Annexure 11: Input Tax Credit - Model All India GST Audit Manual 2023 [CBIC] - GST

Annexure 11: Input Tax Credit Availability of Input Tax Credit throughout the value chain is the essence of GST in India. Needless to say that examining the veracity of ITC availed by an auditee is of paramount importance to an auditor. The provisions related to ITC are as follows: Relevant Rules Rule 36 Rule 37 Rule 38 Rule 39 Rule 40 Rule 41 Rule 42 Rule 43 Rule 44 44A Rule 45 a. How is Input Tax Credit (ITC) defined in GST Section 2(63) of the CGST /SGST Act defines Input Tax Credit as the credit of input tax. Section 2(62) defines input tax as follows: input tax in relation to a registered person means any tax such as Central Tax, State Tax, Integrated Tax or Union territory tax charged on any supply of goods or services or both made to him includes: - Integrated Tax charged on import of goods Tax payable under reverse charge mechanism, but does not include the tax paid under the composition levy. Input is defined in Sec 2(59) as any goods other than capital goods used or intended to be used by the supplier in the course or furtherance of business. Capital goods is defined in Sec 2(19) as goods, the value of which is capitalized in the books of account of the person claiming ITC and which are used or intended to be used in the course or furtherance of business. Input service is defined in Sec 2(60) as any service used or intended to be used by a supplier in the course or furtherance of business. b. Provisions of section 16(1) In accordance with Section 16(1) of the CGST /SGST Act, 2017: (i). Only a registered person other than persons under composition scheme is entitled to claim ITC. (ii). However, this claim is not unconditional and is subject to conditions and restrictions as prescribed. (iii). Self-assessed ITC taken in the return is credited to the electronic credit ledger of the taxpayer. (iv). ITC can be taken on such supply of goods or services or both to the registered person which are used or intended to be used in the course or furtherance of his business. c. Provisions of sec 16(2) provide conditions to avail of ITC With effect from 01.01.2022 another condition to the effect that supplies in respect of which credit is being claimed have been declared by the supplier in his GSTR-1 and the credit available has been communicated to the recipient (vide GSTR-2B ) and that the credit is not restricted in terms of the said communication d. Deemed recipient of goods / services Where 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, it shall be deemed that the registered person has received the goods for the purpose of Section 16(2)(b) . Where services are provided by the supplier to any person on the directions of and on account of another registered person, it shall be deemed that the registered person has received the services for the purpose of Section 16(2)(b) . It may be noted in this regard that the date of receipt of the goods or services is vital for availing ITC. It may happen that the supplier issues invoice on 30th of a particular month and uploads details of the same in Form GSTR-1 of that month and the same is auto-populated in GSTR-2A of the recipient in the same month. However, this does not make the recipient eligible to avail of ITC in the return of this said month if he receives the goods in the subsequent month. In the case of goods, many audit trails can be found in respect of receipt of goods in documents like E-Waybill, GRN etc. This, however, may be difficult to ascertain in the case of services. Further, there may be a situation where goods are received in the subsequent month but purchase is auto populated in GSTR 2A in the month of sale as disclosed by the supplier in GSTR 1. In such cases there is a probability to claim ITC wrongly by the recipient though the goods are not received. e. Goods received in lots If goods are received in instalments against a single invoice, credit can be availed only upon receipt of the last instalment of goods. Suppose, a consignment of iron ores was dispatched from Jharkhand to Kolkata by 10 trucks. Invoice was raised to the recipient on 28.10.2018. Three trucks reached Kolkata by 30.10.2018 but the truck carrying the final lot of the consignment reached the recipient on 03.11.2018. The supplier also disclosed such sales in his GSTR 1 for the month of Oct 18. In this case, ITC in respect of the invoice issued on 28.10.2018 can be availed not before the month of November, 2018. f. Payment in respect of the supply as a condition to avail ITC: When a recipient fails to pay his supplier (other than supplies on which tax is payable under RCM), the amount of value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice, the