GST | Provisions to follow for availing Input Tax Credit

Introduction :

Under GST, it is envisaged that there will be seamless flow of credit from each stage, from manufacturer to trader and till the last businessman in the chain making the commercial transaction, wherein eventually the tax burden will fall on to the final consumer but the tax burden will be reduced as the present cascading effects in the present tax structure have been removed.

Tax will be paid on value addition at each stage and the tax paid earlier will be available for set off against CGST/SGST paid. Thus, there will be no cascading and consumer will only bear GST charged by last dealer.

“Input tax" is defined by Sec 2(57) 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 .

The following chart shows clearly the credit route map for various GST Tax credits.

Note : It is important to note that the credit of CGST cannot be used to set off liability against SGST and vice versa.

Provisions :

• The novel concept of accumulating the credit of input tax admissible to every registered taxable person in a Electronic Credit Ledger will be introduced with the implementation of GST Law. All the credit will be accumulated in electronic format as maintained on the common portal of GSTN.
• Who can avail Input Tax Credit ?

Any registered taxable person who has availed the registration subject to the conditions as laid down in Sec 35 and in the prescribed time limit can avail input tax credit.

Can a first time Assessee claim CENVAT on the stock/inputs held as finished or semi finished goods lying in his premises?

Yes, the provisions specifically lay out such allowance u/sec 16 (2). Therein, the person must have applied for the registration within 30 days from the day he becomes liable to obtain registration and must have successfully obtained the said registration. In this case, he can 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.

Moreover, a taxable person who was paying tax earlier U/Sec 8 ie Composition Tax Levy, can also avail credit of input tax on his goods/stock lying with him subject to fulfilment of conditions as may be prescribed.

How to bifurcate Input Credit if the goods and/or services consumed are for both Business and Personal Use ?

By principle of natural justice, the GST Law also states that the input tax credit to be taken will be on pro – rata basis as much as is attributable to Business.

Similarly, how will credit be made available in case a registered taxable person effecting taxable supplies and partly for effecting non-taxable supplies, including exempt supplies but excluding zero-rated supplies?

Before, moving towards the answer outright, first let us understand the few required definitions of above mentioned terminology :

Sec 2 Defines :

(109) “zero-rated supply” means a supply of any goods and/or services on which no

tax is payable but credit of the input tax related to that supply is admissible;

Explanation.- Exports shall be treated as zero-rated supply.

Herein, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero-rated supplies.

In case of Merger, Demerger, sale or transfer of Business the unutilized credit lying in the existing business entity/ taxable person shall be allowed to be transferred in the new entity/person. This was but obvious and hence a clarity will avoid any further litigation in this regards.

Sec 16(9), enlists the items specifically on which the input tax credit will not be available:

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. When goods or services are provided in relation to food and beverages, outdoor catering, life insurance, health insurance,beauty treatments, cosmetic surgery, health services,travel benefits to employees during their course of leave or vacation – when such goods or services are for personal use and / or consumption of any employee. So, here the services for personal use and employees consumption is being kept out of the ambit to avail input tax credit.

c. The goods and services acquired by a principal executing a Works Contract for construction of immovable property except plant and machinery. So this clause will apply only to works contract of construction wherein an immovable property is being created and input credit will be allowed to contracts undertaken for Plant & Machinery .

d. It is similar to clause c above, with the difference that herein the ownership of goods used in construction and acquired by principal is not transferred to any other third person,used in Works Contract for Immovable Property. Here also if the said goods are acquired , used and not transferred in case of contracts for Plant and Machinery than the Principle can avail input tax credit.

e. Goods and or services on which tax has been paid under Sec 8 – Composition Levy.

f. Goods and/or services used for personal/private consumption to the extent consumed.

So if the said goods are also used for business purpose than as discussed above, input can be availed on pro-rata basis.

In case if the assessee has claimed Depreciation on the tax component of capital goods under Income Tax Act , 1961 than the credit shall be denied on the said tax component.

Provisions which are required to be followed by a taxable person to avail input tax credit :

• He must posses a Tax invoice or debit note or supplementary invoice or similar taxpaying invoice as prescribed issued b a person registered under this Act or IGST Act.
• He must have received the goods and / or services.
• The tax charged in the respect of such supply must have been actually paid by the supplier either in cash or utilizing his credit balance as per the provisions.(Please refer Sec 29 and Sec 29Afor dealing with mismatch in input tax credit).
• He has furnished the return u/sec 27

What happens when a taxable person switches over to Composition Levy u/sec 8 :

In such an instance, the person shall be required to pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the 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 of such switch over.

Here by to say that in such a case he is required to pay back the input credit balance with him in respect of the inputs of stocks on hand held by him on the previous day of his such a switch over.

Moreover, a similar approach has been determined for a person whose goods and /or services become exempt u/sec 10. Also, under both the above cases ,the credit bal of ITC in his electronic credit ledger will lapse. {Sec – 16(12)}

• No availment of input tax credit will be allowed for any previous pending invoices after the filing of return u/sec 27 for the month of September following the end of financial year to which such invoice pertains or the filing of annual return w.e.is earlier. {Sec – 16(15)}
• In case of wrong availment of credit the same shall be recovered from the taxable person as may be prescribed.

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

HAPPY READING ON GST!!