Input Tax Credit (ITC)

  • Contributed by CA. Sukrati Agrawal

    ITC is core provision of GST as GST is destination based tax. ITC avoids cascading effect of taxes.

    Meaning of Input Tax credit.

    Input tax credit means credit of ‘input tax’as defined in section 2(55) of GST Model Law, November 2016.

    Input tax in relation to a taxable person, means the IGST including that on import of goods, CGST and SGST charged on any supply of goods and/or services to him and includes the tax payable under section 8(3) but does not include the tax paid under section 9 of GST Model Law, November 2016.

    Note:-

    1. Section 8(3) covers GST paid under reverse charge.

    2. Section 9 covers GST paid under composition scheme.

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

    Manner of taking Input tax credit.

    A person who is registered as a taxable person shall be eligible to take credit of input tax admissible to him and the said amount shall be credited to the electronic credit ledger of such person. Such credit shall be utilized only for payment for self-assessed output tax liability.

    Note:-

    1. Electronic credit ledger is the input tax credit ledger in electronic form maintained at the common portal for each registered taxable person.

    2. Input means any goods other than capital goods, used or intended to be used by a supplier in the course or furtherance of business.

    3. Outward Supply means supply of goods or services, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other means made or agreed to be made by such person in the course or furtherance of business.

    Credit of Input Tax under special circumstances

    S. No. Case When ITC can be claimed
    1. Where 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 or a person who voluntarily takes registration though not liable. ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock shall be entitled on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.
    2. When a person opts out of composition scheme ITC in respect of inputs held in stock and inputs contained in semi-finishedor finished goods held in stock shall be entitled on the day immediately precedingthe date from which he becomes liable to pay tax under section 8 [on basis of transaction value]
    Further, credit on capital goods shall be reduced by such percentage as may be prescribed.
    3. When exemption on goods or services withdrawn Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person shall, ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply shall be entitled on the day immediately preceding the date from which such supply becomes taxable.
    Further, credit on capital goods shall be reduced by such percentage as may be prescribed

    Input tax credit cannot be taken after one year from the date of invoice or filing of annual return.

    1. Maximum time limit to take input tax credit in respect of any supply of goods and/or services is within one year from the date of issue of tax invoice relating to such supply.(For the credit of Input Tax under Special Circumstances as mentioned in above table).

    2.Further, time limit to take input tax credit in respect of invoice or debit note in normal course shall be earlier of Furnishing of return under section 34 for the month of September following the end of financial year to which such invoice or debit note pertains OR
    Furnishing of annual return. (last date for furnishing an annual return is 31st December u/s 39 following the end of financial year)

    Conditions of taking Input tax credit.

     A taxable person shall be 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:-

    1. he is in possession of a tax invoice or debit noteissued by a supplier registered under GST Act or such other tax paying document as may be prescribed,

    2. he has received the goods and/or services,

    3. 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

    4. he has furnished the return under section 34.

    Note:-

    1. All the above 4 conditions needs to be satisfied for taking Input Tax Credit.

    2. 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 installment.

    3. For the purpose of sr. no. 2 above, 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.

    Input tax Reversal of input tax credit on input services if payment not made to supplier of service within three months.

    Where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in the manner as may be prescribed.

    Proportionate ITC when partly used for business and taxable supplies

    S. No. Cases Apportionment
    1. Where goods and/ 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 theinput tax as is attributable to the purposes of his business
    2. 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

    Special Provision in respect of Banks, FI and NBFC

    For banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances credit shall be restricted to input tax attributed to taxable supplies OR 50% of eligible ITC on inputs, capital goods and input services in that month.

    Note:-
    1. The option once exercised by Banks, FI and NBFC shall not be withdrawn during the remaining part of the financial year.

    Negative list of goods and services ineligible for ITC

    Input tax credit shall not be available in respect of the following:-

    1. Motor Vehicles: except when they are supplied in the usual course of businessor 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.

    2. Goods and services for food, beauty treatment, health mainly for personal consumption :

    (i)            food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of goods or services;

    (ii)           membership of a club, health and fitness centre,

    (iii)          rent-a-cab, life insurance, health insurance except where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; and

    (iv)         Travel benefits extended to employees on vacation such as leave or home travel concession.

    3. Works contract service:-Works contract services when supplied for construction of immovable property, other than plant and machinery, is not eligible, except where it is an input service for further supply of works contract service.

    4. Construction service:- Goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, are not eligible for input tax credit, even when used in course or furtherance of business;
    5. GST paid under composition scheme:- Goods and/or services on which tax has been paid under section 9 (composition scheme) are not eligible.

