Introduction

Input Tax Credit is one of the most significant features of the GST Regime which provides a solution to avoid payment of ‘tax on tax’ also known as cascading of taxes. As the entire supply chain is subject to the same tax, tax paid at every stage would be available for set off for payment of tax at successive stage. The Concept of Input Tax credit (hereinafter ITC)  is not fully new as it existed in the pre-GST indirect taxes system i.e Service tax, Cenvat Credit, Modvat Credit The earlier provisions restricted the ‘credit’ only in respect of inputs and input services used in or in relation to manufacture of the final product (or) for providing a taxable service.However s.16 of the GST Act wides the scope of ITC and the present input tax credit under CGST Act comes out with a comprehensive scheme to enable the supplier of goods and services (or) both to take input tax credit for supply used or intended to be used in the course of or furtherance of business. The restrictions imposed under the earlier Acts are removed in GST law and the scheme has provided wider scope to avail permissible credit.

Origin of Beneficiary Schemes  

The fact that the present scheme under GST is different from the earlier beneficiary schemes such as proforma CREDIT scheme, setoff scheme, modvat scheme and cenvat credit scheme is briefly explained below:

When the traders were representing to the government, that the cascading effect of input tax on  the cost of final product was affecting their business, the government thought over the issue and introduced for the first time the scheme called ‘proforma credit scheme’ which gave the benefit of taking of credit in respect of raw materials which were falling under the same tariff heading as in the case of final product and which were used in manufacture of such final product.  Since under the erstwhile central excise tariff there were very few items which were covering such aspect of the proforma credit scheme, the scheme per se was not successful more so because of the administrative cost of implementing the scheme for assessee was much more than the benefit that would accrue on account of this scheme itself.

Subsequently when the set off scheme was introduced, later to the introduction of Tariff item 68 under erstwhile Central Excise Tariff. Again this scheme was not a successful one, as in most of the cases the manufacturers were not using  inputs falling under tariff item 68. When the government appointed L.K. JHA Committee to recommend a comprehensive credit scheme, taking into account the advantages of earlier scheme and disadvantages of the earlier scheme and for introducing a comprehensive scheme the committee recommended a scheme called MANVAT which would enable availment of credit by an assessee at the last stage. The government accepted the recommendation with certain modifications and introduced a modified value added tax scheme which scheme covered gradually all items in the tariff except certain specific goods/chapters. Subsequently the MODVAT Scheme converted into cenvat credit scheme which has given the way to the present input credit scheme under GST.

Capital goods were also covered under the earlier schemes and were specifically defined while proforma credit scheme covered raw materials, Modvat/Cenvat schemes covered inputs used in or in relation to manufacture and read with Finance Act 1994 covered inputs/input services used for providing service and also capital goods used in such activities. The present GST covers, inputs and input services and capital goods (which are defined differently) which are used in the course of business or in furtherance of business thus enlarging the scope of eligibility to credit.

Conditions for ITC

The conditions related to taking of such credit are relevant and any non-compliance of the conditions would result in denial of the credit as such.

  • The first condition states that the registered person who intends to take credit should be in possession of tax invoice or a debit note issued by the supplier registered under the act or such other taxpaying documents as may be prescribed.

This condition is a simple condition and this can be satisfied as every registered person is expected to remove goods/services only on payment of tax under valid tax invoices.

  • The second condition states that he should receive the goods and services or both.

Though the second condition looks simple, it shall also include cases where there is a deeming provision for receipt of goods. Though there is not a direct deeming provision, in certain cases a particular situation is treated as ‘receipt of goods’ even if goods and services have not been received physically. One can take a legal stand that if there is deeming provision or supply logical consequences will follow (as held by Supreme Court) and in such cases goods and services are deemed to have been received. The receipt of the goods can also be proved through stores registers/e-way bills etc.

  • The third condition states that the tax charged in respect of such supply which is being taken as credit must have been actually paid to the government either in cash or through utilization of input tax credit admissible in respect of such supply.

 This condition is a little bit vague because the recipient of goods and service may not be in a position to find out whether the input tax paid on the goods or services has actually been paid by the supplier to the government.  It is not possible for the recipient in each and every case to verify from the supplier the factual position and no supplier is required to satisfy the recipient on the payment of tax to the government. The government has not laid down any mechanism to ensure that the recipient is not deprived of the credit on account of ineligibility of such cases where he is not able to satisfy the government that the supplier had actually paid tax or not.

However, it must be noted that if the supplier has contravened any provision related to ITC by fraud, collusion, misstatement or suppression of any fact then the recipient may be deprived of ITC.  If the proceedings are initiated against the supplier on the said grounds for demand of tax and imposition of penalty, the recipient must therefore, put a mandatory condition in his contract, agreement or purchase order with the supplier to the effect that in the event of ITC being denied to them on account of supplier’s conduct, the said amount attributable to such ITC is to be reimbursed to the recipient’s account.

  • The fourth condition mandates that the registered person who is intending to take credit must have furnished the returns under section 39 of the Act.

