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Concept of Input Tax Credit

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Concept of ITC

  • “Input tax” means IGST (including that on import of goods), CGST, SGST and UTGST;
  • Charged on any supply of goods or services and;
  • Includes the tax payable under sub-section (3) and (4) of section 9,
  • Includes the tax payable under sub-section (3) and (4) of section 5 of IGST Act,
  • Includes the tax payable under sub-section (3) and (4) of section 9 of SGST Act,
  • Includes the tax payable under sub-section (3) and (4) of section 7 of UTGST Act, excludes the tax paid under section 10 (composition levy)

Principles on Input Tax Credit

  • System for a seamless flow of credit
  • Extends to inter-State supplies
  • Credit utilization would be as follows [Sec 49(5)]:

*The numbers represent the order of utilization of credit

  • Expectation: Accumulation of unutilized GST credits would be avoided except in cases of exports

 

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Conditions for Availment of ITC by a Registered Taxable Person – Sec 16

Note:

  • Credit only upon receipt of the last lot/ instalment in case of goods received in lots / instalments.
  • Goods deemed to be received by a taxable person when the supplier delivers the goods to the recipient/ any other person, on the direction provided by the taxable person to the supplier.
  • Exception in case of goods being directly sent to job worker
  • If the recipient of services fails to pay (value + tax) within 180 days from date of invoice, (ITC availed + interest @ 18%) shall be added to his output tax liability. ITC available when amount discharged later

ITC in case of Capital Goods

“capital goods” means the goods, the value of which is capitalized in the books of accounts of the person claiming the credit and which are used of intended to be used in the course or furtherance of the business

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ITC on the Basis of use of Inputs – Sec 17

  • Note: Attribution of ITC to be made as per the manner prescribed in the ITC Rules

“input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business

“input service” means any service used or intended to be used by a supplier in the course or furtherance of business

  • Note: Attribution of ITC to be made as per the manner prescribed in the ITC Rules

Alternative to apportionment between taxable and exempt supplies in case of banking companies and financial institutions:

  • Yearly option to avail a standard rate of 50% of eligible ITC on inputs, capital goods and input services on a monthly basis
  • 50% shall not be applied on tax paid on supplies made by one registered person to another registered person having same PAN

 

Restrictions on ITC – Sec 17(5) Blocked credits

a) Motor Vehicles

Note: Where any amount has been paid on goods and / or services, in lieu of tax, under composition scheme, no credit on such amount would be allowed.

 

b) Supply of goods and services being:

 

c) Construction of Immovable Property (other than plant and machinery)

  • Taxes on supply of goods or services paid u/s 10
  • Goods or services or both received by a non-resident taxable person except on goods imported by him, shall not be allowed
  • Goods or services or both used for personal consumption
  • Goods lost, stolen, destroyed, written off or disposed of by way of gift or free supplies and
  • Any tax paid in accordance with the provisions of sections 74, 129 and 130.

Plant and machinery means means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises.

 

Eligibility and Time Limit for Availing ITC

 

Eligibility of ITC in case of New Registrations – Sec 18(1)

 

Eligibility of ITC in case of New Registrations (Voluntary Registration) – Sec 18(1)

 

Switching from Composition / Exempt Supply to Normal Tax / Taxable Supply – Sec 18(1)

Credit on Capital Goods to be available after reducing 5% per quarter of a year or part from the date of invoice or such other document on which capital goods were received by taxable person

 

Conditions for claiming credit under – Sec 18(1)

  • Purchase invoice should not be earlier than 1 year from the relevant date
  • Declaration in Form GST ITC-01 to be filed within 30 days from the date of him becoming eligible
  • Details of Inputs held in stock / semi finished or finished goods and capital goods to be furnished in Form GST ITC-01 within 30 days from the relevant date
  • Declaration in Form GST ITC-01 to be certified by a practicing Chartered Accountant or Cost Accountant if the value of credit claimed exceeds Rs. 2,00,000

 

ITC – Change in Constitution of Taxable Person Sec 18(3)

  • ITC shall be apportioned in the ratio of value of assets of the new units in case of demerger scheme
  • Transferor to submit certificate from a practicing Chartered Accountant certifying whether the sale / merger / de-merger / amalgamation / lease / transfer has been done with specific provision for transfer of liabilities
  • Transferee to furnish details of credit available in Form GST ITC-02

 

Switching from regular to over composition- Pay and Exit – Sec 18(4)

Declaration for input tax reversed to be submitted in Form GST ITC-3

 

Supply of Capital goods on which ITC already taken – Sec 18(6)

Note: Any credit wrongly taken shall be subjected to the recovery provisions

 

ITC Rules – Credit in Special Circumstances

  • Credit of Capital Goods as provided to a person switching from composition to regular scheme and a person whose exempt supply becomes taxable supply (Section 18 (1)(c) and (d), shall be claimed after reducing such tax by 5% per quarter from the date of issue of invoice;
  • A declaration within 30 days shall be furnished in all the scenarios as specified in Section 18 (1) for details relating to inputs, semi-finished, finished and capital goods as the case may be;
  • CA/CMA certificate is necessary in case claim for input tax exceeds 2 lakhs;
  • Matching of claims shall be done with GSTR-1 or GSTR-4 of the corresponding supplier.

