GST Series Part 9 – Eligibility & Conditions for taking Input Tax Credit (ITC) under Section 16 of CGST Act, 2017

Section 16 is one of the most important sections for the Input Tax Credit (ITC) it provides the ITC eligibility and conditions for smooth sailing of business. It is the first test for moving further in the direction of GST compliances.

Section 16(1) of CGST Act: Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49 of CGST Act, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Goods & services Tax

2.1. Salient points of ITC entitlement as per sec 16(1) of CGST Act 2017 are as follows:-

(a) A registered person is entitled to take Input Tax Credit.

(b) Credit is available subject to certain conditions and restrictions.

(c) Credit is to be availed in the manner specified in Sec 49 of the CGST Act.

(d) Input Tax Credit is available for the supply of goods and/or services used for the furtherance of business.

(e) Input Tax Credit shall be credited to the electronic credit ledger of a registered person

2.2 Electronic Credit Ledger (ECL): Electronic Credit Ledger is the input tax credit ledger in the electronic form, maintained at the common portal for each registered taxable person.

3. Conditions & Restrictions to avail Input Tax CreditSection 16(2) of CGST Act –: As per section 16(2) of CGST Act, registered taxable person shall not be entitled to the credit of any input tax in respect of any supply of goods or /and services unless following conditions are satisfied:-

Section 16(2)(a) Possession of documents: Rule 36 of CGST Act prescribes following documentary requirements for availing of Input Tax Credit:-

(i) Invoice issued by the supplier

(ii) Self invoice issued for tax paid under reverse charges.

(iii) Debit Note issued by a supplier

(iv) A bill of entry prescribed under the Customs Act for assessment of IGST.

(v) An invoice or credit note issued by an Input Service Distributor

Specified details in tax invoice – Rule 36(2) –: Rule 36(2) of CGST Rules provides that Input Tax Credit shall be availed by a registered person only if all the applicable particulars as prescribed in Invoice Rules are contained in the said document,

The proviso to rule 36(2) of CGST Rules: A proviso has been inserted w.e.f 04.09.2018 stating that Input Tax Credit may be availed by a registered person if the tax invoice contains the details of the amount of tax charged, description of goods or services, the total value of supply of goods or/and services, GSTIN of the supplier and recipient and place of supply in case of inter-State supply.

Section 16(2)(b) Receipt of Goods or/and Services: The Input Tax Credit is available to the recipient only if he has received the goods or/and services

Explanation (i) to section 16(2)(b) of CGST Act:- Where the goods are delivered by the supplier to the agent or any other person as directed by the recipient, it is deemed that the recipient has received the goods. Such delivery to the agent or any other person can take place before or during the movement of goods by way of transfer of title to goods or otherwise.

Thus, in case ‘bill to ship to’ transactions, the intermediary can take ITC when documents of title (i.e. LR or Consignment Note) are endorsed in his favor.

Explanation (ii) to section 16(2)(b) of CGST Act : An explanation inserted vide CGST (Amendment) Act, 2018, w.e.f. 1-2-2019 stating that where the services are provided by the supplier to any person on the direction of and on account of the registered person (recipient) it shall be deemed that such registered person (recipient) has received the services

In many cases, services are sub-contracted. The Principal (or Contractor) asks the contractor (or sub-contractor) to supply service directly to the customer. In such cases, the supply of service to the customer will be the supply of service to Principal

Inputs or capital goods received in installmentsThe first proviso to section 16(2) of CGST Act – Where the goods against an invoice are received in lots or installments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or instilment.

Input Tax Credit on Annual Maintenance Contracts : In case of Annual Maintenance charges , maintainance services not received on the date of invoice and payment made thereof . There are differenct views . Some are of the opinion that ITC can not be availed as the condition u/s 16(2) ie receipt of services is not fulfilled.

Others are of the view that Input Tax Credit can be availed as receipt of invoice and making payment against maintenance contract provides a right to service . There is no condition given in the act for consumption of the services. In my view, ITC can be availed on payment of AMC .

