Search GrowthX Learning Content

What is the process for claiming and optimizing ITC benefits

blog

To claim ITC, ensure you're GST-registered, have valid invoices, and purchases are for business use. Match invoices with GSTR-2B, file GSTR-3B, and reconcile with supplier filings. Optimize ITC by dealing with compliant suppliers, filing timely, tracking deadlines, and avoiding ineligible claims.

Process for Claiming ITC Benefits

- Eligibility Check

Ensure you are eligible to claim ITC. You can claim ITC if:

  • You are a registered GST taxpayer.
  • Goods or services are used for business purposes.
  • The supplier has paid the GST to the government and filed their GST returns.
  • You have valid tax invoices or debit notes for the purchases.

- Match Purchase Invoices with GSTR-2B

  • GSTR-2B is an auto-drafted ITC statement generated monthly, reflecting eligible ITC. Match your purchase invoices with the details in GSTR-2B to avoid discrepancies.

- File GSTR-3B

  • Claim the ITC in your GSTR-3B return by reporting the eligible ITC under the relevant section.

- Reconciliation

  • Reconcile your ITC records with the supplier’s GSTR-1 filing to ensure there is no mismatch.
  • Address discrepancies promptly by following up with suppliers to correct their returns if required.

- Maintain Documentation

  • Keep proper documentation, including tax invoices, debit notes, and payment proofs, to substantiate your ITC claim in case of audits or verification by tax authorities.

Tips for Optimizing ITC Benefits

- Supplier Compliance

  • Deal only with GST-compliant suppliers who file their returns on time, as their compliance directly impacts your ITC eligibility.

- Timely Filing

  • File your GSTR-3B return on time to avoid losing eligible ITC due to delays. ITC for a financial year must be claimed before the due date of filing GSTR-3B for September of the following year or the annual return, whichever is earlier.

- Regular Reconciliation

  • Conduct periodic reconciliation of purchase records with GSTR-2B to identify mismatches and address them proactively.

- Availing Full ITC

  • Ensure you claim all eligible ITC by verifying GST rates and the HSN/SAC codes on invoices. This ensures no eligible input is overlooked.

- Avoid ITC Blockages

  • Check whether certain goods or services are blocked under Section 17(5) of the CGST Act, 2017. For example, ITC on motor vehicles, personal expenses, etc., is restricted.

- Digital Tools

  • Use GST reconciliation software or accounting tools to streamline ITC claims and minimize errors.

- Professional Advice

  • Work with a tax consultant to ensure compliance and maximize ITC optimization, especially if your business deals with multiple suppliers or complex transactions.

Advanced Steps for Claiming and Optimizing ITC Benefits

- Monitor Expiry of ITC Claims

Under GST law, ITC must be claimed within a specified period. Typically, ITC for a financial year can only be claimed:

  • Before filing GSTR-3B for September of the next financial year, or
  • Before filing the annual return (GSTR-9) for that financial year, whichever is earlier.
  • Keep track of deadlines to ensure that no eligible ITC is forfeited.

- Reverse Incorrect ITC Claims Promptly

  • If ITC has been claimed erroneously or a supplier has failed to pay GST to the government, it is important to reverse the ineligible ITC promptly in your GSTR-3B filing.
  • Non-reversal of ineligible ITC can result in interest, penalties, and legal scrutiny during audits.

- Focus on Capital Goods ITC

  • ITC can also be claimed on capital goods used for business operations, such as machinery, equipment, etc.
  • Ensure that capital goods are appropriately classified, and ITC is distributed proportionally if the goods are used for both taxable and exempt supplies.

- Apportionment of ITC (Exempt vs. Taxable Supplies)

  • If your business is involved in both taxable and exempt supplies, you may need to apportion ITC.
  • Only the ITC related to taxable supplies is allowed, while ITC on exempt supplies must be reversed or excluded.
  • Use the formula outlined under Rule 42 and Rule 43 of CGST Rules to compute eligible ITC accurately.

