Summary of ITC Under GST Law

Background of ITC

In India, Indirect taxes are the major source of revenue for government. Indirect Taxes are the backbone of India’s economy. However, earlier tax regime had few drawbacks like cascading effect and multiple taxes.

In order to overcome such problems, major reforms have been made in IDT Regime which is as follows:

1. CENVAT Credit Rules, 2004 and State VAT Rules (Old Regime)

2. GST Act, 2017 (Present Regime)

One of the key features of Goods and Service Tax (GST) in India is its uninterrupted  and continuous chain of input tax credit (ITC). In the previous indirect taxation system, cascading of tax was significant due to non-availability of ITC at various stages.

For example ITC of CST, Entry Tax, Luxury Tax was not available.

Similarly ITC of VAT was not available to manufacturers and service providers and ITC of Central Excise duty, service tax & CVD was not admissible to dealers in goods.

Under GST law, ITC will follow supply chain not only in Intra State transactions but also in   Inter-State transactions. Moreover, Credit of tax paid at the time of import of goods and services would also be creditable. This has resulted in significant reduction in cascading of taxes.

Section 16 to Section 21 of the GST Act’ 2017 passed on 12th April 2017 comprehensively discusses the provisions relating to the Input tax credit. In the pre GST era, the Cenvat Credit Rules’ 2004 used to provide for the detailed provisions relating to the Cenvat Credit as far as Central excise and Service tax concerned. Thus, the major provisions relating to Cenvat Credit was handled by rules only. However, in GST regime, the provisions relating to the Cenvat Credit or we call it as Input Tax Credit has been dealt by Section 16 along with other sections and read with various rules as issued by department. The GST law provides an elaborate mechanism for Availment & Utilization of ITC and seeks to impart clarity so as to minimize disputes. 

The difference between old and new regime are summarised below:

Old Regime	New Regime
Tax components: 1.  Excise duty 2. Service tax 3.  CST, Octroi, Purchase tax, etc	Tax components: 1.  IGST 2.  CGST 3.   UTGST
Credit components: 1. CENVAT 2. State VAT	Credit / ITC components: 1.  IGST 2. CGST 3. SGST / UTGST
Credit eligibility for different persons: 1. Manufacturer – Excise, Service, VAT 2.  Service provider – Service, excise 3. VAT dealer – VAT Credit	ITC / Credit eligibility: 1.  Supplier – GST
Set off of credit of one component with another is not allowed in all cases.	Set off of credit of one component with another is allowed.

ITC – Meaning and scope of ITC under GST regime

Under GST, taxes are levied by central government and state government simultaneously and taxes paid at every stage are allowed to set off against taxes to be paid at subsequent stage. This ensures seamless flow of credit across entire supply chain.

As per sec 2 (62) of CGST Act,2017, Input tax means  IGST/CGST/SGST/UTGST charged on any supply of goods or services which are used / intended to be used in the course or furtherance of business and includes tax payable under Reverse Charge Mechanism (RCM).

 ITC means Credit of Input tax.

Under GST regime, ITC can be availed on goods and services procured and which are used in the course and furtherance of business and for effecting taxable supplies.

ITC under GST shall include, the tax paid

1. On Supply of Inputs or Input Services or both

2. On Capital goods

3. On Import of Goods or Services

4. Under RCM

5. ISD

6. Deemed supply

In the course and furtherance of business:

The term business under CGST Act is inclusive definition and shall include any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity and shall include any ancillary activity related to it.

Inputs : Sec 2 (59) – means any good other than capital goods used or intended to be used by supplier in the course or furtherance of business.

Input services : Sec 2 (60) – means any service used or intended to be used in the course of furtherance of business.

Capital goods : Sec 2 (19) – Capital good means goods, the value of which is capitalised in the books of accounts of the person claiming the ITC and which are used or intended to be used in the course of business

Who can avail ITC?

Section 16 deals with availment of ITC in respect of taxes paid.

As per the said section, every registered person under this act can avail ITC except in case of

1. Composition dealer or

2. Supplier engaged in supply of exempted, Nil rated goods or

3. Unregistered person.

Registered person: As per section 2(94) of CGST Act, a person who is registered under section 25 but does not include a person having a Unique Identity Number as a registered person

  Conditions to avail ITC

1. Goods or services or both must be received

2. Tax charged on such supply should be paid to government

3. There must be a proper documentary evidence to avail ITC viz., Tax invoice, debit note or any other document as per Rule 36. Under rule 36 of CGST Rules, 2017, the following particulars shall be mentioned:

a. Taxable value

b. Tax Rate

c. Description of goods or services

d. GSTIN of supplier and Recipient

e. Place of supply in case of inter-State supply

4. GST returns in respect of such supply must be filed within specified time

Restrictions on ITC

General points: ITC shall be restricted to the extent

a. that relates to Non Business Purpose

b. Exempted Supplies

c. Supplies on which tax has been paid under Composition scheme; and

d. Goods and/or Services used for personal consumption

Specific restrictions under section 17 (5) :

Input tax credit shall not be available in respect of the following namely:

a. Motor vehicles for transportation with 13 or more persons capacity (including the driver)

Exception: when they are used for making the following taxable supplies further supply of such motor vehicles; or transportation of passengers; or imparting training on driving such motor vehicles;

b. General Insurance and related services, service, repairs and maintenance relating to motor vehicles, vessels or aircraft.

