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The core feature of the Goods and Services Tax (GST) concept of indirect taxation provided for in the GST Acts^ as recently passed by the Indian Parliament, is the entitlement to ‘input tax credit’ (ITC) for ‘input tax’ paid by eligible persons (see below) on supply of goods and/or services. 

  • ITC is fundamental to the GST as it seeks to prevent the currently prevalent indirect taxation’s ‘cascading effect(i.e. tax on tax and multiple Central/State indirect taxes on same transaction at varying taxation rates and conditions for levy) and inherent complexity.
  • Such benefit is expected to be achieved by the levy of a single indirect ‘output taxunder the said Acts only on the value additions (if any) to the cost (which excludes such taxes) of the supplies of goods/services;
  • Entitlement to ITC to each ‘supplier’ for any such ‘input tax‘ paid on supplies made to him/her/it, to set-off such credit against ‘output tax‘ liability (if any) for such tax charged/collected on supplies (if any) made by such person thereafter.

^Central Goods and Services Tax (CGST) Act 2017 (pdf); Integrated Goods and Services Tax (IGST) Act 2017 (pdf); Union Territory Goods and Services Tax (UTGST) Act 2017 (pdf) and Compensation Cess Act 2017 (pdf).

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

Section 2 of the Central Goods and Services Tax Act 2017 (CGST Act) lists the various definitions (subject to context) to various key words, terms and phrases, some of which for the purpose of ‘input tax credit‘ have been provided below ––

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

Central tax” means the central goods and services tax levied under section 9.

Cess” shall have the same meaning as assigned to it in the Goods and Services Tax (Compensation to States) Act.

Consideration” in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Credit note” means a document issued by a registered person under sub-section (1) of section 34.

Debit note” means a document issued by a registered person under sub-section (3) of section 34.

Drawback” in relation to any goods manufactured in India and exported, means the rebate of duty, tax or cess chargeable on any imported inputs or on any domestic inputs or input services used in the manufacture of such goods.

Electronic cash ledger” means the electronic cash ledger referred to in subsection (1) of section 49.

Electronic credit ledger” means the electronic credit ledger referred to in sub-section (2) of section 49.

Exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.

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.

Government” means the Central Government.

Integrated Goods and Services Tax Act” means the Integrated Goods and Services Tax Act, 2017.

Integrated tax” means the integrated goods and services tax levied under the Integrated Goods and Services Tax Act.

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 or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.

Input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-section (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 7 of the Union Territory Goods and Services Tax Act,
but does not include the tax paid under the composition levy.

Input tax credit” means the credit of input tax.

Intra-State supply of goods” shall have the same meaning as assigned to it in section 8 of the Integrated Goods and Services Tax Act.

Intra-State supply of services” shall have the same meaning as assigned to it in section 8 of the Integrated Goods and Services Tax Act.

Invoice” or “tax invoice” means the tax invoice referred to in section 31.

Inward supply” in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration.

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

Manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term “manufacturer” shall be construed accordingly.

Market value” shall mean the full amount which a recipient of a supply is required to pay in order to obtain the goods or services or both of like kind and quality at or about the same time and at the same commercial level where the recipient and the supplier are not related.

Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

Non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act.

Non-taxable territory” means the territory which is outside the taxable territory.

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

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

Person” includes—
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a firm;
(e) a Limited Liability Partnership;
(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;
(h) any body corporate incorporated by or under the laws of a country outside India;
(i) a co-operative society registered under any law relating to co-operative societies;
(j) a local authority;
(k) Central Government or a State Government;
(l) society as defined under the Societies Registration Act, 1860;
(m) trust; and
(n) every artificial juridical person, not falling within any of the above.

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

Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.

Proper officer” in relation to any function to be performed under this Act, means the Commissioner or the officer of the central tax who is assigned that function by the Commissioner in the Board.

Recipient” of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
(b) 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; and
(c) 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 and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied.

Registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number.

Return” means any return prescribed or otherwise required to be furnished by or under this Act or the rules made thereunder.

Reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act.

Services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

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

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

Tax period” means the period for which the return is required to be furnished.

Taxable person” means a person who is registered or liable to be registered under section 22 or section 24.

Taxable supply” means a supply of goods or services or both which is leviable to tax under this Act.

Taxable territory” means the territory to which the provisions of this Act apply.

The State Goods and Services Tax Act” means the respective State Goods and Services Tax Act, 2017.

Turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Union territory” means the territory of—
(a) the Andaman and Nicobar Islands;
(b) Lakshadweep;
(c) Dadra and Nagar Haveli;
(d) Daman and Diu
(e) Chandigarh; and
(f) other territory.

Explanation.––For the purposes of this Act, each of the territories specified in sub-clauses (a) to (f) shall be considered to be a separate Union territory.

Union territory tax” means the Union territory goods and services tax levied under the Union Territory Goods and Services Tax Act.

Union Territory Goods and Services Tax Act” means the Union Territory Goods and Services Tax Act, 2017.

Valid return” means a return furnished under sub-section (1) of section 39 on which self-assessed tax has been paid in full.

Voucher” means an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument.

