ITC Mechanism under GST

CA Shobhit Goel

Uninterrupted and seamless chain of ITC is one of the key features of GST. ITC is a mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is ‘tax on tax’. Under the present system of taxation, credit of taxes being levied by Central Government is not available as set-off for payment of taxes levied by State Governments, and vice versa. One of the most important features of the GST system is that the entire supply chain would be subject to GST to be levied by Central and State Government concurrently. As the tax charged by the Central or the State Governments would be part of the same tax regime, the credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.

Goods and Services Tax (GST) would mitigate such cascading of taxes. Under this new system, most of the indirect taxes levied by Central and the State Governments on supply of goods or services or both, would be combined together under a single levy. The major taxes/levies which are going to be clubbed together or subsumed in the GST regime are as under:

Central Taxes	State Taxes
· Central Excise Duty [including additional excise duties, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955] · Service tax · Additional Customs Duty (CVD) · Special Additional Duty of Customs (SAD) · Central Sales Tax ( levied by the Center and collected by the States) · Central surcharges and cesses (relating to supply of goods and services)	· Value Added Tax · Octroi and Entry Tax · Purchase Tax · Luxury Tax · Taxes on lottery, betting & gambling · State cesses and surcharges · Entertainment tax (other than the tax levied by the local bodies) · Central Sales Tax (levied by the Center and collected by the States)

♦ GST comprises of the following levies:

– Central Goods and Services Tax (CGST) [also known as Central Tax] on intra- state or intra-union territory without legislature supply of goods or services or both.

– State Goods and Services Tax (SGST) [also known as State Tax] on intra- state supply of goods or services or both.

– Union Territory Goods and Services Tax (UTGST) [also known as Union territory Tax] on intra-union territory supply of goods or services or both.

– Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] on inter- state supply of goods or services or both. In case of import of goods also, the present levy of Countervailing Duty (CVD) and Special Additional Duty (SAD) would be replaced by integrated tax.

– The protocol to avail and utilize the credit of these taxes is as follows:

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

♦ Some of the technical aspects of the scheme of Input Tax Credit are as under: –

–  Any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business.

–  The pre- requisites for availing credit by registered person are:

√ He is in possession of tax invoice or any other specified taxpaying document.

√ He has received the goods or services. “Bill to ship” scenarios also included.

√ Tax is actually paid by the supplier.

√ He has furnished the return.

√ If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received.

√ He should pay the supplier, the value of the goods or services along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 2(1) & (2) of ITC Rules]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed

♦ Documents on the basis of which credit can be availed are:

√ Invoice issued by a supplier of goods or services or both

√ Invoice issued by recipient along with proof of payment of tax

√ A debit note issued by supplier

√ Bill of entry or similar document prescribed under Customs Act

√ Revised invoice

√ Document issued by Input Service Distributor

– No ITC beyond September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier

– The Input Service Distributor (ISD) may distribute the credit available for distribution in the same month in which, it is availed. The credit of CGST, SGST, UTGST and IGST shall be distributed as per the provisions of Rule 4(1) (d) of ITC Rules. ISD shall issue invoice in accordance with the provisions made under Rule 9(1) of Invoice Rules.

– ITC is not available in some cases as mentioned in section17 (5) of CGST Act, 2017. Some of them are as follows:

√ Motor vehicles and other conveyances except under specified circumstances.

√ Goods and/or services provided in relation to: Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances; Membership of a club, health and fitness center; Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law; Travel benefits extended to employees on vacation such as leave or home travel concession;

√ Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;

√ Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

√ Goods and/or services on which tax has been paid under composition scheme;

√ Goods and/or services used for private or personal consumption, to the extent they are so consumed;

√ Goods lost, stolen, destroyed, written off, gifted, or free samples;

♦ Special circumstances for ITC:

–  ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier.

– In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on transaction value of the supply is more, the same would have to be paid.

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