recipient is liable to add the ITC availed on such supply to his output tax liability along with interest thereon. However, the recipient is also entitled to avail the credit of ITC once he makes the payment towards the amount of value of supply along with tax payable thereon. Capital goods and plant machinery on which depreciation is claimed on the tax component under the Income Tax Act: Sec 16 (3) does not allow a registered person to take ITC on such a tax component of the cost of capital goods and plant and machinery, on which he has claimed depreciation under the provisions of the Income Tax Act, 1961 . g. Time limit to claim ITC As per Sec 16(4), a registered person shall not be entitled to take ITC 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 ( Form GSTR-3B ) 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. For F/Y 2017-18 , a taxpayer shall be allowed to take ITC till the due date of furnishing of the return for the month of March, 2019 i.e. 23.04.2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the FY 2017-18, the details of which have been uploaded in the Form GSTR-1 for the month of March, 2019. For F/Y 2018-19 , a taxpayer shall be allowed to take ITC till the due date for furnishing of the return for the month of September, 2019 i.e. 20.10.2019. For the FY 2018-19, for the taxpayers having aggregate turnover upto Rs. 2 cr, filing of GSTR-9 is optional and for the taxpayers having aggregate turnover upto Rs. 5 cr filing of GSTR-9C is optional. The Ministry of Finance, GoI in an Official Press Release dt.24.10.2020 announced the extension of due date to file GSTR 9, GSTR 9A GSTR 9C for the FY 2018- 19 to 31st December, 2020. h. ITC in respect of supplies not declared by the supplier in Form GSTR- 1 A supplier is supposed to disclose all B2B supplies in Form GSTR 1 which gets auto populated in Form GSTR 2A of the recipient. Auto-population of invoices in Form GSTR 2A primarily assures disclosure of relevant supply by the supplier. However, disclosure in Form GSTR-1 does not sufficiently ensure that tax in respect of such supplies has been paid by the supplier which is paid in the return in Form GSTR-3B . Rule 36(4) has been inserted vide notification No 49/2019-CT, dt. 09-10-2019 (corresponding State notification. No 1730-F.T. dt.16.10.2019 ) and it applies to all returns filed after 9th Oct 2019. In accordance with Rule 36(4), a registered person is entitled to avail of maximum 10% (20% from 09.10.2019 to 31.12.2019) of eligible credit on the basis of auto-populated details in Form GSTR-2A of a particular month in respect of details of invoices or debit notes which have not been uploaded by the corresponding suppliers (i.e. which have not been auto-populated in Form GSTR-2A). Illustration: Suppose X calculates ITC at Rs. 100/- for the month of January 2020 on the basis of invoices in his possession. However, his suppliers declare invoices whose corresponding ITC calculates to Rs. 60/- only, in their Form GSTR-1 which is auto- populated in Form GSTR-2A for the month of January 2020 of X. It is also found out that ITC is eligible for Rs. 60/- since nothing in this amount is restricted by Section 17(1)/(2)/(5 ) etc. In this case, X is eligible to avail of ITC to the tune of Rs. 66/- [Rs. 60/- + Rs. 6/- (=Eligible ITC: Rs. 60/- x 10%)] i. Apportionment of Credit [ Sec 17(1) ] Example: A registered person claims ITC as follows a. ITC of Rs.20,000/- for purchase of taxable goods for resale. b. ITC of Rs.5000/- on rent payment for a two storied building, where 1st floor is used for business purpose and 2nd floor for residential purpose. c. ITC of Rs.1500/- for renting cab services both for business and for personal use. d. ITC of Rs.6000/- for purchase of furniture for residence. Ineligible ITC: Rs.1500/-: Restricted in accordance with section 17(5) Rs.6000/-: On purchase of Furniture for residence (for purpose other than business). Eligible ITC: Rs.20,000/- ITC to be apportioned in accordance with rule 42 Rs.5,000/-: Common Credit for service availed for both business and non business purpose. Eligible to claim portion of ITC out of Rs.5, 000/- which is attributable to business purpose (to be calculated in accordance with rule 42) j. Availability / apportionment of ITC when used for taxable supplies (including zero-rated supplies) as well as exempt supplies [Sec 17(2)] Value of exempt supply for the purpose of apportionment of ITC [Sec 17(3)] Exempt supply has been defined in sec 2(47) of the CGST /SGST Act as supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11 of the CGST/SGST Act or under section 6 of the IGST Act , and it includes non-taxable supply. For the purpose of apportionment