The term Input Tax Credit assumes significant importance in the arena of indirect taxation. Let us zero in on our analysis of this topic under the GST regime.
Every registered person shall be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business on the basis of any of the following tax-paying documents:
- Tax Invoice issued
- Debit note
- Bill of entry
- Invoice prepared in respect of reverse charge basis
- Document issued by Input Service Distributor for distribution of credit.
Catch Point: It is important to observe the words ‘used by him’ and ‘in his business’. These words refer to the registered taxable person in question and not the legal entity as a whole. So, ITC paid in a State MUST NOT be in relation to the business of a taxable person in another State even if belonging to the same taxable person.
- The said goods or services or both are used or intended to be used in the course or in the furtherance of his business;
- He is in possession of tax invoice/ debit note / tax-paying document issued by a supplier registered under this Act.
- He has received the said goods or services or both subject to job-work facilities and restrictions relating to input tax credit
- The supplier has uploaded the relevant invoice on the GSTN (online GST portal);
- The supplier has paid the said amount of tax (as charged in the invoice) to appropriate Government in cash or by way of utilization of input tax credit, as admissible;
- He – claimant of input tax credit – has furnished GST return in FORM-GSTR 2;
- In case all the above conditions are met except for the fact that the supplier has not uploaded the invoice in his GSTR-1, provisional ITC can be taken up to 5% of the credits that are eligible and uploaded by the supplier in his GSTR-1. The provisional ITC cannot exceed the amount of ITC not uploaded by the supplier in his Form GSTR-1.
Goods received in instalments: If goods are received in instalments against a single invoice, credit can be taken upon receipt of the last instalment of goods.
Failure to pay to supplier of goods or service or both, the value of supply and tax thereon:
If the recipient of goods/services has not paid the supplier within 180 days from date of invoice, the amount equal to input tax credit availed along with the interest will be added to output liability of the recipient. The said input tax credit can be re-availed on payment of the value of supply and tax payable thereon.
The above condition does not apply for supplies which are payable under reverse charge basis.
Example: Mr. A sells goods worth Rs 1,00,000 to Mr. B. on 01.08.2017 on credit. GST, @ 5 % has been assumed which comes to Rs 5,000. The invoice value, thus, is Rs. 1,05,000. Mr. B decides to pay the invoice amount later on. Now, while filing the GST returns for August 2017, Mr. B can claim the input tax credit of Rs 5000.00. 180 days (from 01.08.2017) lapses on 27.01.2018. If Mr. B does not pay the invoice amount by this date then the ITC of Rs 5000 will be reversed in the return and added to output tax liability. If subsequently, he pays the invoice amount, such ITC will be re-availed.
Capital goods on which depreciation is claimed: If depreciation has been claimed on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income Tax Act, the input tax credit shall not be allowed.
Time limit to avail the input tax credit: Input Tax Credit has to be availed before
Due Date for filing the return for the month of September of the subsequent financial year
Or furnishing of Annual return,
Whichever is earlier.
ITC Based on Use of Inputs
- Use of Inputs for Taxable / zero-rated supplies – ITC will be available.
Example: Mr. A purchases raw materials and uses them to sell taxable/zero-rated goods. In this case, ITC will be available.
- Use of Inputs for Non-Taxable/Exempt/Nil-rated supplies – then ITC not available.
Note: The value of exempt supplies shall include supply on which tax is paid under Reverse Charge, transaction in securities, sale of land and sale of building.
For Motor Vehicles:
- Input Tax Credit for motor vehicles used for transportation of passengers having seating capacity of up to 13 passengers is generally not available. However such ITC is available only if Motor vehicles are used for: A. Transportation of Goods. B. Further supply of such vehicles, transportation of passengers, imparting training on driving, flying, navigating such vehicles or conveyances.
Example: Mr. A buys a passenger car worth Rs 300000 with GST Rs 80000. He deals in furniture and electronics and uses the car to travel to his showroom. In this case, even if the car is used for his business, ITC Rs 80000 cannot be claimed. In case he deals in transport business and buys a goods vehicle (like trucks) for transporting of goods, he can avail the ITC. If he deals in cars and buys cars (as stocks) for reselling, he can avail ITC. In case, he deals in passenger transport services and gives the car on hire for tourism, he can claim the ITC.
- Input Tax Credit on Supply of goods and/or services such as – food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery: Available only if such supply of goods or services of each category is used for making an outward taxable supply of the particular category of goods or services.
Example: a school buys food and edible items in the canteen for providing food to the students. In such a case, ITC on food is not available. Only hotels and restaurants can avail the ITC.
- Input Tax Credit on membership of a club, health and fitness centre, travel benefits to employees on vacation i.e. leave or home travel concession : Never available
- Input Tax Credit on Works contract services when supplied for construction of immovable property, other than plant and machinery available only if it is for further supply of works contract service.
- Input Tax Credit is not available on Goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even though it is used in the course or furtherance of business.
Example: If Mr. A deals in construction business and supervises the construction of an office for his staff, ITC in relation to that office will not be available.
- Input Tax Credit on rent-a-cab, life insurance, health insurance allowed only if it is notified by the Government as obligatory for an employer to provide to its employees or such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply.
A. What is the difference between the availment of ITC in case of Compulsory Registration and Voluntary Registration?
In case registration has been applied for within 30 days of being liable to do so, and the same is granted to the taxpayer, the input tax credit on stocks can be availed on the day immediately preceding the date from which he becomes liable to pay tax.
In case of application for voluntary registration, the input tax credit on stocks can be availed on the day immediately preceding the date of grant of registration under the provisions of the Act.
B. In case of change of scheme from composition scheme to Regular scheme whether input tax credit can be claimed on capital goods?
Under the GST law the composition dealer is not entitled for ITC and the scheme granted will stand withdrawn from the day on which the aggregate turnover exceeds fifty lakh rupees.
Examples of Above:
- Masters India 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.
- Kunal applies for voluntary registration on 5th June 2017 and obtained registration on 22th June 2017. Mr. Kunal is eligible for input tax credit on inputs in stock as on 21st June 2017.
- Gupta, registered person was paying tax under composition rate upto 30th July 2017. However, w.e.f 31st July 2017. Mr. B becomes liable to pay tax under regular scheme. Mr. Gupta is eligible for input tax credit on inputs held in stock as on closure of business hours as on 30th July 2017.
- Declaration in FORM GST ITC 1 must be filed within thirty (30) days from the date of becoming eligible to input tax credit.
- Rule 5 requires a declaration to be filed containing details of stocks and capital goods along with a certificate from a Chartered Accountant or Cost Accountant where the credit so claimed exceeds Rs.2 lakhs.
- The supplier will not be entitled to credit of goods and or services or both after expiry of 1 year from date of tax invoice.
- The credit on capital goods shall be reduced by 5% per quarter or part thereof from the date of invoice. Such credits are subject to verification of details furnished by the supplier in GSTR – 1 or GSTR – 4 on the common portal.