Input Tax Credit under GST
Input Tax Credit is defined under section 2(63) of CGST Act 2017 as “the credit of Input Tax”.
Input Tax is defined in Section 2(62) of CGST Act 2017 as “input tax in relation to a registered person, means the central tax, state tax, integrated tax or union territory tax charged on any supply of goods or services or both made to him” and include
- The integrated goods and services tax charged on import of goods
- The tax payable under the provisions of sub-sections (3) and (4) of section 9
- The tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
- The tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
- The tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,
But does not include the tax paid under the composition levy;
To understand “Input Tax Credit” first we have to understand “input tax”. Here we can say that whatever tax is paid by recipient of goods or services under GST is Input Tax, it doesn’t matter whether that tax is directly paid to supplier or not. Further if recipient has paid taxes under reverse charge then also such tax will be classify as input tax. IGST paid on import also falls under input tax however basic custom duty paid doesn’t treated as input tax as its charge and calculated under Custom Act.
There is exclusion that if recipient paid taxes to a dealer who is availing composition (u/s 10 of CGST Act) scheme and raising bill of supply (BOS) instead on tax invoices, such taxes paid to supplier will not be treated as input tax.
Let’s take an example to understand better:
“A” is a registered person in Delhi who deals in wooden furniture, if “A” purchased wood & steel for his factory and stationary item for his office then whatever tax paid on such inward supplies of wood, steel & stationary will be classify as input tax.
Eligibility Criteria to avail Input Tax Credit:
If tax paid by recipient is “Input Tax” then we have to analyze that whether can we claim credit of such input tax paid on inward supplies. Lets understand what all provisions are there relating to availability of input tax credit.
Section 16(2) of CGST Act 2017 defined criteria to avail input tax credit, which are as follows
- Recipient should be in possession of a tax invoice or debit note issued by a supplier registered under this act, or such other tax paying documents as may be prescribed. Here such other document can be bill of entry in case of import to avail IGST credit.
- Recipient has received the goods or services or both.
Explanation: For the purposes of this clause, it shall be deemed that the registered 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 registered 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. This explanation clarify that it is not essential that goods must be delivered to recipient of invoice.
- The tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply.
- Recipient has furnished the return under section 39
So there are 4 basic conditions that all has to be satisfied to become eligible for availing input credit which are reproduced here:
- Tax Invoice or debit note should be in possession
- Goods or services must have been received
- Supplier has made payment to government and
- Recipient has filed his return.
From above conditions to avail ITC, one condition is that “Supplier has made the payment of tax to government” here question arises how a recipient can verify that the tax has been paid by supplier to government. Here there is no straight answer to this question however it can be assumed that if such purchases/inwards supplies are reflecting in 2A of recipient than supplier has paid adequate tax as prescribed u/s 16(2) of CGST act.
Further taxpayer has to satisfied few more conditions in certain other cases:
If goods against an invoice are received in lots or installments, the registered person shall be entitled to take credit upon receipt of the last lot or installment.
Reversal of Input Tax Credit
As per proviso to section 16(2) of CGST Act, Recipient has to make payment to supplier within 180 days from the date of issue of invoice. If recipient fails to make payment to supplier then an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon. However this proviso shall not be applicable where tax is liable to pay under reverse charge.
Further, once recipient has paid amount to supplier then he will become eligible to avail credit which he previously added to his output liability.
While adding input tax to his output liability interest has to be calculated at 18% from the date of input availed till the date of “input tax reversal” is added to the output tax liability. Such interest will be calculated on Input credit added to output liability.
Availability of Input Tax Credit in special circumstances:
- A person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted registration, shall 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.
- A person who takes registration voluntarily shall 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 of grant of registration.
- Where any registered person ceases to pay tax as an composition dealer, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods (with some restriction) on the day immediately preceding the date from which he becomes liable to pay tax under section 9.
- Where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall 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 relatable to such exempt supply and on capital goods (with some restrictions) exclusively used for` such exempt supply on the day immediately preceding the date from which such supply becomes taxable
In above four scenarios person was doing their business but either he was not registered or he was supplying exempted goods or services, in these law permits the person to avail the benefit of Input credit on their stock on which he previously didn’t avail input credit
Input Credit of Compensation Cess:
Input credit of compensation cess will be allowed for payment of compensation cess only, hence compensation cess cannot be adjusted against payment of IGST/CGST/SGST/UGST.
