Twenty things to know about Input Tax credit under GST Regime

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Twenty things to know about Input Tax credit under GST Regime: Section 16 and 17 of CGST Act deals with Input Tax Credit provisions. Further, recently CGST Rules for Input Tax Credit (relevant Rules being 36 to 45) are also notified through Not. No. 7/2017-CT.

I. What is Inputs, Input services and capital goods?

Input tax credit can be claimed on inputs, input services and capital goods as defined below:

Term Definition
Input – Section 2 (59) means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business
Input service – Section 2 (60) means any service used or intended to be used by a supplier in the course or furtherance of business
Capital goods” – Section 2 (19) means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used In the course or furtherance of business

It is pertinent to note that the aforesaid definitions are very wide and can cover under its ambit any input, input service or capital goods provided it is used or intended to be used by the supplier in the course or furtherance of business.

II. What is the sequence of utilization?

The available input tax credit should be utilised in the following manner:

Credit of Utilisation
IGST First against IGST then against CGST and later against SGST
CGST First against CGST then against IGST
SGST First against SGST then against IGST

III. Can un-registered person avail ITC?

As per section 16 (1) ‘registered’ taxable person, subject to fulfilment of prescribed conditions, can avail the credit of input tax.

IV. Whether the ITC is now online?

ITC will now be available provided the credit is appearing in the Electronic Credit Ledger online! Thus, unlike current service tax and excise law, the credit will be effectively dependent on the vendors as unless vendors file the appropriate returns, GST credit will not be available to the recipient.

In this regard, vide Not. No. 4/2017-CT gst.gov.in is notified as the Common Goods and Services Tax Electronic Portal for:

  • Facilitating registration
  • Payment of tax
  • Furnishing of returns
  • Computation and settlement of integrated tax and
  • Electronic way bill

V. What are the conditions prescribed for availment of ITC?

Section 16 (2) of the Act, prescribes following four conditions for availment of credit:

  • (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
  • (b) he has received the goods or services or both
  • (c) subject to the provisions of section 41,the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
  • (d) he has furnished the return under section 39:

The aforesaid, inter-alia, two conditions appears to be un-justified as typically, credit should be available basis invoice and recipient should not be burdened with the responsibility of knowing whether the tax has actually been credited to the Government or not. Putting such a kind of onerous condition on buyer leads to un-necessary burden and may pave way of litigation.

Section 16 (2) (b) of the CGST Act prescribes that for availment of input tax credit, inter-alia, services should be received. The condition of receipt of goods can be proved through GRN (Goods Received Note) however, it services are intangible in nature and thus its not clear why a condition of ‘receipt’ of service is provided for.

VI. When ITC be available in case goods are received in instalment?

It is provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment. To claim credit, taxpayer will have to track now whether the goods are received in one lot or multiple!

VII. What is vendor is not paid within 180 days?

To continue to claim the input tax credit the buyer has to ensure that he pays the supplier within 180 days from date of invoice. If payment to vendor is not made within 180 days, then proportionate input tax credit will have to be reversed in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of issue of invoice (refer Rule 37 of CGST Rules).

180 days condition not to apply on Schedule I supplies

It may be noted that condition of 180 days payment is not applicable to value of supplies made without consideration as specified in Schedule I.

Interest payable from date of availment till reversal

Interest will be payable for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability is paid.

Credit can be availed again on payment to vendor!

The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or rules,that had been reversed earlier. Herein, interest paid, if any, will be a cost!

VIII. Whether double benefit under GST and Income Tax is available?

No. In case where registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

IX. What is the time limit for claiming credit?

A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of relevant annual return, whichever is earlier.

X. On what goods or services ITC is not available?

Section 17 (5) provides that input tax credit will not be available on following:

Twenty things to know about Input Tax credit under GST

It was expected that in GST regime, seamless credit will be allowed to business houses without any denial or any restrictions except say goods / services which are availed for personal use than official use (something similar to Unite Kingdom VAT law).

However, surprisingly, inter-alia, aforesaid credit would continue to be not available (in respect of both goods or services). Further, credit is proposed to be denied on goods and/or services used for personal consumption. Also, input tax credit shall not be available on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. This continuation of denial will lead to substantial tax cascading (as rate of GST will be higher than the current rate of service tax!).

Credit will be available on rent-a-cab, life insurance and health insurance if the Government notifies these services as obligatory for an employer to provide to its employees under any law. Also, credit on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery will be available. All this is available if used as inward supply for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.

Also, another round of litigation as interpretation issues will crop up while determining eligibility or otherwise of GST paid on personal consumptions such as business lunch with clients.

