Input Tax Credit (ITC) under GST

Input Tax Credit (ITC) is one of the key features of the Goods and Services Tax (GST) regime.?It aims to eliminate the cascading effect of taxes and reduces the cost of doing business. Every?taxpayer must be aware of the Input Tax Credit (ITC) to be availed by them and the amount?that is required to be set off against the tax liability in the form of GST/CGST/SGST/UTGST.?However, there are some portions of ITC which are Blocked and are not to be considered at the?time of setting off with the tax liability. In this Article, we shall be discussing in detail the?provisions contained in section 16 &17(5) of the CGST Act 2017, which deals with eligibility?and conditions for taking input tax credit and blocked Credit respectively. Before we proceed?to examine the provisions of the mentioned sections, let us first understand some basic concepts?in relation to input tax credit.

What is Input Tax Credit (ITC)?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount. ITC is available to a person when they are registered?as a Taxpayer under GST Act whether as a Manufacturer, Supplier, Agent, or E-commerce?Operator etc. Every registered person is entitled to take credit of input tax charged on any?supply of goods or services or both to him which are used or intended to be used in the course?or furtherance of his business.

For example, if you are a manufacturer and you buy raw materials (Input) Rs 10,000 and pay?GST of Rs 1,800 (18%), you can claim an input tax credit of Rs 1,800. If the finished goods?(Output) are worth Rs. 15,000 and collects GST of Rs 2,700 (18%), you can use the input tax?credit of Rs. 1800 to pay only Rs. 900 as GST.

Who can Claim ITC?

ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as?prescribed (as per the section 16 subsection (2) & (3) of CGST Act 2017).

1. Possession of a tax invoice: The registered person must possess a valid tax invoice or any?other specified tax-paying document to claim the credit.
2. Receipt of goods and services: The credit can be availed only after registered person has?received the goods and services, including the scenarios where the billing and shipping?addresses differ.
3. Actual payment of tax: The tax amount must have been paid by the supplier to the?Government for the credit to be eligible for the recipient. Either in cash or through utilization of input tax credit admissible in respect of the said supply.
4. Furnishing of return: The Registered person should have furnished the necessary return?to claim the input tax credit.
5. Lot-based eligibility: If the inputs received in lots, the credit can be claimed only when?the final lot of inputs is received.
6. Timely payment to supplier: The recipients must pay the supplier the value of goods and?services along with tax within 180 days from the invoice date. Failure to do so will add the?credit amount to the recipients output tax liability with interest. However, once payment is?made, the recipient can claim the credit again.
7. Depreciation Component: No ITC will be allowed if depreciation has been claimed on?tax component of a capital goods.

Time limit to claim input tax credit under GST.

Time limit to claim input tax credit under GST (as per section 16(4) of the CGST Act,2017)?is earlier of the following two dates :

• The due date of filling Annual Return for that financial year; or
• 30th November of the next financial year.

Though ITC can be claimed by a person registered under GST for most inputs, some types of?goods and services are not eligible for input tax credit claim. Such ITC are known as Blocked?Credit and details are mentioned below :

Clauses of Blocked Credit

As per the section 17 of subsection (5) of CGST Act 2017,

a) Motor vehicles for transportation of people having approved seating capacity of not more?than thirteen persons (including the driver). except when they are used for making?further supply, transportation of passengers, imparting training on driving such motor?vehicles.

Example:

• Vehicle purchased for personal use – ITC not available.
• Vehicle purchased by driving school to provide training – ITC available as per?above exception.
• Vehicle purchased by car dealer for sale – ITC available as per above exception.

a.a. Vessels and aircraft except when they are used for making further supply,?transportation of passengers, imparting training on navigating or flying such vessels?or aircraft respectively, for transportation of goods.

a.b. Services of general insurance, servicing, repair, and maintenance in so far as they?relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa)

Provided that the input tax credit in respect of such services shall be available-?

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa)?are used for the purposes specified therein.

(ii) where received by a taxable person engaged-

(I.I) in the manufacture of such motor vehicles, vessels, or aircraft; or

(II.I) in the supply of general insurance services in respect of such?motor vehicles, vessels, or aircraft insured by him.

