Availment of Input Tax Credit (ITC) and Utilisation thereof under GST Law

There are two different concepts under GST that are ‘Availment of ITC’ through credited in Electronic Credit Ledger (ECL) and ‘Utilisation thereof’ to pay output tax liability’ as per Section 49 of the Central Goods and Service Tax Act, 2017 (CGST Act, 2017). Both these concepts have their importance under GST law as there is penalty provisions regarding ITC wrongly availed and utilisation thereof. If any person avails ITC wrongly and utilised the same, then penal provisions under GST Law will applicable.

Therefore, first it becomes crucial to know about penal provisions regarding ITC wrongly availed and utilisation thereof, which are as under-

Section -73 Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful mis-statement or suppression of facts.

Section – 50 Interest on delayed payment of tax

ITC wrongly availed but no utilised shall not draw penal proceedings under GST

“availment of a credit is a positive act and unless carried out for reducing any tax liability by its reflection in the return filed for any financial year, it cannot be a case of either availment or utilization”

The above quote is from the judgement pronounced on 18.07.2019 by The Hon’ble High Court of Patna in the case of M/s Commercial Steel Engineering Vs The State of Bihar; wherein it was held that wrongly availed input tax credit, reflecting in an Electronic Credit Ledger under GST shall not draw penal proceedings until the same, fully or partially is utilized against the tax liability, so as to make it recoverable by the authorities.

By reading the above judgment, it does not mean that every person should take the credit of Input Tax in every situation and credit the same in ECL. Only specified class of person can avail certain specified input tax credit with conditions and restrictions prescribed. Others are not eligible to entitled to take the credit in the return to reflect the same in ECL. Therefore, focus should be upon that persons who are entitled to take/avail ITC in his return.

Now, to go ahead, it is necessary to check who is entitled to take input tax credit or not? It is submitted that the prime concept of ITC arises under GST by Section 41 of the CGST Act, 2017 by the golden sentence ‘entitled to take eligible input put credit’.

Section 41Claim of Input Tax Credit and Provisional acceptance thereof

“(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his Electronic Credit Ledger.

(2) The credit referred to in sub-section (1) shall be utilised only for payment of self-assessed output tax as per return referred to in the said sub-section.”

While analysing the sentence ‘entitled to take eligible input tax credit’, it is necessary to refer sub section (1) of Section 41 and sub section (1) of the Section 16 of the CGST, 2017 and both the sections begin as follows:

“Every registered person shall subject to conditions and restrictions as may be prescribed”

Therefore, if any person wants to take ITC, he should be, first, registered with authority under GST Law. As soon as the Registered Person take his eligible ITC in his return the credit will be available in the ECL, his claim is provisionally accepted, subject to matching, mis-matching elements with the supplier report in his form GSTR-1.

Now, we can see different situations of registered and non-registered person, in respect of availing the ITC under various provisions of GST.

Sr. No. Person Admissible to take ITC Under Section
1. Registered Person YES Section 16(1) of CGST Act, 2017
2. Un-registered person NO Section 16(1) of CGST Act, 2017
3 Unregistered person applied for registration within 30 days from the day he become liable to register YES Section 16(1) of CGST Act, 2017 (for inputs/inputs services/capital goods after registration);

Section 18(1)(a) of CGST Act, 2017 (for earlier stock of inputs)

4 Unregistered person applied for voluntary registration u/s 25(3) of CGST Act, 2017 YES Section 16(1) of CGST Act, 2017 (for inputs/inputs services/capital goods after registration);

Section 18(1)(b) of CGST Act, 2017 (for earlier stock of inputs)

5 Registered person ceases to pay tax under Composition Scheme YES Section 16(1) of CGST Act, 2017(for inputs/inputs services/capital goods after registration);

Section 18(1)(c) of CGST Act, 2017 (for earlier stock of inputs and Capital Goods)

6 Registered person converts for exempt supply to taxable supply. Yes Section 16(1) of CGST Act, 2017;

Section 18(1)(d) of CGST Act, 2017 (for earlier stock of inputs and Capital Goods)

Further, as above mentioned that GST law prescribed ‘certain conditions and restrictions’ to take ITC by Registered Person, therefore, the same can be find by the under the heading “Available Credit/Eligible Credit” and “Shall Not Available the Credit/Not Eligible “.

