Input Tax Credit under GST

By | September 3, 2016

Input Tax Credit  provision of GST

Goods and Service Tax

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Input Tax Credit (ITC) is the core concept of GST as GST is destination based tax. ITC avoids cascading effect of taxes.

Meaning of Input Tax Credit under GST

Input Tax Credit is eligible only when it is credited to electronic credit ledger of taxable person.

“Input tax credit” means credit of ‘input tax’ as defined in section 2(57) – clause 2(58) of GST Model Law, 2016.

“Input tax” in relation to a taxable person, means the {IGST and CGST}/{IGST and SGST} charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under section 7(3)- clause 2(57) of GST Model Law, 2016.

 

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The definition of ‘input tax’ is very wide. Any business related expenditure is ‘Input Tax’ eligible for ITC, except where there are restrictions.

Manner of taking input tax credit

Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 35, be entitled to take credit of input tax admissible to him and the said amount shall be credited to the electronic credit ledger of such person – clause 16(1) of GST Model Law, 2016.

“Electronic credit ledger” means the input tax credit ledger in electronic form maintained at the common portal for each registered taxable person in the manner as may be prescribed in this behalf – clause 2(41) of GST Model Law, 2016.

Credit of input tax at the time of registration – A person who has applied for registration under the Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall, subject to such conditions and restrictions as may be prescribed, be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act – clause 16(2) of GST Model Law, 2016.

This provision also applies if a taxable person takes voluntary registration even if his turnover is below exemption limit – rule 16(2A) of GST Model Law, 2016.

“Input” means any goods other than capital goods, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business – clause 2(54) of GST Model Law, 2016.

“Outward supply” in relation to a person, shall mean supply of goods and/or services, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made by such person in the course or furtherance of business except in case of such supplies where the tax is payable on reverse charge basis – clause 2(72) of GST Model Law, 2016.

The amount of input tax credit shall be calculated in accordance with generally accepted accounting principles in such manner as may be prescribed – clause 16(4) of GST Model Law, 2016.

Input tax credit when person opts out of composition scheme -Where any registered taxable person ceases to pay tax under section 8 [which provides for composition scheme], he shall, subject to such conditions and restrictions as may be prescribed, be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under section 7 [on basis of transaction value] – clause 16(3A) of GST Model Law, 2016.

The amount of input tax credit shall be calculated in accordance with generally accepted accounting principles in such manner as may be prescribed – clause 16(4) of GST Model Law, 2016.

Input tax credit cannot be taken after one year from date of invoice or filing of annual return – A taxable person shall not be entitled to take input tax credit in respect of any supply of goods and/or services to him after the expiry of one year from the date of issue of tax invoice relating to such supply – clause 16(3A) of GST Model Law, 2016.

Further. a taxable person shall not be entitled to take input tax credit in respect of any invoice for supply of goods and/or services, after the filing of the return under section 27 for the month of September following the end of financial year to which such invoice pertains or filing of the relevant annual return, whichever is earlier – clause 16(15) of GST Model Law, 2016.

Proportionate ITC when party used for business or taxable supplies

Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes, the amount of input tax credit shall be restricted to so much of the input tax as is attributable to the purposes of his business – clause 16(5) of GST Model Law, 2016.

Where the goods and/or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting non-taxable supplies, including exempt supplies but excluding zero-rated supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero-rated supplies – clause 16(6) of GST Model Law, 2016.

The Central or a State Government may, by notification issued in this behalf, prescribe the manner in which the proportionate input tax credit is to be taken- clause 16(7) of GST Model Law, 2016.

“Exempt supply” means supply of any goods and/or services which are not taxable under this Act and includes such supply of goods and/or services which are specified in Schedule . . . of the Act or which may be exempt from tax under section 10 – clause 2(42) of GST Model Law, 2016.

“Taxable supply” means a supply of goods and/or services which is chargeable to tax under this Act – clause 2(97) of GST Model Law, 2016.

Zero rated supply – “Zero-rated supply” means a supply of any goods and/or services on which no tax is payable but credit of the input tax related to that supply is admissible. – – Explanation – Exports shall be treated as zero-rated supply – clause 2(109) of GST Model Law, 2016.

Merger, amalgamation or sale of business

Where there is a change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities, the said registered taxable person shall be allowed to transfer the input tax credit that remains unutilized in its books of account to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed – clause 16(8) of GST Model Law, 2016.

