Provisions which grant exemption from tax or which allow benefit of input tax credit adversely affect revenue receipts from goods and services tax. Therefore, while preparing draft of goods and services tax (GST) laws, due precautions are required to be taken. In my opinion, some of the provisions related to availability or admissibility of input tax credit are either incorrect or incomplete. Also some essential provisions have not made.
In section 2 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act), expressions “input tax” and “input tax credit” have been defined as follows:–
(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,
but does not include the tax paid under the composition levy;
(63) “input tax credit” means the credit of input tax;
The definition of expression “input tax”, provided in clause (62) of section 2 of the CGST Act, includes two types of taxes viz. (i) goods and services tax charged from a registered person on any supply of goods or services or both made to him, and (ii) amount of goods or services tax paid by him to the Government on a supply of goods or services or both made to him. Clause (63) of section 2 of the CGST Act defines the expression “input tax credit” as credit of input tax. Section 16(1) of the CGST Act provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, 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. At the same time section 17 of the CGST Act blocks input tax credit in certain cases. Therefore, benefit of input tax credit allowed under section 16(1) of the CGST Act is subjected to provisions of section 17 of the said Act.
According to the provisions of the CGST Act, in relation to a supply of goods or services or both, supplier and recipient of the supply both are registered persons, the recipient of a supply either cannot claim any amount as input tax credit, or may claim input tax credit of part or full, amount of goods and services tax paid by the recipient to the Government, or amount of goods and services tax charged from the recipient by the supplier. Provision for granting benefit of input tax credit may be drafted in following two ways, namely:-
(a) The provision itself may grant benefit of input tax credit of full or partial amount of input tax credit in the cases mentioned in the provision; or
(b) The provision may be enacted in two parts. First part may, subject to provisions of second part, grant benefit of input tax credit in all cases. Second part may provide the details of cases in which no input tax credit can be claimed, and in which cases part amount of input tax can be claimed as input tax credit.
The provision should clearly specify the supplies of goods or services, in relation to which, and the circumstances in which-
(i) no input tax credit can be claimed; or
(ii) benefit of partial amount of input tax which in excess of the given amount cannot be claimed as input tax credit; or
(iii) period after expiry of which input tax credit cannot be claimed.
Admissibility of input tax credit depends on the manner in which goods or services received by the recipient are utilized, disposed of or dispossessed. Unless the law provides otherwise, normally,-
(a) benefit of credit of full or partial amount of input tax is allowed where supply of goods or services or both received is utilized in making a supply of goods or services or both on which tax is payable, except a supply on which tax is payable under composition levy scheme;
(b) benefit of input tax credit is allowed where supply of goods or services or both received is utilized in making a zero rated supply;
(c) benefit of credit of any amount of input tax is not allowed where-
(i) supply of goods or services or both is utilized in making a supply of goods or services or both other than a zero rated supply, on which tax is not payable; or
(ii) supply of goods or services or both is taken in personal consumption; or
(iii) supply of goods or services or both, for any reason, not be utilized in making a supply of goods or services or both.
Admissibility of input tax credit wholly depends upon the provisions made in the law. For example, all supplies of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel are beyond the scope of GST laws but section 16(2) of the Integrated Goods and Services Tax Act, 2017 provides that credit of input tax may be availed for making zero-rated supplies.
Chapter V of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) relates to input tax credit. The said chapter contains sections 16 to 21. Section 16 relates to eligibility and conditions for taking input tax credit, section 17 relates to apportionment of credit and blocked credits, section 18 relates to availability of credits in specified circumstances, section 19 relates to taking of input tax credit in respect of inputs and capital goods sent for job work, section 20 relates to manner of distribution of credit by Input Service Distributor, and section 21 relates to manner of recovery of credit distributed in excess by the input service distributor. Section 16 of the CGST Act runs as follows:–
“16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, 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.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, 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 one hundred and eighty 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, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.”
Section 17 of the said Act provides the details of the cases in which input tax credit will either not be allowed or amount of input tax credit will be restricted to the extent given in specified cases. Provisions of section 17 are based on actual use or disposal of goods or services received. In my opinion, provisions of section 17 put restrictions on the provision of section 16(1) and section 18. Therefore, provisions of section 16(1) and section 18(1) should have been subjected to provisions of section 17, especially when sub-section (1) of section 16 uses words “used or intended to be used”.
It is important to note that most of taxable persons claim input tax credit in the return of the tax period in which supply of goods or services or both is received but in most cases such supply is used in any tax periods subsequent to tax period in which such supply is received. There may be cases in which, after availing input tax credit, it may come to the knowledge of the taxpayer that no input tax credit could have been claimed or input tax credit of lesser amount could have been claimed. There may also be cases of wrong claim of input tax credit.
Clause (h) of sub-section (5) of section 17 of the CGST Act provides that no input tax credit will be allowed in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. These circumstances may arise after the taxpayer has claimed benefit of input tax credit. These circumstances require reversal of input tax credit. If I am not wrong, then I would like to say that there is no provision for reversal of input tax credit for such cases. Two sections of the CGST Act which provide for reversal of input tax credit relates to mismatching of details of the supply furnished by the supplier and the recipient, and credit notes.
