CA Ashish Garg, B.Com (H). FCA, LL.B.

CA Ashish Garg B. Com (H). FCA, LL.B.

It is a second article in the series dealing with the issues of input tax credit. GST is expected to allow seamless flow of input tax credit to the registered taxable person, but taking into consideration the provisions of Revised Model Goods and Service Tax Law (hereinafter referred to as “RMGL”), it still looks like a distant dream for assessees.

In the RMGL, the lawmakers have casted many restrictions on the assessees which will not only intricate the process of availment of input tax credit but will also be inconsistent with the whole idea of seamless flow of input tax credit.

Some of the issues which will create hurdles in the path of smooth implementation of GST for assessees are discussed as under:

a) No input tax credit on Default in payment of GST by the vendor

It is a very strange and harsh condition which has been casted on the assessees for availment of input tax credit. According to RMGL, an assessee shall not be allowed to avail input tax credit of goods or services, if its vendor fails to make the payment of GST on the supplies made to such assessee.

Lawmakers have adopted an approach of punishing innocent assessees for the sins of the guilty by restricting the credit of input tax due to default of its vendor. Furthermore, the law is also silent about the situation where the law enforcers recover tax from the defaulters, whether in such a scenario, assessees who have been disallowed input tax credit earlier will be allowed to take such credit.

Disallowance of input tax credit to purchasers of goods/service does not dissolve the liability of supplier of goods/service from payment of GST and department will demand and recover GST from such tax defaulters. Collection of GST from defaulters and disallowance of input tax credit to the receiver will lead to double taxation which goes against the principle of tax on value addition. This restriction will only allow our governments to prosper at the cost of the honest tax compliant assessees.

Moreover, this draconian provision shall have far greater impact when one person makes default in payment of GST in a supply chain. The receiver of goods/service from such defaulter shall be forced to pay the amount of input tax credit, otherwise it will not be able to file its valid return and the entire chain of supply will get adversely affected. This situation will create more problems for small scale assessees who are supplying goods/services to large scale assessees as these big players of the industry will force the small assessees to pay the amount equivalent to input tax credit availed by them. This provision alone can endanger the existence of some small scale assessees.

b) No input tax credit if registration not taken within 30 days

RMGL provides that no input tax credit shall be available to the person who is liable to take registration under GST but fails to apply for registration within 30 days or who has applied for registration within 30 days time period, but its application was rejected.

This provision is a major setback considering that most of the people in India are still unaware of the taxation laws and they will have to face harsh penalties and restrictions where they have made the default due to unawareness and ignorance. It was expected that the lawmakers will rectify this mistake in the RMGL, however in both the versions of MGL issued in June and in November, this provision persist.  Hence, it appears that it is not an unintentional error rather this provision has been kept intentionally to make sure that every person should be acquainted with the provisions of GST and if not he will have to bear loss.

Moreover, legislature shall recover tax from the assessees who failed to take registration with the GST department for the supplies made by it during the period of default, but non allowance of input tax credit for such period is unjust and unwarranted.

c) No input tax credit if a person does not have establishment in a state where the credit accrues in terms of Place of supply

This provision is a retraction from the concept of seamless flow of input tax credit in the supply chain till the goods/services are consumed by final consumer. The Draft IGST Law prescribes the mechanism for determination of place of supply of goods/services. If the place of supply of any goods/service is in different state than the principal place of business of assessee, in such an event, assessee shall not be eligible to avail input tax credit of GST paid on receipt of such goods/services thereby leading to cascading effect of taxes.

The legislature should have allowed full input tax credit irrespective of the state boundaries. In RMGL and IGST law, all the assessees will still remain subject to jurisdiction of various state authorities and will have to comply with all the state GST separately where they are registered. This provision still gives a sense of One Nation, Many taxes and not One Nation, One tax.

d) Tax on advances but no credit on advances

Presently the concept of payment of tax on advances is prevalent in Service Tax only and manufacturers and traders are not required to pay any tax on receipt of advance payments. However, in the RMGL, all the assessees viz., manufacturers, service providers and traders are made liable to pay GST on receipt of advance payment.

Lawmakers have defined time of supply of goods and services as date of payment or date of invoice whichever is earlier i.e. if any person make advance payment to a registered person against supply of goods/service, then such registered person shall be liable to pay GST on such advances. However, the person making the payment shall not be eligible to avail input tax credit of tax paid by supplier on such advances as he does not satisfy all the requisite conditions for availment of input tax credit.

The purchasing assessee has to shell out more money as he has to pay GST also on advances to its vendors. This will lead to gap between payment of GST and credit availment which will interalia increase the working capital needs of the assessees considerably.

e) Reversal of input tax on use of Capital goods partly used for supply of taxable goods/service and partly for supply of exempted goods/service

Presently CENVAT Credit Rules, 2004 provides full CENVAT Credit of capital goods even if such goods are partly used for supply of exempted goods/services and partly for supply of taxable goods/services.

However, the RGML has proposed to reverse proportionate CENVAT Credit on capital goods if the same are partly used for supply of taxable goods/services or business purpose and partly for exempted goods/service or personal use. The mechanism for proportionate reversal has not yet been prescribed in the RGML, however it will be difficult to determine the appropriate proportion of reversal as the economic benefits of capital goods are reaped over the period of time and it is not possible to assess the exact use of such capital goods in future i.e. whether the assessee will supply exempted goods/service in future or if it will be engaged in supply of exempted goods/service in future, what would be the proportion of exempted supply in total supply. If the supply of exempted goods of an assessee decline substantially in future, then he shall have to bear the loss of input tax credit on capital goods. These are some unanswered questions and we will have to see how government tackles with this kind of situation.

f) Exclusion list from input tax credit on goods and services even if the same is used for business purpose is against the basic intention of GST

Lawmakers have specified the list of certain goods/services on which the assessee shall not be eligible to avail input tax credit even if such goods/services are used for supply of taxable goods/services or for business purposes. It is very shocking to see the restriction on availment of input tax credit as every assessee in the country was expecting a more liberal approach in drafting of Input Tax Credit provisions from the government.

Some of the inputs/input services on which credit has been restricted are genuine business expenditure and are prerequisites for supply of goods/services directly or indirectly, however blanket restriction has been imposed on availment of credit on such inputs/input services. For instance, works contract services availed for construction of factory/office is a pre requisite for supply of goods/services as the goods/services will be supplied from such premises. Rent a cab service is used for attending business meetings, travelling from factory to office etc., without which a business cannot function properly. Therefore, it is evident that lawmakers did not consider the fact that some of the input goods/services are required for supply of goods/services, while restricting the input tax credit on such goods/services. This whole concept of blocked credit is major diversion from the intent of the lawmakers to allow free flow of credit to the assessees.

It is true that tax is a tax and there is no equity in tax, but it is equally true that taxation statute should be not be drafted in such a way that it hinders the growth of industry at large. The draconian provisions of restrictions on availment of input tax credit will defeat the purpose of entire GST input tax credit structure.


In this article, the paper writer has tried to summarize the issues which will create hurdles in the intention of government of allowing seamless flow of GST credit. However, author is of the view that being a new statute, legislature will make necessary amendments once the practical difficulties in implementation of statute are experienced.

For any clarification or discussion on this article, the author may be contacted at A2B/16A, Ekta Apartments, Paschim Vihar, Delhi-110063, Phone: 011-45564490, 011-43464490, E-mail:

Disclaimer: The views in this article are author’s point of view. This article is not intended to substitute the legal advice. No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used, without the express written approval of the author.

The Copyright of the article is with the author.

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February 2024