All about Input Tax Credit (ITC) under GST Provisions

Input Tax Credit (ITC) is the core concept of GST as GST is destination based tax. ITC avoids cascading effect of taxes and ensures that tax is collected in the State in which goods or services or both are consumed.

 “Input tax credit” means credit of ‘input tax’- section 2(62) of CGST Act.

Section 2(62) of CGST Act defines ‘input tax’ as follows— “Input tax” in relation to a registered person, means the CGST, SGST, IGST or UTGST charged on any supply of goods or services or both made to him and includes—

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

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9 [reverse charge of CGST]

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act [reverse charge of IGST]

(d) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 9 of the respective State Goods and Services Tax Act [reverse charge of SGST] or

(e) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 7 of the Union Territory Goods and Services Tax Act [reverse charge of UTGST],  but does not include the tax paid under the composition levy.

Input Tax Credit is eligible only when it is credited to electronic credit ledger of taxable person.

Input tax to Output tax set off / Utilization methodology:

Input Tax	Output tax
IGST	IGST,CGST, SGST ( sequence of Order)
CGST	CGST, (and balance if any) IGST
SGST	SGST, (and balance if any) IGST

 Lets see example to understand better.

• If Company X ltd, is having ITC of Rs.50,000.  (IGST- 30,000, CGST-10,000 & SGST 10,000)

GST liability Rs 75,000 (IGST-50,000 CGST,12500,SGST-12500)

ITC Available (A)	Output tax liability(B)	Tax payable after adjusting ITC  = B-A
IGST – 30,000	50,000	20,00
CGST- 10,000	12500	2,500
SGST-10,000	12500	2,500

• If Company X ltd, is having ITC of Rs.100,000.  (IGST- 40,000, CGST-30,000 & SGST 30,000)

GST output liability Rs.90,000 (IGST-50,000 CGST-20,000 SGST-20,000)

ITC Available A)	Output tax liability(B)	GST payable (B-A)	GST Available (B-A)	After Output liablity available GST
IGST – 40,000	50,000	(10,000)		0
CGST- 30,000	20,000		10,000	0
SGST- 30,000	20,000		10,000	10,000

In the above example IGST output tax liability Rs.50,000 where as available input credit on IGST is Rs.40,000 only and CGST available is Rs30,000 where as output tax is only Rs.20,000. So balance 10,000 can be set off the IGST output tax liability.

• If Company X ltd, is having ITC of Rs.100,000.  (IGST- 20,000, CGST-40,000 & SGST 40,000)

GST output liability Rs.90,000 (IGST-40,000 CGST-25,000 SGST-25,000)

ITC Available A)	Output tax liability(B)	GST payable C=(B-A)	GST Available C1=(B-A)	After Output liablity available GST (C-C1)
IGST – 20,000	40,000	(20,000)		0
CGST- 40,000	25,000		15,000	0
SGST- 40,000	25,000		15,000	10,000

In the above example IGST output tax liability Rs.40,000 whereas available input credit on IGST is Rs.20,000 only and CGST available is Rs40,000 whereas output tax is only Rs.25,000. So, balance after offsetting CGST available tax is Rs.15,000.  Where IGST payable 15000 can be off-stetted and balance payable of Rs.5,000 can be off-stetted against SGST credit available of Rs.15,000.

Document requirements & conditions for claiming input tax:

The input tax credit shall be availed by a registered person, including the Input Service Distributor (ISD), on the basis of any of the following documents – Rule 36 of CGST and SGST Rules, 2017 :

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

(b) an invoice issued in accordance with the provisions of section 31(3)(f), subject to payment of tax [tax paid on reverse charge basis]

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

(d) a bill of entry or similar document prescribed under Customs Act or Rules for assessment of IGST

(e) an invoice or credit note issued by an ISD in accordance with rule 54(1) of CGST Rules, 2017. ITC only if invoice complete in all respects ITC shall be availed by a registered person only if all the applicable particulars as prescribed in Invoice Rules are contained in the said document, and the relevant information, as contained in the said document, is furnished in form GSTR-2 by such person – Rule 36(2) of CGST and SGST Rules, 2017.

Time duration to entitle input credit:

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 – section 18(2) of CGST Act.

 Further, a taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both, after the filing of the return under section 39 of CGST Act for the month of September of financial year to which such invoice or invoice relating to debit note pertains or filing of the relevant annual return, whichever is earlier – section 16(4) of CGST Act. Really, in view of section 16(4), in case of invoices receive after October, the taxable person gets less than one year to take input tax credit

Example : if Tax Invoice dated 05.04.2018  –

04.04.2019 ( credit should be entitled as input tax)

if Tax invoice dated 19.12.2018 –

30.09.2019 ( due date for filling return)

Normally, ITC is taken on basis of ‘Electronic Credit Ledger’. However, if advance payment was made before receipt of goods and services, input tax credit cannot be taken as goods and services are not received.

At the time of payment of GST on advance, the supplier of goods and services cannot issue tax invoice. He has to  option to issue only ‘receipt voucher’.

Requirements 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 to him unless following conditions are satisfied :

(a) he is in possession of a 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 furnished the return under section 39 [every taxable person is required to file electronic return every month as per section 39 of CGST Act].

Inputs or capital goods received in installments- Where the goods against an invoice are received in lots or installments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or installment – first proviso to section 16(2) of CGST Act.

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 180 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, in such manner as may be prescribed – second proviso to section 16(2) of CGST Act.

If partial payment is made, the reversal will be proportionate to the amount not paid to the supplier. If the recipient later makes payment to supplier, he can take credit of input tax – third proviso to section 16(2) of CGST Act

Recent notification for ceiling ITC i.e 20 % on un reported invoices and debit notes. 

The CBIC has notified the Central Goods and Services Tax (Sixth Amendment) Rules, 2019 vide Notification No. 49/2019 – Central Tax dated 09-10-2019. The said Notification has also revamped the entire method of availing credit, by inserting a new Rule i.e. Rule 36(4) in the CGST Rules, 2017.

The rule seeks to restrict credit in relation to invoices & debit notes which are not appearing in GSTR – 2A.

 As per the said Rule, a registered person shall be eligible to avail ITC on unreported invoices and debit notes  (not reflected in GSTR2A) to the extent of twenty percent of the total eligible credit in respect of invoices and debit notes.

Conclusion

This restriction will mean that the Companies need to monitor whether

• The suppliers are uploading their returns on regular basis.
• Most Companies are likely to feel the pinch of the amendment (once it becomes effective).
• The amendment has introduced another set of compliance on a monthly basis.