Input Tax Credit under GST LAW- An Analysis

The term input is one of the important concepts, which is integrally connected to output. The existence of output cannot be realized without input. The input tax occupies an important place in any tax system. Input tax credit under erstwhile Cenvat provisions was backbone of the Cenvat Credit Rules. Similarly, the ITC scheme is the backbone of the GST regime; accordingly the said scheme has been incorporated under GST law. One of the main purposes of bringing GST is that it would remove cascading effect by facilitating seamless flow of credit of tax paid on receipt of goods and services used in furtherance of business of further supply at each stage of value addition.

Definition of Input Tax under GST Law:

Section 2 (62) of the CGST Act, 2017 has defined “input tax “ in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax 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;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;

Further, Section 2 (63) of CGST Act, 2017 defined “input tax credit” means the credit of input tax.

Who are eligible to take input tax credit:

Section 16 of the CGST Act, prescribed every registered person shall, subject to such conditions and restrictions prescribed under section 49 , be entitled take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business.

Who are not eligible to take input tax credit:

(a) A registered person working under composition scheme even when received goods or services are used in furtherance of his business.

(b) A non-resident taxable person on receipt of goods and services except on goods imported by him.

Input tax credit not available on the following goods and services:

(1) Motor vehicles and other conveyances except when they are used for making taxable supplies, namely:-

(a) further supply of such vehicles or conveyances; or

(b) transportation of passengers; or

(c) imparting training on driving; flying, navigating such vehicles or conveyance;

(2) The following supplies except where same category of goods or services is used for making outward supply or an element of mixed or composite supply namely :-

(i) Food and beverages services.

(ii) Outdoor catering services.

(iii) Beauty treatment services.

(iv) Health services.

(v) Cosmetic and plastic surgery.

(3) Membership of a club, health and fitness centre.

(4) The following supplies except when notified by the Government as obligatory to provide such service by employer to employee or where same category of goods or services is used for making outward supply or an element of mixed or composite supply namely :-

(a) Rent-a-cab services,

(b) Life insurance services,

(c) Health insurance services.

(5) Travel benefits extended to employees on vacation such as leave or home travel concession.

(6) Works contract services when supplied for construction (including re-construction, renovation, additions or alterations or repairs) of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.

(7) Goods or services or both received by a taxable person for construction (including, re-construction, renovation, additions or alterations or repairs) of an immovable property ( other than plant or machinery ) even if used for furtherance of business.

(8) Goods or services or both on which tax has been paid under section 10, i.e. composition scheme.

(9) Goods or services or both received by a non-resident taxable person except on goods imported by him.

(10) Goods or services or both used for personal consumption.

(11) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Explanation: For the Sr.No. 6 and 7, above – 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 structure;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

Apportionment of credit and blocked credits:

In addition to cited specific goods or services supplies are not available input tax credit there are other restrictions in taking input tax credit as under :-

(1) Any tax paid in accordance with the provisions of section 74 of the CGST Act, i.e. pursuance to any order where any demand on account of non-levy, short levy due to suppression of facts, any fraud, willful misstatement recovered by the department.

(2) Any tax paid under Section 129 and 130 of the CGST Act, i.e. recovered by the department on account of any detention or seizer of goods, release of goods and Confiscation of goods in transit.

(3) 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.

(4) 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. The value of exempt supply shall be calculated in terms of formula prescribed in rules and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and sale of building.

(5) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of formula so prescribed or 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.

(6) Payment for supplies received has to be made within a maximum period of 180 days; otherwise ITC already claimed will be added, with interest to output tax liability.

(7) If depreciation on Capital goods has been claimed then ITC to that extent is not admissible.

(8) Registered person shall not be allowed to take ITC if the same has not been credited within 1 year from the date of issue of tax invoice relating to such supply of goods or services or both.

(9) ITC would also not be permissible if invoice or debit note is received after due date of filing return for September of next financial year or filing annual return whichever is later.

Basic conditions for taking Input Tax Credit:-

The registered person has to take credit in the electronic credit ledger as provided in Common portal on the following conditions:

(1) Possession of taxpaying documents such as tax invoice, debit note.

(2) Goods / Service should have actually been received / deemed to be received by the taxable person.

(3) Tax charged on the invoice and should have been paid to the Government.

(4) Return should have been furnished by the taxpayers under section 39 of the CGST Act.

