All You Need to Know About ITC

All You Need to Know About ITC

Presently the Indirect tax system in India is a multi-point tax system where tax is levied only on value addition. This is achieved by the fact that Indirect tax (i.e. GST) borne on procurements or capital goods is available as a credit or set-off against GST liability on outward supplies. Relevant to note that over a period of time the concept of the input tax credit has evolved and adapted to requirements of industry and economy. The journey from input VAT credit and CENVAT to the input tax credit under GST has been eventful to reduce the cascading effect of Indirect taxes on consumers. In this article, we will discuss some key milestones in the concept of Input tax credit to bring it to the law as it stands today as follows:

Progression of Credits from Past Laws

The erstwhile laws namely Excise duty, Service Tax, VAT and CST were not interchangeably adjustable/available as a credit against output liability. For e.g.: Excise duty and Service Tax input credit also known as CENVAT credit were not adjustable against the output liability of VAT and vice versa; VAT input tax credit was not available as a set-off against CST liability and vice-versa. This resulted in a cascading effect of indirect taxes i.e. Tax on tax impact as can be seen from the illustration below. 

Before GST

Progression of Credits from Past Laws- Before GST

After GST

Know all about ITC

Conditions Under GST Law to Avail Input Tax Credit

While GST has done away with the cascading effect of taxes, the input tax credit is allowed subject to conditions. Key conditions applicable across all industries can be decoded as follows:

SN Conditions

1

Input goods / Services should be used for furtherance of Business

2

Should have possession of Tax Invoice/ Valid tax paying document as prescribed

3

Should have received goods/services

4

Tax charged in respect of supply has actually been paid to Government

5

Furnished returns under GST law

6

Input goods/ services should not be used for exempted or non-taxable supply

7

No depreciation under Income Tax should have been claimed on ITC portion

8

Should not be restricted credits under GST law

9

Makes payment to the vendor within 180 days from the date of invoice

10

Should be claimed before the due date of furnishing of the return for the month of September following the end of the financial year to which tax paying document pertains or furnishing of the relevant annual return, whichever is earlier

Some of the above conditions have been discussed in further detail below:

  • Documentation Requirements to avail ITC: –
    As mentioned above, the availability of a valid tax paying document is one of the key essentials for availing of an input tax credit. As per Rule 36 of CGST Rules, ITC can be claimed on the basis of the following documents
  1. Invoice issued in accordance with Section 31 of the CGST Act in case of NON-RCM supplies
  2. Self-generated Invoice issued in case of supplies on which tax is paid under RCM
  3. A debit note issued by the supplier
  4. Bill of entry in case of imports of Goods
  5. An Input Service Distributor invoice or Input Service Distributor credit note or any document issued by an Input Service Distributor

The significance of documentation for claiming input tax credit carries various challenges from its predecessor laws. Some of the judicial precedents in relation to the same can be understood as below

1)Amar Forgings Pvt Ltd vs Commissioner of Central Excise, Indore

Facts of the Case: – The assessee claimed MODVAT credit on the basis of an extra copy of the invoice on the contention that the truck in which the goods were being transported met with an accident and as a result of which driver died and the duplicate copy was lost.

Conclusion: – The assessee was denied credit for want of corroboration from any material evidence. The appellants could seek permission from the department for taking credit on the original copy of the invoice but they could not avail the credit on the extra copy.

2)Commissioner of Central Excise, Bhopal vs Diamond Cement

Facts of the Case: – The invoice for security agency service was not bearing the name of the service recipient and the assessee had provided a declaration from the service provider stating the services were provided by him to the assessee.

Conclusion: – The declaration by the service provider was held as not tenable and credit was denied on a want of necessary documents for availing credit.

As it can be seen from above, having valid documents is not only sufficient, it is also relevant to preserve a copy and such document should contain relevant details to avoid litigation or procedural lapses in relation to claiming the input tax credit.