Works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

 

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Input Tax Credit — Conditions and Criteria

Chapter V and Section 16 of the CGST Act provides the eligibility criteria and conditions for taking ‘input tax credit’ (ITC) under the said CGST Act (as well as the UTGST Act and IGST Act for taxes levied there under), which subject to prescribed conditions and restrictions, include —

  • Registration of person claiming ITC;
  • Subject to manner of taking credit under section 49 (Payment of tax, interest, penalty and other amounts)
  • Credit of ‘input tax’ charged on supply of goods and/or services;
  • Goods and/or services are used/intended to be used in the course or furtherance of business;
  • Person is in possession of a tax invoice or debit note** issued by a registered supplier (or such other tax paying documents as may be prescribed);
  • Goods or services have been received***;
  • Subject to the provisions of section 41 (Claim of input tax credit and provisional acceptance thereof), tax charged in respect of such supply has been actually paid (in cash or through utilisation of input tax credit admissible in respect of the said supply) to the Government; and
  • Return under section 39 has been furnished.

**Such registered person will not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods and/or services 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 invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

***For the above said purposes, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise.

***Where the goods against an invoice are received in lots or installments, the registered person shall be entitled to take credit upon receipt of the last lot or installment.


Failure to Timely Pay Supplier

Where a ‘recipient’ fails to pay to the supplier of goods and/or services (other than the supplies on which tax is payable on ‘reverse charge’ basis), the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to ‘output tax’ liability along with interest thereon, in such manner as may be prescribed.

The ‘recipient’ will however be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods and/or services along with tax payable thereon.


Capital Goods and Depreciation

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 will not be allowed.


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 (i.e 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 of attribution of ITC, the Government may prescribe the manner.

^Value includes supplies on which the recipient is liable to pay tax on ‘reverse charge basis’, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

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

(1) Motor vehicles and other conveyances except when they are used for making the following taxable supplies —

  • Further supply of such vehicles or conveyances ; or
  • Transportation of passengers; or
  • Imparting training on driving, flying, navigating such vehicles or conveyances;
  • For transportation of goods.

(2) Following supply of goods and/or services —

  • Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an 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 an element of a taxable composite or mixed supply;
  • Membership of a club, health and fitness centre;
  • Rent-a-cab, life insurance and health insurance except where ––
    (A) 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; or
    (B) 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.
  • Travel benefits extended to employees on vacation such as leave or home travel concession.

(3) 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.

(4) Goods and/or services 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.

For the above said purposes, the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.

(5) Goods and/or services on which tax has been paid under section 10 (‘Composition Levy‘).

(6) Goods and/or services received by a ‘non-resident taxable person’ except on goods imported by such person.

(7) Goods and/or services used for personal consumption.

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

(9) Any tax paid in accordance with the provisions of sections 74, 129 and 130.

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Registration within 30 Days by Taxable Person

A (taxable) person who has applied for registration under the said Acts within 30 days from the date on which he/she/it becomes liable to registration, and has been granted the same, will be entitled to ITC 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 CGST Act.


Voluntary Registration

Person though not required but takes ‘voluntary’ registration, would (subject to such conditions and restrictions as may be prescribed) be entitled to take ITC 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

Where a registered person ceases to pay tax under the ‘Composition Levy‘ scheme, such person will be entitled to take ITC in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which such person becomes liable to pay tax under section 9 (ITC on ‘capital goods’ will however be reduced by such percentage points as may be prescribed).

 

Exempt Goods becoming Taxable

Where an ‘exempt supply‘ of goods and/or services by a registered person becomes a taxable supply, such person shall be entitled to ITC 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 exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable (ITC on capital goods will however be reduced by such percentage points as may be prescribed).


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 person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, such registered person will be allowed to transfer the ITC which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.


Composition Levy Opting and Exemption to Taxable Goods/Services

Where any registered person who has availed of ITC opts into the ‘Composition Levy’ scheme, or where the goods and/or services supplied by such person become wholly exempt, such person shall pay an amount by way of debit in the electronic credit ledger/electronic 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 exercising of such option 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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‘Output tax’ Set-Off/Payment Order

  • The amount of ITC on account of IGST (Integrated Tax) available in the ‘electronic credit ledger’ (ECL) can first only be utilized towards ‘output tax‘ payment of Integrated Tax and the amount remaining (if any), may be utilized towards the payment of CGST (Central Tax), SGST (State Tax) and UTGST (Union Territory Tax), in that order.
  • The amount of ITC on account of Central Tax/State Tax/Union Territory Tax available in the ECL (if any) can first only be utilized towards payment of CGST/SGST/UTGST (as the case maybe and not inter se) 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 or UTGST, and vice versa.

 


ITC on Inputs/Capital Goods sent for Job Work

A ‘principal’ (subject to such conditions and restrictions as may be prescribed) is allowed ITC inputs/capital goods sent to a job-worker for ‘job-work’, and will be so entitled even if the said inputs/capital goods are directly sent to a job worker for job-work without being first brought to such principal’s ‘place of business’.

  • Where the 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 accordance with clause (a) or clause (b) of sub-section (1) of section 143) within 1 year/3 years of being sent out, it will be deemed that such inputs had been supplied by the principal to the job-worker on the day when the said inputs were sent out (where the inputs are sent directly to a job worker, the period of 1 year/3 years shall be counted from the date of receipt of inputs by the job worker).
  • The above does not apply to moulds and dies, jigs and fixtures, or tools sent out to a job worker for job work.

 


Administrative Help

For administrative assistance and general queries, please feel free to contact via —
Telephone: +91 8800 38 1950
Email: contact@minustax.com

Alternatively, please contact for an appointment and visit our representational office in DLF Phase IV, Gurgaon (click for Google Map directions).

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