Article explains Important Definitions related to Input Tax Credit  (ITC) under GST (Section 2 of CGST Act, 2017), Section -16: Conditions for availing ITC under GST, Section- 17: Reversal of Credit & Blocked Credit,  Section- 18: Availability of ITC in certain cases, Notification 8/2018 on payment of ITC of Motor cars and Opinion in case of Freebies or one plus one item sold.

INPUT TAX CREDIT UNDER GST

1. DEFINITION SECTIONS

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

*Now definition of input is very wide and also the condition of receive in the factory is done away with, only condition is for furtherance of business. (Even received in office, inside the factory – now credit is allowed)

Section 2(60): Input Service   Means any service used or intended to be used by the supplier in the course or furtherance of business.

Section 2(19) Capital Goods Means goods the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used by the supplier in the course or furtherance of business.

Section 2(62): Input Tax In relation to registered person means

CGST, SGST, IGST, UTGST tax charged on any supply of good or services or both made to him and

Includes: 9(3) & 9(4)

9(4) – deferred till 30-09-2019

Section 2(63): Input Tax Credit Means credit of Input Tax.

2. CONDITIONS FOR AVAILING INPUT TAX CREDIT

Section 16 (1) Eligible person & manner of availing ITC: Every registered taxable person subject to such conditions and within the time and manner specified in Sec 49 – is entitled to take ITC admissible to him – electronic credit ledger.

*As there is no condition to take credit on capital goods in phased manner – so full credit is allowed now.

Section 49: Payment of Tax will be reflected in electronic credit ledger & Manner of utilization –

SGST – SGST, IGST

CGST – CGST, IGST

UTGST – UTGST, IGST

IGST – IGST, CGST, SGST, UTGST

Note: Credit of tax can’t be utilized for Interest, penalty & fees.

 Section 16 (2): Essential Conditions for availing GST ITC (See the flow of condition)

(a) Is the possession of Tax Invoice/Debit note issued by a registered supplier

(b) He has received good or service (Note: This is the reason that Input is not allowed on the tax paid on advance)

Explanation: For bill to ship to model, it shall be deemed that customer has received the good

New Proposed Amendment: This deeming provision is now applicable on service also.

(c) Subject to section 41 (This section allows the provisional credit on self-assessment basis in the return but the credit can be dined if supplier doesn’t pay), Taxes actually paid to the government, so the credit will be denied even when the recipient has paid the tax amount to the supplier and supplier has failed to pay the tax to the government.

(d) Return has been furnished under section 39.

Provisio-1: ITC when good against an invoice are received in lots – ITC can be claimed upon receiving the last installment of good.

Provisio-2: Payment for good and services if not made within 180 days the Input taken has to be reversed.

Provisio-3: Credit of ITC can be re-claimed on payment being made.

Rule 37(4) Time limit for availing ITC not applicable in case of re-claim of ITC reversed earlier.

Section 16 (3) No ITC when depreciation is claimed on tax component of cost of Capital Goods

Section 16 (4) Time limit to avail GST ITC (on Invoices of particular F.Y)

Earliest of: Due date of furnishing return for the September month following the end of F.Y | Due date of filling of Annual Return so 20-10-2018 in would act as the due date unless annual return is filed early.

3. APPORTIONMENT OF CREDIT AND BLOCKED CREDITS

Section 17 (1): ITC on good & services available only to the extent of business use not for personal use. (This denoted by D-2 – 5% of common credit)

 If the Goods or Services are used for business then only the credit available, if used for other purpose then the credit has to be reversed

Section 17 (2) ITC available only to the extent taxable supplies + zero ratted supplies i.e. no ITC for input or input services used for exempt (This denoted by D-1)

The Manner of reversal for section 17(1) & 17(2):

Rule 42: Manner of reversal in case of Input and Input service  

Ist Step: Determine exclusive eligible & ineligible credit at the invoice level, i.e. let’s exclude the credit which is directly identifiable.

T – Total Credit

T1- Input & Input Service used for non-business purpose

T2- Input & Input Service used exclusively for exempt supplies

T3- Blocked credit u/s 17(5)

T4- Input & Input Service used exclusively for Taxable supplies (Including Zero rated i.e. export)

C1Credit in electronic credit ledger

C1 = T – (T1+T2+T3)

C2 – Common Credit

C2 = C1 – T4

Now when we have common credit, this will be proportionately divided in the ratio of turnover.

D1 – Credit to be reversed for partially used for exempt supplies

D1 = E /F *C2

E – Sale of exempt supplies during the tax period i.e. particular month (Excluding tax)

F – Total Turnover during the tax period (Excluding Tax).

D2- Common input for Business and Non Business purpose

D2: 5% of C2

*This amount is kept low as the inputs are received in business and only a negligible amount would be used for non-business.

C3 – Credit which is eligible

C3 = C1- (D1+D2)

Calculate all these at the year and adjustments can be made before filing the return for the month of September.

Section 17 (3) Value of Exempt supplies

Section 17 (4) Optional 50%ITC or opt for section 17(2) to banking companies & FI Including NBFC engaged in supply of services by way of accepting deposits, extending loans or advances.

