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 present indirect taxation system, cascading of tax is significant due to non-availability of ITC at various stages. For example ITC of CST, Entry Tax, Luxury Tax is not available. Similarly ITC of VAT is not available to manufacturers and service providers and ITC of Central Excise duty, service tax & CVD is 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 is expected to result into significant reduction in cascading of taxes.
2. Concept of ITC in Model GST Law (MGL)
2.1 Section 2 (58) of MGL defines ITC as credit of input tax as defined in section 2 (56) [actually it is section 2 (57)]. “Input tax” has been defined in section 2 (57) as
“input tax” in relation to a taxable person, means the (IGST and CGST)/{IGST and SGST) charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under sub-section (3) of section 7.
It implies that input tax consist of IGST & CGST in CGST Act and IGST & SGST in SGST Act. It also provides that the underlying supply of goods and/or services should be used or intended to be used by the taxable person in the course or furtherance of his business. Further, credit of tax paid on reverse charge basis can also be taken by the taxable person. It may be noted that since CGST Act also recognizes credit of IGST, the credit of IGST is allowed to be used for discharging CGST liability. Similarly, SGST Act also recognizes credit of IGST, so the credit of IGST is allowed to be used for discharging SGST liability.
2.2 Under section 2 (1) (d) of the IGST Act, input tax is defined as IGST, CGST or SGST charged on any supply of goods and / or services. So, in the IGST Act, input tax consists of all three taxes, IGST, CGST and SGST. It implies that credit of all three can be used for discharging IGST liability.
2.3 As ITC is credit of tax paid on inward supplies of goods or services, it is essential to understand three terms, namely inputs, capital goods and input services.
2.4 As per section 2 (54) of the MGL,”input” means any goods other than capital goods, subject to exceptions as may be provided under this Act (i.e. MGL) or the rules made thereunder, used or intended to be used by a supplier for making an outwardsupply in the course or furtherance of business.
2.5 As per section 2 (55) of the MGL, “input service” means any service, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outwardsupply in the course or furtherance of business.
2.6 As per section 2 (20) of MGL”capital goods” means: –
(A) the following goods, namely:-
(i) all goods falling within Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the Schedule to this Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof;
(vii) storage tank; and
motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis but including dumpers and tippers
used‑
(1) at the place of business for supply of goods; or
(2) outside the place of business for generation of electricity for captive use at the place of business; or
(3) for supply of services,
(B) motor vehicle designed for transportation of goods including their chassis registered in the name of the supplier of service, when used for
(i) supplying the service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for supply of service; or
(iii) supply of courier agency service;
(C) motor vehicle designed to carry passengers including their chassis, registered in the name of the supplier of service, when used for supplying the service of‑
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills;
(D) Components, spares and accessories of motor vehicles which are capital goods for the taxable person.
2.7 It may be seen that the definition of capital goods is borrowed from the CENVAT Credit Rules. There is however a distinguishing feature in GST. Under the GST regime, ITC in respect of capital goods is allowed to be taken in one go unlike staggered availment presently permitted in Central Excise and Service Tax and in some VAT laws. It is also important to note that although ITC on inputs and capital goods is permitted in one go yet inputs and capital goods have been defined separately. The necessity of separate definitions of inputs and capital goods is required because some provisions of MGL differentiate capital goods from inputs. For example, when capital goods, on which ITC had been taken, are supplied, the reversal of ITC or payment of ITC is calculated in a specific manner in terms of the provisions contained in section 16 (14) of MGL. Similarly, capital goods and inputs have been treated differently, in section 16A, when these are sent for job work.
3. Additional Concepts:
In order to fully comprehend the concept of ITC, some other concepts like supply, inward supply, outward supply, output tax, place of business, reverse charge, valid return, etc. as provided in the MGL are discussed in subsequent paras.
3.1 In terms of section 2 (92) of MGL, “supply” shall have the meaning as assigned to it in section 3. Section 3 defines supply as:
“(1) Supply includes
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.
(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.
(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.
