Meaning of Input Tax Credit (ITC)
Input tax credit (ITC) means credit of Central Tax, State Tax, Union Territory Tax, Integrated Tax and Compensation Cess paid on supply of goods or services by a supplier that can be used by a recipient for payment of its output tax liability. Integrated Tax paid on import of goods or services and tax paid by the recipient on reverse charge basis is also available as input tax credit.
For example: Steel scrap supplier ‘Modi’ charges Rs. 18000 as Integrated Tax from recipient ‘Rahul’. Subsequently recipient ‘Rahul’ utilizes scrap in making steel ingots and supplies the same at Rs. 120000, on which Integrated Tax of Rs. 21600 is payable. ‘Rahul’ can discharge the tax liability of Rs. 21600, by using available ITC of Rs. 18000 and payment of balance of Rs. 3600 in cash.
Utilization of tax credits of various taxes
|Type of credit ——>
|To be used first for payment of
|Remaining amount can be used for payment of
|Remaining amount can be used for payment of
|ST/UT||Cannot be used for payment of ST/UTT||Cannot be used for payment of CT|
Input tax credit cannot be used for payment of interest, penalty or fees. Further, the credits of compensation cess as per proviso to section 11 of GST (Compensation to States) Act, 2017 can be used only for payment of compensation cess.
Key principles for eligibility of tax credits
|Goods & Services should…
|be registered under GST
|be registered under GST
|be for use or intended for use in course or furtherance of business
|not be under composite
|not be under composite
|not be in the negative
|have deposited the tax to the credit of the govt.
|have paid tax to the Government if on reverse charge
|file valid tax return||have made payment to supplier within 180 days from the date of invoice||———|
|———||have actually received the goods or services||———|
Scope of ‘use in the course or furtherance of ‘business’:
Tax paid on inputs, input services or capital goods that are used in the course or furtherance of its business by the recipient is available as credit. This phrase intends to widen scope of eligibility of credit. Restrictions in erstwhile regime such as ‘use in factory’, ‘in or in relation to the manufacture’, for use in
‘Manufacturing or processing of goods’, ‘for sale’ etc. are no more relevant. Word ‘furtherance’ intends to allow credit of tax even for new or future lines of businesses.
Meaning of word “Business” under GST Law:
GST law has defined ‘Business’ in very wide terms to include:-
(a) Any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;
(b) Any transaction in connection with or incidental or ancillary to (a) above;
(c) Any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction;
(d) Supply or acquisition of goods including capital assets and services in connection with commencement or closure of business;
(e) Provision by a club, association, society or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be;
(f) Admission, for a consideration, of persons to any premises; and
(g) Services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
Meaning of negative list of input credits:
These are inputs or input services, tax paid on which is not available as credit even though they have been used in the course or furtherance of business. These restrictions have been placed under section 17(5) of the CGST Act.
Input tax credits are not allowed under GST in respect of following:-
|GOODS||EXCEPTION FOR GOODS||SERVICES||EXCEPTION FOR SERVICES|
|1) Meant for personal consumption||No Exception||1) Meant for personal consumption||No Exception|
|2) Motor Vehicles||Allowed in following cases -i. Further supply of such vehicle or conveyance (e.g. credit of tax paid on cars by the manufacturer will be available to a car dealer); ii. Taxable supply of transportation of passengers iii. Taxable supply of imparting training on driving, flying, navigating such vehicles or conveyances; (e.g. tax paid by dealer on sale of cars will be available as credit to a car driving school).||2) Outdoor catering||These credits are allowed if the service is used for providing same category of service.|
|3) Goods lost, stolen, destroyed, written off||No Exception||3) Beauty Treatment||These credits are allowed if the service is used for providing same category of service.|
|4) Goods disposed off by way of gift or free samples||No Exception||4) Health Services||These credits are allowed if the service is used for providing same category of service.|
|5) Goods received for construction of immovable property on own account (other than plant
|No Exception||5) Cosmetic and plastic surgery||These credits are allowed if the service is used for providing same category of service.|
|—-||—-||6) Membership of club, health &
|—-||—-||7) Travel benefits to employees||—-|
|—-||—-||8) Rent a cab, life insurance, Health insurance||Can be allowed by way of notification if mandatory on part of employer to provide these facilities. If these services are used as an input for supply of same category of service or as an element of a taxable composite or mixed supply, tax credit will be available.|
|—-||—-||9) Works contracts for construction of immovable property other than Plant and Machinery.||Allowed if used for providing work contracts service e.g. tax paid by sub-contractor for construction of a factory administration building is available as credit to the main contractor for payment of its liability, however the tax paid by the main contractor will not be available to the factory owner / manufacturer.|
|—-||—-||10) Services received for construction of immovable property on own account.||—-|
Meaning of plant and machinery:
Credit of tax paid on goods and services used for construction of immovable property including work contract service has been allowed only if such immovable property is in the nature of plant and machinery. The expression ‘plant and machinery’ has been defined through explanation in Chapter V of the CGST Act to mean apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes –
i. Land, building or any other civil structures;
ii. Telecommunication towers; and
iii. Pipelines laid outside the factory premises.
