Input Tax credit – Backbone of GST

Introduction

Goods and service tax aims at providing seamless flow of credit throughout supply chain. Input Tax Credit is the backbone of goods and service tax.  The term input tax has been defined under section 2 (62) of CGST Act 2017. The term Input Tax in relation to registered person means Central tax, state tax, integrated tax, union territory tax charged on any supply of goods or services or both made to him and includes IGST on import of goods and tax payable on reverse charge basis under CGST SGST IGST UTGST Act. This definition specifically excludes tax paid under composition levy to be called as input tax. Further, the section 2 (63) of CGST Act defines Input Tax Credit. It means credit of tax.

Eligibility to claim ITC

Every registered person shall subject to the conditions prescribed and manner provided under section 49 be entitled to claim credit of input tax in respect of goods or services or both received by him which are used or intended to be used in course or in furtherance of business.

Conditions to claim ITC

The registered person claiming credit of input tax is required to fulfil following conditions

• He must be in possession of Invoice or debit note issued by supplier or any other document for the time being prescribed.
• He must have actually received the goods. There is one exception to this condition i.e. BILL TO SHIP model. According to this the goods or services have been deemed to be supplied to registered person if the same have been delivered or provided to recipient or another person at the instruction of recipient of supply.
• The tax in respect of such supply shall be actually deposited to government
• Last but not least the supplier has file return under section

Three important provisos

There are three important provisions provided under section 16 which are required to be considered before claiming credit of input tax. When the goods are to be received in lots against a single invoice then the registered person shall be entitled to take Input Tax Credit in respect of such goods only upon receipt of last instalment. One more important provision is that which restricts the recipient of supply who have claimed ITC to make the payment in respect of such the invoice against which the credit of input tax is claim within certain specified time. It States that when recipient of supply fails to make payment of value indicated in invoice including tax amount, within period of 180 days from the date of issue of such invoice then is required to add such a Input Tax Credit in output tax liability for the month along with the interest. This does not apply to supply where the tax is paid on reverse charge basis. Further subsequently when he makes the payment of invoice, he shall be again entitled to claim the credit of input tax.

Two benefits cannot be claimed together.

Important point is that recipient of supply cannot take credit of input tax if he has claimed depreciation under Income Tax Act, on entire amount of capital goods including the GST component.

Last date for claiming ITC

The registered person shall not be entitled to claim credit of input tax after expiry of

• due date of filing return for the month of September immediately following the end of financial year to which such a invoice or Invoice relating to debit note pertains i.e. 20 October or
• the actual date of filing annual return: whichever is earlier

Apportionment of ITC

Section 17 of CGST Act talks about apportionment. When goods or services or both is used by registered person for the purpose of making both business or a domestic purpose then the credit of input tax shall be restricted to tax paid on the goods or services or both which are used for his business. Further when the goods or services or both is used for the purpose of making both taxable as well as exempt supply including zero rated supply then the credit of input tax shall be restricted to amount of tax which is attributable to the goods which are used for the purpose of providing taxable supply including zero rated supply.

Scheme for Banks, Financial Institutions

Further Section 17 talks about a scheme for a banking business. Any company which is financial institution, banking company including non-banking financial corporations (NBFC) may opt to pay tax under the scheme provided under section 17 (4).  The scheme provides that a banking company may, without bifurcating the services into taxable and exempt services, may directly avail 50% of the total eligible Input Tax Credit and the balance 50% of the credit shall lapse However, this restriction of 50% is not applicable when the supply of services is made by one person to another having same PAN But different registration i.e. for example when the supplies made by one branch of a bank to another branch of a bank, then the credit of input tax be availed to the extent of 100%, irrespective of restriction under the scheme.

Blocked Credits

The Input Tax Credit in respect of certain supplies is blocked and the supplies are discussed as below. Notwithstanding anything contained in section 18 (1) and section 49 (5), the credit of input tax shall be blocked in respect of following services.

1. Transportation of a person with vehicle having a approved seating capacity not exceeding 13 including driver,

Certain exceptions to this blockage

• further supply of such vehicle
• imparting training of driving of such a vehicle
• transportation of passenger

It means the credit of input tax shall be availed in respect of above exceptions.