Section 17 (5) Negative list of ITC This section overrides section 16(1) and 18(1)

(a) NO CREDIT to Motor Car & Other Conveyance: for transportation of persons (so the having approved sitting capacity from one 1 person to 13 persons i.e. not more than 13 persons (Concept: These are non-revenue generating items for business | Ultimate Consumer)

But when used for below purpose credit is allowed

– for further supply of such motor vehicle

– for transportation of passengers as this is their main business asset

– For imparting training in Diving school as this is their main business asset.

 (aa) vessels and aircraft

But when used for below purpose credit is allowed

– for making the following taxable supplies, namely:—

further supply of such vessels or aircraft; or

transportation of passengers; or

imparting training on navigating such vessels; or

imparting training on flying such aircraft;

– for transportation of goods;

(ab) Services of general insurance, servicing, repair and maintenance of Motor Car, Vessel and Aircraft mentioned above (Except for the service of repair received by the manufacture of above)

Note: The amendment is sought to make it clear that input tax credit would now be available in respect of dumpers, work-trucks, forklift trucks and other special purpose motor vehicles as other conveyance is deleted.

(b) No Input tax credit on the following supply of goods or services or both—

i. food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance (No input of GST on premium of life and health insurance) Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply

*Question: Is the credit allowed for restaurant service?

ii. membership of a club, health and fitness center;

iii. Travel benefits extended to employees on vacation such as leave or home travel concession: Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide to its employees under any law for the time being in force.”.

(c) No Input on Work Contract Service (Material & Labour are involved) in relation to immovable property if (Other than Plant & machinery)

Example: Work contract service of Const. of Road, or Infra facilities – No Input as they are in relation of immovable property. (This clause has been inserted; as major Infra facilities are implemented through govt. so no need to allow credit)

Example: A builder who avails other service then that of WTC then credit will be available.

Exception: This comes with exception, if Input service for further supply of work contract service i.e. if work contractor takes WTC from the sub-contractor then credit allowed

(d) Good & Services received by taxable person for construction of an Immovable Property (Other than Plant & machinery) on his own account including when such goods or services are used in course or furtherance of business, example a construction company building a commercial building for sale or lease then the credit would not be allowed.

Example: A engages Labour and buys all the material on his own account for const. of Immovable property then credit of material would not be available. This Const. can be for personal use (Home) or business use (Factory)

Example: In case of Builders if they enter into sale agreement after the completion of property then it will fall here as it is on his own account, and if he enters into sale agreement well before the completion then he is acting as a work contractor for buyer and he will get the credit as work contractor is allowed to take all the credits.

Note: If a contractor for example is acting as a work contractor then he will get all the credit, but for example he buys a piece of land and constructs a property for his person use or for rental purpose then credit would not be available.

Explanation: for clause (c) & (d): Construction includes re-construction, renovation, addition or alteration or repair to the extent of capitalization, to the said immovable property

Example: If the expenses of repair are debited to P&L account then the credit would be allowed. (Only care should be taken that in income tax is not be in the nature of capital repair)

(e)  Good & services or both of which tax has been paid under section 10 i.e. composition levy.

(f) Good & services or both received by a Non-resident taxable person except on goods imported by him

(g) Good & services or both used for personal consumption

(h) Goods – Lost, Stolen, destroyed, written off or disposed of by way of Gift or free samples (Latest news by government: http://www.ecoti.in/Vqwpja)

(i) Any tax paid in accordance with the provisions of sections 74, 129 & 130 (Recovery etc.)

Explanation:  Plant &Machinery means apparatus, equipment, machinery fixed to earth – used for making outward supply of good or services and includes foundation and structural support but excludes:

– Land, building or any other civil structure

– Telecom towers

– Pipelines laid outside the factory premises.

4. Availability of ITC in special circumstances

Section 18 (1):

(a) If applies for Registration in 30 days from the date on which he becomes liable for registration then he can avail the credit of – Inputs held in Stock | WIP | F.G, so not on capital goods and Input services laying with him on the day preceding the day when he becomes liable for registration.

(b) Voluntary registration: he can avail the credit of – Inputs held in Stock | WIP | F.G, so not on capital goods and Input services laying with him on the day preceding the day of registration

(c) Composition to normal dealer: he can avail the credit of – Inputs held in Stock | WIP | F.G | Capital Goods, so not on Input services laying with him on the day preceding the day from which he becomes liable to pay tax. (In Case of capital goods 5% per quarter from the date of invoice shall be reduced and balance ITC will be taken)

(d) Exempt supply to taxable supply: he can avail the credit of – Inputs held in Stock | WIP | F.G | Capital Goods, so not on Input services laying with him on the day preceding the day from which such supply becomes taxable. (Capital Goods which were exclusively used for exempt supply)

File ITC-01 for availing credit.

Section 18 (2) No credit shall be available after the expiry of one year from the date of tax invoice relating to such supply of which credit is taken as per section 18(1) so the time period here is different.

