In this particular write up, I would like to discuss and to cover all the relevant aspect of ITC under GST to the best of my understanding and per the present legal scenario, ITC is one of the most important and most debatable topic under new tax regime i.e. GOODS and SERVICE TAX, it plays a very vital role with respect to the financial aspect and profitability of the business.
Under the previous indirect tax structure i.e Service Tax, VAT and Excise etc. Input Credit of one tax could not be claimed against output tax of another and there was no proper mechanism of claiming set off hence, ITC not allowed to be set off properly and a lot of input tax remained unutilised, however such issue now has been resolved to a large extent with the introduction of GST as there is only a single Indirect Tax which would be levied and there would be seamless flow of credit.
“Input Tax Credit means reducing the taxes paid on inputs from taxes to be paid on output”
Pull up your socks!!!!!!! we are going to discuss one of the most important topic of GST, it is not just a topic, the term ITC is a soul of GST……
“First we have to understand some basics terminology used in this article related to our topic before proceeding toward technical aspects of the topic”
Input Tax Credit (ITC) is a tax that a business pays on their purchase, whether the purchase is in the nature of input goods, capital goods or services and to the extent of such paid amount, seller can claim the credit subject to the applicable provisions of GST law, GST is an integrated tax structure where every purchase by a person should be matched with a sale by another person and through this process the credit flows in entire supply chain.
At each stage of the supply chain, the buyer gets credit for the input tax paid, and they can use it to offset the GST that needs to be paid to the Centre and State governments.
Input Tax is a tax already paid by supplier on input of goods and services it consist of IGST, CGST and SGST/UTGST as per the governing law of GST and such input tax can be utilised for the payment of tax as per the applicable provisions which we will discuss in this writeup itself, It also includes tax paid on reverse charge basis and integrated goods and services tax charged on import of goods but It does not include tax paid under composition levy.
Output Tax is a tax paid by the receiver on the goods and services purchased by him, it consists of CGST and SGST/UTGST as per the governing law of GST and such tax paid by him is eligible for the credit subject to the provisions of GST.
After discussing some of the key terms which were related to the topic now we were going forward in the technical aspects of the writeup.
Here, we are going to cover all the related provisions for our topic in detail and through this article the author strives to cover all the related topics in this particular writeup only.
Utilisation of input tax credit
There are certain specific provisions and mechanisms for the set off of Input Tax, Section 49A and 49B read with Rule 88A of Central Goods and Services Tax Rules, 2017.
Input tax credit on account of integrated tax shall first be utilised towards payment of integrated tax, and the amount remaining, if any, may be utilised towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order.
the input tax credit on account of central tax, State tax or Union territory tax shall be utilised towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilised fully.
In simple words it is mandatory to utilise the entire IGST available in electronic credit ledger before utilising ITC on CGST or SGST. The order of setting off ITC of IGST can be done in any proportion and any order towards setting off the CGST or SGST output after utilising the same for IGST output.
Note: the credit of CGST & SGST cannot be cross-utilised.
Conditions for availing of ITC
As per section 16 read with relevant Rules of CGST Act, 2017, a registered person will be eligible to claim Input Tax Credit (ITC) of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person, subject to the following conditions:
1. A registered person should have a tax invoice or debit note issued by a supplier registered under this Act, or other tax paying documents (i.e. bill of entry as per Customs Act, 1962, ISD invoices/ISD Credit Note etc).
2. Receipt of goods and/or services.
3. Return should have been furnished by the taxpayer.
4. Tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.
5. In case goods are received in lots or installments, ITC will be allowed to be availed when the last lot or installment is received.
6. In case recipient fails to pay the supplier towards supply of goods and/or services within 180 days from the date of invoice, ITC already claimed by recipient will be added to output tax liability and interest to be paid on such tax involved. (Not apply in case of supply where RCM is involved)
Note: on payment to supplier, ITC will be again allowed to be claimed
7. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good.