In my opinion, certain provisions of section 17 of the CGST Act have not been drafted properly. Also certain provisions, which were required to be made, have not been made. These provisions may be referred to as follows:–
1. Sub-section (2) of section 17 of the CGST Act runs as follows:
“(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
It is noteworthy that taxable supply also includes a supply on which tax is payable under composition levy. In respect of such supplies, input tax credit is not admissible. Secondly, expression “zero rated supply” may also include a taxable inter-State supply. Therefore, such supplies will get included twice in the expression “taxable supplies including zero rated supplies”. Thirdly, zero rated supply may also include a supply which is included in the definition of inter-State exempt supply under section 6 the IGST Act. There is no reference of deemed exports. In my personal opinion, in place of expression “taxable supplies including zero-rated supplies”, expression “supplies in relation to which input tax credit is admissible either under this Act or under the Integrated Goods and Services Tax Act, 2017” should have been used. Similarly, in place of expression “exempt supplies under the said Acts”, expression “supplies in relation to which input tax credit is not admissible under this Act or under the Integrated Goods and Services Tax Act, 2017” should have been used. It would have been to add an explanation to sub-section (2) of section 17 of the CGST Act. In the explanation, details of both types of supplies should have been mentioned.
It is surprising that section 147 of the CGST Act, which gives powers to the Government for notifying certain supplies of goods as deemed exports, is silent about the benefits which will be available or associated with such notified supplies of goods. This is noteworthy that rights and liabilities can only be provided in the substantive law i.e. in the Central Goods and Services Tax Act, 2017 only (and not under the Rules). About taxability of a deemed export, the CGST Act is silent. However, where refund of whole tax is allowed to taxpayer, on value of supply, tax cannot be assessed under the law and supply becomes a supply exempt from tax.
2. There is no provision in section 17 to block input tax credit where supply is exclusively used in making a supply on which tax is not payable or a supply on which tax is payable under composition levy.
3. In respect of receipt of a supply of motor vehicles or other conveyances, where they are not used for purposes specified in clause (a) of section 17(5) of the CGST Act, input tax credit has been blocked whereas input tax credit in respect of goods and services which are used in running, maintaining, repairing & servicing of such vehicles has not been blocked.
4. Input tax credit has been blocked where goods received are lost, stolen, destroyed, written off, gifted or distributed as free sample but input tax credit has not been blocked where supply of goods or services or both is used in manufacture of any other semi-finished or finished goods and such semi-finished or finished goods are lost, stolen, destroyed, written off, gifted or distributed as free sample.
5. No benefit of input tax credit should be allowed in cases in which goods or services or both received are utilized in providing a supply of goods or services or both, on which tax is payable under composition levy.
6. No benefit of input tax credit should be allowed where goods or services or both are used in making a supply of goods or services or both to a Special Economic Zone unit or Special Economic Zone developer, where such supply is not meant for use in authorized operations by such unit or developer.
Here it is noteworthy that CGST Rules provide that while granting refund of tax related to zero rated supply made to Special Economic Zone unit or Special Economic Zone developer, amount of refund which relates to goods or services which are not meant for use in authorized operations shall not be allowed. This provision is against the provision of the substantive law (section 16 of the IGST Act). Such provision under rules is ultra- vires the IGST Act. It may be challenged at any time.
7. No benefit of input tax credit should be allowed where inputs and input services are used in making following activities or transactions (these activities or transactions are not supply), namely:-
(i) providing of services of funeral, burial, crematorium or mortuary including transportation of the deceased or
(ii) sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building;.
(iii) Actionable claims, other than lottery, betting and gambling.
8. No input tax credit should be allowed where supply of goods or services or both is used in carrying out activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council.
9. There is no provision to curtail the benefit of input tax credit where supply of goods or services or both is utilized in making the supply of goods or services or both, which-
(i) is not generally exempt from tax but is exempt from tax if it is made only by specified persons; or
(ii) is generally but conditionally exempt from tax; or
(iii) may, on recommendation of the GST Council, be exempted from payment of tax by special order in each case by the Government under section 11(2) of the CGST Act.
These supplies are not included in the definition of expression “exempt supply” and therefore, these supplies of goods or services or both fall under the category of “taxable supply”. Goods or services which are used in making a taxable supply, benefit of input tax credit is admissible. On such supplies, tax may or may not be payable depending on the circumstances. A policy decision is required to be taken in such cases.
There may be such other cases which may also need attention at the level of persons who have prepared GST Law drafts.
In section 17 of the CGST Act, there should have been a provision which should have provided that no input tax credit shall be claimed in the cases in which benefit of input tax credit has been blocked and where a taxable person has already claimed benefit of input tax credit, in contravention of the provisions of this section 17 of the CGST Act, he shall compute the amount of reverse input tax credit in the prescribed manner and shall pay such amount along with interest with effect from such date as may be prescribed.
It will be better to add a new section 17A in the CGST Act with its title as “Reversal of Input Tax Credit in certain cases”. The new section should not only provide withdrawal of input tax credit in cases in which part or full amount of input tax credit has been blocked but such provision should also provide for reversal of input tax credit in following cases / circumstances, namely:-
(i) where benefit of input tax credit has been claimed fraudulently;
(ii) where a person, who has been carrying on business outside the composition levy, opts for payment of tax under composition levy;
(iii) where a taxable supply is notified an exempt supply;
(iv) any other case in which benefit of input tax credit has not been admissible.
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Disclaimer: Except the quoted versions, interpretations made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to follow the provisions of the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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