It is stated that there is not term defined as “eligible credit” and “not eligible credit” but the same can be categories by applying conditions for taking/availing ITC. One that satisfy conditions, will be called as ‘eligible’ otherwise ‘not eligible’. So, any Registered Person who interested to take ITC on the GST common portal, he must know what are conditions and restrictions which has been prescribed under the CGST Act, 2017. It is also crucial to determine whether such input tax credit is eligible or not and entitled to take credit in the return.

In this regard, Section 16 of CGST Act, 2017 provides certain conditions for taking/availing ITC, i.e., registered person having possession tax invoice on the supply received, actually received the goods or services or both, the supplier also reported details in his return under Section 39 of the CGST Act, 2017, payments were made within the period specified.

It is also stated that even a registered person having tax invoice on the supply received, actually received the goods or services or both, the supplier also reported details in his return under Section 39, payments were made within the period specified, however, under certain stage the recipient could not take ITC in the return, because the CGST Act, 2017 prescribed conditions and restriction for certain ITC to certain ‘specified person’ that he could not avail, hence under such circumstances the recipient is not eligible to take such ITC in the return. For example, Section 17 of the CGST, Act, 2017 prescribed certain conditions and restrictions for such availment of ITC.

Restriction on Availment of ITC:

In view of the above analysis, it is stated that ITC can be availed if the conditions for availing ITC have been fulfilled. Moreover, the Central Board of Indirect Taxes (“CBIT”) having power in Section 164 of the CGST Act, 2017, released a crucial Notification No. 49/2019 (Central Tax) dated 09th October, 2019 by which a new sub-rule (4) under Rule 36 of the Central Goods and Service Tax Rules, 2017 (“CGST Rules, 2017”), was inserted.

The Rule 36(4) in words of the law is-

“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”.

Rule 36 of CGST Rules, 2017 provides ‘documentary requirements and conditions for claiming input tax credit’ under Chapter V-INPUT TAX CREDIT. Rule 36(4) of CGST Rules, 2017 restricts the credit relating to the invoices not uploaded by the suppliers in their form GSTR-1 to the extent of 20% [10% w.e.f.01.01.2020 vide Notification No. 75/2019 Central Tax dated 26th December, 2019 and 5% w.e.f. 01.01.2021 vide Notification No. 94/2020-Central Tax dated 22nd December, 2020].

Rule 36(4) of the CGST Rules, 2017 is concerned with regard to restriction on the availment of ITC in cases where GSTR-1 has not been uploaded by the suppliers under Section 37(1) of the CGST Act, 2017. It is important to note that this newly inserted Rule 36(4) is a substantive condition to be fulfilled for the availment of ITC in addition to conditions prescribed under Section 16 of CGST Act, 2017.

For instance: –

SN. Particular Amount (in Rs.)
a. Eligible ITC appearing in GSTR2A

(on the basis of GSTR-1 filed by the counterparty)

100
b. Eligible ITC not appearing in GSTR2A

(on the basis of not filed in GSTR-1 by the counterparty)

40
c. Total eligible ITC on inward supplies (a+b) 140
Maximum Permissible ITC in GSTR3B on self-assessment basis (a x 120%) 120

We know that prior to the introduction of the above notification entire eligible ITC of Rs 150 can be availed by the taxpayer in GSTR-3B return. However, with effect from 9th October 2019 out of eligible ITC not appearing in GSTR2A of Rs 50, a sum of Rs 20 can only be claimed in GSTR3B of the current month. Remaining ITC of Rs 30 can be claimed in the subsequent months when the corresponding invoices are uploaded by the suppliers in GSTR1.

#Only for your reference please note that ITC once availed as per Section 16 (Rules thereto) is credited to Electronic Credit ledger of the registered person and can be utilized for payment towards output tax as provided in Section 49 of the CGST Act, 2017.

