Input Tax Credit – Eligibility criteria, Additional conditions for eligibility

Input tax credit was allowed under Cenvat Credit Scheme and the same was allowed for utilisation for payment of duty / service tax on final product / output services. The credit was allowed on Inputs, Capital Goods and Input Services used for manufacture of goods or for providing output service.

Eligibility criteria –

(I) As per Rule 2(k) of the Cenvat Credit Rules inputs eligible for credit were –

i) all goods used in the factory by the manufacturer of the final prouct; or ii) any goods including accessories cleared along with the final product. iii) all goods used for generation of electricity or steam or pumping of water for captive use; or iv) all goods used for providing any output service; or v) all capital goods which have a value upto ten thousand rupees per piece, but excludes……………………………

(II) As per Rule 2(l) of Cenvat Credit Rules Input Services eligible for credit were –

  • i) Services used by a provider of output service for providing an output service; or
  • ii) Used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearances of final products upto the place of removal and includes ………… but excludes …………….
  • (III) Rule 2(a) of Cenvat Credit Rules defines capital goods and the credit was allowed on goods covered under Chapter 82, 84, 85, 90, 6805, 6804. It also covered goods like Pollution Control Equipments, Spares parts of machinery, Water Tank, Jigs and Fixtures etc. Specified motor vehicles were also covered provided they were used for specified purposes only.

From the reading of the above definitions, it will be clear that these definitions were very complicated. Various inclusions, exclusions and conditions were prescribed in the definitions. The important provisions in this respect were –

  • i) Input credit was restricted to the inputs used in the factory of production.
  • ii) Capital goods credit was allowed mainly in respect of specified goods covered under chapter 82, 84, 85 and 90 and parts of such goods. Credit was not allowed in respect of office equipments, office furniture and other assets.
  • iii) Capital goods was allowed 50% in the first year and 50% in the next financial year.
  • iv) In respect of services, credit was restricted on services like catering, rent a cab, health services, health insurance etc (even if provided to own employees).

Thus to determine the eligibility and ineligibility of Cenvat Credit was a big problem before the assessees. Often, cases occurred that the credit was taken on items not eligible for credit. Disputes were raised on this point and lot of energy was spent on litigation resulting in payment of interest and penalty. Also due to wrong classification of capital goods as Inputs, excess credit was claimed.

In Value Added Tax also credit was not allowed fully on inputs like Lubricant oils, Furnace oil and in respect of certain capital goods like furniture and office equipments.

Input tax Credit in GST :

a) Section 2(59) of the CGST Act defines Inputs means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business

b) Section 2(60) of the CGST Act defines Input Service means any service used or intended to be used by a supplier in the course or furtherance of business.

c) Section 2(19) of the CGST Act defines Capital goods means, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

The above definitions are very wide and simple. As compared to the earlier definitions this fact must be appreciated that the Input and Capital Goods definitions in GST do not restrict the credit in any way. However, Section 17 of the CGST Act provides for apportionment of Input Tax Credit and Blocked Credit. Sub Rule (5) of this section restricts the credit relating to motor vehicles to any other purpose than the specified activities viz. catering, transportation etc. Also, service tax credit has been denied to services like catering, rent-a-cab, health insurance similar to earlier provisions.

In GST, input tax credit is allowed on inputs used in the course or furtherance of business. This scope is definitely wider than the earlier scope which restricted the credit only to the inputs used in the factory of the manufacturer. As explained earlier, the terminology – Furtherance of business has a much wider coverage than the earlier definition.

Further, the 100% capital goods credit is now available on all equipments, machines, facilities, furniture etc. used in the factory including administrative offices. The criteria for eligibility is – capitalization in the books of account. There are no restrictions like VAT provisions.

Thus, credit availability will be much more wider in GST and this will reduce the cascading effect substantially. Now, the suppliers can claim maximum credit on inputs and capital goods easily and this leaves minimum scope for litigation. More eligibility of credit means lower price of the products resulting in reduction in final price of the finished goods.

However, disallowance of service tax credit on certain services like catering, rent a cab, health services etc. which are essentially used for the purpose of business only, is against the principles of GST as it disrupts the smooth flow of credit. There is no valid reason for such disallowance. Further, such restriction is against the definition which covers – “In the course of furtherance of business”. Hence, when the law projected new concepts, new procedures etc. the old provisions should not have been brought in GST. This vital approach is missing in these provisions.

Additional conditions for eligibility of credit –

In GST, Section 16 of the CGST Act provides for availing Input tax credit, subject to fulfillment of following conditions –

  • a) The material or services are received by the recipient.
  • b) The supply is accompanied by a valid tax invoice or such other prescribed document.
  • c) The supplier has paid the taxes to the government account.
  • d) The supplier has filed a valid return.

The last two conditions are new conditions in GST law which are very important. In Excise law, the credit availment had no relation with the payments done by the supplier and filing of return by him. The earlier facility of filing of return by disclosing liability is no more available to the suppliers. Hence, this provision will help in bringing financial discipline amongst all the suppliers. Further, provision to clause (d) provides that the recipient of goods and services should pay to the supplier within 180 days is also very important. If payment is not made in this period, the recipient has to reverse the credit claimed earlier along with interest.

If all the above provisions are analysed critically, it will be seen that they are very vital in bringing discipline among the suppliers and everyone is required to pay the taxes in time and file the return in time. Then and then only, there will be a smooth flow of credit to all the recipients of goods and services. The suppliers who are non compliant in GST, will not get further business from their customers.

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