Burning Issue Under ITC by GST Law

[Sanjay Loharkar]

GST allows seamless flow of input tax credit. The recipient of goods or services or both can avail input tax credit on inward supply of goods or services or both subject to fulfilment of four (4) conditions laid down u/s 16(2) of CGST Act, 2017.

Those conditions are:

1. The recipient should have tax invoice or debit note in his hand,

2. The recipient should have received the goods or services or both,

3. The tax charged in respect of such supply has been actually paid to the Government by the supplier, and

4. The recipient should have filed the return (GSTR-3B).

The fifth (5th) condition is given u/s 16(2) (aa) inserted vide Section 109 of Finance Act, 2021 which is yet to be notified.

The above stated provision indicates that the recipient can claim the input tax credit on the invoice if he satisfies all the four (4) Conditions. However, the GST Rule requires the recipient to following rule as stated below to claim input tax credit.

The invoice of which input tax credit is to be claimed should appear in GSTR-2B. (It’s mandatory from 1^st Jan 2022)

In before few months ago, we are follow these concept (till Dec-21)

1. The invoice of which input tax credit is to be claimed should appear in GSTR-2A

2. If it is not appearing then claim 5% in excess of the input tax credit populating in GSTR-2A can be claimed.

The benefit of all the recipient who are struggling with the burning issue of claiming input tax credit defence to legally fight with department to justify the eligible input tax credit claim.

A) GSTR-2A and 2B is given under Rule and not in Act      

1. The first defence that a taxpayer can give in his reply to the notice received from GST department is that the GSTR-2A is given under GST Rule and not in GST Act. Act is like parent and Rule is like a child. Without parent there cannot be a child.
2. Similarly, when there is no provision in the Act about GSTR-2A then even if it is given under Rule it has no binding force under law for the recipient to follow it. So a recipient can very well argue that as he satisfied all the four (4) conditions laid down in the Act he is eligible to claim the credit.

Reversal of Credit

The credit claimed wrongfully or unintentionally needs to reversed. In addition, the credit taken on purchases, where payment has not been made to suppliers within 180 days also needs to be reversed. Keeping a track of this is the real big burning issue.

Issues in GST on free samples, buy one get one free -

Free Sample

The treatment of tax for free samples and supplies under GST is more or less similar to VAT regime. Under GST, anything supplied as ’Free’ tax will not be levied on such supplies. However, on doing so, businesses need to sacrifice the benefit of input tax credit. This means, businesses will not be entitled for input tax credit on the goods, which are supplied as ’Free,’ and proportionate ITC needs to be reversed.

It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration.

As per sub clause (a) of sub-section (1) of section 7 of the said Act, the expression “supply” Circular No. 92/11/2019-GST Page 2 of 5 includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as “supply‟ under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as “supply‟ under GST, except where the activity falls within the ambit of Schedule I of the said Act. ii. Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. However, where the activity of distribution of gifts or free samples falls within the scope of “supply‟ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.

B. Buy one get one free offer

i) Sometimes, companies announce offers like Buy One, Get One free. For example, buy one soap and get one soap free‟ or Get one tooth brush free along with the purchase of tooth paste.

As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the goods or services which are supplied free of cost (without any consideration) shall not be treated as supply under GST (except in case of activities mentioned in Schedule I of the said Act). It may appear at first glance that in case of offers like, Buy One, Get One Free, one item is being supplied free of cost without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one.

ii) Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act. Circular No. 92/11/2019.

iii) It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

Issue in foods and beverages – mandatory as per other act & blocked in GST

The Factories Act, 1948 mandates [1] for maintaining and providing the canteen facility for the employees/workers where the number of workers employed in a factory exceeds 250.

In this regard, an employer can either provide such facility on their own or it can be outsourced to the third party caterers. As a general practice, the companies outsource the given requirement to the third party caterers wherein the caterers provides canteen services within the employer’s factory.

In many cases, the employer charges a nominal amount from the employees for providing the food in the factory premises. 

Section 16 of the CGST Act, 2017 enables the registered person to avail ITC on goods or/and services which are used or intended to be used in the course or furtherance of business. Further Section 17(5) of the CGST Act prescribes a list of few goods and services on which ITC is not admissible. Relevant provision reads as under:

Section 17: Apportionment of credit and blocked credits

Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

 Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

As per the above, ITC on food and beverages, outdoor catering, etc. is not available. However, it would be available where the same is used in making outward supply (same category of supply or as an element of a taxable composite or mixed supply).

Further, the proviso given after the sub-clause (iii) allows the registered person to claim ITC where such goods or services are mandatorily required to be provided under any law.

Conclusion:-

In the above backdrop, it can be said that proviso given after sub-clause (iii) would be applicable to the whole of clause (b) and ITC would be available to the employer on expenses incurred by him to maintain or provide the canteen facility to its employees, to fulfill the mandatory requirement given under the Factories Act, 1948.