The ‘Goods and Services Tax’ or ‘GST’ regime has undoubtedly transformed the indirect tax landscape in India. It has integrated a complex mixture of the central and state level tax laws into a single unified system. The mechanism of ‘Input Tax Credit’ or ‘ITC’ has been introduced in the GST framework and lies at its heart. It is a provision designed not only to prevent the cascading effect of the taxes but also to ensure seamless credit flow across the supply chain. However, ITC is not a substantive right, rather it is a statutory benefit or a concession available to a person registered under the Central Goods and Service Tax Act, 2017 (“CGST Act, 2017), subject to certain terms and conditions.
The mechanism of Input Tax Credit allows the registered person, i.e., the GST taxpayer, to deduct the GST amount which he has already paid on inputs from the GST amount which is payable on the outputs. In simpler terms, if A buys thread worth ₹1,00,000/-, such that this amount is inclusive of GST @18% i.e., ₹ 18,000/-, then we can say that, ₹18,000/- paid on inputs. Now, A processed the thread in his factory and sold shirts worth ₹2,00,000 on which he charges GST @18% i.e., ₹36,000 GST from his client, here ₹36,000/- is payable on the output. There after which, A deducted the ₹18,000 already paid from ₹36,000 collected, as a result he is eligible to claim input tax credit of ₹18,000 from the government.
Statutory Foundation:
As per Section 2(62) of the CGST Act , 2017, “Input tax” means the GST charged on goods or services which are supplied to a registered person. This is inclusive of the tax paid under reverse charge mechanism. The credit which will be availed on such GST is the “Input Tax Credit”. The fundamental question that arises is, who is eligible to claim such credits?
Only those person who are registered under Section 25 of the CGST Act, 2017 can avail “Input Tax Credit”. The statutory ability to claim the credit gets triggered only on registration under the act.
Section 16(1) of the CGST, 2017 went a step ahead by laying out that, credit may be claimed even on those goods or services which are used or intended to be used in the course or furtherance of business. However, this is subject to compliance with conditions and restrictions that have been laid out under the CGST Act and Rules. Moreover, the manner which has been prescribed under Section 49 of CGST Act, 2017 has to be followed for availing and utilising the credit.
Interestingly, the GST black letter law does not define the term “in the course or furtherance of business”. However, the courts across India have interpreted it broadly, such that it covers all those activities which are integrally connected with business purposes. But the activities which are purely charitable or for personal use, have been excluded from its ambit.
Is ITC an inherent right?
The fiction usually arises when deciding whether availing ITC is an inherent right of the registered person or is it just a statutory concession. The courts have time and again held that, ITC is not a vested commercial right, rather it is a benefit granted by the statute. If there is a failure in compliance with the statutory frameworks, then the right to avail ITC can be denied. Such denial can result, even when the failure to comply is due to procedural lapse. Morever, a hard cut off for availing the credit has been laid out under Section 16(4) of the CGST Act, 2017. In accordance with the said provision, ITC has to be claimed before 30th November following the end of the financial year to which the invoice or the debit note pertains, or the date on which the annual return is furnished, whichever is earlier. The deadline set out in the said provision has been strictly enforced through multiple ruling across the country.
Till now what we have discussed is just the substantive eligibility. The pre-condition to this is the procedural compliance which in itself is critical. As per Section 16(2)(a) of the CGST Act, 2017, the registered person must have the tax invoice in his possession. There has to be an actual receipt of the goods or supply and the tax on the inputs must have been paid to the government.
Restriction on ITC
The CGST Act, 2017 contains both proportionate restriction rules and absolute denial provisions. Section 17 of the CGST Act, 2017 lays out the framework under which the claim of ITC is restricted. Section 17 (2) of the CGST Act, 2017 has introduced the concept of “apportionment”, i.e., if the inputs are used for both taxable and exempt supplies, then the credit will be allowed only for the taxable portion. The term ‘exempt supply’ has been widely defined under Section 2(47) of the CGST Act, 2017 , and includes nil-rated goods and services, wholly exempt items under GST, and non-taxable supplies.
