On 25th November 2016 the revised Model GST Law has been released by Central Board of Excise and Customs. An attempt has been made in this article to analyse the revised provisions of Input Tax Credit (ITC)..
1. Eligibility and Conditions for taking ITC:
a. A person must be registered as a Taxable Person
b. Goods or Services are used or intended to be used in the course or furtherance of business.
c. ITC to be taken in specified time and manner
d. ITC on Pipelines and telecommunication towers, their structure and foundation.
|sr no.||ITC to be taken in financial year (FY)||Amount of Credit|
|1||First FY in which the said goods are received||1/3rd of total input tax|
|2||Second FY||1/3rd of total input tax|
|3||Third or subsequent FY||balance of total input tax|
e. Provisional: Credit can be taken as self-assessed and shall be provisionally credited to the Electronic Credit Ledger. Such credit shall be utilized only for payment of self-assessed output tax liability. (section 36)
f. Mandatory documents to take ITC: tax invoice or debit note or other prescribed taxpaying document issued by supplier.
g. Actual receipts: The goods or services must actually be received, however, an enabling deeming provision has been made for receipt of goods in cases where goods are supplied before or during its movement on direction of taxable person or agent so that ITC is not denied for non-receipt of goods for such transactions.
h. Tax payment: – Tax must have been paid.
i. Returns: are furnished as per section 34;
j. Goods received in Lots: ITC will be allowed on receipt of the last lot.
k. Payment of dues by recipient: In respect of supply of services, a proviso is added to sub section (2) of section 16 to ensure that where supplier of services has paid the taxes and recipient has taken ITC he must make the payment to his supplier within a period of three months from the date of issue of invoice failing which an amount equal to input tax credit availed by the recipient shall be added to his output tax liability along-with interest.
2. ITC not available: A Negative List is provided under sub-section 4 of section 17 capturing blocked credits in respect of:-
a. motor vehicle and other conveyances, except when they are used for providing taxable supplies viz.
i) further supply of such vehicles or conveyances; or
ii) transportation of passengers or goods; or
iii) imparting training of driving, flying, navigating such vehicles or conveyances
b. supply of goods and services namely
i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except when used for making an outward taxable supply of same category.
ii) Membership of club, health and fitness centre
iii) Rent a cab, life insurance, health insurance except where it is made mandatory for an employer under any law.
iv) Travel benefits to employees on vacation such as leave or home travel concession
c. Work contract services supplied for construction, re-construction, renovation, addition, alteration to the extent of capitalisation to the immovable property, other than plant and machinery; exception – input service used for further supply of work contract service
d. Goods or services received by a taxable person on his own account for construction, re-construction, renovation, addition, alteration or repairs to the extent of capitalisation to the immovable property, other than plant and machinery even when used in course or furtherance of business;
Since, ITC is allowed on plant and machinery including apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.
e. Taxable person who opted for composition levy scheme can’t take ITC; and
f. Goods and/or services used for personal consumption.
g. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
h. Any tax paid under section 67 (fraud), 89 (seizure of goods in transit and release) or 90 (confiscation)
i. If depreciation is claimed under the Income Tax Act on the tax component of capital goods then ITC shall not be allowed on the said amount of tax component. In other words, any one benefit can be enjoyed, either depreciation on tax component of cost of capital goods or ITC of tax component.
4. Time Limits: section 16
Time limits to take ITC in different cases are as under:-
a. Regular basis: sub section 4 of section 16: Time limit to take ITC in respect of an invoice or debit note in normal course shall be earlier of
Furnishing of Return under section 34 for the month of September following the end of financial year to which such invoice or debit note pertains OR
Furnishing of annual return. (last date for furnishing an annual return is 31st December following the end of financial year)
b. Specific cases: section 18
It is necessary to take full credit of input tax in respect of inputs held in stock; inputs contained in semi-finished (SFG) or finished goods (FG) stock and in cases of specific circumstances.
|Case||Entitlement to take credit of Input tax in respect of||Maximum time limit to take ITC|
|1||A person who becomes liable to registration (under sec 23 read with schedule V), has applied for the same and has been granted such registration||inputs held in stock or 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||Within one year from the date of issue of tax invoice relating to such supply (sub section 5 of section 18)|
|2||A person who voluntarily takes registration though not liable||inputs held in stock or in semi finished or finished goods held in stock on the day immediately preceding the date for grant of registration|
|3||A registered taxable person ceases to pay tax under composition levy scheme||inputs held in stock or contained in semi finished goods or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to tax normally under section 8 (credit on capital goods shall be reduced by a prescribed %)|
|4||Exempt supplies becomes taxable supplies||inputs held in stock or contained in semi finished goods or finished goods or on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable. (credit on capital goods shall be reduced by a prescribed %)|
|5||change in constitution of registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of business with specific provision of transfer of liabilities,||Shall be allowed to transfer unutilised ITC to transferee in the prescribed manner|
c. Reversal of ITC: sub section 7 of section 18
|Sr No.||Event||Amount of Reversal||payment / reversal|
|1.||After availing ITC -Switch over to composition scheme||Equal to credit of input tax held in stock or contained in semi finished goods or finished goods and on capital goods on the day immediately preceding the date of such switch over or exemption (credit on capital goods shall be reduced by a prescribed %).
