Input Tax Credit – An analysis in Goods & Service Tax
Goods and Service Tax – One Nation, One Tax would benefit all the stakeholders i.e. Industry, Consumers, Government, Professional, Society, etc on account of Reduction in cost of various commodities as the Input Tax credit is available in the complete chain, which breaks in the present Indirect Tax (Excise/VAT) chain.
For e.g. In case of Garments, VAT is leviable on Cotton, Cotton yarn in the manufacturing chain but “Fabric” is Tax Free as is Goods Declared of Special Importance under Section 14 of Central Sales Tax Act 1956. Cost of Fabric goes up with the Input Tax cost not admissible due to Fabric Being Tax free. As a result of same, cost of Garments also goes by VAT cost (Presently 5% + surcharge applicable in few states).
Input Tax Credit in Model GST Law (Section 16 - 18)
CENVAT / VAT Credit in the present Indirect Tax structure is linked to “MANUFACTURE”, which will shift to “SUPPLY” in the GST Regime, hence would result in Input Tax Credit available across the Value Chain to all stakeholders except the end consumer / self consumed goods.
First, we need to understand the definition of Input and Capital Goods before proceeding ahead with the “Input Tax Credit”.
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CENTRAL EXCISE ACT (CENVAT CREDIT RULES 2004)
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GOODS AND SERVICE TAX MODEL LAW-2016
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Rule 2(k) “INPUT” means–
(i) all goods used in the factory by the manufacturer of the final product; or
(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or
(iii) all goods used for generation of electricity or steam [or pumping of water] for captive use; or
(iv) all goods used for providing any [output service; or];
[(v) all capital goods which have a value upto ten thousand rupees per piece .] but excludes-
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
[(B) any goods used for -
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act;]
[(C) capital goods, except when,-
(i) used as parts or components in the manufacture of a final product; or
(ii) the value of such capital goods is upto ten thousand rupees per piece;]
(D) motor vehicles;
(E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and
(F) any goods which have no relationship whatsoever with the manufacture of a final product.
Explanation. – For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;]
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Section 2(54) defines “INPUT” as means any goods other than capital goods, subject to exceptions as may be provided under this Act or Rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course of furtherance of business.
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Rule 2(L) INPUT SERVICE :
[(l) “input service” means any service, -
(i) used by a provider of [output service] for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,
and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; [but excludes],-
[(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for -
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of one or more of the specified services; or]
[(B) services provided by way of renting of a motor vehicle], in so far as they relate to a motor vehicle which is not a capital goods; or
[(BA) service of general insurance business, servicing, repair and maintenance , in so far as they relate to a motor vehicle which is not a capital goods, except when used by -
(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person ; or
(b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or]
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;”
[Explanation.-For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis.]
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Sec 2(55) defines “Input Service” means any service, subject to exceptions as may be provided under this Act or the Rules made thereunder, used or intended to be used by supplier for making an outward supply in the course of furtherance of business.
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Rule 2(a) of CCR defines"capital goods" means:-
(A) the following goods, namely:-
(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under 35[heading 6804 and wagons of sub-heading 860692] of the First Schedule to the Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof;
(vii) [storage tank and]
[(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis,[but including dumpers and tippers]]
used-
- in the factory of the manufacturer of the final products, or
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[(1A) outside the factory of the manufacturer of the final products for generation of electricity [or for pumping of water] for captive use within the factory; or]
(2) for providing output service;
[(B) motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for-
(i) providing an output service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for providing an output service; or
(iii) providing an output service of courier agency]
[(C) motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of-
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills]
[(D) components, spares and accessories of motor vehicles which are capital goods for the assesse,]
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Sec 2(20) “capital goods” means: -
(A) the following goods, namely:-
(i) all goods falling within Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading
6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the
Schedule to this Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof;
(vii) storage tank; and
(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704,
8711 and their chassis but including dumpers and tippers
used-
(1) at the place of business for supply of goods; or
(2) outside the place of business for generation of electricity for captive use at theplace
of business; or
(3) for supply of services,
(B) motor vehicle designed for transportation of goods including their chassis registered
in the name of the supplier of service, when used for
(i) supplying the service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for supply of service; or
(iii) supply of courier agency service;
(C) motor vehicle designed to carry passengers including their chassis, registered in the
name of the supplier of service, when used for supplying the service of-
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills;
(D) Components, spares and accessories of motor vehicles which are capital goods for
the taxable person.
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Sec 2(58) further defines “Input tax credit” means credit of ‘input tax’ as defined in section 2(57);
Sec 2(57) "Input tax" in relation to a taxable person, means the {IGST and CGST}/{IGST and SGST} charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under sub-section (3) of section 7;
Hence, from above aspect of definition of Input, Input Service & Capital Goods under Model GST Law-2016 is self explanatory and also depicts the fact the Input Tax Credit in Model GST Law is linked to “Supply” as against “Manufacture” in the present Excise / VAT Act.
ELIGIBILITY OF INPUT TAX CREDIT
- Any person who has taken Registration within 30 days from the date when he becomes liable for registration and has been granted same is eligible to avail the Input Tax Credit of Input lying in stock, WIP & Inputs contained in finished goods on the day when he becomes liable to pay tax. Credit of Input Tax shall be recorded in his Electronic Ledger maintained at GSTIN site. Sec 16(2)
- The above provisions of Input Tax Credit are admissible to Persons who get themselves voluntarily registered under GST Act. (Persons falling under Sec 19(3)]
- Persons switching over from Composite Levy (Section 8) to Normal Tax are also eligible to avail Input Tax Credit under GST.- Sec 16(3)
TIME LIMIT FOR AVAILING INPUT TAX CREDIT (Sec 16(3A)
- Taxable person shall avail the credit of Input Tax with a period of 1 year from the date of Issue of Tax Invoice relating to supply of goods / services.