(3) Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as‑
(i) a supply of goods and not as a supply of services; or
(ii) a supply of services and not as a supply of goods; or
(iii) neither a supply ofgoods nor a supply of services.
(4) Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.”
Thus, the definition and scope of supply in MGL is quite expansive and comprehensive. Supply includes all forms of supply whether or not for a consideration as long as it is in the course or furtherance of business.
3.2 Inward supply in relation to a person, in terms of section 2 (61) of MGL, shall mean receipt of goods and/or services whether by purchase, acquisition or any other means and whether or not for any consideration. Thus, it covers receipt of goods or services by any means with or without consideration.
3.3 Outward supply in relation to a person, in terms of section 2 (73) of MGL, shall mean supply of goods and/or services, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made by such person in the course or furtherance of business except in case of such supplies where the tax is payable on reverse charge basis. Thus, it covers all forms of supply excluding supplies where GST is payable by the recipient under reverse charge mechansim. It is important to note that the supply is not to be treated as outward supply in the hands of the recipient although he is liable to discharge the GST liability. In view of this, he cannot discharge this tax liability by utilizing the ITC available with him and he would be required to discharge this tax liability in cash only i.e. through electronic cash ledger only.
3.4 Output tax in relation to a taxable person, in terms of section 2 (72) of MGL, means the CGST/SGST chargeable under this Act on taxable supply of goods and/or services made by him or by his agent and excludes tax payable by him on reverse charge basis. Section 2(1)(g) of the IGST Act defines output tax as “output tax” in relation to a taxable person, means the IGST chargeable under the Act on taxable supply of goods and/or services by him or his agent and excludes tax payable by him on reverse charge basis. It can be inferred from this definition that tax payable by a recipient on reverse charge basis is not an output tax although he is liable to discharge the GST liability. In view of this, he cannot discharge this tax liability by utilizing the ITC available with him and he would be required to discharge this tax liability in cash only i.e. through electronic cash ledger only.
3.5 Place of business, in terms of section 2 (75) of MGL, includes
“(a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, provides or receives goods and/or services; or
(b) a place where a taxable person maintains his books of account; or
(c) a place where a taxable person is engaged in business through an agent, by whatever name called.”
3.6 It may be seen from the definition of capital goods, as contained in para 2.6 above, that the place of business plays an important role with respect to availability of ITC on capital goods. The ITC on capital goods is admissible if used:
(i) at the place of business for supply of goods;
(ii) outside the place of business for generation of electricity for captive use at the place of business;
(iii) for supply of services.
Thus capital goods have to be used at the place of business by the supplier of goods whereas they can be used anywhere by supplier of services.
3.7 Reverse charge, in terms of section 2 (85)of MGL,means the liability to pay tax by the person receiving goods and/or services instead of the person supplying the goods and/or services in respect of such categories of supplies as the Central or a State Government may, on the recommendation of the Council, by notification, speak Provision for Reverse charge liability has been created under section 7 (3) of MGL which provides that “notwithstanding anything contained in sub-section (2), the Central or a State Government may, on the recommendation of the Council, by notification, specify categories of supply of goods and/or services the tax on which is payable on reverse charge basis and the tax thereon shall be paid by the person receiving such goods and/or services and all the provisions of this Act shall apply to such person as if he is the person liable for paying the tax in relation to such goods and/or services”.
3.8 Thus, section 2 (85) read with section 7 (3) of the MGL puts onus of payment of tax in certain supplies on the recipient of goods and / or services. It may be noted that this arrangement has precedence in the present service tax law. The objective of this special provision is to cover those sectors which are difficult to tax because of their unorganized and scattered nature.
3.9 As per the provisions contained in section 2(106) of the MGL, Valid return means the return as per section 27 of the MGL. Section 27(3) of the MGL provides that the return furnished by a taxable person shall not be treated as valid return unless the full tax due as per the said return has been paid. It is only the valid return that would be used for allowing ITC to the recipient. In other words, unless the supplier has not paid the entire self-assessed tax and filed his return and the recipient has filed his return, the ITC of the recipient would not be confirmed.