Section 16(2)(c) Tax actually paid to the Government: As per sec 16, (2)(c) of the CGST Act, Input Tax credit in respect of supply is available to the recipient only if tax charged on such supply has been actually deposited with the Government by the supplier. It can be paid to the credit of appropriate Government either in cash or through the utilization of Input Tax Credit admissible.

This is subject to section 41 and section 43A of the CGST Act, which provides that the registered person can take ITC on a self-assessment basis, which will be credited on a provisional basis to his electronic credit ledger.

Further, Rule 86A has been introduced vide notification No 75/2019 w.e.f. 26.12.2019. It empowers the revenue authorities to restrict the credit available to the recipient. Credit will be blocked where the government has a reason to believe that credit of input tax has been availed on the basis of documents against which no tax has been paid into the Government treasury.

At present, there is no mechanism to know with the recipient whether the supplier of goods or services has paid the tax to the Government. In the 39th GST Council meeting, a new facility called Know Your Supplier (KYS) is introduced

This facility might be made available to the taxpayer only after he logs into the GST portal. This facility provides information about the existing suppliers as well as the proposed suppliers. A user may be able to enter the GSTIN of the supplier available on his record to fetch further details about the regularity of GSTR-1 filing and so on

Recipient of supplies can exercise caution or preventive measures and make the best assessment of suppliers before entering into any business transaction based on such compliance rating. This will help assist a taxable person to choose his vendor carefully since non-remittance of tax by the vendor would lead to disallowance of credit in the hands of the purchaser.

Sec 16(2)(d) Furnishing the Returns under Sec 39 The another condition to avail ITC is that the recipient has furnished the return under section 39. Every registered person is required to file monthly GSTR 3B under section 39.

4. Reversal of input tax credit if payment not made to the supplier within 180 days – Second proviso to section 16(2) of CGST Act. Where a recipient fails to pay to the supplier of goods or/and services (other than the supplies on which tax is payable on reverse charge basis), the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon.

4.1 The interest payment liability shall start only after completion of 180 days and not from the date of the invoice

4.2 Consideration for supply can be made through book adjustment, It is held by AAR – West Bengal e (2019) in re Senco Gold Ltd. That recipient of goods and services can pay consideration for inward supplies by way of setting off-book debt and credit of input tax cannot be denied on this ground alone.

4.3 Reversal of credit, If partial payment is made, the reversal will be proportionate to the amount not paid to the supplier. For example, If a 90% amount of supplier’s invoice (including tax amount) is paid, only 10% of tax amounts should be reversed.

4.4 Re availment of CreditThird proviso to section 16(2) of CGST Act-:- If the recipient later makes payment to supplier, he can take credit of input tax.

4.5 First proviso to Rule 37(1) of CGST Rules, 2017 In cases where GST is payable without consideration as specified in Schedule I of CGST Act, the amount shall be deemed to have been paid.

4.6 Second proviso to rule 37(1) of CGST rules. The second proviso to rule 37(1) of CGST Rules, inserted w.e.f. 13-6-2018 stating that Payment by the recipient on behalf of supplier is deemed to be paid to the supplier and reversal of proportionate credit (for nonpayment to the supplier in 180 days ) is not required

5. Rule 37(1) of CGST and SGST Rules, 2017. Procedure for reversal of input tax credit in case of non-payment of consideration: A registered person, who has availed of the input tax credit on any inward supply of goods or /and services, but fails to pay to the supplier thereof the value of such supply along with the tax payable thereon within 180 days, shall furnish the details of such supply and the amount of input tax credit availed of in form GSTR-2 for the month immediately following the period of 180 days from the date of issue of invoice. It is advisable to furnish such details in GSTR 3B as GSTR 2 is not required to be filed by the taxpayer.