- Blocked ITC under Section 17(5)

  • Familiarize yourself with scenarios where ITC is blocked under Section 17(5) of the GST Act, such as:
    • Personal expenses like club memberships or employee benefits.
    • ITC on motor vehicles (except for specific purposes like transportation of goods).
    • Construction of immovable property (except plant and machinery).
  • Avoid claiming ITC on these ineligible items to prevent penalties.

-Cross-Verify GSTR-2A and GSTR-2B

  • Regularly compare GSTR-2A (dynamic) and GSTR-2B (static) data.
    • GSTR-2A reflects real-time invoices uploaded by suppliers.
    • GSTR-2B is a monthly ITC statement generated on a fixed date.
  • Reconciliation between the two ensures that discrepancies are identified and resolved before claiming ITC.

Error Resolution and Dispute Management

- Follow-Up with Non-Compliant Suppliers

  • If a supplier fails to upload invoices in their GSTR-1, or if there are mismatches in GSTINs or amounts, follow up promptly.
  • Non-compliance by suppliers can lead to denial of ITC, so ensure that they meet their obligations.

- File Rectifications for Past Returns

  • If ITC discrepancies are discovered after filing, amendments can be made in subsequent GSTR-3B returns.
  • However, amendments cannot be made after the deadline for ITC claims (e.g., September or the annual return for that financial year).

- Resolve Notices from GST Authorities

  • If you receive notices regarding incorrect ITC claims (e.g., under Section 73 or 74 of the CGST Act), respond promptly with supporting documentation.
  • Seek professional advice for drafting replies to avoid penalties.

- Interest on Late ITC Reversals

  • If ITC is reversed due to ineligibility or supplier non-compliance, calculate and pay interest (usually 18% p.a.) to avoid penalties during GST audits.

Industry-Specific ITC Tips

- E-Commerce Businesses

  • Ensure ITC is availed on marketplace fees, shipping charges, and other business expenses.
  • Track ITC on interstate purchases as these are common in e-commerce.

- Manufacturing Industry

  • Claim ITC on raw materials, machinery, and utility bills like electricity, which are critical for production.
  • Monitor the proportion of ITC availed if exempt supplies are involved.

- Service Sector

  • Focus on ITC for office rent, professional fees, and software subscriptions used for business operations.
  • For consulting services with inter-state clients, claim ITC on IGST paid.

- Hospitality Sector

  • Ensure proper classification of goods and services, as ITC is often restricted for food and beverages, outdoor catering, etc.
  • Track ITC on utilities, repairs, and capital assets like furniture and fixtures.

Tools and Strategies for ITC Optimization

- Use Accounting Software

  • Platforms like Tally, QuickBooks, or Zoho Books help automate GST filing and ITC reconciliation.
  • Many tools integrate directly with GST portals to ensure real-time updates.

- Automation for Reconciliation

  • Use GST reconciliation software like GSTHero, or Avalara for accurate matching of purchase invoices with GSTR-2B.

- Regular GST Audits

  • Conduct periodic GST audits to identify errors in ITC claims and correct them promptly.
  • A proactive approach reduces risks during official audits.

- Employee Training

  • Train finance and accounts teams on GST rules, ITC eligibility, and documentation best practices.
  • Awareness among staff ensures fewer errors in ITC claims.

GenZCFO Advice

Our team of professionals helps you by following these steps and strategies, businesses can maximize ITC benefits, ensure compliance with GST laws, and reduce potential risks of penalties. If you are dealing with ITC-related challenges or require specific advice tailored to your industry, feel free to consult our GST expert.

CA Manish Mishra is the Co-Founder & CEO at GenZCFO. He is the most sought professional for providing virtual CFO services to startups and established businesses across diverse sectors, such as retail, manufacturing, food, and financial services with over 20 years of experience including strategic financial planning, regulatory compliance, fundraising and M&A.