XI. Can ITC be availed on telecommunication towers and pipelines?

Explanation to Section 17 provides that, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes:

(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises

Thus, through aforesaid Explanation, input tax credit is specifically denied on telecommunication towers, pipelines etc.

XII. What is rule of proportion for taxable and exempt activity?

If goods and/or services used:

  • a. Partly used for the purposes of business and partly for other purposes or
  • b. Partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempted supplies

then credit to the extent of use for taxable or business supplies will be available. Rule 7 of Input Tax Credit Rules, prescribes for apportionment of credit on inputs and input services (for Capital goods – refer Rule 8). The apportionment is required to be done on the basis of previous years turnover. The Rule also provides for segregation of credit, at invoice level itself.

Finally, on actual basis for the financial year, reversal should be done, before the due date for filing the return for the month of September following the end of the financial year to which such credit relates. However, interest will be payable if finally it is determined that the credit availed was more. Herein, short availment will not entitle taxpayer to claim credit from Government!

XIII. What is the rule of proportion for credit on Capital Goods?

Rule 43 prescribes for apportionment of credit on capital goods in various scenarios such as:

  • a. Partly used for the purposes of business and partly for other purposes, or
  • b. Partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempted supplies

Credit cannot be claimed on capital goods used exclusively for effecting exempt supplies whereas credit can be claimed on capital goods used exclusively for effecting taxable including zero rated supplies.

Useful life of capital goods is assumed 5 years and 5% is proposed per quarter or part thereof.

XIV. What are ITC provisions for banking?

For a banking company or a financial institution including a NBFC, the option of availment of 50% input tax credit is available as per section 17 (4) of CGST Act. Further, Rule 38 of CGST Rules provides guidance on availment of credit by banks/ NBFCs.

However, this restriction of 50% on availment of credit does not apply to tax paid on supplies made by one registered person to another registered person having the same PAN.

XV. On which documents credit can be availed?

As per Rule 36 of CGST Rules, the input tax credit can be availed by a registered person, including the Input Service Distributor, on the basis of any of the following documents, namely:-

  • (a) an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31;
  • (b) an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to payment of tax;
  • (c) a debit note issued by a supplier in accordance with the provisions of section 34;
  • (d)  a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for assessment of integrated tax on imports;
  • (e)  an ISD invoice or ISD credit note or any document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule 54

Input tax credit will be availed by a registered person only if all applicable particulars as prescribed in CGST Rules are contained in the said document, and the relevant information, as contained in the said document, is furnished in FORM GSTR-2 by such person.

Further, no input tax credit shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, willful misstatement or suppression of facts.

XVI. Restrictions for sending goods to job worker

As per Rule 45 of CGST Rules, following are the prescribed conditions:

  • (1) The inputs, semi-finished goods or capital goods shall be sent to the job worker under the cover of a challan issued by the principal, including where such goods are sent directly to a job-worker.
  • (2)  The challan issued by the principal to the job worker shall contain the details specified in rule 55.
  • (3)  The details of challans in respect of goods dispatched to a job worker or received from a job worker or sent from one job worker to another during a quarter shall be included in FORM GST ITC-04 furnished for that period on or before the twenty-fifth day of the month succeeding the said quarter.
  • (4)  Where the inputs or capital goods are not returned to the principal within the time stipulated in section 143, it shall be deemed that such inputs or capital goods had been supplied by the principal to the job worker on the day when the said inputs or capital goods were sent out and the said supply shall be declared in FORM GSTR-1 and the principal shall be liable to pay the tax along with applicable interest.

XVII. Restrictions for sending goods to job worker

As per Explanation at the end of Rule 45 of CGST Rules, for determining the value of an exempt supply as referred to in sub-section (3) of section 17:

  • a. Value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and
  • b. Value of security shall be taken as one per cent. of the sale value of such security

XVIII. No refund to developers

No refund of unutilised input tax credit shall be allowed under sub-section (3) of section 54 of the said Central Goods and Services Tax Act, in case of supply of services specified in sub-item (b) of item 5 of Schedule II of the Central Goods and Services Tax Act [refer Not. No. 15/2017-CGST (Rate), 12/2017-IT (Rate), 15/2017-UTGST (Rate)].

XIX. Merger, demerger, amalgamation etc

As per Rule 41 of CGST Rules, a registered person in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, is required to furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee

It is also provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC02 shall be credited to his electronic credit ledger.

XX. Merger, demerger, amalgamation etc – Account appropriately

The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

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1 Comment
  1. Krishnamurthy says

    Whether Reverse charge Mechanism is applicable if purchase is done from a Composite Registered Dealer. Kindly clarify.

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