Input Tax Credit Under GST Law

Editorial…

Preface:

The concept of Input tax credit has its origin to the system of VAT (Value Added Tax), which is common in western European countries. France was the first country to introduce VAT in 1954 and later it was adopted by many countries world over.The concept of VAT was developed to avoid cascading effect of taxes and it was found to be a very good and transparent tax collection system, which reduces tax evasion, ensures better tax compliance and generates higher tax revenue. The GST (Goods and Services Tax) in India is a destination based tax and therefore the ultimate burden of taxes has to be borne by the end consumer of goods or service as the case may be. The GST law has provided an appropriate framework and mechanism to ensure the basic principles of VAT are adhered to. Unlike Income tax where the Government collects taxes directly from the taxpayers, in case of GST being indirect tax it is not expedient and practical for the Government to collect the taxes directly from each and every end person who is the consumer goods or services. Therefore the responsibility is cast on the businesses in the chain of transactions through which goods or services pass, to collect the tax from consumers on their outward supplies and deposit the same in the Government treasury.  Under VAT system, credit is given at each stage of tax paid at earlier stage. These businesses in a sense are mediators or agents of the Government to collect and remit the taxes and therefore ideally the business community should not be overburdened and asked to pay taxes unreasonably from their own pockets.

Meaning – Input tax credit:

Input tax credit as the name suggests refers to the credit in respect of various taxes paid under GST law on the goods or services procured but it excludes the composition tax and taxes paid on advance payments to suppliers. Various taxes that qualify for input tax credit are CGST, SGST and IGST paid either under forward charge or reverse charge. It is relevant to note that, the input tax credit on goods also cover in its ambit the input tax credit on capital goods. Thusin GST regime, input tax credit is available on the procurement of capital goods as well.

Pre-requisites to avail Input tax credit:

Following are the pre-requisites for availing Input tax credit on the goods or services procured:

  • The goods or services procured are either used or intended to be used for the purpose of business. Thereby any goods or services procured for personal use of the directors, employees, etc. of the taxpayers are straight away omitted from availing the benefits of input tax credit.
  • The purchaser possesses the tax invoice, debit note or any other prescribed documents in the GST Rules as evidence of such purchase.v The purchaser has actually received the goods or services. Except where the purchaser directs or instructs the supplier to directly deliver the goods to a third person, in this situation albeit purchaser does not by himself receives the goods, still he is deemed or treated as if he has actually received the goods and therefore he could avail input tax credit. Where against an invoice the goods are received in multiple instalments, in such situation the purchaser is eligible to take input tax credit only on receiving last instalment of the supply of such goods.
  • Claim input tax credit within the due date of filing GSTR3 of September month of following financial year or actual date of filing of annual return, whichever is earlier.

Additional requirements to be fulfilled:

Having fulfilled the pre-requisites as mentioned above and having availed the input tax credit, there are few more additional requirements to be fulfilled ubsequently in order to sustain the input tax credit already availed. Following are those additional requirements:

  • With respect to input tax credit already availed on the goods or services procured, in case the supplier either does not pay the outward tax to the Government and/or he does not file a valid GSTR3 return, then that input tax credit which was already availed would be reversed and along with applicable interest thereon the total amount would be added to the output tax liability on the due date of filing next month’s GSTR3 return.
  • he purchaser has to makecomplete payment to the supplier of goods or services towards the value of supply along with tax thereon within 180 days from the date of invoice. In case the payment is not made within 180 days, the input tax credit which was already availed would be reversed and along with applicable interest thereon the total amount would be added to his outward tax liability on the due date of filing next month’s GSTR3 return subsequent to the expiry of 180 days. However the purchaser could subsequently make the complete payment towards the invoice along with interest and re-avail the lost input tax credit earlier. However the interest for 180 days would be a loss for such taxpayers.he purchaser has to makecomplete payment to the supplier of goods or services towards the value of supply along with tax thereon within 180 days from the date of invoice. In case the payment is not made within 180 days, the input tax credit which was already availed would be reversed and along with applicable interest thereon the total amount would be added to his outward tax liability on the due date of filing next month’s GSTR3 return subsequent to the expiry of 180 days. However the purchaser could subsequently make the complete payment towards the invoice along with interest and re-avail the lost input tax credit earlier. However the interest for 180 days would be a loss for such taxpayers. Note: The requirement of invoice payment within 180 days does not apply for any purchases liable for payment of tax under reverse charge mechanism.
  • Where depreciation has been claimed on the tax component of the value of the capital goods, no input tax credit on that component shall be allowed.