Categories of eligible taxpayers who can avail ITC:
4.1 The scheme of taking ITC is provided under section 16 of Chapter V of the MGL.
4.2 As per the provisions contained in section 16(1) of the MGL, every registered taxable person shall be entitled to ITC which shall be credited to the electronic credit ledger of such person. The conditions and restrictions on taking ITC shall be prescribed under rules. ITC can be taken in time and manner provided in section 35 of MGL. Section 35(2) of the MGL (similar provision contained in section 7(2) of the IGST Act) provides that the ITC as self-assessed in the return would be credited to the electronic credit ledger of the recipient.
4.3 Section 16(2) of the MGL provides that a person who has applied for a new registration shall be entitled to ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock (hereinafter called ‘goods held in stock’) on the day immediately preceding the date from which he becomes liable to pay tax. However, the person has to apply for registration within thirty days from the date on which he becomes liable to registration. The amount of ITC would be calculated in accordance with the generally accepted accounting principles. It may be inferred, therefore, that a new registrant would not be eligible for ITC in respect of goods held in stock if he does not apply for registration within thirty days of the liability to obtain registration.
4.4 A person can take voluntary registration under section 19 (3) of the MGL and pay tax even when his aggregate turnover is below the exemption threshold. Section 16(2A) of the MGL allows such person to take ITC in respect of “goods held in stock” on the day immediately preceding the date of registration. The amount of ITC would be calculated in accordance with the generally accepted accounting principles.
4.5 Section 8 of the MGL provides for composition scheme which provides that the person, whose aggregate turnover is below certain threshold, can opt to pay tax on his turnover at certain specified rate. A person opting for composition levy is not eligible to take ITC. Such person can opt out of composition scheme or ceases to be a composition taxpayer after crossing the prescribed composition threshold. Such person at the time of switching over to normal scheme, in terms of section 16(3) of the MGL, shall be entitled to take ITC in respect of “goods held in stock” on the day immediately preceding the date from which he becomes liable to pay tax as normal taxpayer. The amount of ITC would be calculated in accordance with the generally accepted accounting principles.
5. General disciplines in taking ITC :
5.1 Section 16 (11) of the MGL lays down four essential conditions for entitlement of ITC:
(a) The registered taxable person should be in possession of tax paying document issued by a supplier;
(b) The taxable person has received the goods and / or services;
(c) The tax charged on such supply has been actually paid to the government either in cash or through utilization of input tax credit; and
(d) The taxable person should have furnished the return under section 27.
5.2 Under the present central indirect tax laws, filing of return by the recipient is not compulsory in order to take ITC. A combined reading of section 27(3) and Proviso to section 28 of the MGL makes it clear that filing of valid return both by the supplier as well as by the recipient is necessary for availment and utilization of ITC.
5.3 Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or instalment.
5.4 It has also been provided that ITC can be taken on an invoice billed to the taxable person even where goods have been delivered to a person other than taxable person Dill to’- ‘ship to’ scenarios]. For this purpose, it would be deemed that the taxable person has received the goods although the goods have been delivered to a third party on his directions.
6. Restrictions on taking ITC:
6.1 Section 16 (3A) of the MGL provides that the ITC cannot be taken in respect of any supply of goods and / or services after the expiry of one year from the date of issue of tax invoice relating to such supply. So, the recipient cannot take ITC on any inward supply beyond one-year period from the date of issuance of invoice even if he was otherwise eligible for ITC.
6.2 Section 16 (15) of the MGL provides that ITC cannot be taken beyond the month of September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier. The underlying reasoning for this restriction is that no change in return is permitted after September of next FY. If annual return is filed before the month of September then no change can be made after filing of annual return.
6.3 A combined reading of section 16(3A) and 16(15) makes it clear that the ITC can be availed within one year of issuance of invoice by the supplier or filing of return for the month of September of the following FY or filing of annual return whichever is earlier.