Negative list of goods and services ineligible for ITC

Though definition of input tax is broad, input tax credit shall not be available in respect of the following, as per clause 16(9) of GST Model Law, 2016.

Motor vehicles – Motor vehicles are not eligible, except when they are supplied in the usual course of business or are used for providing the following taxable services—

(i) transportation of passengers, or

(ii) transportation of goods, or

(iii) imparting training on motor driving skills.

Goods and services for personal consumption of employees – Goods and/or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee are not eligible.

Goods and services in works contract – Goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property are not eligible for ITC, other than plant and machinery.

“Principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods and/or services – clause 2(77) of GST Model Law, 2016.

“Agent” means a person who carries on the business of supply or receipt of goods and/or services on behalf of another, whether disclosed or not and includes a factor, broker, commission agent, arhatia, del credere agent, intermediary or an auctioneer or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not – clause 2(5) of GST Model Law, 2016.

The purpose of this provision is that the manufacturer/service provider/trader will not be entitled to avail Input Tax Credit of cement, steel and other material used in construction of office building or factory building and tax paid on input services.

The manufacturer can avail input tax Credit of plant and machinery received by him during execution of works contract.

The contractor who is undertaking works contract will be eligible to avail input tax credit of building material and input services as he is not ‘Principal’.

The issue will arise if the contractor gives some work on sub-contract basis. In that case, the contractor will be ‘principal’ as far as the sub-contractor is concerned and in that case, the contractor will not be eligible to avail input tax credit of GST paid by sub-contractor.

Thus surely is not the intention of provision and hence this clause has to be suitably amended to avoid litigation.

Goods used for construction of immovable property – Goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property are not eligible for ITC, other than plant and machinery.

Goods and services where GST is paid under composition scheme – Goods and/or services on which tax has been paid under section 8 (composition scheme) are not eligible for ITC.

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

Input Tax Credit of capital goods

There is no specific provision allowing ITC of capital goods. Thus, entire ITC of GST paid on capital goods will be available in first year itself, as these are ‘goods’.

Term ‘capital goods’ is defined in clause 2(20) of GST Model Law, 2016.

“Capital goods” means: —

(A) the following goods, namely:—
(i) all goods falling within Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the Schedule to this Act
(ii) pollution control equipment
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof;
(vii) storage tank and
(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis but including dumpers and tippers used (1) at the place of business for supply of goods; or (2) outside the place of business for generation of electricity for captive use at the place of business (3) for supply of services
(B) motor vehicle designed for transportation of goods including their chassis registered in the name of the supplier of service, when used for (i) supplying the service of renting of such motor vehicle; or (ii) transportation of inputs and capital goods used for supply of service; or (iii) supply of courier agency service;
(C) motor vehicle designed to carry passengers including their chassis, registered in the name of the supplier of service, when used for supplying the service of— (i) transportation of passengers; or (ii) renting of such motor vehicle; or (iii) imparting motor driving skills.
(D) Components, spares and accessories of motor vehicles which are capital goods for the taxable person.

 Input tax credit of tax not allowed if depreciation claimed on tax component

Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component – clause 16(10) of GST Model Law, 2016.

Thus, if net value of capital goods is Rs 100 lakhs and GST paid is 16 lakhs, the taxable person should claim depreciation in income tax only on Rs 100 lakhs.

 Removal of capital goods after use

In case of supply of capital goods on which input tax credit has been taken, the registered taxable person shall pay an amount equal to the input tax credit taken on the said capital goods reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods under sub-section (1) of section 15, whichever is higher – clause 16(15) of GST Model Law, 2016.

Requirements for availing Input Tax Credit under GST

As per clause 16(11) of GST Model Law, 2016, registered taxable person shall not be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless following conditions are satisfied—

(a) he is in possession of a tax invoice, debit note, supplementary invoice or such other taxpaying document as may be prescribed, issued by a supplier registered under this Act or the IGST Act
(b) he has received the goods and/or services
(c) the tax charged in respect of such supply has been actually paid to the credit of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 27.

Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or instalment.

For the purpose of clause (b), it shall be deemed that the taxable person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such taxable person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise – Explanation to rule 16(11) of GST Model Law, 2016.

It may be noted that every taxable person (supplier) is required to file electronic return every month as per clause 27 of GST Model Law, 2016.

