The whole beauty and important feature of GST Is its so called seamless chain of input tax credit (“ITC”) . The purpose of ITC is to avoid the bottleneck of the existing indirect taxation system i. e cascading of taxes. Cascading of taxes, in simple language, is ‘tax on tax’. Under this new system Goods and Services Tax (GST) would mitigate such cascading of taxes.
Input Tax Credit is very important Chapter in GST , comprising of pre-requisites for availing Input Tax Credit, by registered person which are as follows :
1. Registered Person has to be in possession of tax invoice or any other specified tax paying document.
2. Registered Person has received the goods or services. “Bill to ship” scenarios also included.
3. Registered Person (Supplier ) has actually paid the tax .
4. Registered Person (supplier) has furnished the return.
5. Registered Person (Receipint) should pay the supplier the value of the goods or services along with the tax within 180 days from the date of issue of invoice.
After charting out the pre – requisites , we should look into the restriction recorded in section 17 (5) which block the Input Tax Credit, Some of them are as follows:
1) a) Motor vehicles , except under specified circumstances
b) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;
c) membership of a club, health and fitness center;
d) Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;
e) travel benefits extended to employees on vacation such as leave or home travel con- cession;
2) Works contract services when supplied for construction of immovable property, other than plant &machinery, except where it is an input service for further supply of works contract;
3) Goods and/or services on which tax has been paid under composition scheme;
4) Goods and/or services used for private or personal con- sumption, to the extent they are so consumed;
5) Goods lost, stolen, destroyed, written off , gifted, or free samples;
6) Any tax paid due to short payment on account of fraud, suppression, mis-declaration, seizure, detention.
In addition to above there are different special circumstances under which ITC is available:
a) A person who has applied for registration within 30 days of becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax.
b) A person who has taken voluntary registration under section 23(3) of the CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock.
c) A person switching over to normal scheme from composition scheme under section10 is entitled to ITC in respect of goods held in stock
d) Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock .
e) ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier
f) In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilised ITC shall be allowed to be transferred to the transferee.
g) In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules .
Input Tax Credit is very important Chapter in GST , comprising of pre-requisites for availing Input Tax Credit, comprising of restriction recorded in section 17 (5) which block the Input Tax Credit and comprising of different special circumstances under which ITC is available. In order to avail proper Input tax credit a proper reconciliation statement is required to be prepared in proper format designed by GST professionals for nine months period . The statement should start with proper opening credit as per TRANS1, add month-wise available input tax credit , less blocked credit (If recorded) less ineligible credits , less /add ITC as per different specified circumstances of the registered person.
ITC will have direct impact on the business organization , if availed more ,will attract interest @24%PA and if availed less will impact the cash flow of the organization. Therefore annual ( first year nine months ) ITC statement should be made with a professional approach.