Overview -Input Tax Credit Mechanism in GST - GST Ready Reckoner - GST

Introduction - Input Tax Credit Mechanism in GST Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, ITC ) is one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is tax on tax . Under the earlier system of taxation, credit of taxes being levied by Central Government was not available as set-off for payment of taxes levied by State Governments, and vice versa. One of the most important features of the GST system is that the entire supply chain would be subject to GST to be levied by Central and State Government concurrently. 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. Let us understand how cascading of taxes used to take place in the earlier tax regime. Central excise duty charged on inputs used for manufacture of final product could be availed as credit for payment of Central Excise Duty on the final product. Example , Manufacture a pen, the manufacturer requires, plastic granules, refill tube, metal clip, etc. All these inputs were chargeable to central excise duty. Once a pen was manufactured using these inputs, the pen was also chargeable to central excise duty. Let us assume that the cost of all the above mentioned inputs is say, Rs. 10/- on which central excise duty @10% is paid, means Rs. 1/-. The cost of the manufactured pen was say Rs. 20/-, the central excise duty payable on the pen @10% will be Rs. 2/-. Now the manufacturer of the pen could use the duty paid on inputs, i.e. Rs. 1/- for payment of duty on the pen. So he will use Rs. 1/- paid on inputs and he will pay Rs. 1/- through cash (1+1=2), the price of the pen becomes Rs. 22/-. In effect he actually pays duty on the value added over and above the cost of the inputs. This mechanism eliminates cascading of taxes. However, when the pen was sold by the manufacturer to a trader he was required to levy VAT on such sale. But under the earlier system, the manufacturer could not use the credit of central excise duty paid on the pen for payment of VAT, as the two were being levied by Central and State government respectively with no statutory linkage between the two. Hence he was required to pay VAT on the entire value of the pen, i.e. Rs. 22/-, which actually includes the central excise duty to the tune of Rs. 2/-. This was cascading of taxes or tax on tax as VAT was not only paid on the value of pen i.e. Rs. 20/- but also on the central excise duty i.e. Rs. 2/-. Goods and Services Tax (GST) has mitigated such cascading of taxes. Under the present system most of the indirect taxes levied by Central and the State Governments on supply of goods or services or both are subsumed under a single levy. The major taxes/levies which are clubbed together or subsumed in the GST regime are as under: Central Tax State Tax Central Excise duty VAT / Sales Tax Additional Duties of Excise (Goods of Special Importance) Central Sales Tax The Excise duty levied under Medicinal Toilet Preparation (Excise Duties) Act, 1995 Purchase Tax Additional duties of Customs (commonly known as CVD ) Entertainment and Amusement Tax (other than those levied by local bodies) Special Additional Duty of Cus toms (SAD) Luxury Tax Service Tax Octroi and Entry Tax (All forms) Surcharges Cesses Taxes on lotteries, betting Gambling Taxes on advertisements State Cesses and Surcharges 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 protocol to avail and utilise 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 CGST IGST SGST/UTGST SGST/UTGST IGST IGST IGST CGST, then SGST/UTGST What is the Input Tax Credit. Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount. Here s how: When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit. For example- you are a manufacturer: a. Tax payable on output (FINAL PRODUCT) is Rs 450 b. Tax paid on input (PURCHASES) is Rs 300 c. You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes. 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) Bill of entry or similar document prescribed under Customs Act e) Revised invoice f) Document issued by Input Service Distributor 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. H) Where goods and/or services are used partly for business purposes and partly for other purposes: Input Tax Credit is eligible on the goods or services or both, which are used or intended to be used in the course of furtherance of business by the registered person. However, some times, the registered person may utilize the goods or services or both, partly for the purposes of business and partly for other purposes or partly for taxable supplies and partly for exempt/ non-taxable supplies. In such cases, the input tax credit cannot be allowed in full and has to be restricted to so much of the input tax that is attributable to the purposes of business/taxable supplies by the registered person. The quantum of the available ITC in such cases has to be worked out as prescribed in the rules. I) Provisions Specifically applicable for Construction Service w.e.f. 01.04.2019, in case of supply of construction services, the input tax shall be calculated finally, for each on going project or project which commences on or after 1st April, 2019, which did not undergo or did not require transition of input tax credit consequent to change of rates of tax on 1st April, 2019 in accordance with notification No. 11/2017- Central Tax (Rate), dated the 28th June, 2017, as amended, for the entire period from the commencement of the project or 1 st July, 2017, whichever is later, to the completion or first occupation of the project, whichever is earlier, before the due date for furnishing of the return for the month of September following the end of financial year in which the completion certificate is issued or first occupation takes place of the project. This has to be calculated in the manner specifically prescribed in the rule42 and 43 of CGST Rules, 2017 (for construction services).