Apportionment of Common Input tax credit:

Where the goods or services procured are used partly for business purpose and partly for other purpose, the input tax as is attributable to the purpose of business only is admissible for claim of input tax credit. Under GST law specific rules have been notified prescribing the manner in which the attributable input tax credit is to be computed and allowed.
Where the goods or services procured are used partly for taxable supply and/or zero ratedsupply and partly for exempt supply & supply not liveable to tax under GST law, in such scenario the input tax as is attributable to taxable/zero rated export supply only is admissible for claim on input tax credit. Under GST law specific rules have been notified prescribing the manner in which the attributable input tax credit is to be computed and allowed.
However banking, financial institutions and non-banking financial institutions have been given an alternate option to avail flat 50% of eligible input tax related to external goods or services procurements.

Blocked credits:

It is the general understanding within the business circles that, under the GST era the input tax credit would flow seamlessly and that would go on to reduce the cost of the supply significantly. Ironically that is not entirely true, the GST law has come up with specific goods or services on their procurement there is no input tax credit available, perhaps such procurements would have been done genuinely for business purposes. The following are those items:

  1. Motor vehicles and other conveyances used otherwise than for further re-sale or transportation of goods/passengers or imparting driving training.
  2. Food & beverages, outward catering, beauty treatment, health services, cosmetic and plastic surgery when not used for further supply in the same line of business.
  3. Membership of club, health or fitness centre
  4. Rent a cab and life & health insurance premium unless:
  5. Leave travel benefits or concessions provided to employees.
  6. Works contract services except when such services are procured for further supply of works contract service.Works contract services except when such services are procured for further supply of works contract service.
  7. Procurement of goods or services for construction of immovable property on own account.
  8. Goods or services procured from a registered person who is under composition scheme.
  9. Goods or services received by a non-resident, except imports.
  10. Goods or services procured and used for personal use or consumption.
  11. Goods disposed of by way of gifts or free samples or goods lost, stolen, destroyed or written off.

Input tax credit in Special circumstances:
Following are some of the typical scenarios where it is explained how input tax credit is to be availed:

  1. Any person who has applied for a fresh registration under GST law is eligible to take input tax in respect of inputs and inputs contained in semi-finished and finished goods on a relevant date. It is important to note that, such persons are not allowed to take input tax credit on the capital goods that are held on relevant date.Any person who has applied for a fresh registration under GST law is eligible to take input tax in respect of inputs and inputs contained in semi-finished and finished goods on a relevant date. It is important to note that, such persons are not allowed to take input tax credit on the capital goods that are held on relevant date.
  2. Any taxpayer who moves from composition scheme to normal scheme of tax payment can take input tax credit in respect of inputs, capital goods and inputs held in semi-finished and finished goods on relevant date.
  3. Any taxpayer who moves from supplier of exempt supply of goods or services to supplier of taxable supply of goods or services could also take input tax credit in respect of inputs, capital goods and inputs held in semi-finished and finished goods on relevant date. Note: As regards all the 3 points above, the invoice dates in respect of the stock of inputs, capital goods or inputs contained in the semi-finished goods or finished goods, should not be older than 1 year from the relevant date.
  4. Any taxpayer who moves from normal scheme to composition scheme is required to pay either through utilization of amount from input tax credit ledger or by cash payment equivalent to the credit of input tax in respect of inputs, capital goods and inputs help in semi-finished and finished goods. After utilization of the amount from input tax credit ledger, if there is any balance remaining, that balance would lapse.Any taxpayer who moves from normal scheme to composition scheme is required to pay either through utilization of amount from input tax credit ledger or by cash payment equivalent to the credit of input tax in respect of inputs, capital goods and inputs help in semi-finished and finished goods. After utilization of the amount from input tax credit ledger, if there is any balance remaining, that balance would lapse.
  5. In case of supply of capital goods or plant and machinery on which input tax credit  has been taken, the taxpayer shall pay an amount equal to such input tax credit reduced by certain percentage as prescribed in Rules or on the transaction value of such capital goods or plant and machinery, whichever is higher.
  6. In case of job work arrangement, the principal could send inputs or capital goods to the job worker either by himself or through the supplier of such inputs or capital goods to be sent directly to the job worker. In such scenarios, the principal (not the job worker) is eligible to take input tax credit on such inputs or capital goods sent. In case such inputs or capital goods sent are not received back by the principal within 1 or 3 years respectively, then sending of those inputs or capital goods to the job worker is deemed as Supply which is exigible to GST liability.

Recovery of input tax credit:

Where input tax credit has been wrongly availed or utilised by the tax payer for reasons of fraud, wilful misstatement or suppression of facts or otherwise, a proper GST officer could serve a show cause notice in pursuit of recovery of such input tax credit wrongly availed or utilised.
Conclusion:
Under the preceding input tax credit mechanism the way Central Excise and Service tax provisions are drafted had led to a lot of litigations with respect to availability of Input tax credit. It is sincerely hoped that the GST regime would simplify the provisions regarding availability of input tax credit.