Amendment in Rule 36(4) by Notification No. 94/2020-Central Tax dated 22nd December, 2020.

After the amendment in Rule 36(4) by Notification No. 94/2020-Central Tax dated 22nd December, 2020, it may be read as under-

“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been furnished in Form GSTR-1 or using the invoice furnishing facility, shall not exceed 5 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been furnished in Form GSTR-1 or using the invoice furnishing facility.”.

Summarised Position before and after introduction of Rule 36(4) w.e.f. 09.10.2019 and with latest amendment vide Notification No. 94/2020-Central Tax dated 22nd December, 2020.

ITC Mechanism before introduction of Rule 36(4) (before 09.10.2019):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in GSTR2A

(on the basis of GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in GSTR2A

(on the basis of not filed in GSTR-1 by the counterparty)

5,000
d. Total eligible ITC on inward supplies (a+c) 1,05,000
Maximum Permissible ITC in GSTR3B on self-assessment basis (a +c%) i.e. d 1,05,000

ITC Mechanism after introduction of Rule 36(4) (i.e. w.e.f. 09.10.2019 to 31.12.2019):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in GSTR2A

(on the basis of GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in GSTR2A

(on the basis of not filed in GSTR-1 by the counterparty)

6,000
d. Total eligible ITC on inward supplies (a+c) 1,06,000
Maximum Permissible ITC in GSTR3B on self-assessment basis (a x 20%) i.e. Rs. 20,000 or Rs. 6,000 whichever is lower, therefore, Rs. 1,00,000 +Rs. 6,000 = Rs. 1,06,000 1,06,000

ITC Mechanism after introduction of Rule 36(4) (i.e. w.e.f. 01.01.2020 to 31.12.2020):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in GSTR2A

(on the basis of GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in GSTR2A

(on the basis of not filed in GSTR-1 by the counterparty)

6,000
d. Total eligible ITC on inward supplies (a+c) 1,06,000
Maximum Permissible ITC in GSTR3B on self-assessment basis (a x 10%) i.e. Rs. 10,000 or Rs. 6,000 whichever is lower, therefore, Rs. 1,00,000 +Rs. 6,000 = Rs. 1,06,000 1,06,000

ITC Mechanism after introduction of Rule 36(4) (i.e. w.e.f. 01.01.2021):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in GSTR2A

(on the basis of GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in GSTR2A

(on the basis of not filed in GSTR-1 by the counterparty)

6,000
d. Total eligible ITC on inward supplies (a+c) 1,06,000
Maximum Permissible ITC in GSTR3B on self-assessment basis (a x 10%) i.e. Rs. 5,000 or Rs. 6,000 whichever is lower, therefore, Rs. 1,00,000 +Rs. 5,000 = Rs. 1,05,000 1,05,000
ITC carried forward to the subsequent tax period subject to the requisite invoices uploaded by the suppler 1,000

__________

Restrictions on utilization of ITC

ITC once availed as per Section 16 of the CGST, Act, 2017 is credited to ‘Electronic Credit Ledger’ of the Registered Person and can be utilized for payment towards ‘output tax’ as provided in Section 49 of the CGST Act, 2017. It is to be noted that pursuant to the provision of Section 49(4) of the CGST Act, 2017 “the amount available in the electronic credit ledger may be used for making any payment towards ‘output tax’ under this Act, or under the Integrated Goods and Service Tax Act in such manner and subject to such conditions and within such time as may be prescribed.”

It is stated that by CGST (Amendment) Act, 2018 passed by Official Gazette of India on 30th August,2018, Section 49 of the CGST Act, 2017 was amended to insert the Section 49A and Section 49B and the provisions of these sections were notified w.e.f. 01st February, 2019 by Notification No. 02/2019 dated 29th January, 2019.

Order of Utilization of ITC

The order/sequence of utilisation of ITC has been prescribed under Section 49(5) of the CGST Act, 2017 but the same shall be subject to conditions prescribed under Section 49A of the CGST Act, 2017 as Section 49A override the provisions of Section 49 of the CGST Act, 2017. Further it is also important to note that the Government is empowered to change the order/sequence of utilisation of ITC under Section 49B of the CGST Act, 2017.

