Input Tax Credit in GST Simplified Version

Input Tax Credit

“Input tax” has been defined in section 2 (57) of the MGL and section 2 (1) (d) of the IGST Act.

Input tax in relation to a taxable person, means the (IGST and CGST) in respect of CGST Act and (IGST and SGST) in respect of SGST Act, 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.

Under the IGST Act, input tax is defined as IGST, CGST or SGST charged on any supply of goods and / or services.

It implies that credit of all three can be used for discharging IGST liability, whereas only credit of IGST &CGST can be taken in CGST Act and that of IGST & SGST can be taken under SGST Act. Further the credit of CGST & SGST cannot be cross-utilized.

SO GOING BY ABOVE TABLE,
CREDIT OF SGST CAN NOT BE UTILZED AGAINST CGST &
CREDIT OF CGST CAN NOT BE UTILIZED AGAINST SGST

The definition of input tax includes the tax payable under sub-section (3) of section 7 (Reverse 92 Charge). The credit can be availed if such goods and/or services are used, or are intended to be used, in the course or furtherance of his business.

As per Section 16(11) of the MGL, following four conditions are stipulated:

(a) The registered taxable person should be in possession of tax paying document issued by a supplier;

(b) The taxable person must have received the goods and / or services;

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

(d) The taxable person should have furnished the return under section 27.

Input Tax Credit on Capital Goods

Credit of tax paid on capital goods also is permitted to be availed in one installment.(As per current rules, Capital Goods credit can be availed in two installments)

Sec. 16(3) provides that where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component.

e.g. A Ltd. buys bike of Rs. 40000 and pays GST @5% of Rs. 2000 so totalled to Rs. 42,000. If A Ltd. Calculates depreciation (for Income tax purpose) on Rs. 42,000, It will not be allowed credit of Rs. 2000. If A Ltd. Calculates depreciation (for income tax purpose) on Rs. 40000, he will be allowed credit of Rs. 2000.

Sale of Capital Goods by the assessee: As per section 16(15) of the MGL, in case of supply of capital goods on which input tax credit has been taken, the registered taxable person shall pay an amount equal to the input tax credit taken on the said capital goods reduced by (after Deducting) the percentage points as may be specified in this behalf (Percentage points are yet to be specified by government) or the tax on the transaction value of such capital goods, whichever is higher.

e.g. In continuation of above example if A ltd. Has taken a credit of Rs. 2000 on the bike purchased. Now if A Ltd. Sells the bike for Rs.30,000 after two years so it will have to reverse the credit as per following calculation (Higher of “a” or “b”):

Let's consider that government may specify that per year 20% can be reduced.

a. Rs. 2000 Minus ( 20 % x 2 years = 40 %) = Rs. 1200
b. Rs. 3000 x 5 % (Rate of tax on bike) = Rs. 1500

Input Tax credit on stock for new Registration

Person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.

It may be noted that the credit on pre-registration stock would not be admissible if the registration has not been obtained within a period of 30 days from the date on which he becomes liable to registration.

e.g. A person becomes liable to pay tax on 1st August, 2017 and has obtained registration on 15th August, 2017. Such person is eligible for input tax credit on inputs held in stock as on 31st July, 2017

As per section 16(2A) of MGL, the person who obtains voluntary registration is entitled to take the input tax credit of input tax on inputs in stock, inputs in semi-finished goods and finished goods in stock, held on the day immediately preceding the date of registration.

No credit allowed for input services used for making goods held in stock as well as capital goods procured during the period he was not liable to pay tax.

Input Tax Credit in case change from Compounding to regular and vice versa.

From Regular to Compounding: As per section 16(12) of the MGL, the registered taxable person, who was paying tax under section 7 opts to pay tax under Compounding Scheme under Section 8, has to pay an amount equivalent to the input tax credit in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such switch over. It has also been provided that after payment of the amount on such goods, the balance, if any available in electronic credit ledger would lapse. The amount, required to be paid, is to be calculated as per GAAP in terms of section 16(13) of the MGL.

From Compounding to Regular: As per section 16(3) of the MGL, he can avail ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under section 7.

e.g. Mr. X, a registered taxable person was paying tax under composition rate up to 30th November, 2017. However, w.e.f. 1st December, 2017. Mr. X becomes liable to pay tax under regular scheme. Is he eligible for ITC?

Yes, Mr. X is eligible for input tax credit on inputs held in stock and inputs contained in semi-finished or finished goods held in stock as on 30th November, 2017.

Input Tax Credit on Exempted Goods

As per section 16(6) of MGL, the input tax credit of goods and / or service attributable to only taxable supplies can be taken by registered taxable person. The amount of eligible credit would be calculated in a manner to be prescribed in terms of section 16(7) of the MGL read with GST ITC Rules (yet to be issued). It is important to note that credit on capital goods also would now be permitted on proportionate basis.

As per section 16(12) of the MGL, the registered taxable person who supplies goods and / or services which become absolutely exempt, has to pay an amount equivalent to the input tax credit in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such exemption. It has also been provided that after payment of the amount on such goods, the balance, if any available in electronic credit ledger would lapse. The amount, required to be paid, is to be calculated as per GAAP in terms of section 16(13) of the MGL.

e.g. If Mr. A is selling Goods ‘X’ which is currently taxable @10 %. Mr. A has Rs. 10,000 as credit in his e-credit ledger today with respect to Goods ‘X’ held in stock. If Government notifies that Goods ‘X’ will be exempted from tomorrow. So Mr. A will have to payback Rs. 10,000 standing as credit in e-credit ledger.

Input Tax Credit on Job work

The principal is eligible to avail the input tax credit on inputs sent to job worker for job work in terms of Section 16A(2) of the MGL provided the goods are received back within 180 days. (Same provision as Excise)

The principal has to reverse the credit along with interest on inputs which have not been received back from job worker within 180 days but he can reclaim the credit on receipt of inputs.

Capital goods sent for job work has to be received back by the principal within 2 years. Principal can reclaim the credit paid once capital goods are received back.

Negative List on which ITC is not allowed

Section 16 (9) of the MGL provides for the negative list with respect to the admissibility of ITC. It has been provided that the ITC on following items cannot be availed:

(a) Motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services-

• Transportation of passengers, or
• Transportation of goods, or
• 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 center, life insurance, health insurance and travel benefit, 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.

Miscellaneous (Yet Interesting)

a. Proviso to Sec. 16(2) provides that where the goods against an invoice are received in lots or installments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or installment.

b. If Seller does not pay tax collected (GST Paid by buyer) , the Buyer will not be able take the credit of the same.

c. If goods are delivered to the recipient on direction of third party, such third party shall be the deemed to be the receiver of goods.

e.g. If Mr. A directs Mr. B to send goods to Mr. C.  In this case, the recipient of goods is Mr. C, however, Mr. A will be considered as receiver of goods.

d. As per section 16(4) of the MGL, Person cannot avail ITC after the expiry of one year from the date of issue of tax invoice relating to such supply.

e. As per Section 16 (15) of the MGL, ITC cannot be taken beyond the month of September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier.

The underlying reasoning for this restriction is that no change in return is permitted after September of next FY. If annual return is filed before the month of September then no change can be made after filing of annual return.

The author can also be reached at camayur2@gmail.com