Exception: ITC in respect of such services shall be available where received by a taxable person engage

i. In the manufacture of such motor vehicles, vessels or aircraft; or

ii. in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

c. supply of goods or services or both relating food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance and health insurance

d. works contract services except plant and machinery

ITC Shall be available for the above two cases, when such goods or services or both are used in making taxable Supply

e. Membership of a club, health and fitness centre; and

f. Travel benefits extended to employees on vacation such as leave or home travel concession. Except where the same obligatory for an employer to provide to its employees

g. goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account, including when such goods or services or both are used in the course or furtherance of business;

h. goods or services or both used for personal consumption;

i. Goods in the nature of lost, stolen, destroyed, or disposed of by way of gift or free samples;

Apportionment of credits of ITC

Total amount of credit available (T) for utilization is:
Fully eligible (exclusively used for taxable supplies incl. Zero-rated)	XXX
Add: Common credit attributable to taxable supplies	XXX
Less: Ineligible credit (Exclusively exempted Supplies)	(XXX)
Less: Exclusively used for other than business purposes	(XXX)
Less: Blocked credits as per Sec 17(5)	(XXX)
Common credit ( C )  (available credit)	XXX

Availment of ITC under GST In case of Inputs and Input Services

ITC can be availed as and when the supplies are received. Further, ITC of taxes paid under RCM (u/s 9(3)) or 9(4)) unless such supplies are used for effecting exempted supplies or ITC on the same is restricted under section 17(5).

Further, any ITC availed shall be reversed where the consideration and taxes applicable thereon is not paid to the supplier within 180 days from the date of invoice. The same can be re-availed when the payment is made without any time limits.

1. In case of imports

Along with Customs duty, IGST is payable in case of Imports. ITC paid in respect of such tax can be availed immediately. However, credit in respect of Customs is not available.

2. In case of Capital goods

For capital goods 100% of the credit is available unless any depreciation has been claimed under Income tax act, 1961 for the same.

Example: A machine was purchased for Rs. 1, 00, 000/- at 28% tax rate by paying Rs. 28,000/- of tax. In this case

♦ If the supplier is charging Depreciation on Rs. 1, 00, 000/-, the supplier is eligible to claim ITC of Rs. 28,000/-.

♦ if the supplier is charging Depreciation on Rs. 1, 28, 000/-, the supplier is ineligible to claim ITC

In case  of ISD

Input Service Distributor : Section 2 (61) – Input service distributor means any office of the supplier for goods or services or both which receive tax invoice issued under section 31 towards the receipt of input services and issues prescribed documents for the purpose of distributing the credit of central tax or state tax or integrated tax or union territory tax paid on the said services to a supplier of taxable goods or services or both  having same Permanent Account Number as that of the said office

ITC shall be distributed on Turnover basis upon the issuance of prescribed document by the recipient. Credit of ISD shall be allowed for the same month provided that GSTR 6 has to be filed within time.

Distribution of ITC by ISD

♦ Where all the branches or units are within the same state, CGST / SGST / IGST can be distributed.

♦ where all the branches or units are not within the same state only IGST can be distributed

Manner of utilization of ITC:

ITC availed by the registered person is credited to his electronic Credit ledger. The balance in the electronic ledger can be utilised to pay off his output liability.

Under GST, the balance in the IGST credit be utilized for the payment of IGST outward liability first, but after such credit is used for payment of IGST liability, the remaining IGST credit can be used to pay CGST and/or SGST/UTGST liabilities in any order and for any amount.

No cross utilization is available for CGST and SGST i.e., CGST cannot be used to pay off SGST and vice versa.

Illustration for Input Tax Credit Mechanism :

S.NO	AVAILMENT OF CREDIT ON	UTILIZATION FROM
		FIRST OPTION	SECOND OPTION	THIRD OPTION
1	IGST	IGST	CGST	SGST/UGST
2	CGST	CGST	IGST	–
3	SGST/UGST	SGST/UGST	IGST	–
Thus, Inter- sectoral credit is not allowed for CGST and SGST/UGST

Refund:

Section 54 deals with Refund. An eligible person or supplier can claim refund provided that ITC is excess of his outward liability.

Conditions to claim refund:

1. Refund should be claimed before the expiry of 2 years from the relevant date

2. No refund shall be allowed on capital goods

3. Return under section 39 should be filed

4. No refund shall be available in case of

a. zero rated supplies made without payment of taxes

b. where the credit consists of rate of tax on inputs is higher than that of output supplies

5. Minimum amount to be refunded is Rs. 1,000/-