Input Tax Credit Under GST – A Birds Eye View

Historical Background

The Indirect Taxation Enquiry Committee constituted in 1976 by Sri L.K.Jha, recommended inter alia, converting specific rates into ad-valorem rates, rate consolidation and input tax credit i.e. Mechanism of Value Added Tax at manufacturing level (MANVAT). In principle, duty was payable on value addition.

Advent of GST

Before advent of GST, the most important sources of indirect tax revenue for the Union were customs duty , central excise duty , and service tax. Tax on services were continued to be levied under the residual entry of the Union List. Central Sales Tax(CST) however is assigned to the State of origin, as per CST Act, 1956. On the State side, the most important sources of tax revenue were tax on sale and purchase, excise duty on alcoholic liquors, opium and narcotics, Taxes on luxuries, entertainments, amusements, betting & gambling, and entry tax. On 01.07.2017 a new Indirect Tax regime has been rolled out i.e Goods and Services Tax (GST). It is a single tax on the supply of goods and services. It will eventually replaced and subsumed all indirect taxes levied on goods and services by the central and state governments, and it is expected to liberate India of its complex indirect taxation structure.The major taxes/levies which are going to be clubbed together or subsumed in the GST regime are as under:
The tax has been divided into 3 main parts –

• Integrated Goods and Services Tax (IGST),
• Central Goods and Services Tax (CGST) and
• State Goods and Services Tax (SGST).

Despite above, IGST comprises import of goods too, the present levy of Countervailing Duty (CVD) and Special Additional Duty (SAD) would be replaced by Integrated Tax. Last but not the least, new tax structure comprises Union Territory Goods and Services Tax (UTGST) on intra-union territory supply of goods or services or both. GST would mitigate such cascading of taxes. Under this new system, most of the indirect taxes levied by Central and the State Governments on supply of goods or services or both, would be combined together under a single levy.

Concept of Input Tax Credit

Concept of Input Tax Credit is “Jewel in the Crown” in Indirect Taxes. Input Tax Credit (ITC) is the core concept of GST.

At the time of paying tax on output, one can reduce the tax which has already paid on inputs. Uninterrupted and seamless chain of input tax credit is one of the key features of GST and it is an effective mechanism to avoid cascading of taxes i.e. tax on tax. Till the rollout of GST, credit of taxes being levied by Central Government is not available as set-off for payment of taxes levied by State Governments, and vice versa. As the tax charged by the Central or the State Governments would be part of the same tax regime, the credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.

Admissibility of Input Tax Credit.

Input tax credit admissible only after supplier makes payment of GST,- The receiver of goods or services or both can take provisional credit on basis of return filed by supplier. However, he will be eligible to take final Input Tax Credit only after the supplier of such goods and services has paid the tax. The statutory mandate for claim of credit is “used, or are intended to be used, in the course or furtherance of his business”. Therefore, in order to claim credit, a taxable person is required to demonstrate how the service (in respect of which applicable GST is paid) furtherance to his business.

To explain this further, the sequence of steps to be examined before claiming eligibility to credit are:

 Firstly, services are received along with valid invoice, the creditable tax having been deposited with the appropriate Government on the inward supplies by the supplier and a valid return has been filed.

Secondly, this service must pass the ‘furtherance of his business’ test by the claimant of credit;

 Possession of Output Invoice/Supplementary Invoice/ Debit or Credit note/ ISD invoice/ Bill of Entry and other related documents are mandatory.

The GST imposed several limitations and the protocol to avail and utilize the Input Tax Credit as follows.

Manner of taking input tax credit.

Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49 of CGST Act, 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 – section 16(1) of CGST Act.

Electronic Credit Ledger referred in section 49(2) of CGST Act – section 2(46) of CGST Act, is the input tax credit ledger in electronic form maintained at the common portal for each registered taxable person. This credit can be utilized for GST liability as specified in section 49(4) of CGST Act.

Requirements for availing Input Tax Credit.

GST imposes several conditions for availing Input Tax Credit, as per section 16(2) of CGST Act, registered taxable person shall not be entitled to the credit of any input tax in respect of any supply of goods or services or both unless following conditions are satisfied :

(a) Registered Taxable Person must possess tax invoice or debit note issued by a supplier registered under GST Act or such other taxpaying document as may be prescribed,

(b) he has received the goods or services or both,

(c) subject to section 41 of CGST Act, the tax charged in respect of such supply has been actually paid to the credit of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply [section 41 of CGST Act allows taking input tax credit in electronic credit ledger on self assessment basis], and

(d) he has to furnish the return under section 39 [every taxable person is required to file electronic return every month as per section 39 of CGST Act].

Apportionment, Reversal and Blocked Credits.

