Decoding GST- Input tax credit of CGST, SGST AND IGST

Goods and Service Tax has brought the ray of hope of increased revenue for Government and elimination of cascading effect of multiple taxes and simple tax structure for assessees. GST has now become a reality and it will finally be implemented with effect from July 1, 2017. With only less than 6 months left, it is important for all the stakeholders to be familiar with GST provisions. In this article, author has tried to articulate the basic concepts of Input Tax credit.

In every value added taxation structure, Input tax credit remains the backbone of such tax structures as it removes the cascading effect of taxes. In GST also being a value added tax, it is the intention of the lawmakers to allow seamless flow of credit in the supply chain and remove cascading effect of taxes.

Before, moving forward with the discussion on input tax credit, it is of paramount importance to understand the meaning of certain terms relevant for understanding the concept.

Capital Goods: All goods which are capitalized in the books of accounts of the person claiming the input tax credit and which are used or intended to be used for the purpose of business or commerce shall be considered as Capital Goods.

It is a major change as compared to present scenario where the definition of capital goods is very specific and covers limited goods under its purview.

Inputs: All movable goods other than money and securities including 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 but excluding capital goods which are used or intended to be used for the purpose of business or commerce.

Input Service: Anything which is not a good and is used or intended to be used for the purpose of business or commerce shall be considered as Input Service.

Exempted Supply: Supply of any good or service which is not taxable under this act or exempted from payment of tax, including goods/services taxable at nil rate of tax. 

Taxable Supply: Supply of any good or service which is taxable under this act.

WHAT IS INPUT TAX CREDIT

Chapter V of the revised MGL deals with the provisions regarding availment, utilization and distribution of credit. Section 2(56) of MGL defines input tax credit as credit of IGST, CGST and SGST charged on any supply of goods or service including import of goods and tax paid under reverse charge mechanism to a taxable person which is used or intended to be used for the purpose of business or commerce.

ELIGIBILITY AND CONDITIONS FOR AVAILMENT OF INPUT TAX CREDIT

Section 16 of MGL covers the provision with respect to the eligibility of an assessee to avail Input Credit and conditions of such availment.

Eligibility and Conditions for availment:

• He should be a registered taxable person;
• He must be in possession of proper duty paying document viz., tax invoice, debit note issued by the supplier of goods or any other document as may be prescribed;
• He should have received the goods or services supplied under aforesaid document;
• The supplier of goods has actually paid the tax charged on the supplies made by him either in cash or through input tax credit;
• He has furnished the returns as prescribed under Section 34;
• He has paid the amount towards value of goods or services along with tax payable on such goods or service to the supplier of goods within 3 months from the date of issue of invoice by the supplier;
• No input tax credit shall be available on supply of goods or services pertaining to a financial year after filing of return for the month of September following the end of such financial year or annual return whichever is earlier. Hence, an assessee can rectify any mistake and take input tax credit only upto the month of September following the end of financial year or annual return whichever is earlier after which the same will lapse.
• He has not claimed Depreciation on the tax component of capital goods under Income Tax Act.
• Input Tax credit on capital goods shall be available in the year of its receipt, however in case of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto, the input tax credit shall be available as under:

a) maximum 1/3rd of total input tax in the financial year in which the aforesaid goods are received;
b) maximum 2/3rd of total input tax in the immediately succeeding financial year; and
c) Balance input tax credit in any subsequent financial year.

It is interesting to note that in comparison to present indirect tax structure where cenvat credit of duty paid on capital goods is available in installments, the revised MGL has allowed the entire input tax credit on capital goods in the year of receipt of goods thereby reducing the working capital needs of the assessee.

APPORTIONMENT OF CREDIT

MGL provides for more simplified procedure for availment of input tax credit on capital goods, inputs and input services used for supply of exempted goods/services and taxable goods/services.

Every assessee shall be entitle to avail full input tax credit of tax paid on capital goods, inputs and input services which are exclusively used for supply of taxable goods/services, whereas in following cases, proportionate input tax credit shall be available to the assessee:

• Goods or services are used partly for business and partly for other purposes;
• Goods or services are used partly for supply of taxable goods/services and partly for exempted goods/services.

Presently, CENVAT Credit Rules permits full CENVAT Credit on capital goods if such goods are used for supply of exempted goods/services and taxable goods/services, whereas in the MGL, assessees shall be under an obligation to reverse proportionate input tax credit on capital goods also.

In the revised MGL, Law makers have allowed Banks and financial institutions including non-banking financial company to take input tax credit of capital goods, inputs and input services equivalent to 50% of the eligible input tax credit.

BLOCKED CREDIT

MGL has restricted the availment of input tax credit on following goods/services, which shall not be available to the assessee even if he receives such goods/services in the course of their business:

(a) Tax charged on Motor Vehicle and other conveyances except when they are used for

i) further supply of such motor vehicles or conveyance (car dealers etc.);
ii) transportation of passengers (cab, buses etc.); and
iii) imparting training on driving, flying or navigating such motor vehicle or conveyances (motor driving training school, etc.)
iv) for transportation of goods (trucks etc.)  

