Input Tax Credit is the backbone of the GST regime. GST is nothing but a value-added tax on goods and services combined. The levy of tax is based on the value added at each stage of the supply chain till the product or service reaches the ultimate consumer.
Value-added tax means collection of tax at all points in the supply chain after allowing credit for the inputs, input services and capital goods. The invoice method of value added taxation will be followed in the GST. The tax paid at the time of receipt of goods or services or both will be eligible for set-off against the tax payable on supply of goods or services or both, based on the invoices with a special emphasis on actual payment of tax by the supplier.
Uninterrupted and seamless chain of input tax credit is one of the key features of GST, which will prevent cascading of taxes. The procedures and restrictions laid down in these provisions are important to make sure that there is seamless flow of credit in the whole scheme of taxation without any misuse. Any registered person can avail credit of tax paid on the inward supply of goods or services or both which is used or intended to be used in the course or furtherance of business except for the cases which are specifically denied.
Let us understand the concept of ITC with the help of an example
Let us understand the various sub-categories of GST
How to determine which sub category(s) attracted?
Here, the place of supply rules play the role in determining which type of GST to be charged.
- If it is found that the supply is Intra-State i.e., within the same state then CGST+ SGST* will have to be charged (*UTGST in case of Union Territory).
- However if it is found that the place of supply for any supplies made is outside the state (Inter-state) then IGST alone would have to be charged.
Please note that IGST is nothing but sum of CGST and SGST.
Therefore, IGST Rate = CGST Rate + SGST Rate.
Cases where Supply is Inter-state
- If the supply involves the movement of goods from one state to another or services provided to a person registered in another state. It is possible when the location of the supplier and the place of supply are in different states. Also, in cases of export or import of goods or services or when the supply of goods or services is made to or by a SEZ unit, the transaction is treated as Inter-State. In an Inter-State transaction, IGST will be collected from the buyer.
Cases where Supply is Intra-state
- If the goods remain within the same state or services are provided to persons registered in the same state. It is when the location of the supplier and the place of supply in the same state. In Intra-State transactions, CGST and SGST will be collected from the buyer. The CGST will be deposited with Central Government and SGST will be deposited with State Government.
Manner of Utilization of ITC
Conditions to be fulfilled for ITC entitlement
- Goods or services or both are used or intended to be used in the course or in the furtherance of his business.
- Tax invoice, debit note or any other taxpaying document should be available.
- Goods or services should have been received by the taxable person, or by another person from the supplier on the direction of the taxable person.
- Tax charged on invoice in respect of supply should have been paid to the Government either by utilizing the input credit admissible in respect of such supply or in cash and a valid return should have been furnished by such person.
- Credit should be availed within the time allowed*.
*Time limit to avail credit
Few Significant Points to Understand
- Where the goods against an invoice are received in lots or installments, credit will be allowed on receipt of last lot or last installment.
- Goods deemed to be received by a taxable person when the supplier delivers the goods to the recipient or any other person, on the direction provided by the taxable person to the supplier. Exception in case of goods being directly sent to job worker
- If the recipient of services fails to pay (value + tax) within 180 days from date of invoice, (ITC availed + interest @ 18%) shall be added to his output tax liability. ITC available when amount discharged later.
- Where the registered person has claimed depreciation on the tax component of cost of capital and plant and machinery, ITC on that component will not be allowed.
Apportionment of Credit
If the goods or services are used by a registered taxable person partly for business and partly for non-business then he is eligible to take the input tax credit of goods or services attributable to the purposes of business only. Similarly, when the goods or services are used partly for effecting taxable supplies or Zero-rated supplies and partly for exempt supplies; he is eligible for credit attributable to the taxable supplies including Zero-rated supplies.
Blocked Credit U/s 17(5) of CGST Act 2017
|Items/ supplies in respect of which credit not available|
|1. Motor vehicles and conveyances except when used for transportation of goods|
|2. Food and beverages|
|3. Outdoor catering|
|4. Membership in a club, health, fitness centre|
|6. Health insurance and life insurance (except where Government makes it obligatory)|
|7. Travel benefits extended to employees on vacation such as leave or home travel concession|
|8. Works contract service for construction of an immovable property (except plant & machinery)|
|9. Goods and/or services used for personal use|
|10. Goods and/or services for construction of an immovable property (other than Plant & machinery)|
|11. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples|
Matching of Claim Of Input Tax Credit
Once the supplier and recipient has filed outward and inward supplies details as per Form GSTR1 and GSTR 2 respectively and the monthly return on Form GSTR 3, the details of inward supply furnished by the recipient shall be matched with the corresponding details of outward supply furnished by the supplier in his return for the same or earlier tax period.
In the process of such matching, the details of inward supplies which matches with the details of outward supplies shall be finally accepted and shall be accordingly communicated to the recipient.
Unless this matching reconciles the buyer will not be able to claim the input tax credit of taxes paid on purchase of input goods and/or services or both. Thus it becomes highly critical for businesses to be highly compliant under the GST regime.
- “Input Tax Credit” means IGST (including that on import of goods), CGST, SGST and UTGST charged on any supply of goods or services and includes the tax payable under sub-section (3) and (4) of section 9 of CGST act i.e. Reverse charge includes the tax payable under sub-section (3) and (4) of section 5 of IGST Act, includes the tax payable under sub-section (3) and (4) of section 9 of SGST Act, includes the tax payable under sub-section (3) and (4) of section 7 of UTGST Act, excludes the tax paid under section 10 (composition levy).
- “Capital Goods” means the goods, the value of which is capitalized in the books of accounts of the person claiming the credit and which are used of intended to be used in the course or furtherance of the business.
- “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.
After having understood the critical provisions concerning the Input Tax Credit for the taxpayer, one thing is clear that though the government has emphasized on ‘seamless flow of credit’ it still has failed to achieve its objective by toughening the criteria to book credit viz a viz.. linking the credit with the outward supplies as filed by the supplier. This is difficult since this demands that the outward liability must also be paid by the supplier in order to provide credit to the recipient which is an unnecessary burden on recipient. Also, provisions such as the credit generated in any state where the recipient is not registered would not be available as ITC to such taxpayer recipient. This has significantly increased the cost of doing business as business meets and hotel stays are very common in business. However the credit of such services would be lost if there is no registration in the state of such hotel accommodations and meetings.
Hope the information will assist you in your Business & Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.
Thanks & Best Regards,
Tax Team, Get Set Business Solutions
B-217, Pacific Business Park, Site-IV, Sahibabad Industrial Area,
Ghaziabad, UP, New Delhi-NCR area, India, 201010.
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