It is a matter of law & fact that the eligibility to credit depends upon the restrictions, prohibitions imposed under the Act itself under s.17 of the Act. The eligibility to credit based on  s.16 &  s.17 envisages that the registered person who  takes full credit and later on he finds himself in a position where the inputs or input services or capital goods have been used partly for furtherance of business or in the course of business and partly for other purposes, he is required to reverse the credit in terms of CGST Rule 42 read with Rule 43.

Exempt Supply & Non Taxable Supply

A dispute that may arise in this context, what exactly is ‘exempt supply’?  s. 2(47) of the Act defines exempt supply as covering NIL rated supply and supplies where the tax is exempted fully and it also includes nontaxable supply. A question further arises, what exactly is ‘nontaxable supply’? s. 2(78) defines nontaxable supply as such supplies which are not taxable under this Act.

Now the question is when to bring a particular supply under nontaxable supply?

Primarily it should be satisfied that there is a supply. Supply means transfer/ disposal of taxable goods/ services for consideration in the course of business or in furtherance of business. Whether at all a particular transaction can be called a supply under the Act is to be determined primarily.

Secondly, if that supply satisfies the conditions as prescribed under the CGST Act then the question comes why it is not taxable and whether it can be called a nontaxable supply?  In other words, when a particular transaction cannot be construed as supply at all merely under the Act because no tax could be paid, in my view it cannot be brought under the scope of nontaxable supply. For Example, Schedule III to CGST Act gives specific transaction which are neither to be treated as supply of goods nor supply of service. Therefore, when these transactions cannot be considered as supply at all under the Act merely because no tax will be paid as such transactions, such transactions cannot be brought under the scope of  nontaxable supply. As we analyse this aspect, we need to also consider the nature of Zero rated supplies in accordance with various provisions of the IGST and the CGST act.

It may be noted that zero rated supplies cannot be construed either as exempt supply nor as non taxable supply as the section 16 of IGST Act read with section 17 of CGST Act allows ITC attributable to zero rated supply subject to restrictions under sec.18 of CGST Act and the Act wherever it refers to taxable supplies includes therein zero rated supplies also.

Thus, exempt supply would refer to such of those transactions which qualify as supply under the Act.  But still they are not taxable such as alcoholic liquor for human consumption, petroleum products etc which are not brought under the scope of GST at present, though they are otherwise supplies and they would satisfy the definition of supply under GST Act.

Reversal of Credit

On the question of reversal of credit under s.17 read with CGST Rules 42 and 43, the provisions have come out with clarity in comparison to earlier provisions and have taken note of the exemptions wherever granted and where there is no requirement of reversal of credit. By virtue of the formula prescribed and the provisions it is also clarified as to how to compute the amount of credit to be reversed by clarifying the symbols used in the formula.  s.17 of the Act practically covers all inputs and Input services which are used in the course of business or for furtherance of business except certain specific exclusions which are prescribed under sub section (5) of s.17.

Interesting aspect in these restrictions is that the section provides for taking of credit in respect of goods and services where it is obligatory for employer to provide the same to his employees under any law for time being in force.  For example under Factories Act, every employer is required to provide canteen facilities to the employees/ workers  where the number of workers is 250 and more, though the restriction specifically says that in respect of services related to supply of food and beverages and outdoor catering etc., no credit is admissible.

Immovable Property vis a vis Plant & Machinery

The restriction under s.17 denies the benefit of credit in respect of works contract services when supplied for construction of an immovable property other than plant and machinery  except where it is an input service for further supply of works contract service or goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account. It is clarified under explanation what is construction and from the explanation given under the section it is seen that immovable property can be inferred to cover only such of those properties other than plant and machinery including such of those properties which are coming under the category of Land and building or any other civil structure telecommunication towers; and pipelines laid outside the factory premises.

The explanation indirectly gives a clue as to how one can differentiate  between immovable property and plant and machinery.  “Plant and machinery” has been referred to as 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 excluding such of those categories as above.  The issues regarding denial of credit on structural supports even when used for plant and machinery that frequently emerged during erstwhile provisions are now legally resolved.Therefore, even structural element used for plant and machinery and which are not structural element to any other immovable property would be eligible for the credit.

Conclusion

Interesting point in the scheme of GST is that the provisions use different expressions at different stages. For example, while talking of eligibility to credit, the section uses the expression ‘taking’ of credit.  But while dealing with recovery of credit on account of wrong credit, or imposition of penalty on account of availment of wrong credit, the provisions use the expression ‘availment’ or ‘utilization’. In other words, GST Act appears to make a distinction between ‘taking’ of credit and ‘availment’ of credit or ‘utilization’ of credit.  While taking of credit relates to mere making of entries in the electronic credit register or merely entering in the books of account, the availment or utilization of credit would refer to ‘making use of’ credit or ‘utilization’ of credit.  In other words the provisions appear to use the expression ‘’availment’’ and ‘utilization’ synonymously as against the expression of ‘taking’ of credit. The meaning of these expressions must be kept in mind in the case of any dispute under the Act.

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