(balance of ITC shall lapse)
|An amount to be paid by debiting electronic cash ledger or credit ledger|
|After availing ITC – Supplies becomes exempt absolutely under section 11|
|2.||Supply of capital goods on which ITC has been taken||pay an amount equal to the ITC taken on the said capital goods reduced by the prescribed percentage points or the tax on the transaction value of such capital goods, whichever is higher. However, if supplied as a scrap, the tax may be paid on transaction value|
5. Utilisation of ITC: sub-section 5 of section 44
a. ITC on account of CGST shall be utilised first towards payment of CGST and amount remaining towards payment of IGST. (ITC of CGST cannot be utilised for payment of SGST)
b. ITC on account of SGST shall be utilised first towards payment of SGST and amount remaining towards payment of IGST. (ITC of SGST cannot be utilised for payment of CGST)
c. ITC on account of IGST shall be utilised first towards payment of IGST and amount remaining towards payment of CGST and then in payment of SGST.
To simplify: I = IGST, C = CGST, S= SGST,
I can be utilised against I then C then S ;
C can be utilised against C then I
S can be utilised against S then I
but C vs S or S -vs C is not allowed.
It is noteworthy that in terms of sub-section 4 of section 44 the amount available in the electronic credit ledger may be used for making payment towards output tax payable whereas the amount available in electronic cash ledger may be used for payment towards tax, interest, penalty, fees or any other amount payable under GST law.
6. ITC in respect of Inputs sent for job work
Here meaning of “principal” is relevant. ‘Principal’ means a person on whose behalf an agent carries on the business of supply or receipt of goods or services. In terms of provisions of section 20 subject to prescribed conditions, the registered taxable person (principal) shall be entitled to ITC on inputs / capital goods sent to a job-worker for job-work or even it is directly sent to the place of job worker without their being first brought to the principal’s place of business, provided that
a. the said inputs are received back by ‘principal’ within a period of one year of their being sent out. For capital goods this time limit is three years
b. If said inputs or capital goods are not received back after job-work or otherwise or even not supplied from place of job worker within aforesaid period, it shall be deemed to be supplied by the principal to job-worker on the day when the said inputs or capital goods were sent out.
c. If inputs or capital goods are sent directly to job-worker, the period of one year or three years shall be counted from the date of its receipt by the job worker.
d. In case of Moulds, dies, jigs, fixtures or tools the aforesaid conditions are not applicable as per sub section 7 of section 20.
7. Apportionment of credit (section 17)
|1||Goods / Services used partly for business and partly for other purposes||Amount of credit shall be restricted to Input tax attributable to the business purposes.|
|2||Goods / Services used for effecting taxable supplies, zero rates supplies or under IGST Act & partly for effecting exempt supplies||Amount of credit shall be restricted to Input tax attributable to the taxable supplies including zero rated supplies|
|3||Banking company / financial institution / NBFC||Options:-
Credit restricted to input tax attributed to taxable supplies OR
50% of eligible ITC on inputs, capital goods and input services in that month
8. Monitoring through matching mechanism – section 37
A matching system is provided to check accuracy of claims of ITC and therefore, details of every inward supply furnished by the ‘recipient’ for a tax period shall be matched
a. with the corresponding details of outward supply furnished by the corresponding‘supplier’ in his valid Return for the same tax period or any preceding tax period.
b. with the additional duty of customs paid under section 3 of the Customs Tariff Act, 1975 in respect of goods imported by him, and
c. for duplication of claims of input tax period.
On matching of aforesaid claims of ITC, it will be finally accepted and shall be communicated to recipient in prescribed manner.
c. Mismatch / excess claim / duplication
If recipient of inward supply claims excess ITC as declared or in case it is not declared by the supplier for same supply in his valid Returns it shall be communicated to both in prescribed manner for rectification. In case of no rectification is done in valid Returns for the month in which discrepancy was communicated, it shall be added to output tax liability of recipient in his return for succeeding the month of communication.
Similarly, rectification of duplication of ITC should be done failing which it shall be added to output tax liability of recipient in his Return for the month in which the duplication is communicated
In case of no discrepancy it shall be finally accepted and communicated to the recipient.
Where supplier declares the details of invoices / debit note in his valid return within specified time, the recipient shall be eligible to reduce the amount added as aforesaid from his output tax liability.
Interest shall be payable at prescribed rates in case amount as aforesaid has been added to output tax liability, however, it will be refunded (not exceeding interest paid) in case of reduction of output tax liability on rectification
(Author is CMA, CS, LLM and can be reached at [email protected])