2. Vessel, aircraft used for transportation of person exceptions to this blockage

• further supply of such vessel or aircraft
• imparting training of driving of such a vessel or navigating aircraft
• transportation of passenger

3. Supply of services of general insurance service of repairing and maintenance in so far as they relate to motor vehicle, vessel and aircraft as stated above. However the credit of input tax is admissible when such a motor vehicle vessel or aircraft is used for any of the purpose provided in exception as discussed above or when the person is engaged in manufacturing of such a motor vehicle vessel or aircraft or when a person is engaged in providing services of general insurance in respect of such a motor vehicle vessel and aircraft.

4. Food And Beverages, Outdoor Catering, Beauty Treatment, Health Service, Cosmetic and Plastic Surgery, Leasing, Renting Hiring of Motor Vehicle, Vessel or Aircraft, Life Insurance Services, etc. However the credit in respect of such services attributable if supply of such services is intended for making for further taxable supply of such services or as an element of composite or taxable composite or mixed supply.

5. Membership of club health and fitness centre

6. Travel benefit extended to employees on vacations and canteen services unless it is provided under obligation by any statute

7. works contract when supplied for construction of an immovable property other than plant and machinery except where it is a input service for making for further supply of works contract services

8. Construction of immovable property other than plant and machinery.

The term construction has also been defined in the GST Act which states that construction means renewal, repair, renovation to the extent capitalized in the books of accounts

9.  Supply from a person paying tax under composition levy

10. Services both received by non-resident person except on goods imported by him goods or services or both used

11. Goods used for personal consumption

12. Goods lost, stolen, destroyed, written off, disposed of by way of gift free samples

13. Any tax paid in accordance with the provision of section 74 section 129 section 130

ITC under Specified Section

1. Person obtaining Compulsory registration

Another important section of the chapter of ITC is ITC in specified circumstances. Section 18(1) talks about four cases where in the person earlier was not eligible to claim Input Tax Credit but now have become eligible to claim Input Tax Credit when a person is liable to be registered under GST and he makes an application for the purpose of registration within 30 days from the date of being liable he shall be entitled to take credit of input tax in respect of goods that are held as stock in raw material and for goods lying as stock in semi-finished or finished goods as on the date immediately preceding to the date on which he becomes liable to register.

2. Person obtaining Voluntary registration

Secondly, The Person who voluntarily opts for registration is entitled to take credit of input tax in respect of goods that are held as in raw material and a good that are held as stock in semi-finished or finished goods immediately on a day proceeding to the date of grant of certificate of register.

3. Person paying tax under Composition leavy opts for Normal Leavy

Thirdly, when a person ceases to pay tax under section 10 of CGST Act i.e. under composition levy then he shall be entitled to claim credit of input tax in respect of goods that are lying in raw material and goods contained in semi-finished of finished goods and also in respect of capital goods as on the date immediately preceding to the date from which he becomes liable to pay tax under normal Navy. However, the Input Tax Credit in respect of capital goods will be reduced by certain percentage point. As per as per Rule 41 of CGST RULES, it is reduced by 5 % point per quarter from the date of purchase of such capital goods till the date of on which starts to pay tax under normal Levy.

Person whose exempt goods become taxable

Lastly, a person whose goods were earlier exempted becomes taxable shall be entitled to  credit of input tax in respect of goods lying in raw material and goods contained in semi-finished and finished goods and also in respect of capital goods as on the day immediately preceding to the date from which his goods become taxable. In this case also the Input Tax Credit in respect of capital goods will be reduced by certain percentage point as prescribed under rule 40(1) i.e. 5% point per quarter.

Eligibility of inputs to claim ITC

Registered person shall not be entitled to take Input Tax Credit in respect of any supply of goods to him after expiry of one year from date of issue of invoice relating to such supply

Change in Constitution of Business

Whenever there is a change in constitution of a business of a registered person due to transfer merger, amalgamation, transfer, sale of a business along with Specific provision of transfer of liability then such a registered person is entitled to transfer the unutilised credit of input tax lying in his electronic ledger, to such merged, transferred, amalgamated or sold business in proportion of the asset transferred.

