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GST has completed four years and during this four year we have seen many complex issues such as inverted duty structure, 2-2A reconciliation, GST Audit, Investigation etc. While facing all such issues one should be sound with basic concept of ITC while dealing with the authorities. Let us revisit basic concept of input tax credit.

As we are aware there are three component of input tax credit i.e. Capital Goods, Input and Input

Capital Goods Section 2(19) of the CGST Act : “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 in the course or furtherance of business”;

Input Section 2(59) of the CGST Act: means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Input Service 2(60) of the CGST Act: means any service used or intended to be used by a supplier in the course or furtherance of business.

services. Let us go through the definition of each.

As we can see in all three definitions emphasis has been given on term “used or intended to be used by a supplier in course or furtherance of business”. ITC can be claimed on input, input services and capital goods only when they are used or intended to be used in the course of furtherance of business.

Let us understand phrase “in the course or furtherance of business”. Term “in the course or furtherance of business” is nowhere defined in the GST law. The literal meaning of the said phrase is ‘during the act of or in continuation of carrying out such act in future’ Thus, in course or furtherance of Business means either of following

  • Anything done in relation to business, while carrying out business or
  • simply a revenue-generating ordinary activity of that organization/concern

Now let us review section 16 of the CGST Act, 2017 which lays downs the basic condition for availing input tax credit

Possession of tax-invoice: One of the first requirement for availing tax credit is possession of tax invoice\debit note or other tax paying

Example-1: If Mr. A purchase goods from Mr. B. Mr. A has received goods from Mr. B. Mr. A makes all the payments towards purchase of goods. However, Mr. A does not receive tax-invoice.  In such case Mr. A will not be eligible to avail input tax credit.

Example-2: M/s ABC limited avails services from XYZ Legal Advisors. M/s ABC limited receives the services, make GST payment on reverse charge basis. However, M/s ABC Limited does not prepare self-invoice as prescribed under relevant provision. In current scenario M/s ABC limit will not be eligible to avail credit of tax paid on reversed charge basis since M/s ABC Limited is not in possession of tax invoice which was required to be prepared as per self-invoicing provision.


Receipt of Goods and services or both: Another requirement for availing tax credit is receipt of goods or services or both. Let us say M/s ABC Limited is located at Gujarat. M/S ABC Limited purchases goods from M/s PQR Limited located at Tamil Nadu. M/s ABC Limited sold these goods to M/s XYZ Limited when goods were in transit. In current case ABC Limited has not received goods, Will ABC Limited would be eligible to take credit? Answer is yes. There is concept of deemed receipt, whereby if goods are sold during the movement of goods it is deemed to be received by taxpayer.

Payment of tax to government: Another condition for availing ITC is payment of tax to the government. With this condition many genuine taxpayers are getting harassed by Tax Authority. Tax authority keeps on targeting purchaser who has already made payment of tax to supplier, instead of supplier who has defaulted in payment of tax to government. Recently Madras High court in similar matter had directed to tax authorities to take action against seller of goods first who has actually defaulted payment of tax.

Filing of return: Another condition for availing credit Taxpayer need to furnish return. 

Payment to vendor within 180 Days: In case taxpayer fails to pay to the supplier within 180 days, taxpayer shall reverse input tax credit along with interest and same shall be eligible once payment is done. As per this provision only failure to make payment within 180 days triggers reversal of credit along with interest. In case there is contractual agreement for making payment beyond 180 days, this provision will not apply in such cases. Let us say if we have agreement with vendor which has specific clause related to credit term which has credit term of more than 180 days, in such case there is no failure at our end for making payment to vendor.

Capitalization of input tax credit in case of Capital Goods: If input tax credit is capitalized and depreciation has been claimed as per Income tax Act, 1961, the input tax credit on said tax component shall not be allowed.

Time limit for availing input tax credit: Input tax credit shall be availed on or before earlier of the following

1. Due date of furnishing of the return for the month of September following the end of financial year to which such invoice pertains

2. Furnishing of relevant annual return

Let us summarize the above discussion, Taxpayer shall be eligible to claim credit on satisfying following condition

1) Possession of tax invoice

2) Receipt of Goods or Services

3) Payment of tax to government

4) Filing of return

5) Payment to vendor within 180 days

6) Availment of credit within prescribed time limit

Once above conditions are satisfied input tax credit shall be evaluated under section 17(5) of the CGST Act, 2017

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April 2024