6.4 Section 16 (5) of the MGL provides for the restrictions on the amount of ITC to the extent of taxes paid on goods and / or services used partly for the purpose of any business and partly for other purposes. Similarly section 16 (6) of the MGL restricts the amount of ITC to the extent of taxes paid on goods and / or services are partly used for making taxable supplies including zero-rated supplies and partly in in non-taxable supplies including exempt supplies. In other words, ITC of taxes paid on goods and / or services is permitted only to the extent they are used in taxable supplies and zero-rated supplies only. The manner of attribution shall be prescribed by notification.
6.5. Section 16 (9) of the MGL provides for the negative list with respect to the admissibility of ITC. It is provided that the ITC on following items cannot be availed:
(a) motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services‑
(i) transportation of passengers, or
(ii) transportation of goods, or
(iii) imparting training on motor driving skills;
(b) goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee;
(c) goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;
(d) goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
(e) goods and/or services on which tax has been paid under section 8; and
(f) goods and/or services used for private or personal consumption, to the extent they are so consumed.
6.6 In other words, ITC is allowed in respect of taxes paid on all goods and / or services, except listed in para 6.5 above, provided they are used or intended to be used for making taxable including zero-rated supplies.
6.7 Section 16(10) of the MGL provides that the ITC on capital goods cannot be taken where depreciation on the tax component of the cost of capital goods has been claimed under Income Tax Act, 1961. This provision has been borrowed from the CENVAT Credit Rules and is based on the principle that the taxable person cannot enjoy double benefit even under two different statutes.
7. Availment and Utilization of ITC:
7.1 As per the provisions contained in section 16(11) of the MGL, filing of return by the recipient is one of the important conditions for availing the ITC. Section 28 r/w section 35(2) of the MGL (section 7 (2) of the IGST Act) provides that the ITC, as self-assessed, would be credited to the electronic credit ledger of the recipient on a provisional basis. Provisions contained in section 29 of the MGL provides that the ITC would be confirmed only if the inward details filed by the recipient are matched with the outward details furnished by the supplier in his valid return. In case of mismatch between the inward and outward details, the supplier would be required to rectify the mis-match within a period of two months and if the mis-match continues, the ITC would have to be reversed by the recipient. Proviso to section 28 of the MGL also provides that the recipient can avail the ITC but cannot utilize the same unless he also discharges his self-assessed tax liability.
7.2 A combined reading of all these provisions indicates that the recipient can avail the ITC, on provisional basis, immediately on receipt of goods and / or services but the ITC will have to be reversed after a period of two months if the outward and inward supply details are not matched. The said matching would happen only when both the supplier and the recipient have uploaded the respective outward and inward supply details, the supplier has filed his valid return and the recipient has filed his return. It is only after such matching has taken place that the ITC allowed on provisional basis would be confirmed.
7.3 Section 35(4) of the MGL (section 7(4) of IGST Act) provides that ITC can be used only for payment of tax, and not for any other liability like interest, penalty, fee.
7.4 Section 35 (5) of the MGL (section 7 (5) of IGST Act) provides the manner in which the ITC can be utilized. The permitted combinations are as follows:
(a) The amount of ITC of IGST available in the electronic credit ledger shall first be utilized towards payment of IGST and the amount remaining, if any, may be utilized towards the payment of CGST and SGST, in that order.
(b) The amount of ITC of CGST available in the electronic credit ledger shall first be utilized towards payment of CGST and the amount remaining, if any, may be utilized towards the payment of IGST.
(c) The amount of ITC of SGST available in the electronic credit ledger shall first be utilized towards payment of SGST and the amount remaining, if any, may be utilized towards the payment of IGST.
It has also been provided that cross-utilization of CGST and SGST credit is not allowed.
7.5 The unutilized ITC can be claimed as refund in two situations namely, export of
goods or services and in case of inverted tax structure [section 38 (2)]. In case of exports also, no refund of unutilized ITC is allowed where goods are subjected to export duty. In all other cases, unutilized ITC can be carried forward.