of ITC as per sec 17(2) exempt supply includes the outward supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause 5(b) of Schedule-II , sale of building. However, it shall not include the value of activities or transactions specified in Schedule III , except sale of land subject to clause 5(b) of Schedule II, sale of building. Example: A registered person engaged in manufacturing of both taxable and exempted goods and pays tax amounting to Rs.1,50,000/- on procurement of inputs and input services for a particular period. The corresponding tax paid on inputs and input services which are used as follows a. Rs.5,000/- exclusively for non-business purposes. b. Rs.45,000/- exclusively for exempt supply. c. Rs.10,000/- ineligible credit u/s 17(5). d. Rs.40,000/- exclusively for taxable supplies including zero rated supply. e. Rs.50,000/- Common credit for both taxable and exempt supply. f. Exempt supply during the period was Rs.1,20,00,000/- and taxable supply was Rs.80,00,000/-. What will be the eligible credit during the period? Answer: Ineligible ITC: Rs.5,000/-: exclusively for non-business purposes. Rs.45,000/-: exclusively for exempt supply Rs.10,000/-: Restricted in accordance with section 17(5) Eligible ITC: Rs.40,000/-: exclusively for taxable supplies including zero rated supply ITC to be apportioned in accordance with rule 42 Rs.50,000/-: Common Credit used for both taxable supply exempted supply Eligible to claim portion of ITC out of Rs.50, 000/- which is attributable to taxable supply (calculated in accordance with rule 42 ) Rs.50,000 (Rs.80,00,000/(Rs.80,00,000+ Rs.1,20,00,000) = Rs.20,000/-. Total eligible credit available to the registered person: Rs.40,000/- + Rs.20,000/- = Rs.60,000/- Availability of Credit for a banking Company or a financial institution including NBFC [Sec 17(4)] Descriptions Options of availing of ITC Conditions Banking company or a financial institution including a non- banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances. Either apportion the ITC as per provisions of section 17(2) . OR Avail 50% of the eligible ITC on inputs, capital goods and input services every month and the rest shall lapse. Option once exercised shall not be withdrawn during the remaining part of the FY The restriction of 50% shall not apply to the tax paid on supplies made by one registered person to another registered person having the same PAN. k. Ineligible Input Tax Credit [Sec 17(5)] Input tax credit is not available in respect of certain inward supply of goods or services in accordance with Section 17(5) (blocked credit). The provision of Section 17(5) was amended w.e.f 1st February, 2019. Hence, the provisions are discussed accordingly: i. Motor vehicles and other conveyances (valid upto 31.01.2019) Example: ABC Pvt Ltd has purchased an SUV @ Rs 7.5 lac +GST on 31.12.2018 to be used by one of its directors. Shall the company be allowed to avail of this ITC? Ans: No, the company is not eligible avail of this ITC since this is blocked as per the provisions of Sec 17(5). There may be a situation where a company may claim ITC on cars purchased in the name of the company with the plea that cars are used to carry employees to office / factory / work site. Whether ITC is allowable in such cases? No, ITC is not allowable in this case also. ii. Food, beverages, outdoor catering, beauty treatment etc (valid up to 31.01.2019) Example: A company pays tax on procurement on some input services as follows: a. Rs.15,000/- on food and beverages for factory workers. b. Rs.2,500/- for outdoor catering for picnic of office employees c. Rs.3,500/- for health-related services to employees d. Rs.3000/- on rent-a-cab services for guests, e. Rs.10,000/- for purchase of GI policy for workers (150 workers), f. Rs.12,000/- for health insurance policies of office staff g. Rs.4,000/- for membership and other expenses of club h. Rs.5,000/- for travel benefit to employees for visiting different sites. i. Rs.2,600/- for travel benefit to employees going on leave. Calculation of eligible ITC. Group insurance to workers is obligatory on the part of the employer as per Workmen Compensation Act. Therefore, ITC is admissible on such input service. Travel benefit is restricted only during leave. Thus, input tax credit for procurement of services under sl. No. e and h above are only eligible for availing. iii. Motor vehicles and other conveyances (valid w.e.f. 01.02.2019) Subsequent to amendment of Section 17(5) the ambit of availability of ITC on motor vehicles is expanded. Prior to 01.02.2019, passenger vehicles, goods vehicles and other conveyances were treated at par and ITC was available for specific purposes only as mentioned above in Table in (i) above. However, subsequent to the amendment w.e.f. 01.02.2019, ITC is made available for goods vehicles. In respect of the passenger vehicles, ITC has been denied for vehicles with seating capacity not more than 13 persons including the driver. This means that, ITC is available on passenger vehicles with seating capacity more than 13 persons including the driver w.e.f. 01.02.2019. However, doubts may prevail in respect of availability of ITC in respect of construction machineries like tractor, crane, road roller, tippers and dumpers etc. i.e. Whether they can be classified as motor vehicles? It may be noted that, most of the earth moving machineries require registration under MV Act as motor vehicle. Since, earth moving machineries like tractor, crane, road roller, tippers, dumpers etc are also considered as motor vehicles, they are not outside the restriction clause in section 17(5). It may further be noted in this regard that, fulfilment of conditions specified in section 16 and 17 of the CGST /SGST Act may not be sufficient sometimes for availing of ITC. Certain restrictions in respect of availability of ITC are also provided in the rate notifications. Illustration Tax paid on purchase of a goods vehicle by a GTA would otherwise be available as ITC, but as per rate notification no.13/2017 CT(R) dt.28.06.2017 , services of a GTA in relation to transportation of goods is taxable @ 5% provided that the ITC on goods and services used in supplying the service has not been taken iv. Food, beverages, outdoor catering, beauty treatment etc (w-e-f 01.02.2019) Hence, w-e-f 01.02.2019, ITC would be available in respect of the aforesaid services if it is obligatory on the part of employer to provide the same to its employees under any law for the time being in force. v. Works Contract Service used for immovable property other than plant machinery but including repair maintenance and renovation to the extent of capitalization Works contract is defined under section 2(119) as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. Works contract as defined under section 2(119) though being a composite supply is treated as a supply of services as per Para 6(a) of Schedule II of the CGST /SGST Act, 2017. If a registered person avails of works contract service as input service for further supply of works contract service, then in such a scenario he would be eligible to avail of the ITC on such service procured by him. Illustration- A taxpayer is constructing his new factory for manufacture of taxable goods. Contractor A supplies construction services and another vendor B supplies Plant Machinery . The taxpayer also procures goods and services on his own account to develop the boundary wall of the factory premises. In this case, the taxpayer is not in the business of supplying works contract service. Therefore, he is not eligible to claim ITC in respect of tax paid on inward supplies of works contract service. He is eligible to claim ITC on plant machinery. The taxpayer is also not eligible to claim ITC on tax paid on procurement of goods and services on his own account for building the boundary wall. However, if contractor A engages a subcontractor, he is eligible to claim ITC on procurement of works contract service from the sub-contractor since the same is procured for further supply of works contract service. Plant and Machinery may also be of the nature of immovable property in certain cases when affixed permanently to the earth. It may be noted that, when a works contract service is procured for construction of plant and machinery, ITC would be available to the recipient, since works contract service procured for construction of plant and machinery is excluded from the negative list. For the purpose of Input Tax Credit plant and machinery means apparatus, equipment, 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. vi. Other unavailable credit ITC is blocked in respect goods lost, stolen, destroyed, written off or disposed off by way of free gift or free samples. Confusion may arise that whether those goods are only inputs and capital goods or also manufactured end product or any intermediary products. Since, there is no such condition, so whether those goods are inputs, capital goods, finished product or any intermediary products ITC is required to be reversed when such goods are lost, stolen, destroyed, written off or disposed off by way of free gift or free samples. l. Availability of credit in special circumstances: a. Sec 18(1) and 18(2) - Supplier Stock held as Stock to be considered as on Inputs or Inputs contained in semi-finished /finished goods Inputs Services Capital Goods Person, who has applied for registration within 30 days from the date