Section 17(5) of the CGST Act, 2017 talks about blocked credits, that basically means that some of the registered persons are prima facie ineligible to claim ITC. However, there are two particular clauses of this provision which has created a very interesting puzzle. First, clause (c), which makes ‘works contract services’ for construction of immovable property ineligible for ITC, unless it is for further supply of works contract services. It is pertinent to note that the term ‘immovable property’ here does not include ‘plant and machinery’, that basically means that, ‘works contract services’ for construction of ‘plants and machinery’ is not ineligible for ITC. Second is clause (d), as per which the registered person cannot avail ITC for goods or services for construction of immovable property on his own account, even if the construction is for business purposes. Again, this is not applicable to construction of ‘plants and machinery’.
Interestingly both the terms, i.e., ‘construction’ and ‘plants and machinery’ has been defined under Section 17 of the CGST Act, 2017. The term “Construction” has been given an inclusive definition such that it includes reconstruction, renovation, additions, alterations, and even repairs. The explanation to the said provision defines the term “plant and machinery” as apparatus, equipment, and machinery fixed to the earth, which are used for making outward supplies, and this includes foundations and supports. However, the definition of ‘plant and machinery’ explicitly excludes land, buildings, and other civil structures. Undoubtedly, Section 17(5)(d) of the CGST Act, 2017 uses “plant or machinery” in a broader linguistic choice, which in turn enables the registered person to claim ITC in wider circumstances.
Property Related Activities:
Property related activities, particularly, real estate, leasing and construction, face differential treatment under the GST regime. When the property is sold after completion, basically after issuance of completion certificate or after the first occupation, then the sale is not considered a “supply” under GST. That means, no GST will be payable on the sale, hence there will be no claim ITC. But when it comes to an under-construction sale, i.e., where the payment has been made before occupation, then the sale is treated as a “supply” under GST. Therefore, the provisions of GST law will apply and ITC can be availed.
Interestingly, property related activities such as renting and leasing of properties are always considered as ‘supply’, therefore the registered person is eligible to claim ITC on it. It is pertinent to note that, the restrictions as laid out under Section 17(5) of the CGST Act, 2017, is applicable here. For example, XYZ Pvt Ltd. constructed a building and leased it to a bank for a period of 5 years. This activity of leasing will generate a rental income for the company, which will make it eligible for ITC. But the ITC claim may be denied under Section 17(5) of the CGST Act, 2017, unless the building is classified as “plant or machinery”.
However, what happens if the registered person has already claimed for depreciation on the “plant and machinery”? Can he avail ‘Input Tax Credit’ on that portion? The clear cut answer to this is, No. If the depreciation has already been claimed on the “plant and machinery” under the Income tax Act, then the registered person cannot claim ITC on the GST component. The reason behind this is to prevent the registered person from enjoying dual benefits, i.e., reducing liability on direct tax through depreciation and on indirect tax through ITC.
Conclusion:
The framework for ‘input tax credit’ is central to the GST regime in Inda and is undoubtedly very unique. To a great extent, the principle of ITC resembles the VAT credit system in the European Union. Particularly, the restrictions enshrined in Section 17(5) of the CGST Act, 2017, is similar to the VAT credit restrictions in EU, though there are certain variations.
Since the introduction of the GST laws, the courts have seen a rise in indirect tax litigation with respect to ITC. Some of the major issues that have been addressed by the courts include: denial of ITC to the registered person, restriction due delayed claims, classification as ‘construction’ or ‘plant and machinery’, etc. The courts have generally shown a sympathetic approach, however, the time-limit adherence and exceptions have been upheld by the judiciary time and again.
That being said, it is safe to conclude stating that, ITC is a powerful cost saving tool, but it is the responsibility of the registered person to adhere to the time limits and ensure compliances. If not aware, the registered person may become ineligible to claim ITC, thereby making it ‘dead capital’ which got locked in tax paid.
Author Bio
Madam,
Why the beneficial right of ITC is not taken care of by the Deptt, in the case of genuine purchaser even after repeated cases of Supreme Court in favour of assessee in Commissioner of Trade &Taxes v. Arise India Ltd.(2018) 29 J.K.Jain’s GST & VR 22 & in Commissioner of Trade and Tax, Delhi v. Shanti Kiran India (P) Ltd.(2025) 44 J.K.Jain’s GST & VR 280 of VAT Regime.
What is the remedy in this regard.
Ca Om Prakash Jain s/o J.K.Jain Jaipur
Tel:9414300730/9462749040/01414-3584043