8. Time limit to claim ITC against an Invoice or Debit Note is earlier of below dates: The due date of filing GST Return for September of next Financial year OR date of filing the Annual Returns relevant for that Financial year.
9. No input tax credit shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, willful misstatement or suppression of facts.
10. Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers, shall not exceed 10 per cent. of the eligible credit available. (will discuss the same in detail later on :-))
Apportionment of credit:
According to Section 17 of CGST Act, 2017, there were some case where there is need of apportionment of GST credit which are as follows:
1. Where in case goods or service is used for business as well as for other purposes then the ITC shall be restricted to the extent of such supply is attributable to the purposes of his business.
2. Where in case goods or service is used for the purpose of executing taxable supply as well as for exempt supply then in that case the ITC shall be restricted to the extent of such supply is attributable to taxable supply.
Note: For the purpose of this particular point Zero Rated Supply shall be treated as taxable supply hence, ITC attributable towards Zero Rated Supply shall be allowed to the registered dealer.
Note: There are 2 Rules were also there i.e. Rule 42 and 43 of the CGST Rule, 2017 these rules has a seperate part of discussion which deals with the Manner of determination of input tax credit in respect of inputs or input services and reversal thereof and Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases respectively.
3. This point is exclusively for Banking and Financial Institution they have the option to avail fifty percent of eligible ITC instead of apportionment of credit between exempt and taxable supply.
Note: once option exercise shall remain for the balance part of Financial year
Note: The restriction of fifty percent shall not be eligible in case of supply from one person to another having the same PAN.
Ineligible items for ITC
There are some cases where the ITC shall not be allowed (i.e. Blocked Credit) these are as follows:
Input tax credit can be claimed for motor vehicles or conveyance only when they are having seating capacity of more than 13 persons (Including Driver) or used for making a further supply of such vehicles or conveyances or transportation of passengers or imparting training or for transportation of goods.
Note: GST paid on the Services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft specified above shall not be allowed as Input Tax Credit except in the case of manufacturer of such vehicles, vessels or aircraft.
Tax paid on the expenses related to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft, life insurance and health insurance can be claimed as input tax credit only when inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply.
Similarly, Tax paid on the expenses relating to membership of a club, health and fitness centre is not eligible for input tax credit.
Tax paid on the Expenses related to travel benefits extended to employees on vacation such as leave or home travel concession shall be available, where it is obligatory for an employer to provide to its employees under any law for the time being in force.
Works contract services, when supplied for construction of an immovable property, cannot be claimed as input tax credit. However, work contract services can be claimed as an input tax credit when it is an input service for the further supply of works contract service.
Goods or services received by a taxable person for construction of an immovable property on his own account or even when it’s used in the course or furtherance of business cannot be claimed as input tax credit. Under GST Act, construction includes re-construction, renovation, additions or alterations or repairs.
Goods or services received by a non-resident taxable person except on goods imported by him is not eligible for input tax credit.
Goods or services used for personal consumption are not eligible for input tax credit.
Input tax credit is not available for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Goods or services or both on which tax has been paid under the Composition Scheme will not be eligible for input tax credit.
In conclusion, although it’s not easy to conclude such a vast topic but In my opinion GST is one of the biggest fiscal reforms that our country has witnessed. It is a unified taxation system in a federal country like India.
Though it is quite mindstorming task to make the implementation and to execute the proper setoff mechanism for the credit of tax which was paid on input but on the other hand it integrate all the different types indirect taxes, through introduction of GST we can claim the credit on the tax paid on input services and can set off with the tax paid on output supply of goods as well and vice versa.
At the end I must say this writeup will help you to understand the concept of Input Tax Credit under the GST and the roll out of GST may lead to greater compliances but along with this it provides transparency and increases the revenue for the Government.
Author– CA Gaurav Bansal is Co-Founder of Lectern India Private Limited and he can be contacted in case of any concern or suggestion on whatsapp his numberd which are 9599892101 / 8168064194.