1. Section 18 of the CGST Act is applicable for Input Tax Credit ( ITC) availability to a taxable person who becomes liable to pay GST at a later stage. The liability to pay GST at a later stage may arise due to the following reasons:-
(a) Turnover exceeds the limit from the prescribed limit for registration (40 L / 20 L /10L)
(b) Opts out of Composition scheme
(c ) Exemption to the Supply of Goods or Service is withdrawn.
(d) Merger, Amalgamation, Sale of business
(d) Sale of Capital Goods
2. Entitlement of Credit in Special Circumstances Sec 18(1) of the CGST Act prescribes the date when a person is entitled to take Credit in particular circumstances:-
| Section 18(1)(a) | A taxable person who has applied for registration within thirty days
from the date on which he becomes liable to registration is entitled to take Credit of input tax on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of the CGST Act. Example: Mr. R become liable to register ( turnover exceeds 40 Lakhs ) on 02 April 2020 and applied for registration on 20 April 2020 ( within 30 days from 02 April 2020 ) He is entitled to take Credit of input tax held in stock on 01 April 2020. |
| Section 18(1)(b) | Voluntary Registration: A person who has applied for voluntary registration be entitled to take Credit of input tax, on the day immediately preceding the date of grant of registration.
Example: Mr. V applied for Voluntary registration ( even turnover is less than the prescribed limit ) on 20 April and granted registration on 18 May 2020. He is entitled to take Credit of input tax held in stock on 17 May 2020. |
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Section 18(1)(c) Rule 40(2) of CGST Rules |
Composition Scheme: Where any registered taxable person ceases to pay tax for composition scheme under section 10 of the CGST Act, he shall be entitled to take Credit of input tax on the day immediately preceding the date from which he becomes liable to pay tax as a normal taxpayer.
He shall be eligible to take Credit of tax on Capital goods also. However, Credit on capital goods shall be reduced by 5% for every quarter or part thereof, from the date of issue of invoice for the capital goods. Example: Mr. C, a Composition dealer, purchased capital goods on 01 April 2019 for Rs 1,00,000 and paid 18000/ as GST. On 02 April 2020, he ceases to pay tax under the composition scheme and become a normal taxpayer. Credit on Capital goods shall be reduced @ 5% for four quarters (April 2019 to Mar 2020 ), and Credit available on capital goods will be 18000- ( 18000*5%*4)= 14400) |
| Section 18(1)(d) | Exempt Supply becomes Taxable: Where an exempt supply by a registered taxable person becomes a taxable supply, such person shall be entitled to take Credit of input tax relatable to such exempt Supply on the day immediately preceding the date from which such Supply becomes taxable.
He shall also be eligible to take Credit on capital goods exclusively used for such exempt Supply. Credit on capital goods shall be reduced by 5% for every quarter or part thereof, from the date of issue of invoice for the capital goods- proviso to section 18(1)(d) of CGST Act. |
| The Credit of ITC on capital goods can be availed only when a taxable person under composition scheme shifts to a normal scheme under sec 18(1)(c), and when exempt Supply of goods becomes a taxable supply u/s 18(1)(d). It cannot be availed when a taxable person applies for fresh registration. | |
3. Conditions & Restrictions for claiming Credit:
| Section 18(2) | Time limit from the date of issue of invoice:- A taxable person shall not be entitled to take input tax credit after the expiry of one year from the date of issue of a tax invoice.
In the example at Para 2 above, Mr. R shall not be entitled to take Credit of stock held on 01 April 2020 if the tax invoice issued for the said stock is prior to 31 March 2019. |
| Declaration in GST ITC 01: The registered person shall within thirty days from the date of his becoming eligible to avail of input tax credit under section 18(1) make a declaration, electronically, on the Common Portal in form GST ITC-01 to the effect that he is eligible to avail of the input tax credit as aforesaid | |
4. Merger, Amalgamation or Sale of Business :
| Section 18(3)
Rule 41(1) Rule 41(2) Rule 41(3) Rule 41(4) |
Where there is a change in the constitution of a registered person on account of the sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business.
Procedure: A registered person shall furnish the details in form GST ITC-02 electronically on the Common Portal along with a request to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee. 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 – proviso to rule 41(1) of CGST Rules. Value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon – Explanation to rule 41(1) of CGST Rules inserted, w.e.f. 29-3-2019. The transferor shall also submit a copy of a certificate issued by a practicing chartered account or cost accountant certifying that the sale, merger, demerger, amalgamation, lease or transfer of business has been done with a specific provision for transfer of liabilities. The transferee shall, on the Common Portal, accept the details so furnished by the transferor and, upon such acceptance, the unutilized Credit specified in form GST ITC-02 shall be credited to his electronic credit ledger. The Inputs and Capital goods so transferred shall be duly accounted for by the transferee in his books of account. |
5. Procedure in case of death of sole proprietor: In case of death of the sole proprietor, application for cancellation of registration shall be made by legal heir/successor in form GST REG-16.
