Key Provisions of Input Tax Credit (ITC) Under GST: Eligibility, Calculation & Refund Rules Explained

The key provisions governing the calculation, distribution, and claiming of Input Tax Credit (ITC) and refunds are primarily outlined in Chapter V (Input Tax Credit) and Chapter XI (Refunds) of the relevant Acts and Rules.

Here is a comprehensive overview of the key statutory and rule-based provisions:

I. Claiming and Eligibility for Input Tax Credit

The eligibility and general conditions for taking Input Tax Credit are governed by Section 16.

General Eligibility and Conditions (Section 16 and Rule 36)

1. Entitlement and Purpose: Every registered person is entitled to take credit of input tax charged on any supply of goods or services or both, provided they are used or intended to be used in the course or furtherance of his business. This amount is credited to the electronic credit ledger.

2. Mandatory Conditions (Section 16(2)): No registered person is entitled to credit unless the following conditions are met: 

   • The person must be in possession of a tax invoice or debit note issued by a registered supplier, or other prescribed tax-paying documents.

   • The details of the invoice or debit note must be furnished by the supplier in their statement of outward supplies (Section 37) and communicated to the recipient.

   • The registered person must have received the goods or services. If goods are received in lots or installments, credit is taken upon receipt of the last lot or installment.

   • The Input Tax Credit details for the supply must not be restricted under Section 38.

   • The tax charged on the supply must have been actually paid to the Government, either in cash or through the utilization of admissible ITC.

   • The registered person must have furnished the return under Section 39.

3. Documentary Requirements (Rule 36): ITC can be availed based on specific documents, including invoices issued by the supplier (Section 31), invoices for reverse charge supplies, debit notes (Section 34), bills of entry for imports, or an Input Service Distributor (ISD) invoice or credit note (Rule 54). ITC may still be availed even if the document does not contain all specified particulars, provided it includes the amount of tax charged, description and value of supply, GSTIN of the supplier and recipient, and place of supply (in case of inter-State supply).

4. Time Limit for Claiming ITC (Section 16(4)): A registered person is not entitled to take ITC after the thirtieth day of November following the end of the financial year to which the invoice or debit note pertains, or the furnishing of the relevant annual return, whichever is earlier.

5. Restriction on Depreciation Claim: If a registered person claims depreciation on the tax component of the cost of capital goods and plant and machinery under the Income Tax Act, 1961, the input tax credit on that tax component is not allowed.

6. Burden of Proof (Section 155): The burden of proving the eligibility for ITC under the Act lies on the person who claims it.

II. Calculation and Reversal of ITC

Apportionment (Section 17 and Rule 42/43): When goods or services are used partly for business and partly for non-business purposes, or partly for taxable (including zero-rated) supplies and partly for exempt supplies, the ITC is restricted to the portion attributable to the business purposes or taxable supplies, respectively.

Determination of ITC on Inputs and Input Services (Rule 42): Rule 42 outlines a detailed formula to calculate eligible ITC and requires the reversal of common credit:

Determination of ITC on Capital Goods (Rule 43): The calculation for capital goods involves attribution over their useful life, which is considered five years (60 months) from the date of the invoice. The amount of input tax credit attributable to a tax period on common capital goods is denoted as Tm, calculated as Tm = Tc ÷ 60, where Tc is the common credit. The amount attributable to exempt supplies (Te) must be calculated and added to the output tax liability during every tax period of the capital goods' useful life.

Reversal Due to Non-Payment to Supplier: If a recipient fails to pay the supplier for the value of supply plus tax within 180 days from the invoice date, an amount equal to the ITC availed must be added to the recipient's output tax liability, along with interest.

III. Distribution of Input Tax Credit (ISD)

The distribution of credit by an Input Service Distributor (ISD) is governed by Section 20 and Rule 39.

ISD Obligation (Section 20): An office of a supplier of goods or services which receives tax invoices for input services (including services liable to tax under reverse charge, w.e.f. 01.04.2025) on behalf of distinct persons is required to be registered as an ISD and shall distribute the input tax credit in respect of such invoices.

Distribution Mechanics (Section 20 and Rule 39):

1. Distribution Document and Timing: The ISD must distribute the credit using a prescribed document (ISD invoice or credit note, as per Rule 54). The input tax credit available for distribution in a month must be distributed in the same month, and details furnished in FORM GSTR-6.

2. Limit: The amount of credit distributed shall not exceed the amount of credit available for distribution.

3. • Credit relating to a specific recipient shall be distributed only to that recipient.

