Input tax is the credit for tax paid on inputs. The concept of input tax credit is currently available under VAT and Excise. The same is available in proposed regime of GST as well. In fact, one of the main advantages of GST is that it allows seamless credit of input tax at all stages.
The mechanism of input tax credit under GST differs from current regime of VAT and Excise along following lines:
1. Under GST, credit is available for input tax paid on inter-state purchases which is not available under VAT.
2. Under GST, credit of input tax paid on capital goods is available in one go while under VAT/Excise, the same is spread over years.
3. The GST Model Law follows a negative list approach for non-allowance of ITC which is non-existent under VAT and Excise.
4. GST provides a matching mechanism for input tax credit at the time of filing of returns which is not there in VAT and Excise.
Let us discuss the entire process of input tax credit under GST under these broad topics:
a). Scope of Input tax credit outlined under GST
b). Determining eligible purchases for claiming input tax credit
c). Negative list of goods and services ineligible for input tax credit
d). Claiming set-off against output tax liability.
e). Matching, reversal and reclaim of input tax credit
f). Special Cases
Scope of Input tax credit outlined under GST
Sec 2(58) of Model GST Law defines “input tax credit” as “credit of ‘input tax’ as defined in section 2(57)”.
Sec 2(56) provides that “ input tax in relation to a taxable person, means the {IGST and CGST}/{IGST and SGST} charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under sub-section (3) of section 7”
Further Sec 16 (1) reads as follows:
“Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 35, be entitled to take credit of input tax admissible to him and the said amount shall be credited to the electronic credit ledger of such person.”
The insurance lawyers based in California area explain the previous mentioned information and based on their explanation, the above definitions can be interpreted as follows:
- Input tax credit is available to a registered taxable person
- Input tax credit is available only in respect of tax which has been charged on invoice.
- Input tax credit is available on respect of both goods and services
- Goods and/or services are used, or are intended to be used, in the course or furtherance of business
- Input tax includes the tax paid on reverse charge mechanism and hence such tax paid on reverse charge basis shall be eligible
- The credit can be taken within the specified time and manner specified in Section 35.
- The amount of admissible input tax credit shall be credited in electronic credit ledger.
Determining eligible purchases for claiming input tax credit
1. Making purchases is not enough to claim credit
Remember the following pre-requisites to claim the input tax credit:
- Possession of a tax invoice, debit note, supplementary invoice or such other taxpaying document, issued by a registered supplier is a must
- The goods and services should have been received either by way of transfer of title documents or otherwise.
- The supplier from whom the goods have been purchased, have actually paid the tax charged to the credit of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply.
- Furnishing of a valid return under section 27 is must.
2. Deadline for taking input credit on an invoice
In respect of any invoice, credit can be taken till earlier of the following:
- Filing of the return under section 27 for the month of September following the end of financial year to which such invoice pertains or
- Filing of the relevant annual return.
3. Input tax Credit on Capital goods
The definition of capital goods in GST is almost same as defined in CENVAT Credit Rules, 2004.
The model law does not specifically lay down provisions for input tax credit in case of capital goods. Drawing inference from definition of goods, we can conclude that input tax credit is available immediately and fully on capital goods in the first year itself.
What happens if I claim depreciation on the tax component?
The law provides that Input tax credit is not available on the tax component of the cost of capital goods if depreciation is claimed on that component. For e.g. you purchase machinery worth Rs 10,000 on which you have paid GST, say @20% amounting to Rs 2,000. Now if you claim depreciation on the machinery cost of Rs 12,000 (inclusive of GST), then you cannot claim credit for Rs 2,000.
What happens if the capital goods, on which ITC has been claimed, are sold?
In this case, the registered taxable person shall have to pay an amount equal to higher of the following:
- The input tax credit taken on the said capital goods reduced by the percentage points as may be specified or
- The tax on the transaction value of such capital goods.
4. Input tax credit in case of goods received in lots
Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or instalment.
5. Input tax credit in case of “Bill to” or “ship to” scenarios
Explanation to Sec 16(11) contains a deeming clause for the receipt of goods. It says that it would be deemed that the taxable person has received the goods when the goods have been delivered to a third party on the direction of such taxable person.
By virtue of this clause, it can be concluded that ITC will be available to the person on whose order the goods are delivered to third person.
6. Attribution and Apportionment of input tax paid for taking credit
Goods and/or services may be used partly for the purpose of any business and partly for other purposes. Similarly, same can be used to make both taxable and non-taxable supplies.
As per section 16(6) of MGL, the input tax credit of goods and / or service attributable to only taxable supplies can be taken by registered taxable person. In such a situation, the following rules shall apply.
