit is allowed for tax paid for membership to a club or a health and fitness centre. Input credit is also not allowed for any goods or services used for personal consumption.
Perhaps, ensuring seamless availability of credit may seem like a challenge unless you bring your bill book and your suppliers on to a connected, integrated software, one which can flag mismatches early on and save you from last-minute reconciliations. A strong technology partner is imperative where thousands of invoices may be involved in a month’s business and manual validations will be unthinkable.
(Archit Gupta is the Founder and CEO of ClearTax)
In the run-up to one of the biggest tax reforms in the country, the market is abuzz with new rules and guidelines about the Goods and Services Tax (GST). How will GST really impact your business? How will your financial reporting change? Find out the answers to all this and more, directly from industry and tax experts who will share their expertise on YourStory’s new series ‘IndiaonGST’.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
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- Chartered Accountant
- Goods and Services Tax
- business finance
- tax credits
- composition dealer
- B2C dealer
- vehicle dealer