    6. Goods and services used for personal consumption:- Goods and/or services used for personal consumption are not eligible for input tax credit.

    7. Lost, stolen or destroyed goods and free samples:- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples are not eligible for input tax credit.

    8. GST paid after detection of fraud or suppression or goods removed in contravention of GST Act:- Any tax paid in terms of section 67, 89 or 90 of Model GST Law, November, 2016 are not eligible for input tax credit. This covers GST paid after detection of fraud or suppression or goods removed in contravention of GST Act.
    Input Tax Credit on capital goods

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

    Note:-
    “Capital goods” means goods, the value of which is capitalized in the books of account of the person claiming the credit and which are used or intended to be used in the course or furtherance of business section 2(19) of GST Model Law, November 2016.

    Credit of tax not allowed if depreciation claimed on tax component

    If depreciation is claimed under the Income Tax Act on the tax component of capital goods then ITC shall not be allowed on the said amount of tax component.

    Thus, if net value of capital goods is Rs 100 lakhs and GST paid is 18 lakhs, the taxable person should claim depreciation in income tax only on Rs 100 lakhs.

    ITC on pipelines and telecommunication tower

    Credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto shall be taken in three yearly instalments of one-third of credit every year.

    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.

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

    Where a person who has availed of input tax credit switches over to composition scheme or, where the goods and/or services supplied by him become exempt absolutely under section 11, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of input tax claimed on the day immediately preceding the date of such switch over or, as the case may be, the date of such exemption.

    Credit on capital goods shall be reduced by a prescribed percentage points.

    After payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

    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.

    Input Service Distributor

    “Input Service Distributor” means an office of the supplier of goods and/or services which receives tax invoices issued under section 23 towards receipt of input services and issues tax invoice or such other document as prescribed for the purposes of distributing the credit of CGST (SGST in State Acts) and/or IGST paid on the said services to a supplier of taxable goods and/or services having same PAN as that of the office referred to above.

    • Manner of distribution of credit by Input Service Distributor
    The credit of CGST as CGST or IGST and IGST as IGST or CGST where the Distributor and the recipient of credit are located in different States.

    The credit of SGST as SGST or IGST where the Distributor and the recipient of credit are located in different States.

    The credit of CGST and IGST as CGST where the Distributor and the recipient of credit, being a business vertical, are located in the same State.

    The credit of SGST and IGST as SGST where the Distributor and the recipient of credit, being a business vertical, are located in the same State

    • Conditions for distribution of Input Tax Credit

    The Input Service Distributor may distribute the credit as per following conditions:-

    (i)            the credit can be distributed against a prescribed document issued to each of the recipients of thecredit so distributed, and such invoice or other document shall contain such details as may be prescribed;

    (ii)           the amount of the credit distributed shall not exceed the amount of credit available for distribution;

    (iii)          the credit of tax paid on input services attributable to a supplier shall be distributed only to that supplier (of goods and services);

    (iv)         the credit of tax paid on input services attributable to more than one supplier shall be distributed only amongst such supplier(s) to whom the input service is attributable and such distribution shall be prorata on the basis of the turnover in a State of such supplier, during the relevant period, to the aggregate of the turnover of all such suppliers to whom such input service is attributable and which are operational in the current year, during the said relevant period.

    • Manner of recovery of credit distributed in excess

    Where the credit distributed by the Input Service Distributor is in excess of the credit available for distribution by him, the excess credit so distributed shall be recovered from such distributor along with interest, and the provision of sections 66 and 67 shall apply mutatis mutandis for effecting such recovery

    ITC in respects of Inputs sent for job work

    1. The registered taxable person (principal) shall be entitled to ITC on inputs / capital goods sent to a job-worker for job-work or even it is directly sent to the place of job worker without their being first brought to the principal’s place of business, provided that

    a. the said inputs are received back by ‘principal’ within a period of one year of their being sent out. For capital goods this time limit is three years.

    b. If said inputs or capital goods are not received back after job-work or otherwise or even not supplied from place of job worker within aforesaid period, it shall be deemed to be supplied by the principal to job-worker on the day when the said inputs or capital goods were sent out.

    c. If inputs or capital goods are sent directly to job-worker, the period of one year or three years shall be counted from the date of its receipt by the job worker.

    d. In case of Moulds, dies, jigs, fixtures or tools the aforesaid conditions are not applicable.

    Note:
    Views presented in this article are personal view of the author. Information presented in this article is intended for information purpose only and does not constitute any legal opinion or advice. Readers and Users are requested to seek formal legal advice prior to acting upon any of the information provided herein.