AN OVERVIEW-INPUT TAX CREDIT UNDER GST

[sandeep rawat]

GST comprises of the following levies:

a.   Central Goods and Services Tax (CGST) [also known as Central Tax] on intra-state or intra-union territory without legislature supply of goods or services or both.

b.   State Goods and Services Tax (SGST) [also known as State Tax] on intra-state supply of goods or services or both.

c.   Union Territory Goods and Services Tax (UTGST) [also known as Union territory Tax] on intra-union territory supply of goods or services or both.

d.   Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] on inter-state supply of goods or services or both. In case of import of goods also, the present levy of Countervailing Duty (CVD) and Special Additional Duty (SAD) would be replaced by integrated tax.

The  mechanism of input credit under GST to avail and utilize the credit of these taxes is as follows:

Credit of	To be utilised first for payment of	May be utilised further for payment of
CGST SGST/UTGST IGST	CGST	IGST
	SGST/UTGST	IGST
	IGST	CGST, then SGST/UTGST

Credit of CGST cannot be used for payment of SGST/UTGST and credit of SGST/UTGST cannot be utilised for payment of CGST.

Some of the technical aspects of the scheme of Input Tax Credit are as under:

A.   Any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business.

B.   The pre-requisites for availing credit by registered person are:

a.   He is in possession of tax invoice or any other specified tax paying document.

b.   He has received the goods or services. “Bill to ship” scenarios also included.

c.   Tax is actually paid by the supplier.

d.   He has furnished the return.

e.   If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received.

f.    He should pay the supplier, the value of the goods or services along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 2(1) & (2) of ITC Rules]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed.

C.   Documents on the basis of which credit can be availed are:

a.   Invoice issued by a supplier of goods or services or both

b.   Invoice issued by recipient alongwith proof of payment of tax

c.   A debit note issued by supplier

d.   An invoice issued under certain circumstances like the bill of supply issued instead of tax invoice if the amount is less than ₹ 200 or in situations where the reverse charge is applicable as per GST law.

e.   Bill of entry or similar document prescribed under Customs Act

f.   Revised invoice

g.   Document issued by Input Service Distributor

All these documents are to furnished at the time of filing form GSTR-2.

D.   No ITC beyond September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier

E.   The Input Service Distributor (ISD) may distribute the credit available for distribution in the same month in which, it is availed. The credit of CGST, SGST, UTGST and IGST shall be distributed as per the provisions of Rule 4(1) (d) of ITC Rules. ISD shall issue invoice in accordance with the provisions made under Rule 9(1) of Invoice Rules.

F.   ITC is not available in some cases as mentioned in section 17(5) of CGST Act, 2017. Some of them are as follows:

a.   motor vehicles and other conveyances except under specified circumstances.

b.   goods and/or services provided in relation to:

i.   Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;

ii.   Membership of a club, health and fitness center;

iii.   Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;

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

c.   Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;

d.   Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

e.   Goods and/or services on which tax has been paid under composition scheme;

f.   Goods and/or services used for private or personal consumption, to the extent they are so consumed;

g.   Goods lost, stolen, destroyed, written off, gifted, or free samples;

h.   Any tax paid due to short payment on account of fraud, suppression, mis-declaration, seizure, detention.

G.   Special circumstances under which ITC is available:

a.   A person who has applied for registration within 30 days of becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock(inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax.

b.   A person who has taken voluntary registration under section 23(3) of the CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi - finished or finished goods) on the day, immediately preceding the date of registration.

c.   A person switching over to normal scheme from composition scheme under section 10 is entitled to ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as normal taxpayer.

d.   Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply, subject to reductions for the earlier usage as prescribed in the rules.

e.   ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier.

f.   In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilised ITC shall be allowed to be transferred to the transferee.

g.   A person switching over from composition scheme under section 10 to normal scheme or where a taxable supply become exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid.

h.   In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on transaction value of the supply is more, the same would have to be paid.

ITC ON Different cases:

ITC for Capital Goods

ITC is available for capital goods under GST.

But, ITC is not available for-

i. Capital Goods used exclusively for making exempted goods

ii. Capital Goods used exclusively for non-business (personal) purposes

Note: No ITC will be allowed if depreciation has been claimed on tax component of capital goods.

ITC on Job Work

A principal manufacturer may send goods for further processing to a job worker. For example, a shoe manufacturing company sends half-made shoes (upper part) to job workers who will fit the soles. In such a situation the principal manufacturer will be allowed to take credit of tax paid on the purchase of such goods sent on job work.

ITC will be allowed when goods are sent to job worker in both the cases:

1.   From principal’s place of business

2.   Directly from the place of supply of the supplier of such goods

However, to enjoy ITC, the goods sent must be received back by the principal within 1 year (3 years for capital goods).

ITC Provided by Input Service Distributor (ISD)

An input service distributor (ISD) can be the head office (mostly) or a branch office or registered office of the registered person under GST. ISD collects the input tax credit on all the purchases made and distribute it to all the recipients (branches) under different heads like CGST, SGST/UTGST, IGST or cess.

ITC on Transfer of Business

This applies in cases of transfer of business. The transferor will have available ITC which will be passed to the transferee at the time of transfer of business.

REVERSAL OF INPUT TAX CREDIT

ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed. Apart from these, there are certain other situations where ITC will be reversed.

ITC will be reversed in the following -

1) Non-payment of invoices in 180 days– ITC will be reversed for invoices which were not paid within 180 days of issue.

2) Credit note issued to ISD by seller– This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.

3) Inputs partly for business purpose and partly for exempted supplies or for personal use – This is for businesses which use inputs for both business and non-business (personal) purpose. ITC used in the portion of input goods/services used for the personal purpose must be reversed proportionately.

4) Capital goods partly for business and partly for exempted supplies or for personal use – This is similar to above except that it concerns capital goods.

5) ITC reversed is less than required- This is calculated after the annual return is furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.

The details of reversal of ITC will be furnished in GSTR-2.

RECONCILIATION OF ITC

ITC claimed by the person has to match with the details specified by his supplier in his GST return. In case of any mismatch, the supplier and recipient would be communicated regarding discrepancies after the filling of GSTR 3.

(Mr. Sandeep Rawat has vast experience & knowledge in dealing with Direct and Indirect Taxation. He is providing his expertise service as Managing Partner at SRT Consultancy & Service. He can be reached at [email protected])