8. Transfer, reversal of ITC:
8.1 Section 16(8) of the MGL provides that on change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business, transfer of unutilized ITC is allowed to the new entity. However, there is a caveat that terms of such change in constitution should also provide for specific provision for transfer of liabilities. In other words transfer of ITC is permitted only and only if both assets, including balance in electronic credit ledger, and liabilities are being transferred from the old entity to the new entity.
8.2 Section 16(12) of the MGL provides that the registered taxable person who has availed of ITC and have been paying taxes as normal taxable person, switches over to composition scheme, is required to pay an amount equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of switch over from the normal scheme to the composition scheme. It has been further provided that the amount can be paid by way of debit in the electronic credit or cash ledger. Likewise, where the goods or services supplied by a registered taxable person become exempt, he is required to pay in similar manner. It has also been provided that the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse. Section 16 (13) of the MGL provides that the manner in which amount shall be calculated would be prescribed.
8.3 Section 16 (14) of the MGL provides for payment of tax when capital goods, on which ITC had been taken, are supplied. In such a situation, the registered taxable person shall pay an amount equal to the ITC taken on the said capital goods reduced by the percentage points as may be specified in this behalf or the tax on the transaction value (TV) of such capital goods as determined under section 15(1) of the MGL, whichever is higher.
9. Penal provisions:
9.1 Section 16 (16) of the MGL gives power to prescribe manner for recovery of ITC, taken wrongly, from the registered taxable person. Such recovery would have to be made by invoking the provisions contained in section 51 of the MGL.
9.2 Section 66 (1) (vi) provides that where a taxable person takes and/or utilizes input tax credit without actual receipt of goods and/or services either fully or partially, he shall be liable to a penalty of rupees ten thousand or an amount equivalent to input tax credit availed of, whichever is higher.
10. Transitional Provisions:
10.1 Since a large number of taxes, which are in the nature of taxes on supply of goods and / or services, are being subsumed in GST, elaborate transitional provisions have been provided in the MGL. These provisions have been provided so that the available ITC balances should be carried forward to the new regime without any undue revenue loss to either the taxable persons or to the tax authorities.
10.2 Section 143 of the MGL provides that a registered taxable person shall be entitled to take, in his electronic credit ledger, credit of the amount of CENVAT credit (under CGST Act) or Value Added Tax (under SGST Act) carried forward in a return furnished under the earlier law. The manner shall be prescribed by rules.The ITC shall be allowedonly if the said amount was admissible as CENVAT credit or ITC under the earlier law and is also admissible as input tax credit under this Act. The recovery of the amount taken as credit, under section 143, shall be under this Act, if found recoverable as a result of proceedings instituted, whether before or after the appointed day, under earlier law.
10.3 In the present law on Central side and in some of the States, ITC of capital goods is allowed in two or more instalments. The portion of such credit of capital goods which is not available in the current year cannot be reflected in the returns filed by assessee. As per the provisions of section 143 of the MGL, such amount of credit in respect of capital goods would not get transferred to electronic credit ledger in the new regime. Therefore, separate provision has been made. Section 144 of the MGL provides that a registered taxable person shall be entitled to take, in his electronic credit ledger, credit of the unavailed CENVAT credit (under CGST Act) or input tax credit (under SGST Act) in respect of capital goods, not carried forward in a return, furnished under the earlier law by him. Unavailed CENVAT credit means the amount that remains after subtracting the amount of CENVAT credit already availed in respect of capital goods by the taxable person under the earlier law from the aggregate amount of CENVAT credit to which the said person was entitled in respect of the said capital goods under the earlier law. The ITC shall be allowedonly if the said amount was admissible as CENVAT credit or input tax credit under the earlier law and is also admissible as input tax credit under this Act. The recovery of the amount taken as credit, under section 144, shall be under this Act, if found recoverable as a result of proceedings instituted, whether before or after the appointed day, under earlier law.