However, the receiver (of goods and services) will not be eligible to take Input Tax Credit unless the supplier of such goods and services has paid the tax.

Taking input tax credit in respect of inputs sent for job work – Input tax credit is available in respect of goods sent for job work and brought back for further use.

 Input tax credit only after tax paid by supplier

One major provision is that the input tax credit will be available only when tax charged in respect of such supply has been actually paid to the credit of the appropriate Government.

For this purpose, a provision has been made of ‘provisional credit’ and ‘final credit’.

The provisional input tax credit will be available on basis of initial return filed by supplier of goods and services. This return is to be filed on or before 10th of the subsequent month. The receiver of goods and services is required to file return of receipt of goods and services by 15th of the subsequent month. Where the entries match with return filed by supplier, provisional input tax credit will be available, which can be utilised for payment of tax and filing of return by 20th of subsequent month.

However, if the supplier of goods and services fails to pay the tax (i.e. unless he files a ‘valid return’) the final input tax credit will not be available.

It may be noted that unless supplier of goods and services pays entire tax due, the return filed by him will not be ‘valid return’. Thus, partial payment by supplier will not entitle the receiver of goods and services to avail input tax credit.

Reversal of input tax credit if goods exempt or taxable person switches to composition scheme

Where any registered taxable person who has availed of input tax credit switches over as a taxable person for paying tax under section 8 (composition scheme) or, where the goods and/or services supplied by him become exempt absolutely under section 10, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such switch over or, as the case may be, the date of such exemption.

After payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse – clause 16(12) of GST Model Law, 2016.

The amount payable under section 16(12) shall be calculated in accordance with generally accepted accounting principles in such manner as may be prescribed.

Recovery of ITC wrongly taken

Where credit has been taken wrongly, the same shall be recovered from the registered taxable person in the manner as may be prescribed in this behalf – clause 16(16) of GST Model Law, 2016.

Transitional provisions of ITC at the time of switching

GST Model Law, 2016 makes detailed provisions for switch over from existing tax structure to GST. The provisions are summarized below.

Cenvat Credit carried forward – Eligible Cenvat credit can be carried forward – clause 143(1) of GST Model Law, 2016.

State VAT Credit carried forward – Eligible State VAT credit can be carried forward – clause 143(2) of GST Model Law, 2016.

Unvailed Cenvat Credit on capital goods – Unvailed Cenvat Credit on eligible capital goods not carried forward in a return can taken – clause 144(1) of GST Model Law, 2016

Unvailed State VAT Credit on capital goods – Unvailed State VAT Credit on eligible capital goods not carried forward in a return can taken – clause 144(2) of GST Model Law, 2016

Eligible duties and taxes on goods which were exempt prior to GST -Some goods are presently exempt from excise duty and hence Cenvat credit or State VAT credit was not available. Some of these goods may become taxable under GST. In such cases, input tax credit of specified duties paid on such inputs and inputs contained in semi-finished and finished which are in stock on the date of introduction of GST can be taken, if documents and records are available. The credit can be taken on basis of generally accepted accounting principles – clause 145 of GST Model Law, 2016.

Credit if taxable person switches from composition scheme to normal scheme and vice versa – A taxable person who was under composition scheme may shift to normal scheme of payment of GST. In that case, he can take credit of taxes paid on inputs and inputs contained in semi finished and finished goods which are in stock on the date of introduction of GST can be taken, if documents and records are available. The credit can be taken on basis of generally accepted accounting principles – clause 146 of GST Model Law, 2016.

If a taxable person switches from normal scheme to composition scheme under GST will have to pay an amount equal to taxes paid on inputs and inputs contained in semi finished and finished goods which are in stock on the date of introduction of GST – clause 147 of GST Model Law, 2016.

Exempted goods returned to place of business – If goods which were exempt earlier but now subject to GST are returned to place of business within 6 months from introduction of GST, these will be exempt from tax, if these are identifiable – – clause 148 of GST Model Law, 2016.

Duty paid goods returned to place of business – If goods which were dutiable earlier but now subject to GST are returned to place of business within 6 months from introduction of GST, these will be exempt from tax, if these are identifiable -clause 149 of GST Model Law, 2016.

Distribution of credit by Input service distributor of service invoices received after GST – Input service distributor can distribute credit in respect of services received prior to GST, even if invoices of such services were received after introduction of GST – clause 162 GST Model Law, 2016.

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