Restrictions on availability of Input Credit:
As per rule 36(4) of CGST rules 2017 inserted vide Notification No. 49/2019 dated 09th Oct, 2019 and it was made applicable w.e.f. 09th Oct, 2019, input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20% of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37
Further by issuing a Notification No. 75/2019–Central Tax dated 26th Dec, 2019 word 20% has been replaced with 10% and it was made applicable w.e.f. 1st Jan, 2020.
If we interpret the above amended notification, which restrict tax payers to claim upto 110% of Input Credit showing in 2A. It means if 2A is showing 2,00,000 as eligible ITC for any respective month then taxpayer can maximum claim 2,20,000 as ITC even if actual ITC available as per inwards supplies is higher than that.
This provision raised practical challenges as there are several tax payers who opt out to file quarterly filing of GSTR-1and reporting their outward supplies on quarterly basis which comes in 2A of buyer at the end of each quarter hence even after genuine purchases recipient will not be able to claim actual input credit and will be restricted to 110% of ITC showing in 2A of respective month.
In-eligible Input Tax Credit:
The section 17(5) of CGST Act 2017 prohibits the registered person from availing the input tax credit. As per this section input credit of certain items shall not be allowed which are as follows:
|S.no.||Supplies not eligible for Input Tax Credit||Exceptions to section 17(5) i.e. in these cases credit will be allowed|
Motor vehicles and other conveyances.
Services of general insurance, servicing, repair and maintenance of aforesaid motor vehicles
Credit will be allowed when motor vehicle are used for making taxable supply of- 1) supply of such vehicles or conveyances 2) transportation of passengers 3) imparting training on driving, flying, navigating such vehicles or conveyances 4) for transportation of good.
Motor vehicles used for transportation of persons having approved seating capacity of more than 13 persons (including the driver)
|2||Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery||Credit will be allowed where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply|
|3||Membership of a club, health and fitness center||No Exception, Credit will not be allowed at all|
|4||Rent-a-cab, life insurance and health insurance||Credit will be allowed if such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply|
|5||Travel benefits extended to employees on vacation such as leave or home travel concession||No Exception, Credit will not be allowed at all|
|6||Works contract services when supplied for construction of an immovable property (other than plant and machinery)||Credit will be allowed where it is an input service for further supply of works contract service; or Work contract services pertains to plant & machinery|
|7||Goods or services or both received by a taxable person for construction of an immovable property||Credit will be allowed where it is an input service for further supply of works contract service; or Work contract services pertains to plant & machinery|
|8||Goods or services or both on which tax has been paid under section 10||No Exception, Credit will not be allowed at all|
|9||Goods or services or both received by a non-resident taxable person except on goods imported by him||No exception, Credit will not be allowed at all|
|10||Goods or services or both used for personal consumption||No exception, Credit will not be allowed at all|
|11||Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;||No exception it means that if goods are disposed off without consideration then credit will not be allowed.|
|12||Any tax paid in accordance with the provisions of sections 74, 129 and 130||Tax paid against demand notice in case of fraud, on confiscation or goods or detention then also credit will not be allowed|
Explanation: For the purposes of clauses (6) and (7), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property
Explanation: For the purposes of clauses (6), the expression “plant and machinery” means 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 but excludes
- Land, Building or any other civil structures;
- Telecommunication towers; and
- Pipelines laid outside the factory premises
It means that input credit of these 3 business assets will not be allowed even if these are treated as plant & machinery in books of accounts of taxpayer.
Other Points about ITC
- Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes business and we have to reverse the input credit which belongs to goods or services used for other than business purpose.
- Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
- Refund of ITC can be claimed if outward supplies falls under inverted duty structure i.e. rate of tax on outward supply is lesser than tax on inward supply
- ITC on an invoice can be claimed till September of following financial year or before the filling of annual return whichever is earlier i.e. if registered person forgot to claim ITC in financial then he can claim ITC in next financial year till September or annual filling whichever is earlier.
- In case of supply (sale) of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points [Credit Availed*(60 months – no. of months Assets used) /60 Months] as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher
- Where registered taxpayer person has claimed depreciation on tax component then ITC will not be allowed.