Input Tax Credit under GST

[Surabhi Bohra]

Goods and Service Tax (GST) in India provides for seamless and continuous flow of input tax credit (ITC). In the earlier tax regime, cascading of tax is significant due to non-availability of ITC at various stages. Credit of taxes like CST, Entry Tax, and Luxury Tax was not available which became cost of the goods/services. Credit of VAT was not available to manufacturers and service providers and CENVAT credit and credit of Additional Duty of Customs/Countervailing Duty was unavailable to VAT dealers unless registered as First/Second stage dealers.

• The tax not available as credit became part of the cost which adds to the price of goods/service. Ultimate burden of taxes not available as credit fell on the end consumer.
• Under GST, ITC will be available for tax paid at all the stages of supply paid in course or furtherance of business. ITC will flow uninterruptedly not only for intra-State transactions but also for inter-State transactions. Moreover, credit of GST paid on import of goods/services would also be available.

1. Eligibility of Input Tax Credit 

The credit availability under GST is thus more liberal as compared to the earlier indirect system. A registered person can avail the credit of input tax charged on supplies of goods/services made to him if the underlying supplies are used or intended in course or furtherance of business.

ITC to be credited to his electronic credit ledger.

ITC can be availed for CGST/SGST/IGST/UTGST charged on any supply of goods or services or both made to him and includes-

(a) IGST on import of goods;

(b) CGST/ SGST/ UTGST/ IGST payable under reverse charge.

2. Manner of taking credit

• Amount available in electronic credit ledger (ECRL) can be used only for payment of output tax liability.
• ITC can be utilized in the following manner sequentially:

ITC in ECRL	Can be adjusted with output liability of
IGST	·         IGST ·          CGST ·          SGST ·          UTGST
CGST	·         CGST ·         IGST
SGST	·          SGST ·          IGST
UTGST	·          UTGST ·          IGST

3. Conditions for claiming ITC

ITC can be claimed by the registered person (RP) if all the following conditions are satisfied:-

a. RP possesses tax invoice/debit note/other taxpaying document, issued by a registered supplier;

b. Goods/services shall have been received by him.

• If goods are delivered on his direction [Bill to ship to scenario] to a third person it would be deemed to have been received by him.
• Where the goods are received in lots or installments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or installment.

c. The tax charged on supply has been actually paid to the government either in cash or through utilization of input tax credit;

• The recipient of supply to pay to the supplier the value of supply along with the tax within 180 days for date of invoice. If paid after 180 days than such ITC claimed along with interest will be added to the output liability of the recipient. The recipient will be entitled to ITC when payment is made by him.

d. GSTR-3 shall have been furnished by RP.

e. ITC on capital goods or plant machinery can be claimed only if depreciation on the tax component has not been claimed under the Income Tax Act, 1961.

4. Timeline for claiming ITC:

ITC shall be claimed at anytime earlier of the following:-

a. 20th of October of the following financial year(FY) to which the tax invoice pertains to (due date for filing GSTR 3 for month of September of the following FY); or

b. Date of filing of Annual return (GSTR-8) to which the invoice pertains to.

The reason for this restriction is that no change in return is permitted after September of next FY that is after the finalisation of the accounts and completion of audit for the relevant FY to which the tax invoice related to. If GSTR-9 is filed before the month of September then no ITC can be claimed for the invoice relating to such FY after filing of GSTR-9.

5. Restriction on claiming ITC

• ITC to the extent of taxes paid on goods and / or services used partly for the purpose of any business for other purposes shall be permitted to the extent of ITC attributable to purpose of business.
•  ITC to the extent of taxes paid on goods and / or services is used for taxable supplies including zero rated supplies and partly for exempted [1] supplies shall be permitted only to the extent they are used in taxable supplies and zero-rated supplies only.
•  Banking company or financial institution engaged in supply of service by way of accepting deposits, extending loans or advances may claim ITC in respect of taxes paid partly for taxable supply and partly for non taxable supplies in either of the following manner:

        a. to the extent attributable to taxable supplies; or

          b. 50% of eligible ITC on inputs, capital goods and input services in that month and the rest shall lapse. Such restriction not applicable to supplies made between RP having same PAN.

•       The option exercised in one month will be applicable throughout the financial year.