5.1 Rule 37(2) of CGST and SGST Rules, 2017. The amount of input tax credit as above shall be added to the output tax liability of the registered person for the month in which the details are furnished

5.2 Period for interest calculation- Rule 37(3) of CGST and SGST Rules, 2017. : The registered person shall be liable to pay interest at the rate notified under section 50(1) of CGST Act for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, is paid

5.3 The time limit for re availment of credit – Rule 37(4) of CGST Rules, 2017 The credit of ITC so reversed can be taken after payment is made to the supplier of goods or services or both. The time limit of one year as specified in in section 16 of CGST Act will not apply to such re-credit

6. Depreciation under Income Tax Vs Input Tax Credit – Sec 16(3) of CGST Act: Where the registered person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

For example, a company purchased machinery worth Rs 50 Lakhs and paid GST @ 18% on it. The total cost of the machine including GST will be Rs (50+9) 59 lakhs. In case the company claimed depreciation on Rs 59 lakhs, an input tax credit of Rs 9 lakhs shall not be allowed. Another option available with the company to claim depreciation on Rs 50 lakhs and avail input tax credit of Rs 9 Lakhs

7. The time limit for availment of Credit – Section 16(4) of the CGST Act. : A registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the due date of furnishing of the return under section 39 (GSTR 3B) for the month of September following the end of the financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

7.2 proviso to section 16(4) of CGST Act inserted vide Removal of Difficulties Order No. 02/2018 dated 31-12-2018 stating that, invoices and debit notes pertaining to period July 2017 to March 2018 can be uploaded by supplier in his GSTR-1 return upto return of March 2019 (which is to be filed by 10-4-2019) and the recipient can take its credit in his GSTR-3B return upto return for the period upto March 2019 (which is to be filed by 20-4-2019).

7.3 It has been held in ALD Authomotive (P) Ltd V CTO(2018) that Law can provide for time limit .Input Tax Credit is in nature of benefit extended to dealer under the statutory scheme. The concession can be received by beneficiary only as per the scheme of statute

7.4 Section 16(4) of the Central GST Act, 2017 has been proposed to be amended vide Finance Act 2020 to delink the date of debit note from the date of issuance of the underlying invoice.

7.5 The provision will extend the time period to avail ITC on debit notes i.e. up to the due date of September month return or annual return following the financial year corresponding to the debit note.

For example, Mr. X issued an invoice in Feb 2020 for Rs 1,00000/-. In the month of December 2020, he realized that there was an error in the bill and issued a debit note for Rs 20000/-. Prior to the proposed amendment in Finance Act 2020, as the invoice related to this debit note of Rs 20000/- pertains to FY 2019-20, the time limit to avail ITC was Oct 2020. After a delinking debit note from the original invoice, ITC can be availed till 20 Oct 2021.

8. Input Tax Credit Restriction vide insertion of Rule:- Rule 36(4) of CGST Rules, 2017 inserted vide Notification No. 49/2019 dated 09th Oct 2019 and it was made applicable w.e.f. 09th Oct 2019 . The said Rule got amended w.e.f. 01 Jan 2020 vide Notification No. 75/2019 – CT dated 26-12-2019

8.1 The simplified provision under Rule 36(4) is as explained below:-

8.1.1. The input tax credit availed by a registered person shall comprise of eligible credit as uploaded by the supplier in its GSTR 1 which is then auto-populated in the GSTR 2A of the recipient.

8.1.2. Further, in regard to invoices not uploaded by suppliers and thus not reflected in GSTR 2A of the recipient, such recipient can at maximum avail input tax credit up to 10% of eligible credit as uploaded by supplier and reflected in its GSTR 2A.(amended w.e.f. 01 Jan 2020 – from 09 Oct to 31st Dec 2019 maximum credit limit was upto 20% in place of 10%)

8.1.3 The calculation of limit of 10% of the eligible credit available in Form GSTR-2A for the invoices not uploaded by the supplier in Form GSTR-1 can be understood with the help of an example,

Example :- Where a registered person ‘A’ receives 100 invoices for inward supplies involving ITC of Rs. 10 lakhs during the month of October 2019. Suppliers have furnished only 60 invoices involving ITC of Rs. 6 lakhs in Form GSTR-1 (reflected in GSTR-2A).