(5) Input Credit for goods against an invoice received in lots / installments can be availed only on last lot in installments.

Documents requirements for claiming Input Tax Credit:-

Rule 36 of the CGST Rules, prescribed that the input tax credit shall be availed by a registered person, including the Input Service Distributor, on the basis of any of the following documents, namely:-

(1) an invoice issued by the supplier of goods or services or both;

(2) a debit note issued by a supplier;

(3) a bill of entry under the Customs Act,1962 or rules made thereunder for the assessment of integrated tax on imports.

(4) an invoice issued under reverse charge payment of tax;

(5) an Input Service Distributors invoice or Input Service Distributor credit note.

Reversal of Input Tax Credit:-

Rule 37 of the CGST Rules, prescribed that a registered person, who has availed input tax credit on the following cases:

(1) When a registered person opts to go out from normal scheme to composition scheme, credit on stocks on the relevant date has to be reversed.

(2) When registered shall surrender his registration due to closure of business, credit on stocks on the relevant date has to be reversed.

(3) When capital goods removed by the registered person after put into use on which credit has been taken.

(4) When consideration for supplies is not made within 180 days of issuance of invoice.

(5) When there is a mismatch of returns of supplier and recipient.

(6) When credit has been availed twice against single document.

(7) When credit has been availed on common inputs, reversal of credit to the extent of credit relating to exempted supplies or supplies for non-business purpose.

Utilisation of Input Tax Credit:

The manner of availment and utilization of Input Tax credit of CGST, SGST, IGST and UTGST has explained in the following Table.

Credit of	To be utilized first for payment of	May be utilized further for payment of
CGST	CGST	IGST
SGST / UTGST	SGST / UTGST	IGST
IGST	IGST	CGST, then SGST/UTGST

Credit of CGST cannot be used for payment of SGST / UTGST and credit of SGST / UTGST cannot be utilized for payment of CGST.

Matching of ITC:-

The final credit would be allowed only when details of supplies made by supplier match with the recipient’s return of availing credit. Rules provide that the matching has to be done in respect of GSTIN of Supplier and GSTIN of recipient in respect of each supply and recipient, Invoice number, Debit Note number, Credit Note number, Taxable Value and Tax amount involved. In case the details match or the return filed by supplier is accepted by recipient, the matter ends there. In such case an intimation of acceptance of credit would be sent to recipient in FORM GST MIS-I. However if details don’t match and discrepancy is noticed , same would be communicated to both the supplier and recipient in case fault is that of supplier, or only to the recipient in case fault is that of recipient.

Mismatch of ITC:-

The discrepancies could be availing credit in excess of the tax declared by the supplier, or the outward supply is not declared by the supplier, or there is a second time claim of ITC by the recipient . In case of differences of figures of amount of supplier and recipient or non-declaration of outward supply by supplier, the supplier would be asked to rectify the discrepancy in the return of month in which discrepancy is informed to him. In case of failure, such ITC would be added to the output tax liability of recipient next month. The recipient is liable to pay an interest @18% on the amount added to the output tax liability from the date of availing the ITC till the discrepancy is reflected in returns.

Re-Claim of ITC on subsequent matching:-

In case the supplier rectifies the discrepancies after reversal of credit by recipient, ITC can be re-claimed by recipient. In such a case, interest paid, if any would be refundable by crediting the amount to the recipient’s Electronic Cash Ledger.

Transitional Provisions of Input Tax Credit:-

The registrants under Central Excise, Service Tax and VAT on migration to GST would be allowed ITC, if already have available credits provided these are covered under GST law and the following cases:

(a) The amount of Cenvat credit on inputs, capital goods and input services carried forward in the last return filed.

(b) Unavailed credit in respect of capital goods, i.e. the balance amount of credit that remains after subtracting the credit already availed.

In the above situation the registered person, other than a person opting to pay tax under composition scheme, has to file a declaration in FORM GST TRAN -1 within 90 days from appointed date, specifying amount of credit claimed and admissible as per earlier credit Rules. Then ITC can be availed in Electronic Credit Register.

Conditions for availing ITC by new registrant:-

A person who has applied for registration under GST, Who is not registered person prior to 01-07-2017, Input tax credit can be admissible only, if ,

(i) goods on which input tax credit is claimed were not unconditionally exempt from the whole of the duty of excise or not nil rated.