- Only input tax on goods and/or services attributable to business purpose is recoverable.
- Input tax attributable to taxable supplies wholly recoverable
- Input attributable to non- taxable supplies (excluding zero rated supplies) not recoverable.
- Where one-to-one correlation is not possible, the following formula to be used:
Negative list of goods and services ineligible for input tax credit
Input tax credit is not available in respect of following:
- Motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services—
i. transportation of passengers, or
ii. transportation of goods, or
iii. imparting training on motor driving skills;
- Goods and / or services provided in relation to :
i. food and beverages,
ii. outdoor catering,
iii. beauty treatment,
iv. health services,
v. cosmetic and plastic surgery,
vi. membership of a club, health and fitness centre,
vii. life insurance, health insurance and travel benefits
extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee;
- Goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;
- Goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
- Goods and/or services purchased from a Composition tax payer and
- Goods and/or services used for private or personal consumption, to the extent they are so consumed.
These restrictions are similar to those provided in Existing CENVAT Credit Rule, 2004.
Claiming set-off against output tax liability
1. Not all Supplies are eligible for input tax credit
Following table presents the different types of supplies and the ITC eligibility:
| S.no. | Particulars | Eligible for ITC | Relevant Section |
|---|---|---|---|
| 1. | Taxable intra state supply | Yes | Sec 16 |
| 2. | Taxable Inter-state supply | Yes | Sec 16 |
| 3. | Zero-rated supply | Yes | Sec 2(109) |
| 4. | Exempted supply | No | Sec 16 |
| 5. | Inter-state Stock transfers | Yes | Sec 16 |
| 6. | Supply under Composition Scheme | No | Sec 8(2) |
2. Input Service Distribution
Input Service Distributor has been defined under Section 2 (56) of MGL. It is basically an office meant to receive tax invoices towards receipt of input services and further distribute the credit to supplier units proportionately.
For the purpose of distributing the credit, ISD is deemed as supplier of services. The distribution of credit would be done subject to the following conditions:
- Credit should be distributed through tax invoice or other document as prescribed;
- Amount of credit distributed should not exceed the amount of credit available;
- Credit should be distributed only to such suppliers to whom such services are attributable;
- Credit in respect of services attributable to more than one supplier should be distributed proportionately on the basis of turnover of respective supplier during the preceding financial year.
3. Cross utilization of CGST, SGST and IGST input tax
The table below depicts the order in which input tax can be claimed against different GST liability. For example, input tax pertaining to SGST can be utilized to discharge liability of SGST and IGST in this order.
Cross utilization of SGST input tax against liability of CGST or vice versa is not allowed. Excess input if any after set-off may be either claimed as refund or else carry forward.
Matching, reversal and reclaim of input tax credit
Unlike current regimes, GST proposed a matching process for input tax credit. The process is enumerated below:
Filing of returns
1. The registered supplier will submit GSTR-1 containing details of outward supplies effected during the month by 10th of the next month. Thereafter, these details of outward supplies furnished by the supplier shall be made available electronically to each of the registered taxable persons (recipients) in Form GSTR-2A through the Common Portal.
2. The registered recipient will submit GSTR-2 containing details of inward supplies effected during the period by 15th of the next month, after adding, modifying or deleting data in Form GSTR-2A.
3. Once the GSTR-3 is filed, input tax credit shall be provisionally allowed as claimed in GSTR-3 and credited to the electronic credit ledger of such person.
4. Final credit will be allowed after matching input tax credit as provided under Section 29.
Matching Process
1. The details of every inward supply furnished by recipient for a tax period shall be matched:
a). With the corresponding details of outward supply furnished by the corresponding supplier in his valid return for the same tax period,
b). with the additional duty of customs paid under section 3 of the Customs Tariff Act, 1975 in respect of goods imported by him, and
c). for duplication of claims of input tax credit.
2. The following details relating to the claim of input tax credit, provisionally allowed, shall be matched:
a). GSTIN of the supplier
b). GSTIN of the recipient
c). Invoice/Debit Note date and number
d). Taxable value
e). Tax amount
3. The claim of input tax credit in respect of invoices and debit notes in FORM GSTR-2 that were accepted by the recipient in FORM GSTR-2A without amendment shall be treated as matched if the corresponding supplier has furnished a valid return.
4. Additional invoices added by recipient will remain under mismatch category till these are accepted by pairing supplier.
5. All invoices will remain under mismatch pertaining to those suppliers who have not filed the valid returns till date.
6. The claim of input tax credit shall be considered as matched, where the amount of input tax credit claimed is equal to or less than the output tax paid on such tax invoice or Debit Note, by the corresponding supplier.