INPUT TAX CREDIT OF SUPPLY OF TAXABLE AND NON TAXABLE GOODS / SERVICES & EXPORT OF GOODS
- Amount of Input Tax Credit shall be restricted to so much as is attributable to the business. Calculation formulae would be specified once the GST Rules is notified by the GST Council. (Sec 16(5)]
- Amount of Input Tax Credit shall be restricted to so much as is attributable to the business and towards Taxable supplies including Exports categorised as Zero rated Supplies. Calculation formulae would be specified once the GST Rules is notified by the GST Council. (Sec 16(6)]
- In case of change in the constitution of registered Taxable Person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with transfer of liabilities, the Input Tax Credit is allowed to be transferred by the said registered taxable person.(Sec 16(8)]
RESTRICTION ON AVAILING INPUT TAX CREDIT (SEC 16(9)]
As set out in the present Excise / VAT Laws, CENVAT Credit is not admissible on some of the items as covered under the definition part as listed in table produced above. Similarly, Input Tax Credit is not admissible in respect of goods and supplies as listed out below:
Sec 16(9) : Notwithstanding anything contained in sub-section (1), (2), (2A) or (3) input tax credit shall not be available in respect of the following:
(a) motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services-
(i) transportation of passengers, or
(ii) transportation of goods, or
(iii) imparting training on motor driving skills;
(b) goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee;
(c) goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;
(d) goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
(e) goods and/or services on which tax has been paid under section 8; and
(f) goods and/or services used for private or personal consumption, to the extent they are so consumed.
Hence, barring above stated conditions, Credit of Input Tax Credit is allowed across goods and services supplied in the value chain.
No Input Tax Credit if Depreciation availed on Tax component (Sec 16(10)]
Input Tax Credit provisions in respect of Capital Goods shall stand on same footing as prevails in the present Tax Regime i.e. Input Tax Credit shall not be admissible on Capital Goods if the Depreciation has been availed in respect of the Tax component under Income Tax Act 1961.
Important aspects to be noted while availing Input Tax Credit - Sec 16(11)]
Registered Taxable Person availing Credit of Input Tax shall ensure following:
- Tax Invoice / Debit Note / Supplementary Invoice or any document as may be prescribed by the Government issued under CGST/SGST/IGST Act shall be available in his possession.
- Goods / Services must have been received
- Tax charged by the Supplier in documents prescribed above has ACTUALLY been paid into respective Government treasury in Cash / Utilisation of Input Tax credit. (This is the most challenging and harsh provisions as the receiver of goods should be punished for fault of supplier of goods / services if that person fail to deposit tax / return). GST Council should review the above mechanism and put the supplier of goods / services on penal mode.
- The return has been submitted under Section 27.
- Where the goods are received in lot or instalments, Input Tax credit is available on receipt of last lot / consignment.
- In case registered taxable person switches from Composition scheme or goods /services becomes absolutely exempt, then he has to pay Input tax by way of debit in his electronic Tax ledger the Input Tax equivalent to tax on inputs held in stock, contained in semi finished goods or finished goods on the day immediately preceding the date of switch over (Sec 16(12)]
- Input tax on Capital Goods removed as such shall be paid by taxable person if he has availed the Input Tax credit and such tax shall be equivalent to input tax credit taken reduced by % points as specified or the Tax on transactional value of such capital goods whichever is higher.
- No input Tax credit is allowed once the registered taxable person has furnished the return for month of September falling in next F.Y. or filing of Annual return w.e. is earlier.
Input Tax in respects of Input sent on Job Work (Sec 16A)
- Input Tax credit is admissible to registered Taxable person if the inputs are sent to job worker for job work and are received back within a period of 180 Days. Credit of Input Tax is even admissible if the inputs are sent directly by job worker from supplier premises to Job worker premises, wherein period of 180 days would count from receipt of material by job worker.
- Period of 2 years shall be considered for bringing back Capital Goods after job work for availing Input Tax credit.
- In case of non receipt of Inputs / Capital goods within defined time frame, Input Tax credit has to be paid back with Interest and the same may be reclaimed back upon receipt of goods after period of 180 days / 2 years.
Manner of Distribution of Credit by Input Service Distributor (Sec 17)
- Input Credit of IGST & CGST shall be distributed as IGST if both the ISD and recipient of credit are situated in different states.
- Input Credit of IGST & CGST shall be distributed as CGST if both the ISD and recipient of credit are situated in same states.
- Input Credit of SGST shall be distributed as IGST if both the ISD and recipient of credit are situated in different states.
- Input Credit of IGST & SGST shall be distributed as SGST if both the ISD and recipient of credit are situated in same states.
- Further the credit of Input Tax shall be distributed against document such as Invoice and the said document shall contain all particulars as specified.
- Credit of Input Tax to be distributed shall not exceed the amount of credit available for distribution.
- credit of tax paid on input services attributable to a supplier shall be distributed only to that supplier;
- credit of tax paid on input services attributable to more than one supplier shall be distributed only amongst such supplier(s) to whom the input service is attributable and such distribution shall be pro rata on the basis of the turnover in a State of such supplier, during the relevant period, to the aggregate of the turnover of all such suppliers to whom such input service is attributable and which are operational in the current year, during the said relevant period.
Manner of recovery of credit distributed in Excess (Sec 18)
- Credit of Input tax distributed in excess to supplier and in contravention to the provisions as specified in GST Law, then the same shall be recovered from such distributor along with interest.
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