Then, eligible ITC as per Rule 36(4) is to be taken in GSTR-3B to be filed by November 20, 2019, = ITC in respect of details of invoices uploaded + 10% of the eligible ITC in GSTR-2A (in respect of invoices not furnished in Form GSTR-1)

= Rs. 6,00,000+10% of Rs. 6,00,000

=Rs. 6,60,000

8.2 In view of COVID-19 Outbreak Rule 36(4) will not apply while filing of returns for the period February to August 2020 and will be applicable on a cumulative basis for these months while filing of return for September 2020. (Notification No. 30/2020 – CT dated 03-04-2020 )

8.2.1 As a consequence of above relaxation t, GST registered persons can avail full eligible input tax credit on the basis of their books viz invoice towards goods or services or both received for business purposes/taxable outward supplies, even if same is not reflected in its GSTR 2A.

8.2.2. It is important to note here that Rule 36(4) has been postponed for the months February to August, 2020 and not scrapped .The recipient should follow up with the supplier and make sure that GSTR-1 for all these months are filed by supplier upto September, 2020 so that all the invoices are reflected in GSTR 2A of the recipient as on 11-10-2020.

9. General provisions related to Eligibility & Conditions to avail Input Tax Credit :

9.1 Burden of proof on taxable person availing input tax credit – Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person – section 155 of CGST Act

9.2 Instant credit :Credit will be available as soon as inputs or input services are received. It is not necessary to wait till these are utilised or sold.

Disclaimer: Every effort has been made to keep the information cited in this article error-free. Suggestions and feedback to improve the task are welcome.

The author can be approached at caanitabhadra@gmail.com

Part 10 of the series will cover the topic “Apportionment of Credit & Block Credit under Sec 17 of the CGST Act.