(b) supply of goods and services namely

i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of goods or services;

ii) membership of a club, health and fitness centre;

iii) rent-a-cab, life insurance, health insurance except where 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; and (Input tax credit of taxes paid on insurance and repair of motor vehicle shall be available under MGL which is presently prohibited under current indirect tax statutes);

iv) travel benefits extended to employees on vacation such as leave or home travel concession.

(c) works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service; (works contractor can only avail input credit of works contract services and input tax credit shall be available only if such services are used for provision of works contract and not for personal use);

(d) goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business; (i.e. Input tax credit shall be available to builders/developers on goods or services used for construction/development of residential or commercial complex)

(e) goods and/or services on which tax has been paid under section 9 (i.e. Composition Scheme);

(f) goods and/or services used for personal consumption;

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

(h) any tax paid in terms of sections 67, 89 or 90 (i.e. in cases where there is a fraud, collusion, search and seizure).

UTILIZATION OF INPUT TAX CREDIT

Every assessee shall be entitle to utilize the eligible input tax credit of tax paid on supply of capital goods, inputs and input services and as available in its electronic credit ledger in its return on self assessment basis.

All the assessee shall be required to file return of inward supply and outward supply with the GST department and details of every such return shall be matched with the corresponding details of the corresponding taxable person.

If the input tax credit taken by the recipient of goods or services is in excess of tax declared by the supplier, then such taxable person shall be liable to reverse the input tax credit and pay the amount of so claimed in its return. However, such taxable person shall be entitle to claim back the input tax credit after the rectification of records by selling dealer.

MANNER OF UTILIZATION OF CREDIT OF CGST, SGST AND IGST

• The amount of input tax credit of IGST available in the electronic credit ledger shall first be utilized towards payment of IGST and the amount remaining, if any, may be utilized towards the payment of CGST and SGST, in that order.
• The amount of input tax credit of CGST available in the electronic credit ledger shall first be utilized towards payment of CGST and the amount remaining, if any, may be utilized towards the payment of IGST.
• The amount of input tax credit of SGST available in the electronic credit ledger shall first be utilized towards payment of SGST and the amount remaining, if any, may be utilized towards the payment of IGST.

Cross Utilization of input tax credit of CGST and SGST has been prohibited in the model GST law. It is unlikely that restriction on cross utilization of input tax credit of CGST and SGST will have any adverse impact on the assessee as they can adjust input tax credit of CGST and SGST with IGST and vice versa.

Input tax credit provisions in special circumstances

In following cases, an assessee shall be eligible to avail the input tax credit:

• Where a person who becomes liable to take registration under GST shall be eligible to avail input credit of inputs lying in stock and inputs contained in semi finished or finished goods held in stock on the date immediately preceding the day he becomes liable to pay tax under GST. However, the availment of input tax credit is subject to the provision that he shall apply for registration within 30 days from the date on which he becomes liable to take registration.
• Any person who voluntarily takes registration under GST shall be entitle to avail input tax credit of inputs lying in stock and inputs contained in semi finished or finished goods held in stock on the date immediately preceding the date of grant of registration.
• Any person who has ceases to pay GST under Composition levy, shall be eligible to avail input credit of inputs lying in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods on the date immediately preceding the day he becomes liable to pay tax under normal scheme of GST.
• Any person who is engaged in supply of exempted goods or services and supply of such good or service has become taxable, then it shall be eligible to avail input credit of inputs lying in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods on the date immediately preceding the day such supply becomes taxable.

In all the aforesaid cases, an assessee shall be entitle to avail input tax credit within one year from the date of issuance of tax invoice in respect of inputs lying in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods.

Reversal of Input tax credit in certain circumstances

• Where any assessee is engaged in supply of taxable goods or service and he switches to pay GST under composition levy or where the goods/services supplied by him becomes absolutely exempt, in such cases, he shall be liable to pay amount equivalent to input tax credit pertaining to inputs lying in stock and inputs contained in semi finished or finished goods held in stock and on capital goods on the date immediately preceding the date of such switch or from the date of grant of exemption.
• Where a registered taxable person has availed the Input Tax Credit on capital goods or plant and machinery and he has sold such capital goods or plant and machinery, then it shall be liable to pay input tax credit reduced by such percentage as may be prescribed or tax on transaction value of sale of such capital goods or plant and machinery whichever is higher.

CONCLUSION

In this article, the paper writer has tried to summarize the basic concepts of Input Tax Credit under proposed Goods and Service Tax Law. There are various other issues related to input tax credit viz., job worker, ISD which could not be discussed in this article.  

The author can also be reached at mail@arajassociates.com.

Disclaimer: The views in this article are author's point of view. This article is not intended to substitute the legal advice. No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used, without the express written approval of the author.