Input Tax Credit under GST – Detailed Analysis

Input Tax Credit is one of the Key Features of the GST. Input Tax Credit is available on each supply made under GST subject to conditions prescribed. It is a very important topic for the registered person to understand how he can claim input tax credit, when he can claim, which he cannot claim etc.. The wrong claim of input tax credit may attract penal tax, interest and penalty.

Article explains What is Input Tax Credit, Eligibility and condition for taking input tax credit, Time period to avail Input Tax Credit Section 16 (4), When Input Tax Credit shall not be eligible, Reversal of Input Tax Credit under GST, Availability of Input Tax credit under GST in special circumstances, New Rule 36 (4) effecting from 09-10-2019 restriction on input tax credit against which tax invoices not uploaded by the suppliers and Circulars issued in regard to Input Tax Credit.

A. What is Input Tax Credit ?

There is a very simple definition of Input Tax Credit under the Act. Section 2 (63) of the CGST Act says “Input Tax Credit” credit of input tax.

Now question arise what is input tax ?

According to Section 2 (62) “input tax” in relation to a registered person means tax ( any tax i.e. CGST, SGST, UGST or IGST ) charged on any supply of goods or services or both made to him ( registered person ) and includes –

( i ) the integrated goods and services tax charged on import of goods and

( ii ) the tax payable under provisions of the reverse charge mechanism

but does not include the tax paid under the composition levy.

B. Eligibility and condition for taking input tax credit

1. Entitlement to take credit of Input Tax Section 16 (1):

• Input tax charged on any supply of goods or services or both and such Supply are used or intended to be used in the course or furtherance of his business.
• Input Tax shall be credited to the Electronic Ledger of the person.

2. Conditions for claiming Input Tax Credit Section 16 (2) read with rule 36:

2.1 The registered person in possession of a tax invoice or debit note issued by a supplier registered under this Act or other tax paying documents as prescribed.

2.2 Documents prescribed under rule 36 (1) are as under:

(a) an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31;

(b) an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to the payment of tax;

(c) a debit note issued by a supplier in accordance with the provisions of section 34;

(d) a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for the assessment of integrated tax on imports;

(e) an Input Service Distributor invoice or Input Service Distributor credit note or any document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule 54.

2.3 The registered person has received goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services—

(i) 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;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

2.4 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.

2.5 he has furnished the return under section 39.

3. Time when input tax credit can be availed when goods received in lots or instalment:– The registered person shall be entitled to take credit upon receipt of the last lot or instalment.

4. Reversal of Input Tax Credit if the Recipient fails to make payment – Section 16 (2) read with rule 37:

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.

Deemed Payments ( Rule 37 ) :

a) The value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid.

b) Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

5. Re-avail Input Tax Credit as reversed according to above stated in para 4 Section 16 (2) with rule 37 (4)

The recipient shall be entitled to re-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.

There is no time lime to re-avail such credit. No interest shall be refunded which shall have been paid at the time of reversal.

C. Time period to avail Input Tax Credit Section 16 (4): –

To understand it by the following example:

Invoice or Debit Note pertains to F.Y.2018-19 the last date to claim input tax credit towards this document is

a) Due date of furnishing of the return under section 39 for the month of September following the end of financial year (2018-19) or

b) furnishing of the relevant annual return, whichever is earlier

The above due date for F.Y.2017-18 has been extended till 31-03-2019 subject to conditions prescribed vide proviso to section 16 (4) of the CGST Act.

D. Input Tax Credit shall not be eligible:

1. Input Tax pertain to supply of goods or services or both and such supply have been used for non-business.

2. Input Tax pertain to supply of goods or services or both and such supply have been used for making exempt supply.

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 (43 of 1961), the input tax credit on the said tax component shall not be allowed. Section – 16 (3) of the CGST Act.

4. Block Input Tax Credit as per section 17 (5) of Act:

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

(aa) vessels and aircraft except when they are used—

(i) for making the following taxable supplies, namely:—

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available—

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged—

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. ]

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.—For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

Explanation.— For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means 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.

E. Reversal of Input Tax Credit:

1. Reversal of Input Tax Credit is required when:

(a) Section 17 (1) – 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 so much of the input tax as is attributable to the purposes of his business.

(b) Section 17 (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.

