INPUT TAX CREDIT (ITC) IN GST (PART-I)

[Alkesh Jani]

The Input Tax Credit is one of the key features of Indirect tax. The objective of ITC is to avoid cascading effect on tax. GST is supply based and the entire supply chain would be subject to GST. As the tax charged by the Central or the State Governments would be part of the same tax regime, credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage and ultimately to be borne by the end user of goods or service or both.

2.       The main objective is to avoid cascading effect on tax, but always been major part of litigation matter and ambiguity. The ITC has been always an issue of discussion and subject of litigation both by department and tax payer (assessee in erstwhile law). The erstwhile law i.e. Central Excise, Service Tax, which was based on production or manufacture, while GST is supply based, therefore,  we need to come out of the old  regime  and a new thought has to be given. For better understanding we need to start from the beginning.

3.       The ITC is governed by Chapter-V, Section-16 to Section 21 of CGST, Act,2017, which includes the recovery of credit. Let us start with Section 16 (1) of CGST, Act, 2017, is as under:-

“16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both 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”.

The Section 49 of the said act deals with payment of tax. On plain reading, it implies that, ITC is available to registered person and upon fulfilling the conditions by following restrictions and manner as specified by the Government. The foremost condition is ITC can be taken on the tax charged on inputs and input services, which are to be used or intended to be used in the course or furtherance of business. Here, the Section mandates that inputs and input services should have nexus with the business. It is now obligatory on the part of the tax payer to prove the nexus of ITC with regards to business. Further, the input tax credit has been defined in Section (2) (63) of CGST, Act, 2017 and definition of “input” , “input service” and “input tax” which is given at Section (2) (59), (60) and (62) respectively, being pertinent to reproduced below:-

“(63) “input tax credit” means the credit of input tax;”

“(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;”

“(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;”

“(62) “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 includes-

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) 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

(d) 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;”

From above, it can be summarized that ITC can be availed by a registered person, which has nexus to his business.

4.       The sub-section (2) of Section 16 of CGST, Act, 2017, imposes some restriction and is reproduced below for ready reference:-

“(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both 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 tax paying documents as may be prescribed;

(b) he 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;”

From above, it becomes clear that ITC can be availed by a registered person on the basis of tax invoice and debit note issued by the supplier of goods or services and the same should be in the possession of recipient of goods or service or both. It is also important that goods and/or services should be received by the recipient. This may be to restrict paper transaction. The proviso gives some liberty regarding deemed receipt of goods, but again limiting to documents whereby transferring the title of goods. The invoice is one of the documents where title of goods are said to be transferred. For example, if supplier A issued invoice in name of B, but somehow goods are lying in the registered place of supplier, and the fire took place and goods lying got damaged. In this case, as the A has transferred the title of goods to B by way of invoice, the insurance is to be claimed by B.

5.       The sub-clause 2(c) Section 16 of CGST, Act,2017, further restricts the eligibility of ITC, which states that :-

“(c) subject to the provisions of section 41, 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; and

(d) he has furnished the return under section 39:

Provided that where the 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:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days 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 such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon”.

This sub-clause restricts that recipient of the inputs and/or input services shall pay the tax along with the value of goods and/or services to the supplier and recipient is required to file the returns under the law. Here, it is necessary to mention that supply if made, in installment than ITC can be availed on the last lot received by the recipient. Some liberty is given, where goods and/or services are made on credit basis, as per the trend of the market, but precaution is to be made that in that conditions Invoice or debit note is required to be issued by the supplier or else goods supplied without Invoice, will lead to litigation. If value of goods and/or services are not made to supplier within 180 days, as stipulated in 2^nd proviso, the credit availed is required to be reversed along with interest.

6.       Now we shall deal with sub-section 3 of Section 16 of CGST Act, 2017, which is as under :-

“(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed”.

This sub-clause deal with the ITC availed on the capital goods and plant and machinery. For better understanding the definition of capital goods is necessary and it is defined at Section (2)(19) of CGST Act, 2017, is as under

“(19) “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;”

          In erstwhile law the capital goods were separately defined but in GST, it is liberalized and indirectly restricted, to the value which is capitalized in books of Account. On going through the Balance sheet, we can know the supplies which are capitalized. GST restricts to double benefit of claiming ITC and also deprecation.

          The plant and machinery are defined by way of explanation given after the sub-section 6 of Section 17 of CGST Act, 2017 and is given below:-

“Explanation.––For the purposes of this Chapter and Chapter VI, 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-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises”.

The ITC of plant and machinery can be availed, but not for land, building and civil structure, telecommunication towers and pipelines laid outside the factory premises. If we adhere to above restrictions, ITC can be availed. As the facts and circumstances vary from each case, care should be taken.

7.       The sub-section 4 of Section 16 of CGST Act, 2017, stipulates the time limit for availing the ITC, it states that:-

“(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 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”.

          The sub-section urges on taking the ITC as soon as goods and / or services are received along with the documents. In some scenario or due to any reason person fails to take such credit the limit is to avail such credit before due date of furnishing the return i.e. GSTR-1 for the month of September following the end of financial year to which such invoice pertains. However, as per the design of GST, returns as per law has been changed, this may create ambiguity and litigation may arise in future. Hopefully, Government may come out with some clarification.

8.       From above, we can conclude that,

(i) ITC of inputs and/or input services can be availed only by the registered person;

(ii) ITC availed on inputs and/or input services shall have nexus with the business, in simple language, should be used for or furtherance of business.

(iii) ITC can be availed on the strength of Invoice or debit note.

(iv) Tax (CGST, SGST, IGST or as applicable) has been paid along with the value of goods and/or services to the supplier.

(v) Mandatory returns as stipulated under law is filed by the recipient.

(vi) ITC availed on capital goods and on plant and machinery, the depreciation cannot be claimed under Income Tax, Act. In either case ITC may be reversed.

We shall further discuss Section 17 of CGST Act, 2017, in Part-II. The case law has not been discussed here, as they may not have attained finality. The comments/suggestion, are invited by our experts/readers. Thanks to TMI for providing such a great platform. At this juncture it becomes irresistible, to note that “Thanks giving” is one of the non-GST supply. Any typing or language error may please be ignored with open heart. NO right reserved in public interest.

Discussions to this article

[aditya kothari]

Dear Sir,

I want to know that as per the conclusion drawn by you if we claim depreciation on the goods purchased in income tax we cannot claim itc on the same for the first year