Example :

• General insurance of motor vehicles purchased for personal use – ITC not available.
• Repairs and maintenance of vehicles used for driving school – ITC available as per?above exception.

b) The following supply of goods or services or both

(i) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic?and plastic surgery, leasing, renting, or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified?therein, life insurance and health insurance.

Provided that the input tax credit in respect of such goods or services or both shall be?available where an inward supply of such goods or services or both is used by a?registered person for making an outward taxable supply of the same category of goods?or services or both or as an element of a taxable composite or mixed supply.

Example: M/s ABC Caterers is engaged in providing catering services to various?clients on occasions of marriage, business functions, festivals, etc. During peak festive season, M/s ABC Caterers availed the services of M/s XYZ Caterers with a view to?catering to the huge demand from clients. M/s XYZ Caterers raised an invoice on M/s ABC Caterers for a specific amount including GST. M/s ABC Caterers will be able to?claim ITC of the GST paid to M/s XYZ Caterers since the inward supply of catering services is being used by M/s ABC Caterers for making an outward supply of the same?category of services. Hence in this case, ITC is available for outdoor catering services.

(ii) Membership of a club, health, and fitness center; and?ITC will not be available for any GST paid on membership of a club, health, and fitness?center under any circumstances.

(iii) Travel benefits extended to employees on vacation such as leave or home travel?concession :

Provided that the input tax credit in respect of such goods or services or both shall be?available, where it is obligatory for an employer to provide the same to its employee sunder any law for the time being in force.?

For example, A Pvt Ltd provided a holiday package to employees on vacations. In that?case, the said company cannot claim credit for GST paid on such travel expenses.

c) Works contract services when supplied for construction of an immovable property (other?than plant and machinery) except where it is an input service for further supply of works?contract service.

“construction” includes re-construction, renovation, additions, or alterations or repairs,?to the extent of capitalization, to the said immovable property.

If the expenses are incurred in relation to the construction of the immovable property and if it?is not capitalized in the books, then ITC is available. For Example, Repair and maintenance are?done to the building if debited to profit and loss account then ITC would be available.

d) Goods or services or both received by a taxable person for construction of an immovable?property (other than plant or machinery) on his own account including when such goods?or services or both are used in the course or furtherance of business.

ITC is not available for the purchase of goods and/or services for the construction of?immovable property, including the purchase of goods and/or services in the business.?However, ITC will be allowed on the inputs, in case of construction of plant or machinery?on his own.

e) Goods or services or both on which tax has been paid under section 10.

Tax paid under sec 10-GST under composition scheme.?Suppliers registered under a composition scheme are not entitled to collect any GST from?the recipient. Thus, the recipient is not entitled to any ITC.

f) Goods or services or both received by a non-resident taxable person except on goods?imported by him.

ITC shall not be available for any tax paid on goods or services or both received by a non-resident taxable person except on goods imported by him. However, ITC shall be available?to a non-resident taxable person only on goods imported by him. No credit shall be allowed?to him on import of service.

g) Goods or services or both used for personal consumption.

E.g. A runs a proprietary firm registered under GST law. Stationery is purchased in bulk by?the firm ostensibly for use in the business, however 60% of the stationery is used by the?family of A for personal use. No ITC is available with respect to the stationery used for?personal consumption.

h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

In case of goods lost, stolen, or destroyed, if the loss is due to unnatural reasons, tax credit?will not be allowed. However, if the loss is due to natural reasons like in case of medicines?(loss due to expiry), then ITC may be allowed.

(i) Any tax paid in accordance with the provisions of sections 74, 129 and 130.

- Section 74, It deals with recovery of tax not paid or short, paid by reason fraud willful misstatement or suppression of facts. Tax Paid is not eligible as ITC.

- Section 129, It deals with detention seizure and release of Goods in transit which had been removed. in contravention of legal provisions. Tax Paid is not eligible as ITC.

- Section 130, It deals with confiscation of goods in certain circumstances. Tax paid is not eligible as ITC.

Written By : Neeti Singh

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