of incurring liability for registration and who has been granted such registration ITC available Stock of service is not possible. ITC not available ITC not available The day immediately preceding the date from which he becomes liable to pay tax Voluntarily Registered ITC available ITC not available ITC not available The day immediately preceding the date from which supplier is liable to pay tax under the regular scheme. Person ceases to pay tax under the composition scheme ITC available ITC not available ITC not available The day immediately preceding the date from which supplier is liable to pay tax under the regular scheme. Exempt supplies become taxable ITC available on inputs relatable to such exempt supply ITC not available ITC available on capital goods exclusively used for such exempt supply The day immediately preceding the date from which exempt supplies become taxable. Note: a. ITC in respect of inputs or inputs contained in semi-finished/ finished goods or capital goods held in stock as noted in the above table would be available only within one year from the date of issuance of the tax invoice related to such supply. b. The credit on capital goods shall be reduced by five percentage points per quarter or part thereof from the date of invoice. b. Transfer of credit in special circumstances [ Sec 18(3) ] c. Other circumstances provided under section18 d. ITC in respect of inputs and capital goods sent for job work. If the inputs/ capital goods sent for job work are not received back by the principal after completion of job work or otherwise or are not supplied from the place of business of the job worker (Sec 19) The above time period for returning back inputs/ capital goods from job workers to the principal shall not apply to moulds and dies, jigs and fixtures, or tools sent out to a job worker for job work. Principal means a registered person referred to in section 143(1) For the purposes of job work, input includes intermediate goods arising from any treatment or process carried out on the inputs by the principal or the job worker e. Manner of distribution of credit by Input Service Distributors. a. Conditions for distribution of Credit by ISD relevant period for the purposes of Section 20 shall be (i) if the recipients of credit have turnover in their States or UTs in the financial year preceding the year during which credit is to be distributed, the said financial year; or (ii) if some or all recipients of the credit do not have any turnover in their States or UTs in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed recipient of credit means the supplier of goods or services or both having the same Permanent Account Number as that of the Input Service Distributor; turnover , in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied under entries 84 and 92A of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule. Example of distribution of ITC by ISD: A company has 6 numbers of GSTIN under a single PAN in the following States: i. In Delhi as normal taxpayer ii. In Delhi as ISD iii. In West Bengal as normal taxpayer iv. In Bihar as normal taxpayer v. In Uttar Pradesh as normal taxpayer vi. In Punjab as normal taxpayer The ISD received invoices from different vendors as follows: a. Factory building renovation in West Bengal involving IGST of Rs.1,00,000/- (renovation works duly capitalized in the books in HQ Delhi) b. Advertisement in all the above States involving input tax of Rs.30,000/- as IGST. c. Repairing of plant machinery at Delhi and UP involving input tax of Rs.10, 000/- as CGST and Rs.10, 000/- as SGST. d. Tax audit in Punjab involving input tax of Rs.20, 000/- as IGST. Turnover of previous year of the above GSTINs was as follows: Delhi UP Punjab MP WB Bihar Turnover 10 Cr 10 Cr 4 Cr 5 Cr 8 Cr 1 Cr Pro-rata ratio 25% 25% 10% 12.5% 20% 2.5% The ISD distributed ITC as follows: Invoice wise total credit(Rs.) Delhi UP Punjab MP WB Bihar Inv. a 1,00,000 IGST=100000 Inv. b 30000 CGST=3750 SGST=3750 IGST=7500 IGST=3000 IGST=3750 IGST=6000 IGST=750 Inv. c 20000 CGST=5000 SGST=5000 IGST=10000 Inv. d 20000 IGST=20000 Distribution of ITC by the ISD as appeared in the above tables is correctly done except in respect on Inv. a. for which ITC is blocked as per provisions of section 17(5) of the CGST/SGST Act. Now, the question arises how and from whom that can be recovered? Let us go through the provisions of section 21 below. Thus, the credit distributed in excess to West Bengal by the ISD as IGST of Rs.1,00,000/- for renovation of factory building which has been capitalized can be recovered under section 73 or 74 as applicable along with interest from the distinct person in West Bengal as he was the recipient in this case.