10.4 Some persons may not have been liable for registration in the earlier law. One reason can be higher exemption threshold in the earlier law. Some of the goods which were exempted under the earlier law may come in tax net in the GST regime. The persons dealing in such goods were not required to be registered under the earlier law. Section 145 of the MGL provides for entitlement of ITC to such registered taxable persons under GST. The ITC of eligible duties and taxes or value added tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day would be allowed subject to the following conditions:
(i) such inputs and / or goods are used or intended to be usedfor making taxable supplies under this Act;
(ii) the said taxable person was eligible for CENVAT credit or ITC on receipt of such inputs and/or goods under the earlier law but for his not being liable for registration or the goods remaining exempt under the said law;
(iii) the said taxable person is eligible for input tax credit under this Act;
(iv) the said taxable person is in possession of invoice and/or other prescribed documents evidencing payment of duty / tax under the earlier law in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day; and
(v)such invoices and /or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.
(vi) the recovery of the amount taken as credit, under section 145, shall be under this Act, if found recoverable as a result of proceedings instituted, whether before or after the appointed day, under earlier law.
10.5 Section 146 of the MGL provides for transfer of credit of eligible duties and taxes on inputs held in stock to a taxable person switching over from composition scheme under the earlier law to the normal scheme in the GST regime. It has been provided that a registered taxable person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the earlier law (composition taxpayer), shall be entitled to take, in his electronic credit ledger, credit of eligible duties and taxes (under CGST Act) or Value Added Tax (under SGST Act) in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed date subject to the following cconditions:
(i) such inputs and / or goods are used or intended to be used for making taxable supplies under this Act;
(ii) the said person is not paying tax under section 8 of this Act;
(iii) the said taxable person was eligible for CENVAT credit on receipt/purchase of such inputs and/or goods under the earlier law but for his being a composition taxpayer under the said law;
(iv) the said taxable person is eligible for input tax credit under this Act;
(v)the said taxable person is in possession of invoice and/or other prescribed documents evidencing payment of duty / tax under the earlier law in respect of inputs held in stock and inputs contained in semi- finished or finished goods held in stock on the appointed day; and
(vi)such invoices and /or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.
It has also been provided that the amount of credit shall be calculated in accordance with the generally accepted accounting principles in such manner as may be prescribed. The recovery of the amount taken as credit, under section 146, shall be under this Act, if found recoverable as a result of proceedings instituted, whether before or after the appointed day, under earlier law.
10.6 The expression “eligible duties and taxes” used in section 145 and 146 of the MGL has been defined. The said duties and taxes are those duties and taxes the credit of which is presently available under the CENVAT Credit Rules.
10.7 A person may switch over to composition scheme under GST from normal scheme under the earlier law. Such a person, in terms of section 147 of the MGL, is required to pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such switch over. It has also been provided that the balance of input tax credit, if any, lying in electronic credit ledger shall lapse.
10.8 Section 155 (1) of the MGL provides that every proceeding of appeal, revision, review or reference relating to a claim for CENVAT credit or input tax credit shall be disposed of under the earlier law. As a result of the proceedings, if any amount of credit is found to be admissible to the claimant, it shall be refunded to him in cash subject to the provisions of unjust enrichment, and shall not be admissible as input tax credit under this Act.
10.9 Section 155 (2) of the MGL provides that every proceeding of appeal, revision, review or reference relating to recovery of CENVAT credit or input tax credit under the earlier law shall be disposed under the earlier law. As a result of the proceedings, if any amount of credit becomes recoverable, the same shall be recovered as an arrear of tax under this Act. Further the amount so recovered shall not be admissible as input tax credit under this Act.
10.10 It may so happen that on the appointed day, tax paid goods belonging to the principal are lying at the premises of the agent. In terms of section 162A of the MGL, the agent shall be entitled to take credit of the tax paid on such goods subject to fulfillment of the following conditions:
(i) the agent is a registered taxable person under this Act;
(ii) both the principal and the agent declare the details of stock of goods lying with such agent on the date immediately preceding the appointed day in such form and manner and within such time as may be prescribed in this behalf;
(iii) the invoices for such goods had been issued not earlier than twelve months immediately preceding the appointed day; and
(iv) the principal has either reversed or not availed of the input tax credit in respect of such goods.
