“Governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive”
Above quote of “Chanakya” the great Indian philosopher and economist reminds us of the mechanism of “Input Tax Credit” which is akin, since Government by giving needed credits for the inputs ensures that only right amount of taxes are collected, there by causing economy to sustain and proliferate. Taxpayers should be aware of the provisions pertaining to “Input Tax Credit (ITC)”, and avail maximum benefit from these provisions. In the article below, the author endeavors to bring to the readers the key concepts and provisions pertaining to ITC and more importantly surfaces few important factors which if neglected could heavily undermine the prudent utilization of ITC.
B. ITC – Concept And Conditions To Be Fulfilled For Availing:
Goods and Services Tax (GST) is a consumption-based tax. It is charged at each point of supply in the production chain from manufacturing stage to distribution to retailing stage, including imported supplies.
To understand the term Input Tax Credit it is essential that we first understand two basic terms, which are “Input Tax and Output Tax”. Input tax is the GST charged on the purchase of goods and/or services. Output tax on the other hand, is GST charged and collected on supply of goods and/or services. Taxpayers shall be allowed to take credit of taxes paid on inputs and utilize the same for payment of output tax. This process of utilization of input against the output will be executed electronically on “electronic credit ledger” which is maintained in soft form on common portal.
C. Conditions To Be Fulfilled Before ITC could be availed (Sec 16(11)) (Q25 FAQ On GST Pg 98):
1. The person intending to avail ITC should be Registered taxable person.
2. The supplier of goods and/or supplies in respect of which ITC is intended to be availed has to be registered under IGST or MGST as the case may be.
The person claiming ITC should be in possession of below referred documents:
1. Tax invoice, debit note, supplementary invoice or such other taxpaying document as may be prescribed, issued by a supplier.
2. The Person should have filed returns as are specified under Sec 27.
The person claiming ITC should have:
1. Received the goods and/or services.
2. Use or should intend to use these goods and/or services in course or furtherance of his business.
3. 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.
D. Manner of utilization of “Input Tax Credit”: ( Q2 FAQ On GST Pg 91)
E. Factors Which May Influence Availability Of ITC:
(Due to limitations of time and context, I have covered here few key areas. Readers may please note that these are indicative and not exhaustive)
A. Timing of registration by person claiming ITC:
1) If the registration is not taken within 30 days from the date the person so becomes liable then ITC on pre-registration stock would not be admissible.(Q5 FAQ On GST P92)( Sec 16(2))
2) Example: A person becomes liable to pay tax on 1st August 2017 and has obtained registration on 15th August 2017. Such person is eligible for input tax credit on inputs held in stock as on 31st July 17.(Q6 FAQ On GST P92)
2. Category Of Goods:
A. Expiry Of One Year From Date Of Issue Of Tax Invoice:
1) A taxable person shall not be entitled to take input tax credit in respect of any supply of goods and / or services to him after the expiry of one year from the date of issue of tax invoice relating to such supply. Sec 16(3A). (Q16 FAQ On GSTP96)(Note that FAQ mistakenly quotes the section to be 16(4) instead it should be 16(3A)
B. ITC on Capital Goods:(Q4- FAQ On GSTP92,2(54,55,20):
1) Credit of tax paid on capital goods is permitted to be availed in one installment.
C. ITC on Input sent for Job Work :(Q17,18 FAQ On GST Sec 16A(1)):
1) Input Goods:
a) The “principal” referred to in section 43 A shall, be entitled to take credit of input tax on inputs sent to a job-worker for job-work if the said inputs, after completion of job-work, are received back by him within 180 days of their being sent out. Sec 16A(1)
2) Capital Goods:
a) The “principal” shall, subject to such conditions and restrictions as may be prescribed, be entitled to take credit of input tax on capital goods sent to a job-worker for job-work if the said capital goods, after completion of job-work, are received back by him within two years of their being sent out.(Sec 16A(2))(Q21 FAQ On GST P97)
3. Transaction Type:
A. ITC on reverse charge mechanism:(Q3-P91)( Sec 7(3)):
1) Sec 2(57) defines the term Input Tax and the section clearly specifies that it includes tax payable under Sec 7(3). Therefore GST paid on reverse charge shall be considered as input tax.
2) However important condition here is that the credit can be availed if such goods and/or services are used, or are intended to be used, in the course or furtherance of his business.
B. Registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961 (Q24 FAQ On GST P98)( Sec 16(10)):
1) In such case the input tax credit shall not be allowed on the said tax component.
C. Where the goods against an invoice are received in lots or instalments,:(Q26 FAQ On GST P99)( Sec 16(11)):
1) Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or installment.
4. Purpose For Which Inputs Are Used:
1. Negative List:
1. Input Credit Not Available If They Are Covered By Sec 16(9) Of GST Act 2016.This section elaborates six type transactions where ITC cannot be availed. Detail understanding of these six types of transactions is extremely essential to ensure that wrong ITC is not being claimed mistakenly calling for initiation of recovery with interest by the regulatory authorities. (May by at some point of time we would discuss these 6 types of transactions in details). (Q29 FAQ On GST P99).
2. Goods and/or services received by a taxable person are used foreffecting both taxable and non-taxable supplies:(FAQ ON GST Q8 P93) , Sec 16(6).
1. In such case the amount of credit shall be restricted to so much of the input tax as is attributable taxable supplies including zero-rated supplies. (Sec 16(6))
3. Goods and/or services received by a taxable person are used for the purpose of business and non-business supplies(Q9 P93)(Sec16(5)).
In Such case the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
In any organization prudent availment and utilization of “Input Tax Credit” constitutes an important aspect for enhancing returns on working capital. As is evident from above article, the availment and utilization of “Input Tax Credit”, warrants dexterous application of the provisions of the statue to the relevant business model of the entity. I would therefore conclude my article emphasizing on all stakeholders to understand “How provisions of GST are going to influence their Business Model” especially the “Working Capital”, after all we all know that “Procrastination is like a credit card: its lot of fun until you get the bill!!.” Therefore lets get going and construct a blueprint for impact of GST on working capital of our respective businesses.
(CA Rajeev.Joshi ( CA,CISA,DISA,BSc (Microbiology)) The author is a Senior Management & Tax Consultant with over two decades of comprehensive industrial experience.He could be reached at firstname.lastname@example.org/9619912774)