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Input Tax Credit (ITC)

The core feature of the Revised Model Draft GST (and IGST) Law is the levy, transfer, set-off, credit etc. of ‘input tax(see definitions) on supplies of goods and/or services. Input Tax Credit (ITC) is fundamental to the Draft Law and principles thereof as it seeks to prevent the currently prevalent indirect taxation’s ‘cascading effect(tax on tax and multiple Central/State indirect taxes on same transaction at varying taxation rates and conditions for levy) and inherent complexity.

Chapter V and section 16 thereunder, of the said Draft Model GST Law (the Draft Law) directly covers the concept ‘Input Tax Credit’ (ITC), wherein every registered taxable person would be entitled (subject to prescribed conditions and restrictions, see below) to take credit (via the relevant ‘electronic credit ledger’ or ECL) of ‘input tax’ charged/paid on any supply of goods or services to him/her/it, which are used or intended to be used in the course or furtherance of the subject business.

> Read about ‘Supplies’ and ‘Registration’ for GST

This above said benefit is expected to be achieved by the levy of a single indirect tax (CGST/SGST and/or IGST) under the said Draft Laws only on the ‘value additions‘ (if any) to the cost (which excludes such taxes) of the supplies of goods/services, and entitlement to credit to each supplier for any such tax paid on supplies made to him/her/it, and set-off of the same against any ‘output tax‘ liability for tax charged/collected on supplies made by such person.

Input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Input service” means any service used or intended to be used by a supplier in the course or furtherance of business.

Input Service Distributor” means an office of the supplier of goods and/ or services which receives tax invoices issued towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and/or IGST paid on the said services to a supplier of taxable goods and/or services having same PAN as that of the office referred to above.

Input tax” in relation to a taxable person, means the IGST, including that on import of goods, CGST and SGST charged on any supply of goods or services to him/her/it, but does not include the tax paid under section 9 (Composition Levy).

Input tax credit” means credit of ‘input tax’ as defined immediately above.

Capital goods” means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

Exempt supply” means supply of any goods and/or services which are not taxable under the Draft Model GST/IGST Act and includes such supply of goods and/or services which attract nil rate of tax or which may be exempt from tax under section 11.

Goods’’ means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

IGST” means the tax levied under the Integrated Goods and Services Tax Act 2016.

Inward supply” in relation to a person, shall mean receipt of goods and/or services whether by purchase, acquisition or any other means and
whether or not for any consideration.

Job work” means undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “job worker” shall be construed accordingly.

Output tax” in relation to a taxable person, means the CGST/SGST chargeable under this Act on taxable supply of goods and/or services made by him or by his agent and excludes tax payable by him on reverse charge basis.

Outward supply” in relation to a person, shall mean supply of goods or services, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other means made or agreed to be made by such person in the course or furtherance of business.

Principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods and/or services.

Recipient” of supply of goods and/or services means-

  • Where a consideration is payable for the supply of goods and/or services, the person who is liable to pay that consideration
  • Where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available
  • Where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply.
    Explanation.- The expression “recipient” shall also include an agent acting as such on behalf of the recipient in relation to the goods and/or services supplied.

Reverse charge’’ means the liability to pay tax by the recipient of supply of goods or services instead of the supplier of such goods or services in respect of such categories of supplies as notified under sub-section (3) of section 8 of the Draft Model GST Law.

Services’’ means anything other than goods.

SGST” means the tax levied under the State Goods and Services Tax Act 2016.

Supplier” in relation to any goods and/or services shall mean the person supplying the said goods and/or services and shall include an agent acting as such on behalf of such supplier in relation to the goods and/or services supplied.

Taxable supply’’ means a supply of goods and/or services which is chargeable to tax under the Draft Model GST Law.

Zero-rated supply” means supply of any goods and/or services in terms of section 15 of the IGST Act 2016.

 

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Conditions for ITC Entitlement

  • Registration for GST
  • Goods/Services used/intended for furtherance of business
  • Available on Taxable Supplies (including Export or ‘Zero Rated Supplies’) but not under ‘Composition Levy
  • Possession of a tax invoice or debit note (or such other taxpaying document(s) as may be prescribed) issued by a registered supplier
  • Receipt* of subject goods and/or services
  • Actual payment (in cash or through utilization of ITC admissible) of tax charged on supply to the account of the appropriate Government
  • Furnishing of prescribed Return(s) with ITC on a ‘self-assessed’ and provisional basis to the ECL


*
Where the goods against an invoice are received in lots or instalments, the registered taxable person would be entitled to take credit upon receipt of the last lot or instalment.


Failure to Timely Pay Supply of Services

Where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of 3 months from the date of issue of invoice by the supplier, an amount equal to the ITC availed by the recipient would be added to his/her/its output tax liability, along with interest thereon.

 

Apportionment and Restrictions on Attribution of ITC

Where the goods and/or services are used only partly for the purpose of any business, the amount of ITC would be restricted to the amount attributable to such business purposes.

