1. Documentary requirements and conditions for claiming input tax credit
Rule 1 of draft GST ITC Rules requires that input tax credit shall 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) a debit note issued by a supplier in accordance with the provisions of section 34;
c) a bill of entry;
d) an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31;
e) a document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule invoice.7;
f) a document issued by an Input Service Distributor, as prescribed in clause (g) of sub-rule (1) of rule 4
The aforesaid Rule fails to cover the documents where inputs/capital goods are imported by post or Courier.
It is suggested that rules be amended to include the documents where inputs/capital goods are imported by post or Courier.
2. Documentary evidence for claiming credit by registered person
Rule 1(2) of draft GST ITC Rules provides that Input tax credit shall be availed by a registered person only if all the applicable particulars as prescribed in Chapter —- (Invoice 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.
The condition being placed on the recipient of ensuring all the prescribed particulars as prescribed are contained in the said document is unjustified since it is the duty of supplier to include all the necessary particulars in the Invoice. A recipient cannot be punished for the mistakes of supplier. Submission of prescribed particulars by the recipient in GSTR-2 should be enough compliance for him to take the credit with other conditions as prescribed under Sec 16, 17 and 18 of the law.
Further, the GSTR 2 return only provides a field which is Yes/ No in determining the eligibility of credit. The field Yes does not distinguish the quantum of Common Credit / Zero Rated Supply Credits and hence linking this to the GSTR 2 return is not practical until and unless the fields are modified in the GSTR-2 returns.
The Institute of Chartered Accountants of India Suggestions on Draft GST Rules
It is suggested that in order to rationalise the provisions and remove the undue hardship on the recipient the rule 1(2) be redrafted as follows: –
Input tax credit shall be availed by a registered person only if all the relevant information, as contained in the invoice, is furnished in FORM GSTR-2 by such person.
3. Reversal of credit due to non-payment of consideration
Rule 2 of draft GST ITC Rules provides that a registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof the value of such supply along with the tax payable thereon within the time limit specified in the second proviso to subsection (2) of section 16, shall furnish the details of such supply and the amount of input tax credit availed of in FORM GSTR-2 for the month immediately following the period of 180 days from the date of issue of invoice.
As Valuation Rules may require payment of GST based on notional value increase over the transaction value of a supply, requirement to pay the ‘value of supply’creates an anomaly where the notional value may need to be paid in order to retain credit. This is obviously not the intention of the law.
Further, this rule is applicable to all supplies even in case of distinct persons and related persons. Once, credit is linked to time, additional condition of payment is not relevant to distinct persons and even related persons.
It is suggested that:
4. Drafting anomaly & reference in the Rule 3
Rule 3(b) of draft GST ITC Rules provides that banking company or a financial institution shall avail the credit of tax paid on inputs and input services referred to in the second proviso to sub-section (4) of section 16 and not covered under clause (a).
The Rule 3 pertaining to claim of credit by a banking company or a financial institution makes wrong reference of provisions in clause (b). It is pertinent to mention that there is no proviso to sub-section (4) of section 16.
It is suggested that the wrong reference so provided in clause (b) be corrected.
5. Distribution of credit by ISD
Rule 4 of draft GST ITC Rules provides for a mechanism for distribution of credit by ISD
The said Rule provides for distribution of credit in the ‘same month’which also includes all ‘ineligible credits’.
