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TMI BlogRESTRICTIONS ON INPUT TAX CREDIT UNDER GST LAWSX X X X Extracts X X X X X X X X Extracts X X X X ..... RESTRICTIONS ON INPUT TAX CREDIT UNDER GST LAWS - By: - Mr. M. GOVINDARAJAN - Goods and Services Tax - GST - Dated:- 17-9-2021 - - Entitlement to take input tax credit Section 16 of the Act provides that 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. Restrictions under section 49 Section 49 (5) of the Act provides that the amount of input tax credit available in the electronic credit ledger of the registered person on account of Integrated tax shall first be utilized towards payment of integrated tax and the amount remaining, if any, may be utilized towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order. The central tax shall first be utilized towards payment of central tax and the amount remaining, if any, may be utilized towards the payment of integrated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax. The State tax shall first be utilized towards payment of State tax and the amount remaining, if any, may be utilized towards payment of integrated tax. The input tax credit on account of State tax shall be utilized towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax. The Union territory tax shall first be utilized towards payment of Union territory tax and the amount remaining, if any, may be utilized towards payment of integrated tax. The input tax credit on account of Union territory tax shall be utilized towards payment of integrated tax only where the balance of the input tax credit on account of Central tax is not available for payment of integrated tax. The central tax shall not be utilized towards payment of State tax or Union territory tax. The State tax or Union territory tax shall not be utilized towards payment of Central tax. Conditions for availing input tax credit Section 16(2) provides that no registered person shall be entitled to input tax credit in respect of any supply of goods or services or both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him unless, he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying documents as may be prescribed; he has received the goods or services or both. 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; he has furnished the return. Depreciation Section 16(3) provides that 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. Discount The value of the supply shall not include any discount which is given after the supply has been effected, if input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply. Non entitlement A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply 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 debit note pertains or furnishing of the relevant annual return, whichever is earlier. Restricted claim Section 17(1) provides that where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business. Restriction on exempted supplies Section 17(2) provides that where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. Banking companies Section 17(4) provides that a banking company or a financial institution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2) or avail of, every month, an amount equal to 50% of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse. The option once exercised shall not be withdrawn during the remaining part of the financial year. 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 Permanent Account Number. If the said company does not exercise the option the company shall not avail the credit of- the tax paid on inputs and input services that are used for non-business purposes; and the credit attributable to the supplies specified in sub-section (5) of section 17 , in Form GSTR -2 ; Blocked creditrs Section 17(5) provides that input tax credit shall not be available in respect of the following, motor vehicles for transportation of persons having approved seating capaci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:- further supply of such motor vehicles; or transportation of passengers; or imparting training on driving such motor vehicles; vessels and aircraft except when they are used for making the following taxable supplies, namely:- further supply of such vessels or aircraft; or transportation of passengers; or imparting training on navigating such vessels; or imparting training on flying such aircraft; for transportation of goods; services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft. Supply of food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft; works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. goods or services or both on which tax has been paid under composition scheme. goods or services or both received by a non-resident taxable person except on goods imported by him; goods or services or both used for personal consumption; goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and any tax paid in accordance with the provisions of section 74 Recovery of tax where the same has not been paid with the intention to evade tax; section 129 tax paid for the release of detained goods; section 130 tax paid . Limitation A registered person shall not be entitled to take input tax credit in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply. Restrictions to certain percentage Rule 36 (4), which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been inserted vide Notification No. 49/2019-Central Tax, dated 09.10.2019 , provides that the Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been furnished by the suppliers in Form GSTR-1 or using the invoice furnishing facility, shall not exceed 20% of the eligible credit available in respect of invoices or debit notes the details of which have been furnished by the in Form GSTR-1 or using the invoice furnishing facility. This came into effect from 09.10.2019. Case Eligible ITC as per books Eligible ITC reflected in 2A Permissible ITC (Eligible ITC in 2A + 20%) Actual ITC which can be claimed 1 20,00,000 12,00,000 13,44,000 13,44,000 2 20,00,000 14,00,000 15,68,000 15,68,000 3 20,00,000 18,00,000 20,16,000 20,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The above said restriction shall be done on self assessment basis. This will apply to the invoices/debit notes issued on or after 19.10.2019. Restriction is to be calculated on consolidation basis on the given tax period not on the basis of supplier wise. How to subsequently avail the ITC restricted in a particular tax period Tax period Oct, 19 Nov, 19 ITC as per books 10,00,000 12,00,000 Eligible ITC as per 2A 6,00,000 2,00,000 (for Oct 19) 9,00,000 (for Nov 19) Permissible ITC 7,20,000 (6,00,000 + 20%) 2,40,000 (for Oct 19 2,00,000 + 20%) 10,80,000 (for Nov 19 9,00,000 + 20%) Restricted ITC 2,80,000 40,000 (for Oct 19) 1,20,000 (for Nov 19 The rate of 20% has been reduced to 10% with effect from 01.01.2020 vide Notification No.75/2019-Central Tax, dated 26.12.2019 . The said condition shall apply cumulatively for the period February, March, April, May, June, July ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and August, 2020 and the return in Form GSTR -3B for the tax period September, 2020 shall be furnished with the cumulative adjustment of input tax credit for the said months in accordance with the condition above. Vide Circular No. 142/12/2020- GST , dated 09.10.2020 , the Board issued the following clarifications- Taxpayers shall reconcile the input tax credit availed in their Form GSTR -3B s for the period February, 2020 to August, 2020 with the details of invoices uploaded by their suppliers of the said months, till the due date of furnishing Form GSTR -1 