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GST Input Tax Credit Refund Claiming
The term “Input Tax Credit (ITC)” is one of the features, or mechanisms of Goods and Services Tax (GST). Input tax credit is introduced to help to eliminate the cost cascading effect of the pre-GST tax regime. In other words, there is no cost cascading effect under the regime of GST because most of the taxes are combined into a single tax, or moderated by the input tax credit.
What is Input Tax Credit?
The meaning of Input Tax Credit (ITC) can be easily understood when we take the words ‘input’ and ‘tax credit’. Inputs are materials or services that a manufacturer procures or avails in order to manufacture a product or services which is the output.
Input tax is the taxes paid by a manufacturer while buying the raw material or services. On the other hand, tax collected on the sale of the product [or services] is called the output tax. Tax credit means the tax a producer was able to reduce while paying his tax on output. As such, ITC means that when a manufacturer pays the tax on his output, he can deduct or take credit for the tax he previously paid while purchasing inputs. As GST is charged on both goods and services, input credit can be availed on both goods and services.
Concisely, ITC is GST paid or payable by a registered person on the purchases or expenses incurred for the business activities.
Who is entitled to Claim Input Credit Under GST?
In Malaysia, a person is eligible to claim input tax refund if he or she is making a taxable supply and fulfils criteria as follows:
- input tax has been incurred;
- input tax is allowable;
- he or she is a taxable person ( e.g. a person who is or is liable to be registered)
- goods or services acquired in the course or furtherance of business; and
- goods or services made in Malaysia or any supply made outside Malaysia, which would be a taxable supply if made in Malaysia.
How to claim input credit under GST?
- He or she must have a tax invoice (of purchase) or debit note issued by registered dealer. Please note that credit will be available against the tax invoice upon receipt of last lot or instalment if goods are received in lots/instalments.
- He or she should have received the goods (or services). Please note that the said credit will be added to his output tax liability along with interest if recipient does not pay the value of service or tax thereon within 3 months of issue of invoice (and he has already availed input credit based on the invoice).
- He or she must hold a valid tax invoice with the correct name and address inserted. This is considered as an offence if the tax invoice is not issued to the correct party and a claim on input tax is made, hence, attracting penalty.
- The tax charged on his or her purchases has been deposited (or paid) to the government by the supplier in cash or via claiming input credit.
- The supplier has filed GST returns. Please note that input credit is only allowed if his or her supplier has deposited the collected tax.
In other words, all your suppliers must be GST compliant if you were to claim input credit on purchases.
Is it necessary to claim input tax?
A GST-registered person who has incurred GST may fail or choose not to claim any input tax credit under the GSTA for various reasons. Among them are administrative reasons where the GST incurred is negligible or the company does not have a valid tax invoice or misplaces a valid tax invoice. If the person who is entitled to credit the GST paid or to be paid as input tax credit but fails to make a claim from the RMCD, the GST incurred is not a deductible expense by virtue of paragraph 39(1)(o) of the ITA.
GST credits after a person is liable to register for GST
Input tax credit is eligible to claim once a person is liable to register for GST. For a Company with inventories unsold at the point of time the person is liable for GST registration, input tax is allowable to be claimed on the unsold inventories, if these inventories are purchased from GST registered Company / persons.
If a Company registers for GST voluntarily, he is entitled to claim input tax from the day he is liable to become a GST registered person. The criteria is the same as mandatory GST registration.