Note – Telecommunication towers and pipelines outside the factory premises have been specifically excluded from the definition of plant and machinery.
Exclusion of credits relating to towers, pipeline and land / building / civil structures:
From the definition of plant and machinery telecommunication towers and pipelines laid outside the factory premises cannot be treated as plant and machinery. Similarly land, building and other civil structure (excluding foundation and structural support) cannot be treated as plant and machinery. Therefore, any inputs or capital goods used for construction of telecommunication towers, pipeline laid outside the factory, buildings and other civil structures (excluding foundation and structural support) will not be available on input tax credit.
Will tax credits be available if ……..
|Cement is used for construction of administration building||No. Building is not plant and machinery|
|Cement is used for foundation of pillars supporting a boiler
|Yes. As such structural support for plant and machinery is included in definition of plant and machinery|
|Works contract services is provided by sub-contractor to a contractor
|Yes. Works contracts service is excluded except when used for providing work contract service.|
|Health insurance for factory
workers if it is statutorily mandated to take such insurance
|No. Apart from being statutorily
mandated, credit is not allowed unless permitted by Government by notification.
|Goods are used for running a guest house in a factory
|Yes. As guest house is used for furtherance of business. (dispute cannot be ruled out) However credit in respect of provision of food and beverages & catering services will not be available|
|Car used by a factory for personal use||No. Car or any conveyance is in negative list, except when it is intended for use in further supply or for making taxable supply of transportation of passenger service.|
|Steel and other structural are used for setting up a telecommunication tower||No. Telecommunication towers have been specifically excluded from definition of plant and machinery.|
Time for availing input tax credit:
Subject to fulfilment of other conditions explained in above para, credit can be availed when the recipient has received :-
i. Tax invoice or debit note or other prescribed tax paying document and
ii. Underlying goods and/or services. If the goods under an invoice are received in lots, credit can be availed only after receipt of the last lot.
For better understanding let us have following examples:
‘A’ Limited received services of repair of machinery in plant on April 16, 2017 and released payment on the basis of pro-forma invoice on same day. Tax invoice was issued by the supplier on April 30, 2017. Credit can be availed on or after April 30, 2017.
‘B’ Limited released payment for services of repair of machinery in plant on April 16, 2017 on the basis of pro-forma invoice. Engineers of the service provider visited plant on between May 01 to May 05, 2017 and carried repair. They brought the tax invoice dated April 30, 2017 issued by the supplier. Credit can be availed on or after May 05, 2017.
‘C’ limited placed order for supply of 1000 bags of cement. Supplier was asked to dispatch 200 bags every alternate day. Supplier issued Tax invoice for 1000 bags on May 01, 2017 and dispatched first lot of 200 bags. Payment was released on May 02, 2017. Last lot of 200 bags was received on May 09, 2017. Credit can be availed on or after May 09, 2017. If separate invoice is issued for each of the lots then credit can be taken on receipt of each lot.