A registered person, who has availed of input tax credit on inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, and the amount of input tax credit availed of proportionate to such amount to the supplier in FORM GSTR-2 for month immediately following the period of 180 days from the date of the issue of the invoice ITC shall be reversed.

Further, ITC is not admissible in some cases as mentioned in section 17(5) of CGST Act, 2017. Some of them are as follows:

A. motor vehicles and other conveyances except under specified circumstances

B. goods and/or services provided in relation to:

I Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;

II Membership of a club, health and fitness center;

III Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;

IV Travel benefits extended to employees on vacation such as leave or home travel concession;

C. 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;

D. Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

E. Goods and/or services on which tax has been paid under composition scheme;

F. Goods and/or services used for private or personal consumption, to the extent they are so consumed;

G. Goods lost, stolen, destroyed, written off, gifted, or free samples;

H. Any tax paid due to short payment on account of fraud, suppression, mis-declaration, seizure, detention.

Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to the extent of the input tax as is attributable to the purposes of business only.

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 IGST, and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to the extent of the input tax as attributable to the said taxable supplies including zero-rated supplies.

On the service angle, a financial institution including NBFC’s, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of CGST Act 2017 , or an amount equal to fifty percent of the eligible input tax credit on inputs, capital goods and input services in that month ( the rest shall lapse).

Amount required to be reversed for ITC on exempt supplies (i.e. amount of ITC attributable towards exempt supplies).

Value of Exempt Supplies during the tax period X ITC Available.

Total turnover in the State of registered person during the tax period.

Reverse Charge Mechanism- Effect ON ITC

Another magical concept under Goods and Service Tax structure is “Reverse Charge Mechanism”. The concept is inversely proportional to Input Tax Credit. Generally, the supplier of goods or services is liable to pay GST. But in this mechanism in specified cases like imports and other notified supplies, the liability casts on the recipient .

Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible. Advance paid for reverse charge supplies is also liable to GST. The person making advance payment has to pay tax on reverse charge basis.

Some applicable services under RCM .

• Services received from non-taxable territories other than non assessee online recipient.
• Services of Goods Transport Agency.
• Services provided by Advocates.
• Services provided by Arbitral Tribunal.
• Sponsorship Services.
• Services provided by Government or Local authority other than specified services.
• Services provided by a director.
• Services provided by Insurance Agent to Insurer.
• Services provided by recovery agent to Banking, Financial and NBFC.
• Service of Goods Transport by vessal from place of out side India to importer.
• Services of transfer of permitting the use of copy right relating to original literary, dramatic, musical and artistic works.
• Radio Taxi or Passenger Transport services provided to E-Commerce.
• GST if any charged in the above services shall not be re-imbursed to vendors. Receipient shall be liable to pay GST and eligible to claim ITC for succeeding month.

A road map of Services.

Despite the foregoing, It is not out of place to discuss that, how GST impacts on services especially ITC provisions in service sector like Insurance , Banking, NBFC etc which are now contributing more than 57% of the GDP of India.

Section 17(5)(b) restricts the ITC in respect of supply of health services, life insurance services etc., subject to two exceptions (i) where health services are used for making an outward taxable supply of the same category of services. (ii) The expenditure does not fall under the exceptions and hence ITC is ineligible. Further section 17(5) (g) denies ITC in respect of goods or services or both used for personal consumption.

Government or a local authority or a governmental authority is liable to pay tax on supply of services other than the services notified as exempt or notified as neither a supply of goods nor a supply of services under clause (b) of sub-section (2) of section 7 of the CGST Act, 2017. In respect of services other than – (i) renting of immovable property; (ii) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government; and (iii) services in relation to an aircraft or a vessel, inside or outside the precincts of an airport or a port, the service recipients are required to pay the tax under reverse charge mechanism. It is not out of place to discuss that, Services supplied by an insurance agent to any person carrying on insurance business is liable for payment of GST under reverse charge basis on the part of an Insurance Agent.

Conclusion.

Glitches in pre-GST indirect taxes are sought to be overcome by advent of GST which provides utilization of cross credit across goods vs services and vice versa. Effective implementation of Input Tax Provisions under GST augmented various benefits like creation of National market by bringing down fiscal barriers amongst the States. It mitigated the cascading effect of taxes by allowing seamless credit of input tax across goods and services and also given a major boost to the ‘Make in India’ initiative. It also paved the way to the Government to improve its position in National and International markets in prevailing Global competitive scenario.

References

1. GST Circulars on Input Tax Credit from CBEC,

2. E-Filers from CBEC on Input Tax Credit.

3. E-Filers from CBEC on Reverse Charge Mechanism.

4. Practical FAQ’s under GST, published by Institute of Charted Accountants of India.

5. Hand Book of GST for Service Providers published by the Institute of Charted Accountants of India.

6. GST Ready reckoner for field officers from CBEC (From Shillong CGST Commissionerate, Shillong).