Input Tax Credit (ITC) means the amount of tax paid on purchase of Input Goods, Input Services and Capital Goods and includes tax paid under Reverse charge. Then at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount. This mechanism is called utilization of input tax credit. Due to this mechanism Input Tax Credit is the backbone of GST regime because these provisions of ITC makes GST a value added tax i.e. collection of tax at all points after allowing credit for inputs.

Section 16:  Eligibility and conditions for taking Input Tax Credit

1. Eligibility Criteria : Every Registered Person shall be entitled to take Input tax Credit on any supply of goods or services or both to him which are used or intended to be used in the course of furtherance of his business and said amount will be credited to the electronic credit ledger of such person.

2. Conditions for availment of ITC : Notwithstanding anything contained in this section, no registered person is entitled to the credit of any input tax in respect of goods and services supplied to him unless:

(a) He is in possession of Tax Invoice or Debit Note or any other Tax paying document issued by the supplier.

(b) He has received the goods or services or both.

(c) Subject to the provisions of Sec 41, the tax charged in respect of supply has been actually paid to the government.

(d) And He has furnished the Return u/s 39.

Provided that if the recipient of the goods and services fails to pay to the supplier within one hundred and eighty days from the date of issue of invoice by the supplier ,then the Input tax Credit availed by the recipient shall be added to his output tax liability with interest.

And that Input Tax Credit will be available to the recipient again when payment has been made to the supplier.   

Provided further 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. 

3. No ITC if Depreciation is claimed on Tax component of Capital Goods: When the registered person claim the Depreciation on tax component of cost of Capital Goods and Plant & Machinery, then the Input Tax Credit on said component shall not be allowed.

4. Time limit for availing ITC: A registered person shall not be entitled to take Input tax Credit in respect of Invoice or Debit Note for supply of goods or services or both

  • after the “Due Date of furnishing of Return u/s 39 for the month of September following the end of Financial Year to which such Invoice pertains” or
  • “Date of furnishing of relevant Annual Return”, whichever is earlier.

***

Section 17: Apportionment of Credit and Blocked Credits

In the below situations full ITC on inward supplies cannot be taken, only proportionate ITC is allowed in this:

1. When the goods or services or both are used by the Registered Person for the purpose of Business and partly for other purposes : Then only ITC attributable to Business purpose can be taken.

2. When the goods or services or both are used by the Registered Person for making Taxable supplies including Zero Rated Supplies and partly for making exempt supplies: Then only ITC attributable to Taxable Supplies and Zero Rate Supply can be taken.

3. Special option of ITC to Banking and Financial institutions: A banking company or a financial institutions including a non-banking financial company, can at their option avail of, every month, an amount equal to 50% of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

 4. ITC of tax paid on Input Goods, Input Services used for supply of taxable goods or services or both is allowed under GST except a small list of items provided u/s 17(5).

5. Tax paid u/s 74, 129 and 130 is not available as ITC. These sections provide the provisions relating to tax paid as a result of evasion of taxes, or upon detention of goods or conveyance in transit, or towards redemption of confiscated goods or conveyances.

***

Section 18: Availability of Credit in Special Circumstances

This Section provides for:

1. Entitlement of ITC:

(a) At the time of Registration or Voluntary Registration:

The Person who has applied for registration within 30 days from the date on which he becomes liable for registration or the person who is not require to register but obtains voluntary registration and has been granted registration, shall be entitled to take ITC.

  • In this situation, goods will be entitled to ITC on the day immediately preceding the date from which he becomes liable to pay tax in case of normal registration or the day immediately preceding the date of registration in case of voluntary registration.
  • ITC to be availed within 1 year from the date of issue of tax invoice by the supplier.
  • ITC will be available of inputs in stock, Finished Goods and Work in progress

(b) Switching to regular tax paying structure from existing composition levy:

  • In this, goods will be entitled to ITC on the day immediately preceding the date from which he becomes liable to pay tax under regular scheme.
  • ITC will be available for inputs held in Stock and inputs contained in semi-finished or finished goods held in stock and Capital Goods
  • ITC on Capital Goods will be reduced by 5% per quarter of a year or part of the year from the date of invoice.
  • ITC to be availed within 1 year from the date of issue of tax invoice by the supplier.

(c) On coming into tax paying status on account of exempt supply becoming taxable supply:

  • In this, goods will be entitled to ITC on the day immediately preceding the date from which such supply becomes taxable. 
  • ITC will be available for inputs held in Stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and Capital Goods exclusively used for such exempt supply.
  • ITC on Capital Goods will be reduced by 5% per quarter of a year or part of the year from the date of invoice.
  • ITC to be availed within 1 year from the date of issue of tax invoice by the supplier.

