Input tax credit, tax invoices and reverse charge

GST is charged at each stage of a supply chain, but each business pays only on the value it adds. Input tax credit is what makes that work. Junior accounts roles check credit and invoices almost every day.

How input tax credit works

A registered business pays GST on its business purchases and collects GST on its sales. It can set the first against the second.

Output tax on sales     60,000
Eligible input credit  (41,000)
Paid in cash            19,000

Credit is generally available only when you hold a valid tax invoice, have received the goods or services, the tax has actually been paid to the government by the supplier, and you have filed your own return. Purchases for personal use and certain blocked items do not qualify.

Order of using credit

• IGST credit is used first against IGST, then against CGST and SGST.
• CGST credit can be used against CGST and IGST, but never against SGST.
• SGST credit can be used against SGST and IGST, but never against CGST.

The cross-use ban between CGST and SGST is a favourite screening question because the two always appear together on intra-state invoices.

What a tax invoice must show

• Supplier name, address and GSTIN.
• Invoice number and date.
• Recipient name and GSTIN if registered.
• HSN code for goods or SAC code for services.
• Description, quantity and taxable value.
• Rate and amount of each tax.
• Place of supply for inter-state supplies.

A missing or wrong GSTIN is the most common reason a buyer cannot claim credit.

Reverse charge and composition

Under reverse charge, the recipient pays the GST instead of the supplier for notified supplies. The recipient can usually claim that tax as credit if it is used for business.

The composition scheme is a simpler option for small taxpayers. They pay tax on turnover, cannot collect GST from customers, cannot claim input tax credit and issue a bill of supply instead of a tax invoice.

Checklist

Before booking a purchase, check the supplier's GSTIN, the tax type against the place of supply and whether the item qualifies for credit.