Person earlier eligible to avail ITC; but now not eligible to avail ITC

Section 18 also discuss what if the person has avail Input Tax Credit and now opts to pay tax under composition levy or earlier his goods were taxable but now become exempt.

In such a case the registered person who has availed Input Tax Credit of tax paid opts to pay tax under section 10 i.e. under composition levy or where the goods or services or both supplied by him become wholly exempt, shall pay, by way of debit in e-credit ledger or electronic cash ledger an amount equivalent to the credit of input tax in respect of the input held in stock or input contains semi-finished of finished goods held in stock and on the capital goods as reduced by certain percentage point as may be prescribed as on the date immediately preceding the date for exercising such option or as the case may be the date of such exemption.  If there is any balance remained in the e-credit ledger after debit of such as equivalent amount the same shall lapse.

Supply of Capital Goods on which ITC is availed.

In case of supply of capital goods on which Input Tax Credit has been availed, an amount of Input Tax Credit availed in respect of such a capital goods or the amount of tax paid on a transaction value as determined under section 15 whichever is higher shall be paid by such registered person. The disposal of capital goods without consideration is also supply as per section 7(1)(c) read with schedule 1 para 1. The proviso to section 18(6) provides that where there is a sale of refractory bricks, moulds, dies, jigs, fixtures, as a scrap, the taxable person may opt to pay tax on the transaction value of such goods are determined under section 15.

Job worker

Section talks about provision relating to goods or capital goods that are sent to job worker for processing. This section provides that the principal shall be entitled to take credit of input tax in respect of goods that are sent to a job worker. It also states that the principal is entitled to take credit in respect of input tax in respect of such a good even if the goods are directly sent at a place of job worker without first bringing them to the place of principal. however, if such a goods so sent to job worker have not been returned by job worker within a period of one year from the date of supply of such goods or otherwise have not been removed from a place of a job worker then it shall be deemed to be supplied by principal to job worker. The period of one year shall be calculated from the date of receipt of such goods by job worker, if the goods are directly sent at place of job worker.

The same is the case about capital goods. The principal shall be entitled to take credit in respect of capital goods that are sent to job worker. The principal shall be entitled to take such a credit even if the capital goods are directly sent at a place of job worker without first bringing them to the place of principal. If such capital goods have not been returned within period of three years from the date of being sent to place of job worker or otherwise have not been removed from place of job worker, the capital goods shall be deemed to have been supplied by principal to the job worker as on the date on which the such capital goods have been sent at a place of the job worker. However, the period of three years shall calculate from the date of receipt of such goods by job worker, if the capital goods are directly sent at place of job worker.

The Content in this section shall not be applicable to fixtures, moulds, dies that are sent to job worker.

Input Service Distributor

Section 20 talks about input service distributor input service distributor. Section 2(61) defines the term Input service distributor i.e. ISD. ISD means and office of supply of goods services or both which receives tax invoice issued under section 31 towards receipt of input services and issues a prescribed document for the purpose of distributing credit of such Central tax state tax integrated tax or union territory tax paid on the sales services to a supplier of taxable goods or services or both having same and as that of the said office. Rule 39 provides about procedure for distribution of Input Tax Credit by input service distributor.

Input service distributor shall distribute the credit of following condition

• The credit will be distributed on the basis of prescribed on the basis of document containing prescribed details
• The credit so distributed shall not exceed in any case the credit available for the purpose of distribution
• The credit of tax paid in respect of input services attributable to one recipient distributed to only that recipient
• The credit of tax paid in respect of input services attributable to more than one unit shall be distributed among all such units and the distribution shall be Pro-rata on the basis of proportion of turnover of such a unit at a particular time in comparison with the aggregate turnover of all such units

Conclusion

The above analysis of Input Tax Credit is glimpse on the provisions of the GST Act. The Input tax credit is the provision to avoid the cascading effect of tax. If the credit of input tax is not allowed, this will be the additional cost to the further purchaser. Thus, this is the most important provision in the act ensuring seamless flow of tax.