   • Credit attributable to more than one recipient (common credit) shall be distributed among them pro rata based on the turnover in the State/Union Territory during the relevant period.

4. • Input tax credit on Integrated Tax (IGST) is distributed as Integrated Tax to every recipient.

   • Input tax credit on Central Tax (CGST) and State/Union Territory Tax (SGST/UTGST): 

     • If the recipient is in the same State/UT as the ISD, it is distributed as Central Tax and State/Union Territory Tax, respectively.

     • If the recipient is in a different State/UT, it is distributed as Integrated Tax, equal to the aggregate of the credit distributed.

5. Recovery of Excess Credit (Section 21): If the ISD distributes credit in contravention of Section 20, resulting in excess distribution, the excess credit shall be recovered from the recipients along with interest. Recovery procedures follow Section 73 or Section 74 (or Section 74A) mutatis mutandis.

IV. Provisions Governing Refunds

The main provision governing refunds is Section 54.

Claiming and Eligibility

1. General Application: Any person claiming a refund of any tax, interest, or any other amount paid may apply.

2. Time Limit: The application must be made before the expiry of two years from the relevant date. 

   • For refund on account of excess payment, the relevant date is the date of payment of tax.

   • For goods exported by sea or air, the relevant date is the date the ship or aircraft leaves India.

   • For tax paid on a transaction initially considered intra-State but subsequently held to be inter-State (Section 77), the application may be filed before the expiry of two years from the date of payment of tax on the correct head.

3. Refund Application Form: Applications for refund (except for IGST paid on exported goods and certain notified persons under Section 55) are filed electronically in FORM GST RFD-01. Refund of any balance in the electronic cash ledger (Section 49(6)) is also claimed via this form.

4. Refund of Unutilized ITC (Section 54(3)): A registered person can claim a refund of unutilized ITC only in the following cases: 

   • Zero-rated supplies made without payment of tax (under bond or Letter of Undertaking).

   • Where the credit has accumulated due to an inverted duty structure (rate of tax on inputs is higher than the rate of tax on output supplies, excluding nil-rated or fully exempt supplies).

   • Restriction: No refund of unutilized ITC is allowed if the supplier has availed drawback of such tax.

5. Debit to Electronic Credit Ledger: When the application relates to the refund of ITC, the electronic credit ledger shall be debited by the applicant by an amount equal to the refund so claimed.

Refund Calculation Formulas (Rule 89)

For Zero-rated Supplies (Rule 89(4)): Refund of input tax credit for zero-rated supplies made without payment of tax is calculated as per the formula: $$\text{Refund Amount} = \frac{(\text{Turnover of zero-rated supply of goods} + \text{Turnover of zero-rated supply of services}) \times \text{Net ITC}}{\text{Adjusted Total Turnover}}$$ Where "Net ITC" means input tax credit availed on inputs and input services during the relevant period.

For Inverted Duty Structure (Rule 89(5)): Refund on account of inverted duty structure is granted as per the formula: $$\text{Maximum Refund Amount} = \left(\frac{\text{Turnover of inverted rated supply of goods and services} \times \text{Net ITC}}{\text{Adjusted Total Turnover}}\right) - \left[\text{Tax payable on such inverted rated supply of goods and services} \times \left(\frac{\text{Net ITC}}{\text{ITC availed on inputs and input services}}\right)\right]$$ For this calculation, "Net ITC" generally refers to input tax credit availed on inputs during the relevant period.

Payment and Disbursement

1. Provisional Refund (Section 54(6)): For claims on account of zero-rated supplies, the proper officer may grant a provisional refund of ninety per cent. of the total amount claimed, excluding the amount of ITC provisionally accepted, within seven days of the acknowledgement.

2. Unjust Enrichment Principle: Generally, if the incidence of tax has been passed on to another person, the refund amount shall be credited to the Consumer Welfare Fund (Section 57).

3. Direct Payment to Applicant: The refundable amount is paid directly to the applicant if it relates to (among other items): refund of tax paid on exports/inputs used therein; refund of unutilized ITC (Section 54(3)); refund of tax where incidence was not passed on; or refund of tax wrongfully collected (Section 77).

4. Sanction and Disbursement: The proper officer issues the final refund order in FORM GST RFD-06 and a payment order in FORM GST RFD-05. The amount is electronically credited to the applicant's bank account based on a consolidated payment advice.