 

ITC Rules (Rule 36-45) – Manner of Reversal

I.  Reversal of credit where inputs or input services are used partly for business purposes or partly for effecting exempt supplies

  • Total input tax in a tax period to be denoted as ‘T’
  • Amount of input tax used exclusively for the purposes other than business ‘T1’
  • Amount of input tax used exclusively for effecting exempt supplies ‘T2’
  • Amount of blocked credit as per Section 17 (5) ‘T3’
  • Amount of input tax to be credited to electronic credit ledger ‘C1 = T-(T1+T2+T3)’
  • Amount of input tax used exclusively for effecting taxable and zero rated supplies ‘T4’
  • T1, T2, T3, T4 to be determined at invoice level in GSTR-2
  • Common Credit “C2 = C1-T4”
  • Credit attributable towards exempt supplies “D1 = C2*(E/F)

where

  • ‘E’ is the aggregate value of exempt supplies, that is, all supplies other than taxable and zero rated supplies, during the tax period, and
  • ‘F’ is the total turnover of the registered person during the tax period:
  • Credit attributable towards non business purpose “D2 = C2*5%
  • Remaining credit available for business purpose and for taxable and zero rated supplies “C3 = C2 – (D1+D2)”;
  • C3 to be computed separately for CGST, SGST, UTGST and IGST;
  • D1 and D2 shall be added to output tax liability provided invoice wise segregation has been made;
  • Credit calculated on provisional basis shall be computed finally before due date of filing returns for the month of September following the end of the FY to which credit relates;
  • In case amount calculated exceeds the provisional calculation the differential amount shall be added to the output tax liability and interest from the month of April of next FY till the date of payment to be paid;
  • In case amount finally calculated is short of the provisional calculation, the differential amount shall be taken as credit in the month of September.

ITC Rules – Manner of Reversal- Illustration

ITC Rules – Manner of Reversal

II. Reversal of credit where capital goods are used partly for business purposes or partly for effecting exempt supplies:

  • Amount of input tax in respect of capital goods used exclusively for non business purposes or used for effecting exempted supplies shall be indicated in GSTR-2 and shall not be credited in ECL
  • Amount of input tax in respect of capital goods used exclusively for effecting taxable supplies including zero rated supplies shall be indicated in GSTR-2 and shall be credited in ECL
  • Amount of input tax for remaining capital goods shall be denoted as ‘A’ and useful life shall be taken as 5 years
  • In case where capital goods subsequently used for business purposes or for effecting taxable supplies including zero rated supplies, input tax credit shall be included in A after reducing 5% for every quarter
  • The aggregate amount of A shall be denoted as Tc
  • Input tax attributable to common capital goods “Tm=Tc/60”
  • Input tax at the beginning of tax period for capital goods having remaining residual life during tax period ‘Tr’ which is aggregate of Tm of all capital goods
  • Amount of credit attributable towards exempted supplies “Te=(E/F)*Tr, where,
  • ‘E’ is the aggregate value of exempt supplies, that is, all supplies other than taxable and zero rated supplies, during the tax period, and
  • ‘F’ is the total turnover of the registered person during the tax period:
  • Amount of Te along with applicable interest shall be added to output tax liability during every tax period of the residual life of the concerned capital goods
  • Te to be computed separately for CGST, SGST, UTGST, IGST

For the purpose of this rule –

  1. “capital goods” shall include “plant and machinery” as defined in the Explanation to section 17;
  2. for determining the value of an exempt supply as referred to in sub-section (3) of section 17:-
    1. the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and
    2. the value of security shall be taken as one per cent. of the sale value of such security.

 

ITC in respect of goods sent for job work – Sec 19

 

Input Service Distributor – Sec 20

  • ITC is distributed to supplier of goods and / or services of same entity having the same PAN
  • Deemed as ISD is a supplier of Service for distributing credit
  • Common Services used at for

 

Conditions to distribute credit : Input Service Distributor

  • Credit distributed to recipient through prescribed documents containing prescribed details. Such document should be issued to each of the recipient of credit.
  • Credit distributed should not exceed the credit available for distribution
  • Tax paid on input services used by a particular location (registered as supplier) has to be distributed only to that location.
  • Credit of tax paid on input service used by more than one location who are operational is to be distributed to all of them based on the pro rata basis of turnover of each location in a State to aggregate turnover of all such locations who have used such services

 

Excess Credit distributed by Input Service Distributor – Sec 21

 

ITC Rules – Credit Distribution Procedure in case of ISD

  1. Distribution to one or more recipients – Section 20(2)(d)(e)
    • Credit to be distributed to recipients whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason –

C1 = (t1/T)*C

where,

“C” is the amount of credit to be distributed,

“t1” is the turnover, as referred to in section 20, of person R1 during the relevant period, and

“T” is the aggregate of the turnover of all recipients during the relevant period;

 

 

Source : ICAI

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