Inputs, input services and capital goods defined separately for availment of credits:
Inputs, input services and capital goods have been defined separately. While inputs and input services have been defined to mean goods and services used or intended to be used in the course or furtherance of business, capital goods have been defined to mean goods whose value is capitalized in the books of accounts of the person claiming the credit and which are used or intended to be used in the course of furtherance of business.
Credits for capital goods are available in full upfront:
Credits for capital goods are available in full. There is no provision stipulating availment of capital goods credit in instalment or tranches. Further, if the tax payer claims depreciation of the tax component in the value of capital goods under the provisions of Income Tax Act, then credit is not allowed on such tax component of capital goods.
Is There Any Difference in treatment of capital goods credit from credit of inputs and input services?
There is no major difference as credit in case of capital goods is also available upfront. There would only be difference in treatment of capital goods when supplied after use or in manner of reversal of credits when inputs / capital goods are used for taxable and non-taxable supplies or partly for the purposes of business and partly for other purposes.
Inputs or input services used partly for making taxable supplies and partly for non-taxable supplies or partly for non-business purpose:
When common taxable inputs and/or services are used for making both taxable and non-taxable/ exempt supplies or inputs and/or services are diverted to non- business/personal use then the quantum of credit on such inputs/input services is restricted to the credit attributable to taxable supplies or to the extent such inputs/input services are used in course or furtherance of business. In other words the total credit will be subject to pro-rata reversals i.e. reversal in proportion to value of non-taxable/exempt supplies or value of inputs/input services diverted for non-business use or personal use.
Rule 42 of the CGST Rules, 2017 prescribes principles/formula for computation of ineligible credit or for pro rata reversals. The scheme prescribed through rules is summarized below:-
An input tax credit claimant, engaged in supply of taxable as well as exempt supplies (including non-taxable supply) should segregate total input tax as under:-
|T1||Credit attributable to inputs and input
services intended to be used exclusively for purposes other than business
|T2||Credit attributable to inputs and input services intended to be used exclusively for effecting exempted supply (including non-taxable supply)|
|T3||Inputs and input services on which credit is not available under section 17(5), i.e. negative list|
|T4||Credit attributable to inputs and input services used exclusively for effecting taxable supply including zero-rated||Amounts gets credited to electronic credit ledger|
|C2||Credit attributable to inputs and input services which do not fall in any of above category (common use credit)||Amounts gets credited to electronic credit ledger|
Out of C2 portion ineligible due to (i) use for the purpose of effecting exempt supply (D1) and (ii) use for purposes other than business (D2) will be calculated by following formula.
D1 = C2 X (E / F)
Where E is the aggregate value of exempt supplies. (For meaning of ‘exempt supplies’ please see point no. 6.17)
D2 = 5% of C2
As common credit, i.e. C2 was credited to electronic credit ledger, D1 and D2 will be added to output tax liability.
If for the credits which are common for taxable and exempt supplies and/or used for non business purposes, the taxpayer has identified T1 and T2 at invoice level, the amount will not form part of common credit (C2). Credit for eligible portion will be available in full.
Above computation for reversal of input tax credit will be made by tax payer for every tax period and again at the end of financial year.
If D1 and D2 computed earlier is less than D1 and D2 calculated at the end of financial year, the shortfall will be added to the output tax liability of the current year. The taxpayer will be liable to interest from April 1st of the year succeeding the relevant financial year till the month in which ineligible credit has been added. The taxpayer will have to offer shortfall as part of output tax liability in the return for any tax period succeeding the relevant financial year but not later than the month of September.
If D1D1 and D2 computed earlier is more than D1 and D2 calculated at the end of financial year, the taxpayer will be allowed to claim credit of such excess in the return for any tax period succeeding the relevant financial year but not later than the month of September. However, the taxpayer will not be eligible for interest on excess output tax liability admitted earlier.
Meaning of exempt supplies for pro rata reversals:
As per the definition of ‘exempt supplies’ under GST law, exempt supplies include supplies which attracts NIL rate of tax; supplies which may be exempt and includes non-taxable supplies as well. The ambit of the term ‘exempt supplies’ has been expanded for purpose of determining pro rata distribution of input tax credits to include the following
i. Transaction in securities (which is neither treated as goods nor services)
ii. Sale of land
iii. Sale of building provided the entire consideration has been received after issuance of completion certificate where required by the competent authority or before its first occupation whichever is earlier.