It is suggested that Rule 4 be suitably amended to:
a) permit distribution not later than due date for filing return for September next year
b) delete the requirement to distribute ineligible credit including reference to credit u/s 17(5)
6. Distribution of input tax credit by Input Service Distributor
Rule 4(d) of draft GST ITC Rules provides for the manner of distribution of ITC by an Input Service Distributor. The input tax credit that is required to be distributed in accordance with the provisions of clause (d) and (e) of sub-section (2) of section 20 to one of the recipients ‘R1’, whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, “C1”, to be calculated by applying the following formula:
C1 = (t1÷T) × C
“C”is the amount of credit to be distributed,
“t1”is the turnover, as referred to in section 20, of person R1 during the relevant period, and
“T”is the aggregate of the turnover of all recipients during the relevant period
a) If assesse Maintain Separate set of Books of accounts, eligible credit for the taxable invoices be taken.
b) Where separate set of books of accounts are not maintained for Taxable and Non Taxable activities, eligible credit to be calculated in the following way ITC eligible = Total ITC × (Taxable Turnover / Total Turnover)
7. Correction of spelling of Chartered Accountant under Rule 5 of ITC Rules
Under rule 5 of draft GST ITC Rules in clause d the spelling of Chartered Accountant is mistakenly written as Chartered Account.
It is suggested that spelling mistake be corrected with words Chartered Accountant.
8. Input tax credit (ITC) on shifting of factory from one State to another
A manufacturer having factory in West Bengal is discharging central excise duty and VAT/CST, as applicable, while clearing the goods manufactured at the said factory. He is intending to shift the entire factory set up to a new site in Maharashtra. Entire stock in process and finished goods and capital goods would also be transferred to the said location in Maharashtra.
Present Indirect Tax implications – The said manufacturer will be able to transfer the entire amount of unutilised CENVAT credit balances to the new site at Maharashtra in terms of Rule 10(1) of the CENVAT Credit Rules, 2004 (‘CCR 2004’). In so far as the accumulated VAT ITC is concerned, he can claim refund in the quarterly returns filed in normal course.
Situation in Proposed GST regime – Clause 18(3) of the CGST Act, 2017 read with Rule 6 of the draft GST Input Tax Credit Rules, proposes to allow transfer of ITC only in case of change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business with the specific provision for transfer of liabilities.
No provision as on date appears to take care of a situation where the manufacturer, in the proposed GST regime, merely shifts his factory from one State to another. In case of shifting of factory, there is no change in the constitution of the said manufacturer (registered person) on account of sale, merger, demerger, amalgamation, lease or transfer of business. The question of provision for transfer of liability would also not arise.
The present CCR 2004 allows transfer of accumulated CENVAT Credit balances in both the situations – (1) when there is mere physical shifting of factory from one place to another place and (2) when there is a change in the constitution of the manufacturer on account of sale, merger, demerger, amalgamation, lease or transfer of business with the specific provision for transfer of
The Institute of Chartered Accountants of India Suggestions on Draft GST Rules liabilities. The said transfer of accumulated credit balance is allowed even if the credit balance does not exactly correspond to the actual stock of finished goods or WIP or capital goods. The said transfer of accumulated credit balance is permissible if the available stock of finished goods or WIP and capital goods lying in the factory are transferred to the new site.
Ideally, the manufacturer should be allowed to transfer the accumulated Credit balances of CGST or IGST in the above situation. It appears that there is inadvertent omission in the draft provision to care of the situation stated above.
It is suggested to provide for transfer of unutilised input tax credit balance, under Clause 18(3), in case the registered person shifts his factory to another State, in the electronic credit ledger of the registered person having the same permanent account number.
9. Reference of Input Services missing in Rule 7(1)(d)
Clause d of Rule 7(1) of draft GST ITC Rules provides that the amount of input tax, out of ‘T’, in respect of inputs on which credit is not available under sub-section (5) of section 17, be denoted as ‘T3’.
Rule 7(1)(d) provides for exclusion of blocked credit under sec 17(5), however here the word Input services are not included. Although the credit is denied itself in sec 17(5), still this should effectively be there under rule 7(1 )(d) to avoid any possible conflict of taking credit of services specified in sec 17(5).