[1] Exempt supplies to include supplies on which recipient pays tax under reverse charge, transactions in securities, sale of land/building.

6. Comparative View

Particulars	Existing Tax Laws	GST Regime
Time limit for claiming ITC	 Up to 1 year from the date of issue of Invoice.	Earlier of-  Return of September of the following F.Y.  Filing of Annual Return.
Time Limit for payment	Input service – Within 3 months from the date of Invoice. ·Failure will attract reversal of ITC. ·Inputs / Capital Goods – None.	· Input service/goods – Within 180 days from the date of Invoice. · Failure will result in ITC claimed to be added to output GST and interest also payable.
Capital goods	· 50% of credit can be claimed in the F.Y. and balance 50% in subsequent F.Y.	· 100% ITC can be claimed if not relevant taxes not claimed as depreciation under IT Act, 1961.
Electronic Credit Ledger	·  No such concept	·  ECRL required to be maintained for crediting   and utilizing ITC.
Reversal of Credit	· Reversal of ITC provided for in certain circumstances.	·  No such concept. Cases demanding reversal to be added to the output GST.
Payment to Appropriate Government	·Credit claim and utilization not dependent upon payment of tax by the supplier.	· ITC claim dependent upon payment of tax by the supplier. Failure to do so disentitles ITC claim to the recipient.

7. Negative list of ITC

ITC on following items cannot be availed:

a. motor vehicles, except when supplied in the usual course of business or are used for providing taxable services of –

i. further supply of such vehicles or conveyances ; or

ii. transportation of passengers; or

iii. Imparting training on driving, flying, navigating such vehicles.

b. Transportation of goods;

c. Supply of goods or services or both of personal nature like – food and beverages, beauty treatment, health services, club membership, health and fitness centre, rent a cab, life/health insurance, travel benefits etc.

d. Works contract services when supplied for construction of an immovable property (other than plant3 and machinery) except where it is an input service for further supply of works contract service;

e. Goods/services or both received 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.

2 “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.3 “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes- (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises.

f. Tax paid under Composition levy;

g. Supply made by a non-resident taxable person except on goods imported by him;

h. Supply of goods/service for personal consumption;

i. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;

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

8. Matching of ITC:

 The matching, claim, reversal and reclaim of ITC a fool proof mechanism to tap revenue leakage in hands of the Government.

 Supplier to furnish details in GSTR-1 by 10th of the subsequent month. Details of the same to be communicated by GSTN to the recipient in GSTR-2A.

 On the basis of GSTR-2A the recipient shall verify, validate, modify, delete or include the details of inward supply in GSTR-2 by 15th of the next month. The details of the same to be communicated by GSTN in GSTR-1A to the supplier.

 On the basis of the self assessed return, the Input Tax Credit will be credited to the ECRL.

 By 20th of the next month a GST-3 of inward and outward supplies, ITC availed, tax payable, tax paid shall be filed.

 Details of every inward supply furnished by the recipient in GSTR – 2 shall be matched with GSTR – 1 of outward supply filed by the supplier.

 In case of any discrepancy the same will be communicated by GSTN. The discrepancy shall be rectified in the subsequent Return.

 If not rectified than the ITC claimed by the recipient will be added to the output tax of the recipient.

9. Basic criteria for matching:

 Supplier should have filed valid returns for the tax period and / or IGST should have been paid by the importer.

 Resulting in the recipient establishing that tax has been deposited by the supplier.

 Failure to do so may lead to denial of ITC in hands of the recipient.

 If the discrepancy is not rectified the excess claim of ITC shall be added to the output liability of the recipient.

 The person claiming excess credit has to bear interest.

 Cases give rise to discrepancy-

•  Reversal / Mismatch of ITC;
•  Excess claim of ITC by recipient;
•  Outward supply not declared by the supplier;
•  Duplication of claim of ITC by recipient 

A person who has not furnished a valid return shall not be allowed to utilize ITC.
The recipient can avail the ITC by filing a return but he cannot utilize the same unless he has filed the valid return. The recipient can re-claim the reversed ITC after the supplier has paid the taxes due from him.

10. Conclusion:

ITC allowed in GST is quite liberal and elaborate as compared to existing laws. An effort has been made to permit ITC in respect of all taxes paid in relation to business expenses except those of personal nature. The ITC self assessed in the return would be allowed on provisional basis.