Mismatch
1. The discrepancy shall be notified to both such taxable persons in Form GST ITC-1 on or before the last date of the month in which the matching has been carried out.
2. The cases of discrepancy could be:
a). Where ITC claimed by recipient is in excess of the tax declared by the supplier for the same supply or
b). The outward supply is not declared by the supplier in his valid return.
3. Duplication of claims of input tax credit in the details of inward supplies shall be communicated to the recipient.
4. Supplier or recipient to whom any discrepancy is made available may make suitable rectifications in the statement of outward supplies/inward supplies to be furnished for the month in which the discrepancy is made available.
Correction
1. Where supplier rectify the discrepancy in the return for the next month
Provisional credit will be confirmed.
2. Where supplier does not rectify the discrepancy in return for the next
Provisional credit will be reversed. Such uncorrected ITC shall be added to the output tax liability of the recipient in his return in FORM GSTR-3 for the month succeeding the month in which the discrepancy is made available and recipient will be communicated.
On being informed, the taxable person shall pay an amount equal to the output tax liability added along with applicable interest.
Acceptance
The final acceptance of claim of input tax credit will be made available electronically in FORM GST ITC-1 through the Common Portal.
What will be the legal position in regard to the reversed input tax credit if the supplier later realizes the mistake and feeds the information?
At any stage, but before September of the next financial year, supplier can upload the invoice and pay duty and interest on such missing invoices in his GSTR-3 of the month in which he uploaded the invoice. The recipient will then automatically get ITC on that invoice. The interest paid by the recipient at the time of reversal will also be returned to the recipient through an automated system on the GSTN.
Special Cases
1. Input tax credit in respect of inputs or capital goods sent for job work
Section 16A of Model Law contains the provisions for input tax credit in respect of inputs or capital goods sent for job work.
The principal shall be entitled to take credit of input tax on inputs or capital goods sent to a job-worker for job-work if after completion of job-work, inputs or capital goods are received by principal within 180 days (in case of inputs) or 2 years (in case of capital goods).
The credit is available even if the inputs or capital goods are directly sent to a job worker for job-work without their being first brought to place of business of principal, and in such a case, the aforesaid period shall be counted from the date of receipt by the job worker.
Where the goods are not received within the mentioned time:
- Principal will have to pay an amount equivalent to the input tax credit availed of on the said inputs or capital goods, along with interest.
- He may reclaim the input tax credit and interest paid earlier when the inputs or capital goods, are received back by him at his place of business.
2. Input tax eligibility in case of change in constitution
There might be a change in the constitution of registered person on account of
1. sale,
2. merger,
3. demerger,
4. amalgamation,
5. lease or
6. transfer of the business
In that situation, the transferor shall be allowed to transfer the input tax credit that remains unutilized in its books of accounts to the transferee provided that there is a specific provision for transfer of liabilities.
3. Eligibility of input tax credit on inputs in stock for a person obtaining registration under the Act
The law provides credit of input tax in respect of inputs held in stock on obtaining registration. The credit is available in respect of:
- inputs held in stock and
- inputs contained in semi-finished or finished goods held in stock
Such input tax credit can be availed only till the expiry of one year from the date of issue of tax invoice relating to such supply. Further, the amount of credit is to calculated in accordance with generally accepted accounting principles (GAAP)
The relevant dates are:
Case I: Where registration is granted to a person who has applied for registration within thirty days from the date on which he becomes liable to registration.
He shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of the Act.
For example, a person becomes liable to pay tax on 1st August, 2017 and has obtained registration on 15th August, 2017. Such person is eligible for input tax credit on inputs held in stock as on 31st July, 2017.
Case II: Voluntary registration
He shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of registration.
For example, Mr. A applies for voluntary registration on 5th June, 2017 and obtained registration on 22nd June, 2017. Mr. A is eligible for input tax credit on inputs held in stock and inputs contained in semi-finished or finished goods held in stock as on 21st June, 2017.
4. Reversal of input tax credit in certain cases
Following are the situations which could lead to cessation of benefit of input tax credit:
- Where a normal taxpayer opt in Composition Scheme
- Where goods and /or services become exempt
In such cases, the taxpayer will have following responsibilities in relation to ITC:
- He shall have to pay an amount equivalent to the credit of input tax on inputs held in stock on the day immediately preceding the date of switchover or date of exemption. The amount is to be calculated in accordance with GAAP.
- The amount can be paid either through the electronic credit ledger or the electronic cash ledger.
- Where payment is made through the electronic credit ledger, excess ITC balance lying, if any, will lapse.
Recovery of wrongly availed ITC
In case credit has been taken wrongly, the same shall be recovered from the registered taxable person in the manner as may be prescribed in this behalf.
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