Section 18 (3) Change in constitution of registered taxable person – ITC will be allowed to the other concern. – File ITC -02

Section 18 (4) From normal taxable person to composition dealer/or his supplies becomes wholly exempt – Pay amount of ITC on Inputs held in Stock | WIP | F.G | Capital Goods

Section 18 (5): Manner as prescribed in rule 36 to Rule 45

Section 18 (6) ITC reversal on supply of Capital Goods and P&M on which credit was taken

Higher of:

Reduction @5% per quarter of usage from total ITC Taken

Tax on Transaction Value as per section 15

5. Notification No. 8/2018 -Central Tax (Rate)

New Delhi, the 25th January 2018

G.S.R. 82(E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the central tax on intra-state supplies of goods, the description of which is specified in column (3) of the Table below, falling under the tariff item, sub-heading, heading or Chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), as are given in corresponding entry in column (2), from so much tax as specified in Schedule IV of Notification No. 1/2017 -Central Tax (Rate), as is in excess of the amount calculated at the rate specified in the corresponding entry in column (4), of the said Table, on the value that represent margin of the supplier, on supply of such goods.

Table

S. No. Chapter, Heading, Sub‑ heading or Tariff item Description of Goods Rate
(1) (2) (3) (4)
1. 8703 Old and used, petrol Liquefied petroleum gases (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity of 1200 cc or more and of length of 4000 mm or more.

Explanation. – For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under.

9%
2. 8703 Old and used, diesel driven motor vehicles of engine capacity of 1500 cc or more and of length of 4000 mm

Explanation. – For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under.

9%
3 8703 Old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.

Explanation. – For the purposes of this entry, SUV includes a motor vehicle of length exceeding 4000 mm and having ground clearance of 170 mm. and above.

9%
4. 87 All Old and used Vehicles other than those mentioned from S. No. 1 to S.No.3 6%

 Explanation –For the purposes of this notification, –

(i) in case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act,1961(43 of 1961) on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored; and

(ii) in any other case, the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.

2. This notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the input tax credit of Value Added Tax or any other taxes paid, on such goods

6. Opinion given on ITC:

QUERY: Taxability of Promotional Items under GST.

First Opinion: 

In Case of Free Samples:

They are distributed before the sale of the main product.

As per Section 17(5)(h) of the CGST Act provides that No Input tax credit is available if goods lost, stolen, destroyed, written off or disposed of by the way of gift or free sample

Further as per Schedule I of the Act, supply made without consideration to unrelated party will not be considered as supply and not chargeable to GST so free samples shall not be treated as supply; therefore they are not liable to GST.

Crux: If goods are distributed as free samples then the ITC availed on the same shall be reversed.

Free Promotional Items given with Taxable Product:

They are distributed along with the main product

Promotional Items are not in the form of free samples or gift as it is sold with a condition of buying a particular quantity in which the seller recovers its cost so the provision of Section 17(5) (h) will not apply so no need to reverse the ITC.

Further since the promotional item is sold along with the taxable item for which the consideration is received so we can say that is not given free of cost so GST would be recovered on the total amount charged.

Crux: If goods are distributed as promotional items then the ITC will be allowed.

Further Supporting:

Tweets received by askGST_GOI handle have been scrutinized and developed into a short FAQs of 150 tweets.

76 What is treatment of promotional item given free to end consumers by FMCG companies? Tax will be charged only on the total consideration charged for such supply.
81 What is the treatment of promotional item given free to end consumers by FMCG companies? If taxable, whether ITC is allowed? Tax is payable on consideration received for the supply and ITC will be available accordingly.

Second Opinion:

As per Section 17(5)(h) of the CGST Act provides that No Input tax credit is available if goods lost, stolen, destroyed, written off or disposed of by the way of gift or free sample, now on plain reading of the section it implies that ITC of gifts are not allowed.

Regarding gifts given as offer packs, like Buy1Get1free, X item free against purchase of 100 pieces Y item etc., the first provision that deserves attention is Section 15 of the CGST Act talks about “Transaction Value”. Every time, something is given free of cost or a promotional scheme, it has an extra commercial consideration which creates the confusion for payment of GST on outward supply or reversal of ITC or both. The above are gifts/ free supplies in course of business. If consideration for these goods is not charged directly, they shall qualify as “gifts” and ITC shall not be eligible. If these goods are said to be given in lieu of discount, and the said discount satisfies the conditions under Section 15(3), i.e. the discount (whether in full or in part) arises and is recorded as a contractual obligation under specific invoice(s), ITC shall be available on such goods. It may be worthwhile to show such goods under the respective invoice/ credit note after establishing on record, the agreement under which it arises. As soon as an obligation is attached, the commodity loses its identity as a “gift” and no denial of ITC can arise under Section 17(5) in such case. However, festive gifts/ customary gifts, in our view can never fetch this status.

Conclusion:

It is advisable to raise the sale bill of the entire item and then offer discount on the invoice, in this case there can never be a contradiction with the department for not allowing of ITC.

Author Bio

Qualification: CA in Practice
Company: ARGR & CO.
Location: BATHINDA, Punjab, IN
Member Since: 11 Jun 2019 | Total Posts: 1

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