Input TAx Credit Conditions

[CA Akash Phophalia]

Introduction

Tax credit is the mechanism which ensured avoidance of cascading effect. Principally cascading means paying tax on tax. Presently an assessee pays excise duty and thereafter pays sales tax in the form of vat on the said excise duty. This is an example of cascading effect. However, when it is required to pay sales tax then assessee is eligible to avail of set off of the tax already paid by it in the form of sales tax while procuring raw materials or inputs or goods in trade. Same concept is applicable with the excise duty and service tax. But inter-credit of sales tax and excise duty is not available presently. However, inter set off of credit between excise duty and service tax is available to certain extent. GST aims at bringing all the taxes viz service tax, excise duty and sales tax at par and ensure that the set off taxes is available to assesses at all the times till the raw material reaches to the final consumer. However, to prevent misuse of such credit it puts on certain conditions in regard to the said ITC . In this article author aims to discuss the said conditions.

Section 16. Eligibility and conditions for taking input tax credit

(1) Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 44, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person:

PROVIDED that 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 not exceed-

(a) one-third of the total input tax in the financial year in which the said goods are received,

(b) two-third of the total input tax, including the credit availed in the first financial year, in the financial year immediately succeeding the year referred to in clause (a) in which the said goods are received, and

(c) the balance of the amount of credit in any subsequent financial year.

(2) Notwithstanding anything contained in this section, but subject to the provisions of section 36, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless,-

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying document(s) as may be prescribed;

(b) he has received the goods and/or services;

(c) the tax charged in respect of such supply has been actually paid to the account 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 34:

PROVIDED that where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or installment:

PROVIDED FURTHER that 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.

Explanation.-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.

(3) 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(43 of 1961), the input tax credit shall not be allowed on the said tax component.

(4) A taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services after furnishing of the return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

Analysis of the Section 16

1. Every registered taxable person shall be entitled to take input tax credit here in after referred to as ITC. It means in order to avail of input tax credit following are essentialities:-

• A person should be “taxable person” or in other words he should not be exempted under GST .
• Secondly the person should be a registered person. An unregistered person shall not be allowed ITC of CGST/SGST paid on goods and services.

2.  The goods and services on which ITC is claimed must be used by the eligible person in the course or furtherance of his business. To put it differently, the goods and services which are used for purpose other than business eg personal purposes, then ITC of tax paid on such goods and services could not be availed of.

3. In case pipelines and telecommunication tower fixed to earth by foundation or structural support, ITC paid shall be allowed in 3 equal installments in three financial years. 1^st installment shall be allowed in the year of receipt of capital goods, 2^nd in the next financial year and balance in 3^rd financial year. Further the limit of availment of input tax credit on such goods is defined in cumulative manner which is explained by the following example.

For example :- Tax paid on pipelines fixed to earth during financial year 2017-18amounted to ₹ 90,000/-, the credit on such goods shall be allowed as follows:

Year	Cumulative credit that can be claimed
2017-18	Upto 30,000/-
2018-19	Upto 60,000/-
2019-20	Upto 90,000/-

4.Further, in order to claim input tax credit following  conditions are required to be fulfilled cumulatively:-

• The registered taxable person should be in possession of tax invoice, debit note, other tax-paying document.
• He should have received goods and/or services.

This condition is to ensure that ITC shall not be allowed on the basis of bogus invoice or documents. Further, for this condition it shall be deemed that the taxable person has received goods when goods are sent to any other person on his direction, whether as an agent or otherwise, before or during the movement of goods, either by way of transfer of documents of title to goods or otherwise.

Let us understand this with the help of an illustration.

Mr. X purchased goods from Mr.Y and paid tax of ₹ 10,000. But Mr. X directs Mr. Y to send goods to Mr.Z ,ultimate consumer. Here it will be deemed that goods are received by Mr X

Mr. A purchases goods from Mr. B and pays tax thereon, and directs Mr B to send goods to Mr.C, an agent of Mr. A/ Here also delivery of goods to Mr C shall be deemed to receipt of goods by Mr A.

• Tax collected should have been actually paid to the appropriate government either through cash or utilization of ITC.
• Retun should have been filed.
• Where goods are received in installments or lots, ITC shall be allowed upon receipt of last installment or lot. For instance a registered taxable person has procured goods worth ₹ 10,00,000/- against a single invoice but the nature or the quantity of goods could be sent in lots, say, goods value of ₹ 2,00,000 is received on 5^th April 2017 morning, next lot of ₹ 2,50,000/- on 5^th April 2017 evening, next lot of ₹ 2,50,000/- on 6^th April 2017, balance lot of ₹ 3,00,000/- on 7^th April 2017, then in this case the assessee will be eligible to avail of input tax credit on 7^th April 2017 in respect to the entire lot. He will not be eligible to avail of input tax credit proportionately on partial receipt of goods.
• Condition applicable to services - There is a special provision in respect of services. This is not applicable to goods. The provision states that if the recipient of services fails to pay to the supplier of services the value of service and tax thereon within a period of 3 months from the date of invoice then ITC availed of by the recipient in respect to the said extent of value and tax thereon shall be added to his output tax liability and recovered along with interest.
• Where depreciation is claimed on the tax component under the provisions of the Income Tax Act 1961, then input tax credit shall not be allowed on the said tax component. This is to avoid double benefit of the single amount.
• Lastly, input tax credit shall not be allowed in respect of any invoice or debit note for supply of goods or services after furnishing of the return for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

CA Akash Phophalia

9799569294

[email protected]

Discussions to this article

[JAIPRAKASH RUIA]

Dear Sir,

If manufacturer place the Annual Maintenance Contract for 1 or 2 year and invoice is received and paid within 90 days and returned is also filed. Whether the manufacturer is entitle to take the credit even if the service period is for next two year.

[CA Akash Phophalia]

Dear Sir

The situation given by you is not seperately dealt with in the provisions stated for input tax credit. Therefore, by considering the restriction imposed by Seciton 16(2)(b), I feel that the proportionate credit is admissible over the period of time.

Different view is also welcome.