Where the goods and/or services are used partly for effecting taxable supplies including ‘zero-rated’ supplies (export supplies) and partly for effecting ‘exempt’^ supplies, ITC would be restricted to the amount attributable to the said taxable supplies including zero-rated supplies.

^For the above said purposes, ‘exempt’ supplies shall include supplies on which recipient is liable to pay tax on ‘reverse charge’ basis under subsection (3) of section 8 (‘Notified’ goods/services).

Input Tax Credit (ITC) will not be available in respect of the following —

(A) Motor vehicles and other conveyances except when they are used;

(a) For making the following taxable supplies, namely
(i) further supply of such vehicles or conveyances ; or
(ii) transportation of passengers; or
(iii) imparting training on driving, flying, navigating such vehicles or conveyances;
(b) for transportation of goods.

(B) Supply of goods and services (below stated)
(i) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of goods or services;
(ii) Membership of a club, health and fitness centre,
(iii) Rent-a-cab, life insurance, health insurance except where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; and
(iv) Travel benefits extended to employees on vacation such as leave or home travel concession.

(C) Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service;

(D) Goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business;

Explanation 1- For the above purpose, the word “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.
Explanation 2- ‘Plant and Machinery’ means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.

(E) Goods and/or services on which tax has been paid under section 9 (Composition Levy);

(F) Goods and/or services used for personal consumption;

(G) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(H) Any tax paid in terms of sections 67 (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts), 89 (Detention, seizure and release of goods and conveyances in transit) or 90 (Confiscation of goods and/or conveyances and levy of penalty).

 

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Registration within 30 Days by Taxable Person

A (taxable) person who has applied for registration under the Draft Laws within 30 days from the date on which he becomes liable to registration and has been granted such registration would (subject to such conditions and restrictions as may be prescribed) 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 this Act.


Voluntary Registration

A person, who takes ‘voluntary’ registration under section 23(3) of the said Draft Law, would (subject to such conditions and restrictions as may be prescribed) 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 grant of registration.


Composition Levy ineligibility for Taxable Person

Where any registered taxable person ceases to pay tax under section 9 (Composition Levy), such person would (subject to such conditions and restrictions as may be prescribed) be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods (credit on capital goods shall be reduced by such percentage points as may be prescribed in this behalf) on the day immediately preceding the date from which he becomes liable to pay tax under section 8.


Exempt Goods becoming Taxable

Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person would (subject to such conditions and restrictions as may be prescribed) 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 relatable to such exempt supply and on capital goods (credit on capital goods shall be reduced by such percentage points as may be prescribed in this behalf) exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable.


Limitation

In all the above mentioned cases, a taxable person would not be entitled to take ITC in respect of any supply of goods and/or services to him/her/it after the expiry of 1 year from the date of issue of tax invoice relating to such supply.


Constitutional Change

Where there is a change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities, the said registered taxable person would be allowed to transfer the input tax credit that remains unutilized in its books of accounts to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed.


Composition Levy (switch over by Taxable Person) and Exemption to Taxable Goods/Services

Where any registered taxable person who has availed of input tax credit switches over as a taxable person for paying tax under section 9 (Composition Levy) or, where the goods and/or services supplied by him become exempt absolutely under section 11, such person would be required to pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods (reduced by such percentage points as may be prescribed) on the day immediately preceding the date of such switch over or, as the case may be, the date of such exemption.

After payment of such amount, the balance of input tax credit (if any) lying in his electronic credit ledger shall lapse.

 

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Capital Goods and ITC

Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act 1961, ITC would not be allowed on the said tax component.

In case of supply of capital goods or plant and machinery, on which ITC has been taken, the registered taxable person shall pay an amount equal to the ITC taken as reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods or plant and machinery as determined under the relevant provisions of the Draft Law, whichever is higher.

 

ITC Set-Off/Payment Order

  • The amount of ITC on account of IGST available in the ECL can first only be utilized towards payment of IGST and the amount remaining (if any), may be utilized towards the payment of CGST and SGST (in that order).
  • The amount of ITC on account of CGST/SGST available in the ECL can first only be utilized towards payment of CGST/SGST and the amount remaining (if any) may be utilized towards the payment of IGST.
  • ITC on account of CGST cannot be utilized towards payment of SGST and vice versa.

 

ITC on Inputs/Capital Goods sent for Job Work

The “Principal” would (subject to such conditions and restrictions as may be prescribed) be allowed ITC on inputs/capital goods sent to a job-worker for job-work.

  • “Principal” shall be entitled to take credit of input tax on inputs/capital goods even if the inputs/capital goods are directly sent to a job worker for job-work without their being first brought to his place of business.
  • Where 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 in the prescribed manner within a period of 1/3 year(s)^^ of their being sent out, it shall be deemed that such inputs/capital goods had been supplied by the principal to the job-worker on the day when the said inputs were sent out.

^^Where the inputs/capital goods are sent directly to a job worker, the period of 1/3 year(s) shall be counted from the date of receipt of inputs by the job worker.

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