10.11 It may so happen that on the appointed day, tax paid capital goods belonging to the principal are lying at the premises of the agent. In terms of section 162B of the MGL, the agent shall be entitled to take credit of the tax paid on such capital goods subject to fulfillment of the following conditions:
(i) the agent is a registered taxable person under this Act;
(ii) both the principal and the agent declare the details of the stock of capital goods lying with such agent on the date immediately preceding the appointed day in such form and manner and within such time as may be prescribed in this behalf;
(iii) the invoices for such capital goods had been issued not earlier than twelve months immediately preceding the appointed day; and
(iv) the principal has either not availed of the input tax credit in respect of such capital goods or, having availed of such credit, has reversed the said credit, to the extent availed of by him.
11. Conclusion:
11.1 In sum, a liberal and elaborate scheme for allowing ITC has been provided in the MGL. An effort has been made to permit ITC in respect of all taxes paid in respect of business expenses except a very small list of items on which ITC will not be permitted. The ITC would be initially allowed on provisional basis for a period of two months. The said ITC would be reversed in the hands of the recipient in case of mismatch between the outward supply details submitted by the supplier and inward supply details submitted by the recipient whether on account of non-payment of self-assessed tax by the supplier or due to non filing of returns by the supplier. The recipient can avail the ITC by filing a return but he cannot utilize the same unless he has filed the valid return. The recipient can re-claim the reversed ITC after the supplier has paid the taxes due from him.
11.2 In other words, filing of valid return both by the supplier and recipient is an absolute must before the ITC chain (from eligibility, availment on confirmed basis and utilization thereof) can be said to be complete.
ANNEXURE
LIST OF RELEVANT PROVISIONS
1. Definitions:
a) Section 2 (5): Agent
b) Section 2 (20): Capital goods
c) Section 2 (41): Electronic credit ledger
d) Section 2 (54): Inputs
e) Section 2 (55): Input services
f) Section 2 (57) / Section 2(1)(d) of IGST Act: Input tax
g) Section 2 (58) / Section 2(1)(e) of IGST Act: Input Tax Credit (ITC)
h) Section 2 (61): Inward supply
i) Section 2 (72) / Section 2(1)(g) of IGST Act: Output tax 1) Section 2
j) (73): Outward supply
k) Section 2 (75): Place of business
l) Section 2 (77): Principal
m) Section 2 (85): Reverse charge
n) Section 2 (92) r/w section 3: Supply
o) Section 2 (106) r/w section 27(3): Valid return
2. Section 8: Composition levy
3. Section 16: Manner of taking ITC
4. Section 19 (3): Voluntary registration
5. Section 25: Furnishing details of outward supply
6. Section 26: Furnishing details of inward supply
7. Section 27: Returns
8. Section 28: Claim of ITC & provisional acceptance thereof
9. Section 29: Matching, reversal and reclaim of input tax credit
10. Section 35 (2) / 7 (2) of IGST Act: Credit of self-assessed ITC in electronic credit ledger
11. Section 35 (4) / 7 (4) of IGST Act: Utilisation of ITC
12. Section 35 (5) / 7(5) of IGST Act: Cross – utilisation of ITC
13. Section 38 (2): Refund of unutilised ITC
14. Section 66: Offences and penalties
15. Transitional provisions
a) Section 143: Transfer of credit carried forward in return
b) Section 144: Transfer of unavailed credit of capital goods not carried forward in return
c) Section 145: Transfer of credit of eligible duties and taxes in certain situations
d) Section 146: Transfer of credit of eligible duties and taxes for a person switching over from composition to normal scheme
e) Section 147: Reversal of credit while switching over to composition from normal scheme
f) Section 155: Claim of credit to be disposed of under the earlier law
g) Section 162A: Credit of tax paid on goods lying with agents
h) Section 162B: Credit of tax paid on capital goods lying with agents
