Input Tax Credit Provision and rules under GST

After implication of GST, Most of query raised related to INPUT TAX CREDIT (ITC) like on which goods and service ITC available or not, if available then how much, Availability of ITC on Motor vehicles, how much ITC available on goods and service which partly used for business or partly used of any purpose.

Input Tax Credit (ITC) provision and Rules are being discussed in this article .

Eligibility and Conditions for Taking Input Tax Credit (ITC) – Section 16

(1) Every registered person shall, subject to such condition and restrictions as may be prescribed and in the manner as specified in section 49, be entitled to take credit of input tax charged any supply of goods and service or both to him which are used or intended to used in course of furtherance of his business and said amount shall be credit to the electronic Cash Ledger.

(2) Notwithstanding anything contained in the section, no registered person shall entitled to ITCin respect to supply of goods and services or both to him unless

he is in possession of tax invoice or debit Note .

he has received the goods and services or both.

Provided that where goods against an invoice are received in lot or installment, receiver (RP) shall entitled ITC upon receipt of last lot or installment.

Provided further that where a recipient fails to pay to supplier of goods or service or both, other than supplies on which tax is payable on RCM Basis, the amount towards the value of supply along with tax payable on thereon within 180 days from the date of invoice by supplier, an amount equal to the ITC availed by recipient shall added to his output liability along with interest.

Provided also Input Tax Credit (ITC) available upon the payment of amount toward value of goods or service or both along with tax payable thereon.

(3) where Registered person  has claimed Depreciation on Input Tax Credit (ITC) component of cost of capital goods and P&M under provision of IT ACT 1961. ITC credit not

(4) A Registered person  shall not be entitled to take Input Tax Credit (ITC)in respect of any invoice or debit not after the due date of furnishing of the return for the month of September following the end of financial year to which invoice relates or furnishing of relevant annual return, whichever is

Availment of input tax credit on the tax paid under RCM.

The input tax credit on the tax that is paid under RCM will be available only after making payment. Hence it will be available in the month in which the RCM has been admitted and paid and filed the necessary return as envisaged in Sec.16 of CGST Act,2017.

Recent updated case law :-

(AAR-WEST BENGAL)  – Senco Gold Ltd dt 08 May 2019

GST Act and rules made there under does not restrict the recipient from claiming the input tax credit when consideration is paid through book adjustment, subject to the conditions and restrictions as maybe prescribed and in the manner specified in Sections 16 and 49 of the GST Act.

Apportionment of credit and blocked credits – Section 17

1. where the goods or service or both are used partly business purpose or party for other purpose, amount of credit shall be restricted to so much of input tax as is attributable to purpose of his business.

2. where the goods or service or both are used partly taxable supplies including zero rated supplies and partly exempt supplies, the amount of ITC shall be restricted to so much amount of ITC as Attributable to Said Taxable supplies including Zero rated

3.  Value of Exempt Supplies = Exempt Goods and service + Supplies liable to RCM + Transactions in securities + sales of land + Sales of building subject to clause (b) of paragraph 5 of Schedule II.

4. A Banking Co. or Financial institution including a NBFC, engaged in supply service by the way of accepting deposit , extending loans and advance shall have the option either comply with provision of sub section ( 2), or avail of every month an amount equal to 50% of eligible ITC in the monthand rest shall be

Provided that the restriction of 50% shall not apply to the tax paid on supplies made by One RP to another RP having same PAN.

5. Notwithstanding anything contained in sub section (1) of Section 16 or subsection (1) of section 18, ITC shall not be available in respect of following namely:

(a) Motor vehicles and other conveyances Except when they are used –

(i) For making the following taxable supplies, Namely :

Further supply of such vehicles or conveyance

Transportation of passenger

Imparting training on Driving, Flying

(ii) For transportation of Goods.

(b) Following Supply of goods and service

(i) Membership of a club, health and fitness center.

(ii) Personal service like Food and beverage, outdoor catering, beauty treatment, health service, plastic surgery.

(iii) Rent –a-cab, Life insurance, Health insurance.

(iv) Travel benefit extended to employees on vacations

(c) Work Contract Service when Supplied for Construction of Immoveable Property ( other than P&M), except where it is an input service for the further supply of work Contract Service.

(d) Goods or service or both received by a taxable person for the construction of an immovable property (other than P&M) on his account including when such goods and service or both used in course or furtherance of business.

Here for the purpose of clause (c) and (d) “Construction” Includes Renovation, alternation, re- construction, or alternation, or repairs, to the extent of capitalization, to the said immovable properties.

(e) Goods or service or both used on which tax has been paid U/s 10.

(f) Goods or service or both received by Non-resident Taxable person except on goods imported by him.

(g) Goods or service or both used for personal consumption.

(h) Goods lost, stolen, destroyed, written off, or disposal off by way of gift or free samples

(i) Any tax paid in accordance with provisions of section 74, 129 and 130.