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8 Comments

  1. CA Om Prakash Jain says:

    The cases ALD AUTOMOTIVE PVT. LTD. quoted in the article pertains to Tamil Nadu Value Added Tax Act, 2006 – Section 19(11), which prescribed the Time limit for Input Credit claim under the TN VAT Act itself. As such its compliance ia a must so far as Tamil Nadu Value Added Tax Act, 2006.
    In the para 32, 36 of the SC case ALD AUTOMOTIVE PVT. LTD., it has been clearly mentioned by the SC that the concession can be received by the beneficiary only as per the scheme of the Statute. The Scheme under the TN VAT Act (The Act before the SC) specifically provided that the party shall make the claim within the stipulated period.
    In contrast, no such condition of time limit, has been put in under all the 4 conditions put in by the legislature for availment of ITC u/s 16(2) GST Act, which also contains a notwithstanding clause, meaning thereby that it supersedes S.16(4),GST Act as per decided cases of SC quoted by me. Beyond this, no more conditions can be put under GST Act, for availment of ITC, since otherwise, it will be against the legislative provisions.
    It is respectfully submitted that S.16(2), CGST Act, 2017 stipulates various conditions for availment of ITC beyond which no other condition is to be read. Corroborating additional conditions on the shelter of decision of ALD AUTOMOTIVE PVT. LTD. or of Jayam & Company (2016) 26 J.K.Jain’s Vat Reporter 147 (SC) goes beyond the ratio decidendi of the Hon’ble Supreme Court that “every taxing statue including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly per SC case (2018) 30 J.K.Jain’s GST & VR 105 Commissioner of Customs v. Dilip Kumar and Company per SC case of (20117) 28 J.K.Jain’s GST & VR 162 State of Karnataka v. M.K. Agro Tech Pvt. Ltd.. It is settled proposition of law that taxing statutes are to be interpreted literally and nothing could be added to what is stated in the itself per SC case (2011) 16 J.K.Jain’s Vat Reporter 120 Eureka Forbes Limited v. State of Bihar and Ors..
    The court only interprets the law within the four corners of the Act and cannot legislate it under the disguise of interpretation.
    Sub-clause (d) of section 16 stipulates “furnishing of return u/s 39 for entitlement of ITC”. This clause nowhere mentions “timely submission of returns and/or debarring rectification statute of any return belatedly, for being entitled to avail ITC. The “notwithstanding clause”, in the section 16(2) means that it supersedes all the sub-sections of section 16 including sub-section (4) per following cases;
    As such, in our view, if a registered person has furnished returns &/or rectified any return belatedly, he is entitled to ITC and his vested right PER sc CASE OF (1999) 106 ELT 3 Eicher Motors Ltd. v. Union of India Can not be withdrawn.
    My main emphasis is on Section 16(2), CGST Act, 2017 which laid down 4 conditions for availment of ITC & starts with notwithstanding clause meaning thereby that it supersedes all the sub-sections of section 16, GST Act, 2017 per SC case (2014) 22 J.K.Jain’s Vat Reporter 55 Cryptom Confectioneries Pvt. Ltd. v. State of Kerala (SC). & is not dependent on section 16(4), GST Act, 2017 per (2020) 33 J.K.Jain’s GST & VR 9 Synergy Fertichem Pvt. Ltd. v. State of Gujarat & Ors. (Guj)
    “A non-obstante clause is incorporated in a statute to give overriding effect to a particular section per (2009) 4 SCC 94 Central Bank of India v. State of Kerala (SC) or the statute as a whole. It means that irrespective of any other provisions under a particular section per SC case : (2014) 22 J.K.Jain’s Vat Reporter 55 Cryptom Confectioneries Pvt. Ltd. v. State of Kerala.

  2. Ashok Herma says:

    Mem, thank you very much for such a valuable. Now my query is vide no. 4.1 the text says interest to be charged from the end of 180 days, can you share the provision in CGST Act/rules in support of the same.
    Once again we are thankful for such a valuable article and waiting for Part 10 of the series

    1. Anita Bhadra says:

      Dear Sir
      Thanks for your kind words.
      Para 4.1 is mentioned based on the expert’s views and logical interpretation of the provision.
      Interest should be charged only after 180 days as from the date of receipts of goods/services till 180 days – It is a valid ITC and only on non-payment after 180 days, it becomes ineligible and subject to interest

  3. Sivakumar Sethuraman says:

    Very useful and insightful. May I request the author to clarify whether the time limit for availing ITC prescribed under Sec. 16(4) applies to availing credit of tax paid under RCM? Yjere are lot of confusion on this. Please guide. Thanks.

    1. Anita Bhadra says:

      Dear Sir
      Thanks for your kind words.
      As you rightly mentioned there is a lot of confusion prevails regarding the time limit of ITC under 16(4) for RCM payments.
      On careful reading of all the definitions ( self invoicing, the time limit for RCM invoice, etc ), it is established that time limit under sec 16(4) is applicable for RCM also.

  4. CA. BHARGAV PATEL says:

    Madam, first of all, thank you for such a resourceful article. Now my question is in 4.1 the text says interest to be charged from the end of 180 days, and in 5.2 it suggests interest be calculated from the date of invoice. It is quite perplexing. Please clarify.

    1. Anita Bhadra says:

      Dear Sir
      Thanks for your kind words. Interest in ITC reversal is a debatable issue.
      Experts are of the view that ITC becomes ineligible only after 180 days on non-payment. The recipient has taken valid credit on receipt of goods/ services, hence interest need not be paid for that period.

      Rules are prescribed for procedures to be followed. Rule 37(3) prescribed the period for interest and indicated at Para 5.2. ( It is not binding as an Act and that’s why the expert’s view and logic mentioned at para 4.1 )

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