If legal heirs continue the business, it will be considered as a transfer of business. Credit shall be allowed to be transferred as per section 18(3) of the CGST Act, read with rule 41 of CGST Rules.
The registered person shall file form GST ITC-02 in respect of registration, which is required to be cancelled. Form GST ITC-02 should be filed before submitting an application for the cancellation of registration.
On acceptance by transferee/successor, unutilized ITC, as specified in form GST ITC-02, shall be credited to the electronic credit ledger of the transferee.
6. Transfer of ITC on obtaining separate registration for multiple places of business within a State Form 2A: A registered person who has obtained separate registration for multiple places of business in accordance with the provisions of rule 11 and who intends to transfer, either wholly or partly, the unutilized input tax credit lying in his electronic credit ledger to any or all of the newly registered place of business, shall furnish within thirty days from obtaining such separate registrations, the details in FORM GST ITC-02A electronically on the common portal, either directly or through a Facilitation Centre notified in this behalf by the Commissioner.
7. Reversal of Input Tax Credit :
| Section 18(4)
Rule 44(1) Rule 44(3) |
If GST registration of a taxable person is cancelled or goods or services become wholly exempt, The amount of input tax credit relating to inputs and capital goods required to be reversed.
Reversal of Credit in Inputs:- The Input Tax Credit shall be calculated proportionately based on corresponding invoices on which Credit had been availed by the registered taxable person on such input. Where the tax invoices related to the inputs lying in stock are not available, the registered person shall estimate the amount based on the prevailing market price of goods on the effective date of cancellation or the date goods/ services becomes exempted. |
| Rule 44(2) | The amount to be reversed shall be determined separately for an input tax credit of IGST and CGST. |
| Rule 44(4) | The amount to be reversed shall form part of the output tax liability of the registered person, and the details of the amount shall be furnished in form GST ITC-03, where such amount relates to taxable Supply becomes exempted and in form GSTR-10, where such amount relates to cancellation of registration |
| Rule 44(5) | The details shall be certified by a practicing CA/CMA. |
| Rule 44(6) | Reversal of Credit in Capital Goods: The input tax credit involved in the remaining residual life in months shall be computed on a pro-rata basis, taking the residual life as five years.
Example: Capital goods have been in use for three years, six months and 15 days=(42 months) The remaining residual life in months = 18 months ignoring a part of the month The input tax credit is taken on such capital goods = C ITC required to reverse (attributable to remaining residual life) = C multiplied by 18/60 |
| Section 18(6)
Rule 40(2) |
ITC on Sale of Capital goods after use
In case of sale of capital goods on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods reduced by @ 5% per quarter or the tax on the transaction value of such capital goods determined under section 15 of CGST Act, whichever is higher. Example: Mr. CG purchased a machine on 1-7-2018 for Rs. 10,00,000 on which GST was paid @ 18%. On 2-10-2019, he sold the machinery for Rs 7,50,000. (a) Asset is utilized for 6 quarters ( July 2018- Sep 2019) (b) GST Paid = 10,00,000@18% = 1,80,000 (c ) ITC on Capital Goods utilized = 1,80,000@5% *6= 54000/- (d) Amount to be paid towards ITC taken = 1,80,000- 54000 = 1,26,000 Or the tax on the transaction value of such capital goods= 7,50,000@18% = 1,35,000/= whichever is higher . Thus Rs 1,35,000 shall be added as output tax liability in form GSTR-1. |
| . If such amount exceeds the tax determined on the transaction value of the capital goods, the amount shall be added as output tax liability in form GSTR-1 – proviso to rule 44(6) of CGST Rules.
However, in case of bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15 of CGST Act – proviso to section 18(6) of CGST Act. |
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Part 12 of the series will cover the topic “ITC of Material Sent for Job Work under sec 19 of CGST Act 2017
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Dear TaxGuru,
what can we do in case if seller is not provide us IGST input tax credit ?
if seller is not doing anything against this issue.
do we have any right to take any disciplinary action against them from claiming of input..
I think in example given for sec 18(1)(c)
5% disallowance of ITC should be for 5 qtrs because Upto 31.03.20, it’s gonna 4 qtrs already but transition have taken effect on 02 Apr. So 1st April shall be counted in the composition period hence next qtr shall be considered as one qtr because even a single day shall be counted as one qtr. And that’s how it should be 5 qtr.