It is suggested that rule 7(1) (d) be redrafted as follows:
The amount of input tax, out of ‘T’, in respect of inputs and input services on which credit is not available under sub-section (5) of section 17, be denoted as ‘T3’
10. Payment of interest
Rule 7(2)(a) of draft GST ITC Rules provides that where the aggregate of the amounts calculated finally in respect of ‘D1’and ‘D2’exceeds the aggregate of the amounts determined under subrule (1) in respect of ‘D1’and ‘D2’, such excess shall be added to the output tax liability of the registered person for a month not later than the month of September following the end of the financial year to which such credit relates and the said person shall be liable to pay interest on
the said excess amount at the rate specified in subsection (1) of section 50 for the period starting from first day of April of the succeeding financial year till the date of payment;
The method prescribed for estimation is based on the turnover of the month which can vary, hence interest cannot be demanded from first day of the month
It is suggested that interest be payable after the due date of return for September following the end of financial year or filing of annual return whichever is earlier.
11. Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases
Rule 8(1) of draft GST ITC Rules clause c,d & e provides as follows:
(c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as 5 years:
Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger;
(d) the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c) to be denoted as ‘Tc’, shall be the common credit in respect of capital goods for a tax period:
Provided that where any capital goods earlier covered under clause (b) is subsequently covered under this clausethe value of ‘A’ arrived at by reducing the nput tax at the rate of 5 percentage points for every quarter or part thereof shall be added to the aggregate value ‘Tc’;
(e) the amount of input tax credit attributable to a tax period on common capital goods during their residual life, be denoted as ‘Tm’ and calculated as:-
The formula given in clause (e) for calculating input tax credit on common capital goods for a tax period is by dividing aggregate of common input tax credit on capital goods with 60. Thus, even if any capital goods exclusively used for exempted or taxable supplies, say for a period of 2 years, is commonly used thereafter, the common credit pool would only cover the credit attributable to balance life i.e. 3 years but monthly common credit would still be arrived at after dividing the common credit pool by 60 even if it contains some capital goods whose effective life is less than 60 months.
Further, clause (h) of sub-rule (1) provides that common input credit attributable towards exempted supplies should be added to the output tax liability of the person making such claim of credit for every tax period of the residual life of the concerned capital goods along with applicable interest. This interest is demanded in respect of unwanted credit.
It is suggested that:
a) the amount of input tax credit attributable to a tax period on common capital goods be allowed to be computed for each capital goods depending upon its residual life.
b) the reversal on such account only be added to the output liability for the said month and not any interest thereon. Even if the interest is payable, it be clarified whether it is payable from the first day of the availment of credit till every month of reversal or for one month for every reversal.
Alternatively, it is suggested that a mechanism be provided for the registered person to avail the credit every tax period instead of reversal which will avoid payment of any interest.
Also, replace in 8(1)(h) the interest payable to ‘…reverse immediately when credit no longer required but pay interest in case reversal is delayed….’
12. Manner of reversal of credit under special circumstances
Rule 9(1) of draft GST ITC Rules provides that amount of input tax credit, relating to inputs lying in stock, inputs contained in semi- finished and finished goods lying in stock, and capital goods lying in stock, for the purposes of sub-section (4) of section 18 or sub-section (5) of 29, shall be determined in the following manner namely, –
(a) For inputs lying in stock, and inputs contained in semi-finished and finished goods lying in stock, the input tax credit shall be calculated proportionately on the basis of corresponding invoices on which credit had been availed by the registered taxable person on such input.
(b) For capital goods lying in stock the input tax credit involved in the remaining residual life in months shall be computed on pro-rata basis, taking the residual life as five years.
There seems to be a drafting anomaly here with the words “taking the residual life as five years”.
It is suggested that the words “taking the residual life as five years” be replaced with ‘….taking the useful life as 5 years…’.
13. Conditions and restriction in respect of inputs and capital goods sent to the job worker
If the inputs or capital goods are not returned to the principal within the time stipulated in section 143, the challan issued under sub-rule (1) shall be deemed to be an invoice for the purposes of this Act.
Here the date of challan will become the time of supply and accordingly the tax paid on the basis of such challan will attract interest and penalty which will cause undue hardship to the assessee.