Section 49B in words of the law is-

“Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and clause (f) of sub-section (5) of section 49, the Government may, on the recommendations of the Council, prescribe the order and manner of utilization of the input tax credit on account of integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax.”

By perusal of the said provision of Section 49B, it is clear that the provision of Section 49B overrides the provision contained in the Chapter X – Payment of Tax i.e. from Section 49 to 53A but these are subject to the provisions of clause (e) and clause (f) of sub-section (5) of Section 49 of the CGST Act, 2017.

Furthermore, pursuant to the power given under Section 49B of the CGST Act, 2017, new ‘Rule 88A -Order of utilisation of input tax credit’ was inserted by Notification No. 16/2019 dated 29th March 2019 by amending CGST Rules, 2017 called as Second Amendment (2019).

Therefore, it becomes necessary to study the order and manner of utilisation of the ITC as provided under new Rule 88A. But, please note that Section 49B is subject to the provisions of clause (e) and clause (f) of sub-section (5) of Section 49 of the CGST Act, 2017, therefore, it becomes also necessary to see first the provisions mentioned in Section 49(5)(e) & (f) which are as under

“(e) The central tax shall not be utilised towards payment of State tax or Union territory tax, and

(f) The State tax or Union territory tax shall not be utilised towards payment of central tax.”

With above, it is crystal clear that there is total restriction regarding utilisation of ITC of Central Tax (CGST) and State (SGST)/Union Territory Tax (UTGST) with each other i.e. ITC of CGST shall not be utilised towards liability of SGST/UTGST and ITC of SGST/UTGST shall not be utilised towards liability of CGST.

After seeing provisions mentioned in Section 49(5)(e) & (f) of the CGST Act, 2017, it is also necessary to see the provisions of ‘Rule 88A -Order of utilisation of input tax credit’ which are as under-

“Input tax credit on account of integrated tax shall first be utilized towards payment of integrated tax, and the amount remaining, if any, may be utilized towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order:

Provided that the input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilized fully.”

From the above, it is clear that ITC of IGST will be first utilized to settle the liability of IGST and if after payment of entire IGST, there is a balance of ITC of IGST in ECL, if any, may be used either for payment of CGST or SGST/UTGST in any order i.e. as per the choice of taxable person.

Furthermore, as mentioned above that the order/sequence of utilisation of ITC has been prescribed under Section 49(5) of the CGST Act, 2017 subject to conditions prescribed under Section 49A of the CGST Act, 2017. Therefore, it becomes also necessary to study ‘Section 49A -Utilisation of input tax credit subject to certain conditions’ which is as under-

“Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilized fully towards such payment.”

It is stated that it is very clear that the provisions of section 49A are same as provided under proviso to Rule 88A which mentioned that ITC of Integrated tax shall be first utilised fully then the question of utilisation of ITC of CGST, SGST or UTGST shall arise.

Finally, now we shall study of order/sequence of utilisation of ITC provided under Section 49(5)(a) to (d) of the CGST Act, 2017 as under-

“(5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of––

(a) the integrated tax shall first be utilized towards payment of integrated tax and the amount remaining, if any, may be utilized towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;

(b) the central tax shall first be utilized towards payment of central tax and the amount remaining, if any, may be utilized towards the payment of integrated tax;

(c) the State tax shall first be utilized towards payment of State tax and the amount remaining, if any, may be utilized towards payment of integrated tax;

#Provided that the input tax credit on account of State Tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(d) the Union territory tax shall first be utilized towards payment of Union territory tax and the amount remaining, if any, may be utilized towards payment of integrated tax;

#Provided that the input tax credit on account of Union territory tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

#Inserted by the CGST (Amendment) Act, 2018 dated 30.08.2018, w.e.f. 01.02.2019 vide Notification No. 02/2019-Central Tax, dated 29.01.2019.

