Seamless Flow of Input Tax Credit under Goods and Services Tax Act, 2017

[K Balasubramanian -]

1) Introduction: The Statement of Objects and Reasons accompanying the bill introducing the CGST Act emphasised that there would be a seamless transfer of ITC from one stage to another in the chain of value addition. Moreover, the eligibility of Input Tax Credit as contained in Section 16 (1) of the CGST Act 2017 with the words which are used or intended to be used in the course or furtherance of his business gave a view that the flow would be seamless from 01/07/2017. However, after several amendments relating to Input Tax Credit, the situation as on date on SEAMLESS FLOW needs to be revisited.

2) Conditions for availment of ITC: The conditions for availing ITC as contained in section 16 were amended from time to time by imposing more restrictions on taking ITC which has adversely affected the seamless flow.

3) Conditions prevalent as on 01/07/2017: Our focus on this article is mainly on conditions under Section 16.  Sub section 2 of section 16 stipulated only the following conditions as on 01/07/2017 which are discussed below:

a) possession of invoice or debit note or any other prescribed document.

b) receipt of the goods or services or both (as the case may be)

c) the seller has paid the tax charged on the supply to the Government

d) buyer/ recipient has filed the return under section 39.

a and b are reasonable conditions and always to be fulfilled simultaneously as a without b would be bogus invoice and b without a is possible with unaccounted money. The law makers took a clue from the case of Union of India and others V Ind-Swift Laboratories Limited (Supreme Court). However, condition c is a burden on the recipient as the recipient has no control over the seller to ensure that the seller promptly makes the payment to the Government. Though similar restrictions were there during VAT regime, Courts took a view that the buyer has no control over the seller and this condition is difficult to fulfil. It is interesting to note that during 10/09/2004 to 30/06/2017, there were no such restrictions as contained in c under the Cenvat Credit Rules 2004 so far as Service Tax and Excise are concerned. d is corollary to the requirement of reflection of eligible ITC in GSTR 2 which was made mandatory with effect from 01/01/2022.

4) Let us move forward by simply comparing the favourable as well as adverse conditions under the GST Laws on ITC.

5) Favourable to the Registered Person. 

A) The definition of the terms input, input services and capital goods are assessee friendly.

B) Conditions like used in manufacture have been removed to facilitate the registered person to avail credit on all genuine business expenses subject to the restrictions contained elsewhere.

C) Full credit in one go on capital goods.

D) Few credits which were not available up to 30/06/2017 are now available. A registered person is now able to avail credit even on goods used for office.

6) Adverse to the registered person.

A) ITC is available only when supplier deposited tax with the Government.

B) View taken by Supreme Court that Input Tax Credit is in the nature of benefit/concession and availment is only as per the statutory scheme.

C) Burden of proof is on the tax payer on the eligibility of ITC  (Section 155). This is one of the powerful section to the Government in the simplest words which reads as: “where any person claims that he is eligible for Input Tax Credit under this Act, the burden of proving such claim shall be on such person”.

D) Input tax credit cannot be taken after November of subsequent financial year.

E) No ITC on advances paid to supplier as credit is to be availed only on supply of goods/services.

F) Restrictions imposed with effect from 01/10/2022 by way of amendment to Section 38 by imposing further restrictions.

G) Requirement for reflection in GSTR with effect from 01/01/2022. 

H) When goods are received in lots, credit is eligible only on receipt of the last lot or instalment as per proviso to Section 16(2).

I) Condition on payment to supplier within 180 days. Even if part amount is not paid by 180^th day, proportionate credit to be reversed and interest is applicable from the first day.

Conclusion:

The fact that the restrictions made applicable from 01/07/2017 are stringent and the requirement that all the eligibility conditions are to be simultaneously fulfilled for rightful Availment of ITC would definitely adversely affect the flow of the credit. As the registered persons have so far mostly adjusted to the above requirements, Government should not impose further restrictions which may affect the flow of credit. For augmenting the Revenue, Government should not use restriction on ITC as a tool anymore.