Explanation in Chapter V of the CGST Rules, 2017 provides that value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty and the value of security shall be taken as one percent of the value of such security.
Exclusion of non GST taxes for pro rata reversals:
As per definition of ‘aggregate turnover’ under GST law it includes the total value of supply of goods or services or both minus the GST taxes paid by the registered person on such value. Therefore, while calculating the credits attributable to non-taxable turnover for the purpose of pro rata reversals the value of non-GST taxes like Excise duty, VAT etc are not getting excluded leading to disproportionately high reversals.
Explanation in rule 42 of the CGST Rules provides that for the purpose of computation of quantum of pro rata reversals, the aggregate value of exempt supplies and total turnover shall exclude Central and State Excise Duty and Sales VAT. However, the Central Sales Tax is not excluded. This appears to be an inadvertent mistake, but is the position in law.
With the help of example try to explain computation of pro-rata reversal
Let us take example of a large format retail store selling cosmetics, refrigerators, milk, fruits & vegetables, soaps, shampoos, alcohol for human consumption etc. Assuming cosmetics and refrigerator are liable to GST; Milk, fruits and vegetables are exempt from GST. Alcohol for human consumption is a non-GST product.
Cosmetics are delivered in bright print plastic boxes. Refrigerators are repacked in wooden caskets. Milk is delivered in non-returnable glass bottles. Fruits & vegetables, soaps, shampoo, alcohol are delivered in a polythene bags which are common for all the goods.
The retail store has cleaning staff, internet connectivity, security, a diesel generating set for back up electricity supply, arrangement with a bank for daily pickup of cash etc. These services are common for all goods and services supplied from the store.
So far as tax credit of goods sold is concerned, there is no ambiguity and respective credits can be availed. For example, full credit of tax paid on refrigerator would be available to the retail store as the refrigerators are being sold further on payment of GST. Credit relating to bright print plastic boxes for
cosmetics, wooden caskets for refrigerator would also be admissible in full as these items are identifiable as used in taxable supplies. Let us assume credit identifiable with taxable supplies works out to Rs. ‘a’.
Non-returnable glass bottles for milk are identifiable with exempt supplies and hence tax credit cannot be claimed. Let us assume credit identifiable with exempt supplies works out to Rs. ‘b’.
Tax credit relating to polythene bags which are used for delivery of fruits & vegetables, alcohol, soaps and shampoos are credits in in respect of inputs that are used for making exempt, non-GST as well as taxable supplies. Let us say common credits on inputs work out to Rs.‘c1’. Similarly input services are common for exempt, non-GST and taxable supplies. Let us say common credits on input services works out to Rs. ‘c2’.
Let us further assume that store achieved a turnover of Rs 50 lakh (F) during the calendar month. This consisted of supply of taxable goods and service worth Rs. 30 lakh and supply of non-taxable and exempt goods/services worth Rs. 20 lakh (E).
Total credit available (T) = a+b+ c1+c2.
Credit identifiable with taxable supplies (X) = a
Credit identifiable with non-taxable/exempt supplies (Y) = b
Common credit (C) = c1+c2
Ineligible credit (D) = (E/F) x C
= (20/50) x C
Credits available for utilization = T – [‘b’ + D]
Common credit was disallowed in the proportion of non-eligible turnover vis-à- vis total turnover. Exact mechanism for pro-rate reversal is provided by draft input tax credit rules.