(ii) the document for procurement of such goods is available with the registered person . In case these documents are not available input tax credit shall be allowed at the rate of sixty per cent.( 30 % in case of IGST is payable) on such goods which attract central tax at the rate of nine per cent or more and forty per cent.(20% in case IGST is payable) for other goods of the central tax applicable on supply of such goods and shall be credited after the GST has to be paid prior to availing credit.

(iii) the registered person availing of this scheme and having furnished the details of stock , submits a statement in FORM GST TRAN-2 at the end of each of the six tax periods during which the scheme is in operation indicating the details of supplies of such goods effected during the tax period.

(iv) the amount of credit allowed shall be credited to the electronic credit ledger of the applicant maintained in FORM GST PMT-2 on the common portal.

(v) the stock of goods on which the credit is availed is so stored that it can be easily identified by the registered person.

Provisions of Transfer of credit on sale, merger, amalgamation, lease or transfer of a business:-

A registered person shall transfer his unutilized input tax credit in the following circumstances,

(1) In the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee.

(2) In case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

(3) The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

(4) The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.

(5) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account

Manner of reversal of credit under special circumstances:- ( Rule 44 of CGST Rules)

(1) The amount of input tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall, be determined in the following manner, namely,-

(a) for inputs held in stock and inputs contained in semi-finished and finished goods held in stock, the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed by the registered taxable person on such inputs;

(b) for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years.

(2) The amount, as specified in sub-rule (1) shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.

(3) Where the tax invoices related to the inputs held in stock are not available, the registered person shall estimate the amount under sub-rule (1) based on the prevailing market price of the goods on the effective date of the occurrence of any of the events.

(4) The amount determined under sub-rule (1) shall form part of the output tax liability of the registered person and the details of the amount shall be furnished in FORM GST ITC-03, where such amount relates to any event and in FORM GSTR-10, where such amount relates to the cancellation of registration.

(5) The details furnished in accordance with sub-rule (3) shall be duly certified by a practicing Chartered accountant or cost accountant.

(6) The amount of input tax credit for the purposes relating to capital goods shall be determined in the same manner as specified and the amount shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax:

Provided that where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in FORM GSTR-1.

Other provisions of ITC on Capital Goods in GST:-

(a) ITC would be available in full without restriction where Capital Goods have been used for effecting taxable supplies and business activity. No credit will be admissible capital goods used exclusively for effecting exempt supplies or non-business or personal activity.

(b) The scheme of 50% credit in first year in terms of erstwhile Cenvat Credit Rules has been dispensed with.

(c) Credit to extent of depreciation under Income Tax Act is not admissible.

(d) Capital goods after taking credit can be sent to job-worker without reversing credit. The capital goods so sent to job-worker are to be returned within three years and otherwise the principal shall be liable to pay the tax along with applicable interest.

Input Tax Credit for importers: –

The earlier provisions of CVD paid on imports is entitled for CENVAT credit by the importer, which is replaced with IGST in GST regime. In GST regime also Integrated Tax is paid on imports is entitled for Input Tax credit in terms of document namely 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 read with rule 36 (d) of the CGST Rules, 2017. However, the credit of basic customs duty (BCD) would not be available.

On import, EOUs/EHTPs/STPs will continue to be eligible BCD exemption but not for IGST which has to be paid if payable. But the credit of the IGST so paid shall be eligible. This credit can be utilized towards payment of CGST on DTA clearance or refund can be claimed on accumulation of the IGST.

In case of goods imported by a unit or a developer of SEZ, for authorised operations are exempted from the whole of the IGST.

Demand and Penalty on registered person for violation of ITC provisions:-

(1) The demand notice to be issued to a registered person on violation of ITC provisions under section 73 or 74 of the CGST Act,2017

(2) A Penalty maximum equal to amount of ITC availed wrongly will be imposable under the said sections.

(3) A person issuing invoice without supplying goods, thus enabling recipient to take credit without possession of goods is also liable to a penalty equal to amount of ITC involved or Rs.1000/- whichever is higher.

(4) Prosecution can be initiated and the offender of ITC is liable for imprisonment and fine. Imprisonment may range from one year upto five years depending upon amount of ITC involved.

Author Details:-

Ramesh Chandra Jena, B. A (Hons)., M.A (Eco)., D.M.M., LL.B.

Senior Manager- Indirect Taxation, KSK Energy Ventures Limited.

Click here to Know the Role of GST Practitioner?