 2. Reversal of ITC

(a) On Switching to Composition levy or exit from tax- paying status:

  • ITC on inputs held in stock, inputs contained in semi finished goods or in finished goods and capital goods should be reversed proptionately on the basis of corresponding invoices on which credit has been availed. If invoice are not available, then the prevailing market price of such goods on the date of switch over/exemption.
  • ITC involved in the remaining useful life (in months) of the Capital Goods should be reversed on pro-rata basis (Rule 44), taking useful life as 5years.
  • The registered person has to debit the electronic credit or cash ledger by the reversal amount and balance of ITC if any shall lapse.

(b) On Cancellation of Registration:

  • In this, ITC on inputs held in stock/ contained in semi-finished goods or finished goods held in stock, capital goods or plant and machinery on the day immediately preceding the cancellation date.
  • The amount to be reversed as ITC on inputs should be reversed proptionately on the basis of corresponding invoices on which credit has been availed. If invoice are not available, then the prevailing market price of such goods on the date of switch over/exemption.
  • ITC involved in the remaining useful life (in months) of the Capital Goods should be reversed on pro-rata basis, taking useful life as 5years, taking the useful life as 5 years.
  • Such amount is compared with the output tax payable on such good, and the higher of the two amounts shall be paid by the registered person.
  • The Reversal amount is added to the output tax liability of the registered person.

(c) Amount payable on supply of Capital Goods or Plant & Machinery on which ITC has been taken :

The registered person shall pay an amount that is the higher of the following

  • ITC pertaining to remaining useful life of the Capital Goods (in quarters)

 OR

  • Tax on Transaction Value.

(d) Transfer of ITC on account of Change in Constitution of registered person :

In case of sale, merger, demerger, amalgamation, transfer or change in ownership of business etc., it includes transfer or change in ownership due to death of the sole proprietor, the ITC that remains unutilized in the electronic credit ledger of the registered person can be transferred to the new entity, provided there is a specific provision for transfer of liabilities in such change of constitution.

(e) Transfer of ITC on obtaining separate registrations for multiple places of business within a State/Union Territory :

  • Sec 25 enables a taxpayer to obtain separate registrations for multiple places of business within a State/Union Territory.
  • The registered person (transferor), having separate registrations for multiple places of business within a State/Union Territory, can transfer the unutilised ITC (wholly or partly) lying in his electronic credit ledger to all or any of the newly registered places of business in the ratio of value of assets held by them at the time of registration.
  • “Value of assets” means the value of entire assets of the business irrespective of whether ITC has been availed thereon or not.

Author Bio

Qualification: CA in Practice
Company: M/s S.K. Bajpai & Co.
Location: Agra, Uttar Pradesh, IN
Member Since: 03 May 2020 | Total Posts: 3

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8 Comments

  1. OPJAIN says:

    whether GST charged by GTA on freight charges in the invoice can be claimed as input the gta charged @ 12%, and whether RCM is compulsory or not in such circumstance.

  2. ASHISH GAUTAM says:

    Resp. Sir
    Want clarification in case of GST Input reversal from Buyer, can be credited to seller GST account / Ledger / Register or not.

    Illustration :
    If Mr. A supplies (Rs.100000+Rs.18000) on 1 April 2019 to Mr. Y. But Mr. Y don’t make payment even till 18-11-2020.

    Also Mr. A not able to pay his GST3B from April 2019 onwards only due to non payment from Mr. Y.

    So Mr. A complaint to GST Department for GST Input Reversal agst his supplier to Mr. Y. as per Rule 37 of Section 16

    GST Input from Mr. Y is also got reversed under GST Dept influence.

    At the end, Can this GST Input reversed by Mr. Y agst the supplies from Mr. A due to non payment goes to Mr. A GST account / Ledger / Register or not.

    1. Pooja Gurwani says:

      Hello Mr. Manoj ,
      In the blog which you have referred, she has explained the Rule 43 , which tells you how to calculate tha amount of ITC to be reversed in respect of goods used in non -business purpose or in providing exempt supply or in providing both taxable and exempt supply ,which hs given in Section 17
      And in my Blog i have told you briefly about all the measures that in cases you have to reverse the ITC but didn’t provide the calculation of that. So. You can refer my Sec 17 above plus those rules then you will get whole picture clear.

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