Input Tax Credit eligibility and its restriction

[Ganeshan Kalyani]

The provision for Input Tax Credit (ITC) is given under Chapter V of CGST Act, 2017.

            Section 16 : Eligibility and conditions for taking Input Tax Credit (ITC)

            Section 17 :  Apportionment of credit and blocked credits

            Section 18 :  Availability of credit in special circumstances

            Section 19 :  Taking input tax credit in respect of inputs and capital goods sent for job work

            Section 20 :  Manner of distribution of credit by Input Service Distributor (ISD)

            Section 21 :  Manner of recovery of credit distributed in excess

Section 16(1) allows every registered person to take credit of the input tax charged by their supplier on the tax invoice when the goods or services or both so procured are used or intended to be used in the course or furtherance of the business by the buyer. The credit so determined to be eligible should be credited to the electronic credit ledger in GSTN while filing GSTR-3B as that is the only way to claim credit.

Condition to claim credit (S. 16) :  A registered person can claim the credit only when :

1. he has the physical copy of the tax invoice or debit note or any other document prescribed.
2. he has received the goods or services or both
3. the tax charged on the tax invoice is actually been paid to the Govt. by the supplier.
4. the supplier has filed the return
5. the payment of invoice value with tax is made to the supplier within 180 days.

Restriction to claim credit (S. 16) : A registered person will not be allowed to claim credit:

• unless the last lot or installment of the goods are received when goods against an invoice are received in lots or installment.
• if the taxpayer fails to pay the supplier the invoice value with tax within 180 days.
• if the depreciation of the tax component of the cost of capital goods and plant and machinery is claimed under the Income Tax Act.
• If the registered person claims any credit after the month of September following the end of financial year.

Partially Blocked credit (S. 17): ITC is allowed to be claimed subject to restriction as discussed below:

1. S.17.1: If goods or services or both are partly used for business and party for other purpose then the portion which is used for business purpose will be eligible for the purpose of claiming credit.
2. S.17.2: If goods or services or both are partly used for taxable supply including export and party for exempt supplies then the portion which is used for taxable supplies will be eligible for the purpose of claiming credit.
3. S.17.3: exempt supply under S.17.2 includes supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
4. S.17.4: a banking company or a financial institution including a non-banking financial company has an option to either take credit proportionate to taxable supply or take fifty percent of credit on inputs, capital goods and input services.

Fully blocked credit (S.17.5):: ITC in respect of the followings are not available:

a)       motor vehicle which are having seating capacity up to 13 persons including driver.

           Exception: ITC is allowed, if the vehicle is used,

• for further supply of such vehicle or
• for transportation of passengers or
• for imparting training on driving such vehicle

b)       vessels and aircraft.

           Exception: ITC is allowed, if the vessels or aircraft,

• is used for further supply of such vessels or aircraft or
• is used for transportation of passengers or
• is used for imparting training on navigating such vessels or
• is used for imparting training on flying such aircraft
• is used for transportation goods

ab)    services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa)

            Exception: ITC will be allowed if,

                          (i)  the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

                          (ii)  if received by a taxable person engaged-

                                      (I)  in the manufacture of such motor vehicles, vessels or aircraft; or   

                                      (II)  in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by                                               him;

b)        (i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Exception: ITC is allowed, if the above mentioned goods or services  or both are used for making an outward supply of the same category of goods or service or both.

                        (ii) membership of a club, health and fitness centre; and

                        (iii) travel benefits extended to employees on vacation such as leave or  home travel concession

            c)         works contract services procured for construction of an immovable property

                        Exception: ITC is allowed if,

                                    i)   the works contract service is availed for further supply of such service;

                                    i)   the works contract service is availed for construction of plant and machinery;

d)        goods or services or both received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business.

                        Exception: ITC is allowed if,

                                    i)   goods or services or both received for construction of plant  and machinery

Explanation.––For the purposes of clauses (c) and (d), the expression  “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation: 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

            e)        goods or services or both on which tax has been paid under section 10 i.e., composition scheme;

            f)         goods or services or both received by a non-resident taxable person  except on goods imported by him;

            g)        goods or services or both used for personal consumption;

            h)        goods lost, stolen, destroyed, written off or disposed of by way of gift  or free samples; and

            i)          any tax paid in accordance with the provisions of

                                    i)    sections 74 - tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by                                           reason of fraud or any wilfull-misstatemnet or suppression of facts, and 130.

                                    ii)   section 129 - Detention, seizure and release of goods and  conveyances in transit

                                    iii)  section 130 - Confiscation of goods or conveyances and levy of penalty.

Restriction to claim ITC vide Notification no. 75/2019-CT dated 26.12.2019

Input Tax Credit of those invoices not appearing in GSTR-2A is restricted to 10%: .

Recently, vide notification no 49/2019 dated 09.10.2019, the Govt. had restricted the ITC claim of the invoices which are not appearing in GSTR-2A to 20% of eligible credit that are populated in the GSTR-2A report. That is, if an invoice is not appearing in GSTR-2A, then the tax payer has to calculate additional 20% of eligible ITC appearing in GSTR-2A and claim the credit on provisional basis. The said limit, is hereby reduce to 10% vide Notification no.75/2019-CT dated 26.12.2019.

Example : The input tax credit available as per books is ₹ 1,00,000/-. However Form GSTR-2A shows an input tax credit of ₹ 80,000/- only. In such cases one can claim ITC amounting to ₹ 88,000/- ( that is ₹ 80,000/- + 8,000/- that is 10% of eligible credit which is ₹ 80,000/-) . In the next month, ₹ 8,000/- claimed on provisional basis needs to reversed.  

In the same example , if Form GSTR-2A shows an ITC  of ₹ 95,000/- , then as per rule ITC comes to ₹ 1,04,500/- ( that is ₹ 95,000 + 9,500/- which is 10% of ₹ 95,000/-. However, one is allowed to claim up to a maximum of ₹ 1,00,000/- only . In the next month, ₹ 5,000/- claimed on provisional basis needs to reversed.  

Author's view: A taxpayer has to keep himself updated with the changes in GST law so that he can do the compliance correctly. From October 2019, it became mandatory to carry out reconciliation of GSTR-2A report with the ITC as per books. This is because from 09.10.2019 to 31.12.2019, 20% restriction condition applies vide notification no 49/2019 dated  09.10.2019. And w.e.f. 01.01.2020, the restriction of 10% is provided vide notification no.75/2019-CT dated 26.12.2019. Hence, it became necessary to carry out activity of matching ITC as per books vs as per GSTR-2A report.

Discussions to this article

[Dr. Sanjiv Agarwal]

This is a very comprehensive article covering in detail the provisions of ITC.

[Ganeshan Kalyani]

Thank you Sir for your words.