Updates – Amendments / AAR Rulings

A. Changes in ITC eligibility of motor vehicles effective from 01.02.2019.

ABSTRACT OF Section 17(5) BLOCKED CREDIT (APPLICABILITY AFTER 01-02-2019 ) FOR MOTOR VEHICLE

Motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—

(i) further supply of such motor vehicles; or

(ii) transportation of passengers; or

(iii) imparting training on driving such motor vehicles;

With the introduction of new provisions w.e.f. 01/02/19, ITC on renting, leasing and hiring of motor vehicles have been disallowed only for vehicles having capacity upto 13 seats. (Section 17(5)(b)(i))

B. No ITC  allowed on general insurance, servicing, repair and maintenance services used in relation to the motor vehicles on which ITC is blocked.

C. it has been amended  (w.e.f 01 Feb 2019 )  to allow ITC in respect of food and beverages,health services, etc. , where the provision of such goods or services or both is obligatory for an employer to provide to its employees under any law for the time being in force

D Rent a cab

Prior to CGST Amendment Act, the ineligibility of ITC was for services under the head ‘rent a cab’. ‘Rent a cab’ being a wide term included all types of motor vehicles which were hired for transportation of employees.

This was further confirmed by Advance Ruling No. HAR/HAAR/R/2018-19/04 by Haryana Authority for Advance Ruling stating that the words ‘Rent a cab’ implied renting of any commercial vehicle for transportation of passengers and thus ITC on such services is ineligible.

E. (AAR-WEST BENGAL) -Tewari Warehousing Co. (P.) Ltd. Dt 18 Feb 2019

Applicant is constructing a warehouse on a land taken on lease for a period of thirty years using pre-fabricated technology – It sought advance ruling on question: whether input tax credit is admissible on inward supplies for construction of said warehouse.

It is held that the warehouse being constructed is immovable property. The input tax credit is, therefore, not admissible on the inward supplies for construction of the said warehouse, as the credit of such tax is blocked under section 17(5)(d) of the GST Act.

F. Authority for Advance Ruling -Rajasthan in the case of M/s Rambagh Palace Hotels Pvt. Ltd. 

It is held that input tax credit in general is not available for construction, reconstruction, renovation, addition, alteration or repair of an immovable property  even when such goods or services or both are used in course or furtherance of business.

G. Circular no. 92/11/2019-gst [f.no. 20/16/04/2018-GST], dated 7-3-2019 issued  for clarification on various doubts related to treatment of sales promotionschemes under GST

Free samples and gifts:  it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration..

Buy one get one free offer:- it is clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

Discounts including ‘Buy more, save more’ offers:- It is  clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

Secondary Discounts :- There is no impact on availability or otherwise of ITC in the hands of supplier in this case.

ITC Rules 2017

Manner of determination of ITC and its reversal.

Rule 42 (1) ITC in respect of input or input services, which attracts the provisions of sub section (1) and (2) of section 17,(Given Above) shall be attributed to the purpose of business or for effecting taxable supplies in following manner. Namely,-

(a) Total input tax involved on input and input services in a tax period, be denoted as“T’

(b) The amount of input tax out of ‘T”, attributable to input or input services intended to beused exclusively for the purpose other than business, be denoted as “T1”

(c) The amount of input tax out of ‘T”, attributable to input or input services intended to beused exclusively for effecting Exempt supplies, denoted as “T2”

(d) The amount of input tax out of ‘T”, attributable to input or input services on which credit isnot available under sub section (5) of section 17, denoted as “T3”

(e) Amount of ITC credited to Electronic credit ledger of RP, be denoted as “C1”calculated as- C1 =T-(T1+T2+T3)

(f) The amount of ITC attribute to input or input services intended to be or exclusively foreffecting taxable supplies other than exempted but including Zero rated supplies denoted as “T4”

(g) T1,T2,T3, and T4 shall be determined and declared by registered person at the invoice levelin GSTR 2 (In the Colum 3&4(B2B) of in GSTR-2 “Äction”.

(h) ITC left after attribution of input tax credit under clause (g) shall be called common credit, be denoted “C2” and calculated as –C2= C1-T4

(i) Amount of ITC attributable towards exempt supplies, be denoted as “D1”and calculatedas D1= (E/T)*C2

Here – ‘E’ is aggregate value of exempt supplies during the tax period.

‘T’ is aggregate value of total turnover of registered person during the tax period.

(j) the amount of credit attributable to non-business purpose if common input and input services are used partly business or partly non business purpose be denoted as “D2”and shall be equal to 5%of C2(common credit) and

(k) the reminder of the common credit shall be eligible ITC attributable to the purpose of business and Taxable supplies and shall be denoted as “C3” where,-C3= C2-(D1+D2)

(l) the amount “C3” shall be computed separately for ITC of CGST, SCGS,UGST, and

(m) The amount equal to aggregate of D1 and D2 shall be added to the output tax

Presentation of ITC rules Summary Rule (42)

Total ITC (Input & input Service) = T1

Republished with amendments carried out by Team Taxguru and CA Anita Bhadra