Credit on capital goods are also subject to pro rata reversal:
If capital goods are used for making both taxable and exempt/non-taxable supplies, the credits in respect of such capital goods will also be restricted to the extent it is attributable to non-taxable supplies/non business activity. Exact mechanism for working out the credits so attributable is provided in rule 43 of the CGST Rules. The scheme prescribed through rules is summarized below:-
An input tax credit claimant, engaged in supply of taxable as well as exempt supplies (including non-taxable supply) should segregate total input tax in respect of capital goods as under:-
|Credit attributable to capital goods intended to be used exclusively for purposes other than business||Rule 43 does not talk about credits attributable to capital goods barred by section 17(5). However since provisions in Act will supersede rules, credit attributable to ineligible capital goods should also be identified at this stage|
|Credit attributable to capital goods intended to be used exclusively for effecting exempted supply (including non-taxable supply)|
|Credit attributable to capital goods which is barred by section 17(5), i.e. negative list|
|Credit attributable to capital goods intended to be used exclusively for effecting taxable supply including zero-rated||Amounts gets credited to electronic credit ledger|
|Tc||Credit attributable to capital goods which do not fall in any of above category (common use credit)|
For capital goods comprised in Tc, the taxpayer will maintain record of each capital asset separately. Useful life of each capital asset will be considered as 5 years. For each tax period i.e. calendar month, the taxpayer will calculate common credit attributable to such capital asset (Tm) based on age profile of asset. Sum of all Tm will be denoted as Tr.
Ineligible portion (Te) will be calculated every tax period by following formula.
Te = Tr X (E / F)
Where E is the aggregate value of exempt supplies, i.e. all supplies other than taxable supplies and zero rated supplies and F is total turnover during the tax period.
As common credit, i.e. Tc was credited to electronic credit ledger, Te will be added to output tax liability.
The taxpayer will also be liable to interest on Te for the period starting from the month in which entire credit was claimed till the month in which ineligible credit is added to output tax liability.
Treatment of credit already availed where capital goods used for making taxable supplies are subsequently used for making exempt supplies as well:
Credit proportionate to the residual life of the capital goods will be subject to reversals based on turnover of exempt supplies. Proviso below rule 43(d) provides that original input tax credit eligible for availment will get reduced by five percentage points for every quarter or part thereof and balance will be subject to reversal computation.
Period for availing tax credits:
Credit should be availed on or before furnishing of the return for the month of September following the end of the financial year to which invoice relates or furnishing of the relevant annual return whichever is earlier. Return for a month is to be filed on or before the twentieth day of the succeeding month. Thus return for the month of September is to be filed by 20th October.
Input Service Distributor is required to file return within thirteen days of the succeeding month. Thus for an Input Service Distributor, return for the month
of September is to be filed by 13th October. Annual return is to be filed by thirty first day of December following the end of relevant financial year. This can be further understood with following example of a Non-ISD taxpayer:
Where Annual return for Financial Year 2017-18 is filed on August 16, 2018
|Invoice Date||Last date up to which tax credit should be availed|
|April 01, 2017||August 16, 2018|
|March 31, 2018||August 16, 2018|
Where Annual return for Financial Year 2017-18 is filed on December 31, 2018
|Invoice Date||Last date up to which tax credit should be availed|
|April 01, 2017||October 20, 2018|
|March 31, 2018||October 20, 2018|
Penalties of wrongly availing tax credits:
Tax credit wrongly availed will be added to the output tax liability of the month in which discrepancy in tax credit claim is communicated to claimant recipient. Recipient will also be liable to interest for the period from the date of availing credit till the date of corresponding addition.
If the credit has been availed without actual receipt of goods and/or services either fully or partly, the claimant will be liable to further consequence of a penalty of rupees ten thousand or an amount equivalent to the input tax credit so availed, whichever is higher.
Importance of paying for receipt of goods and services in time:
Under GST it is very important that supply of goods and services on which input tax credit is taken are paid for in time. As per CGST Act if recipient of goods or services fails to pay to the supplier the amount towards value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice, an amount equal to the input tax credit availed on such supply shall be added to output tax liability of recipient along with interest. The Input tax credit rules provide that such addition will be proportionate to the amount not so paid. The recipient shall be entitled to avail the credit again once he makes payment to the supplier. However the interest paid will not be refunded.
Payment condition in credit availment in cases of reverse charge:
The condition for payment to the supplier within 180 days for availment of credit does not apply to supplies on which tax is payable under reverse charge.
Disclaimer: The contents of this article are solely for information and knowledge and does not constitute any professional advice or recommendation. Author does not accept any liability for any loss or damage of any kind arising out of this information set out in the article and any action taken based thereon.
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018