2. Manner of Reversal of Input Tax Credit:

Formula according to Rule 42 for reversal of Input Tax Credit towards exempt supply and supply used for non-business:

T – Total Input Tax Credit;

T_{1 –} Input Tax Credit intended to be used exclusively for purpose other than business;

T₂ – Input Tax Credit intended to be used exclusively for effecting exempt supply:

T_{3 –} ITC not available according to section 17 (5) of CGST Act

C­_{1 –} T-( T₁+T₂+T₃ )

T₄ – Input Tax Credit intended to be used exclusively for effecting supplies other than exempted but including zero rated supplies;

C₂ – Common Credit = C₁ – T₄

D₁ – The amount of input tax credit attributable towards exempt supplies ( This amount is to be reversed )

D₁ = (E÷F) × C₂

Where –

‘E’ is the aggregate value of exempt supplies during the tax period, and

‘F’ is the total turnover in the State of the registered person during the tax period

D₂ – The amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as ‘D₂‘, and shall be equal to five per cent of C₂;

Formula according to Rule 43 for reversal of Input Tax Credit towards capital goods used for exempt supply:

When the capital goods being partly used for taxable supply and partly used for exempted supply in that case input tax credit on such capital goods shall be reversed as much as it ( common input tax credit ) attributable to the exempted supply. We can understand this with following example:

Common Input Tax Credit of Capital Goods = A

Total of Common Input Tax Credit of A = Tc

Useful Life of Capital Goods = 60 months

Input Tax Credit attributable to a tax period = Tm

Calculation of Tm = Tm = Tc/60

Input Tax Credit on all common capital goods = Tr = Tm+Tm+Tm+………

i.e. total of Tm

Amount of common credit attributable = Te

towards the exempted supply

Calculation of Te = ( E/F ) * Tr

Where

E = the aggregate value of exempt supply made during the tax period and

F = the total turnover in the state of the registered person during the tax period

S. No.	Tax Period	Total Turnover ( F )	Exempted supply ( E )	Opening Tr	Addition of Tm	Closing Tr	Te Reversal of Input Tax
1	Jul	100000	10000	6000	0	6000	600
2	Aug	120000	25000	6000	500	6500	1354
3	Sep	No Turnover	No Turnover	6500	0	6500	1354
4	Oct	200000	50000	6500	0	6500	1625

If there is no turnover during any tax period, reversal of input tax credit be taken as per previous tax period.

It is also informed about interest to be added to the amount of ( Te ). Rule 43(1)(h) of the CGST Act in this regard is reproduced “the amount T_e along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.”

F. Availability of credit in special circumstances

S. No.	Section	Circumstances	Particulars
1	18 (1)(a)	A person who has applied registration with in time of 30 days.	The person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.
2	18 (1)(b)	Voluntary Registration	A person who takes registration under sub-section (3) of section 25 (voluntary) shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration.;
3	18 (1)(c)	Composition Dealer shifted to Regular Dealer	Such person shall be entitled to take credit of input tax on stock and capital goods held on the day immediately preceding the date from which he becomes liable to pay tax under section 9:
4	18 (1)(d)	Exempt Supply becomes Taxable Supply	The person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable.
5	18 (2)	Conditions for Section 18 (1) to avail input tax credit	A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.
5	Rule 40	Time Period, Form and other conditions to claim ITC under section 18 (1)	1. Within 30 days from the date of becoming eligible to avail the input tax credit. 2. Form to fill is GST ITC-01 3. Certification is required from the CA or Cost Accountant if the claim of ITC exceeds two lakh rupees.
6	18 (3)	Change in Constitution on account of sale, merger, demerger, amalgamation, lease or transfer of the business	The said registered person (Transferor) shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to the account of the Transferee.

G. New Rule 36 (4) effecting from 09-10-2019 restriction on input tax credit against which tax invoices not uploaded by the suppliers.

The provisions of this rule is that the registered person has been restricted to take input tax credit for those invoices which have not been uploaded by the Supplier. The maximum input tax credit for such invoices shall be up to 20 per cent of input tax which have been uploaded.

For example in the month of November 2019 total input tax available in the books of account is Rs.1 lakh. The invoices are uploaded by the Suppliers for input tax of Rs.80,000.00 and invoices for input tax Rs.20000.00 are not uploaded. The registered person is eligible to take input tax credit of Rs.96000.00 in the month of November. Calculation is as under:

1. Eligible Input Tax Credit is – 80,000.00
2. Input Tax Credit allowed for which invoices not uploaded – 20% of 80000 = Rs.16,000.00
3. Total Input Tax Credit can be availed of Rs.96,000.00 ( 80000+16000 ) in place of Rs.1 lakh available input tax in books of account.

H. Circulars issued in regard of Input Tax Credit

S.No.	Date	Circular No.	Particulars
1	08/06/2018	47/2018	Moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case?
2	08/06/2018	47/2018	In case of auction of tea, coffee, rubber etc., whether the books of accounts are required to be maintained at every place of business by the principal and the auctioneer, and whether they are eligible to avail input tax credit?
3	28/03/2019	96/2019	Transfter of input tax credit in case of Death of the proprietor
4	23/04/2019	98/2019	Clarification in respect of utilization of input tax credit under GST Section 49A read rule with 88A
5	11/11/2019	123/2019	Restriction in availment of input tax credit in terms of sub-rule (4) of rule 36 of CGST Rules, 2017

To reach to me for any suggestions, rectifications, amendments and/or further clarifications in regard of this article my email address is pkmgstupdate@gmail.com.

Don’t forget to check section 10 38 of income tax act.