Now, to better understand, it is necessary to consolidate the aforesaid provisions of utilisation of ITC and their sequences and the same may be read as under-

First Step -Check total/ Complete Restriction regarding utilisation of ITC

Total/Complete Restriction: ITC of CGST cannot be utilized to settle the liability of SGST/UTGST and ITC of SGST/UTGST cannot be utilized to settle the liability of CGST [Please refer to clause (e) and (f) of Section 49(5) of the CGST Act, 2017]

Second Step -Utilisation of ITC of IGST

i. ITC of IGST will be first utilized to settle the liability of IGST. [Please refer to Rule 88A and Section 49(5)(a) of the CGST Act, 2017];

ii. If after payment of entire IGST, there is a balance of ITC of IGST in ECL, if any, may be used either for payment of CGST or SGST/UTGST in any order i.e. as per the choice of taxable person [Please refer to Rule 88A of CGST Rules, 2017 -it overrides Section 49(5)(a) of CGST Act];

iii. The taxable person can partially utilise ITC of IGST for liability of CGST and partially for SGST/UTGST as per his choice after first utilising fully towards liability of IGST [Please refer to Circular No.98/17/2019-GST dated 23-4-2019].

Third Step -Utilisation of ITC of CGST

i. ITC of CGST will be first utilized to settle the liability of CGST [Please refer to Section 49(5)(b) of the CGST Act, 2017];

ii. Then, balance ITC of CGST will be utilized to settle the liability of IGST [Please refer to Section 49(5)(b) of the CGST Act, 2017]

Please note only after the ITC of IGST is fully exhausted then ITC of CGST can be utilized to settle the liability of IGST [Please refer to Proviso to Rule 88A and Section 49A of the CGST Act, 2017].

iii. If no IGST is payable, that credit should be carried forward.

iv. ITC of CGST cannot be utilized to settle the liability of SGST/UTGST [Please refer to clause (e) of Section 49(5) of the CGST Act, 2017].

Fourth Step -Utilisation of ITC of SGST

i. ITC of SGST will be first utilized to settle the liability of SGST [Please refer to Section 49(5)(c) of the CGST Act, 2017];

ii. Then, balance ITC of SGST will be utilized to settle the liability of IGST [Please refer to Section 49(5)(c) of the CGST Act, 2017]

Please note only after the ITC of IGST is fully exhausted and there is no balance of ITC of CGST, then ITC of SGST can be utilized to settle the liability of IGST [Please refer to Proviso to Rule 88A, Section 49A and Proviso to Section 49(5)(c) of the CGST Act, 2017].

iii. If no IGST is payable, that credit should be carried forward.

iv. ITC of SGST cannot be utilized to settle the liability of CGST [Please refer to clause (f) of Section 49(5) of the CGST Act, 2017].

Fifth Step -Utilisation of ITC of UTGST

i. ITC of UTGST will be first utilized to settle the liability of SGST [Please refer to Section 49(5)(d) of the CGST Act, 2017];

ii. Then, balance ITC of UTGST will be utilized to settle the liability of IGST [Please refer to Section 49(5)(d) of the CGST Act, 2017]

Please note only after the ITC of IGST is fully exhausted and there is no balance of ITC of CGST, then ITC of UTGST can be utilized to settle the liability of IGST [Please refer to Proviso to Rule 88A, Section 49A and Proviso to Section 49(5)(d) of the CGST Act, 2017].

iii. If no IGST is payable, that credit should be carried forward.

iv. ITC of UTGST cannot be utilized to settle the liability of CGST [Please refer to clause (f) of Section 49(5) of the CGST Act, 2017].

*****

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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3 Comments

  1. Bharath says:

    sir from this article I have gained good knowledge l have a doubt I have 2 heads of sales 1-retail textile 2 rental income
    can I use the ITC of textile purchase to set off the rental output tax
    please give clarity on this issue

  2. AMIT says:

    Sir you have very nicely explained the provisions, Sir I have one query:
    1. whether ITC availed through 3B but not utilised, whether same will be treated as ITC utilitsed

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