for the month of September, 2020. The cumulative amount of ITC availed for the said months in Form GSTR -3B should not exceed 110% of the cumulative value of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37 of the CGST Act , till the due date of furnishing of the statements in Form GSTR -1 for the month of September, 2020. The availability of 110% of the cumulative value of the eligible credit ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37 of the CGST Act does not mean that the total credit can exceed the tax amount as reflected in the total invoices for the supplies received by the taxpayer i.e. the maximum credit available in terms of provisions of section 16 of the CGST Act. The excess input tax credit availed arising out of reconciliation during this period, if any, shall be required to be reversed in Table 4(B)(2) of Form GSTR - 3B , for the month of September, 2020. Failure to reverse such excess availed input tax credit on account of cumulative application of sub-rule (4) of rule 36 of the CGST Rules would be treated as availment of ineligible input tax credit during the month of September, 2020. The manner of cumulative reconciliation for the said months in terms of proviso to sub-rule (4) of rule 36 of the CGST Rules is explained by way of illustration, in a tabulated form, below. Tax period Eligible ITC as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Chapter V of the CGST Act and the rules made thereunder , except rule 36(4 ) ITC availed by the taxpayer (recipient) in GSTR -3B of the respective months Invoices on which ITC is eligible and uploaded by the suppliers till due date of FORM GSTR -1 for the tax period of September, 2020 Effect of cumulative application of rule 36(4) on availability of ITC . Feb 2020 300 300 270 Maximum eligible ITC in terms of rule 36 (4) is 2450 + [10% of 2450] =2695. Taxpayer had availed ITC of 2750. Therefore, ITC of 55 [2750-2695] would be required to be reversed as mentioned above. March 2020 400 400 380 April 2020 500 500 450 May 2020 350 350 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 320 June 2020 450 450 400 July 2020 550 550 480 August 2020 200 200 150 Total 2750 2750 2450 ITC Reversal required to the extent of 55 September, 2020 500 385 350 10% Rule shall apply independently for September, 2020 In the FORM GSTR -3B for the month of September, 2020, the tax payer shall avail ITC of 385 and would reverse ITC of 55 The rate of 10% has been reduced to 5% with effect from 01.01.2021 vide Notification No. 94/2020-Central Tax, dated 22.12.2020 . Such condition shall apply cumulatively for the period April and May, 2021 and the return in Form GSTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -3B for the tax period May, 2021 shall be furnished with the cumulative adjustment of input tax credit for the said months in accordance with the condition above. Reversal of input tax credit A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within 180 days shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in Form GSTR -2 for the month immediately following the period of 180 days from the date of the issue of the invoice, which shall be added to the out tax liability of the registered person. The registered person shall also liable to pay interest on the said amount from the due date till the amount added to the output tax liability of the registered person. Conditions and restrictions in respect of inputs and capital goods sent to the job worker The inputs, semi-finished goods or capital goods shall be sent to the job worker under the cover of a challan issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the principal, including where such goods are sent directly to a job-worker. Where the goods are sent from one job worker to another job worker, the challan may be issued either by the principal or the job worker sending the goods to another job worker. The challan issued by the principal may be endorsed by the job worker, indicating therein the quantity and description of goods where the goods are sent by one job worker to another or are returned to the principal: The challan endorsed by the job worker may be further endorsed by another job worker, indicating therein the quantity and description of goods where the goods are sent by one job worker to another or are returned to the principal. The challan issued by the principal to the job worker shall contain the details specified in rule 55 . The details of challans in respect of goods dispatched to a job worker or received from a job worker during a quarter shall be included in Form GST ITC -04 furnished for that period on or before the 25 th day of the month succeeding the said quarter or within such further period as may be extended by the Commissioner by a notification in this beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf. Where the inputs or capital goods are not returned to the principal within the prescribed time it shall be deemed that such inputs or capital goods had been supplied by the principal to the job worker on the day when the said inputs or capital goods were sent out and the said supply shall be declared in Form GSTR -1 and the principal shall be liable to pay the tax along with applicable interest. Order of utilization of input tax credit Input tax credit on account of integrated tax shall first be utilized towards payment of integrated tax, and the amount remaining, if any, may be utilized towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order. The input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilized fully - Reply By OmPrakash jain as = Sir, 1. In ARS Steels Alloy International Pvt. Ltd. v. State Tax Officer Ors. 2021 (6) TMI 957 - MADRAS HIGH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... COURT , it has been held that that the reversal of ITC involving S.17(5)(h) , in cases of loss by consumption of input, proportionate to the loss of the input, which is inherent to manufacturing loss is misconceived such loss is not contemplated/ covered by the situations adumbrated u/s 17(5)(h) . A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. It has to be understood in the context of a manufacturing process, which result in some kind of a loss such as evaporation, creation of by-products, etc. The total quantity of inputs that went into the making of the finished product represents the inputs of such products in entirety. And as such, full ITC shall be allowed and no Reversal of ITC is required. Where tax free by-products have been produced during manufacturing process, then in the light of the above judgment read with S.17(2) 17(5)(h) , how will you work out the amount of the component T4 of ITC u/rule 42(1)(e) , which reads as under; The amount of ITC attributable to inputs and input services intended to be used exclusively for affecting supplies other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempted supplies. 2. Further, the significance of the word notwithstanding in S.16(2) , has not been explained in the entire article. The notwithstanding clause , in the section 16(2) means that it overrides the effects of all the sub-sections of section 16 , per decision of the cases in Central Bank of India v. State of Kerala 2009 (2) TMI 451 - SUPREME COURT Synergy Fertichem Pvt. Ltd. v. State of Gujarat Ors. 2019 (12) TMI 1213 - GUJARAT HIGH COURT , Skill Lotto Solutions Pvt. Ltd. v. Union of India 2020 (12) TMI 140 - SUPREME COURT , Government of Kerala v. Mother Superior Adoration Convent 2021 (3) TMI 93 - SUPREME COURT . Dated: 17-9-2021 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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