  • Input goods/ services should not be used for exempted or non-taxable supply:
    As per Section 17(1) and 17(2) of the CGST Act, where goods or services are used partly for non-business purposes and partly for business purposes, ITC attributable only to business purposes can be taken by the registered person. Similarly, where goods or services are partly used for making taxable supplies (including zero-rated supplies) and partly for exempt supplies, ITC attributable to taxable supplies and zero-rated supplies can be taken by the taxpayer.

Rule 42 of CGST Rules provides the methodology for apportionment of ITC on inputs and input services and reversal of ineligible credit. The same is explained below:-

  • Step 1: – Compute Common Credit

Total input tax involved on inputs and input services in a tax period

T

Less: – Input tax involved on inputs and input services exclusively for non-business

(T1)

Less: – Input tax involved on inputs and input services exclusively for exempt supplies

(T2)

Less: – Blocked credits as per Section 17(5)

(T3)

ITC to be credited to Electronic Credit Ledger

C1

Less: – Input tax involved on inputs and input services exclusively for taxable supplies

(T4)

Common Credit available for apportionment

C2

Note: – Where ITC on inputs and input services used partly for non business purposes and exempt supplies can be segregated at invoice level, the same will be added to T1 and T2 respectively and the balance will be added in T4

  • Step 2 : – Compute credit attributable to exempt supplies
The aggregate value of exempt supplies during the tax period

E

Total turnover in the state during the tax period

F

Credit attributable to exempt supplies out of common credit

= (E/F) * C2

Notes: – 

i. If the taxpayer does not have any turnover during the tax period, the values for the last tax period may be used

ii. Exempt supplies include outward supplies taxable under RCM, transactions in securities, sale of land and building where consideration is received after obtaining completion certificate

iii. The value of land and building will be the value considered for paying stamp duty

iv. Value of security shall be taken as 1% of the sale value of such security

  • Step 3: – Compute credit attributable to non-business purpose
    It will be 5 % of Common credit (C2)
  • Step 4: – Compute Eligible credits

It will be common credit (C2) reduced by credit attributable to exempt supplies (as per step 2) and non-business purpose (as per step 3)

Notes: –

I. Eligible credit as per step 4 above needs to be calculated separately for IGST, CGST and SGST
II. Credit attributable to exempt supplies and non-business purpose should be computed for the whole financial year by taking the exempted turnover and aggregate turnover for the whole year
III. If the credit attributable by computation on the basis of whole year is more than the amount considered on the monthly basis by following the above steps, then the differential amount should be added to the output tax liability and interest @ 18 % should be added on such differential from 1st April of succeeding year till the date of payment
IV. However if the differential amount is negative, then such amount can be claimed back as credit in the return period of the month not later than September of the succeeding financial year.

Similarly there are rules provided for methodology for apportionment of credit of capital goods and reversal in case of exempt supplies and non business purposes. Rule 43 of CGST rules provides for the mechanism which is explained below:

Step 1: – Compute common credit on capital goods as under: – 

Total Input tax of capital goods for the tax period

A

Input tax of capital goods used exclusively for non-business purposes

A1

Input tax of capital goods used exclusively for exempt supplies

A2

Amount not to be credited to electronic credit ledger

=A1 + A2

Input tax of capital goods used exclusively for taxable supplies (including zero-rated)

A3

Amount to be credited to electronic credit ledger

A3

Balance Amount of Input tax on capital goods will be common credit which will be credited to electronic credit ledger (denoted as TC)

={A – (A1 + A2 + A3)}

  • Step 2 : – Determine common credit during the useful life of capital goods (denoted as TM) : TM = (TC / 60)
  • Step 3 : – Determine common credit at the beginning of the tax period (denoted as TR) : TR = TM for such capital goods
  • Step 4: – Apportionment of common credit attributable to exempt or non business purposes (denoted as TE) : TE = TR X (E / F)

Where,

E = Aggregate value of exempt supplies and non business purposes

F = Total turnover during the tax period

Notes: – 

I. In case of change from exclusive use for non business purpose or exempt supplies to common use, credit will be computed by reducing ITC @ 5 % per quarter or part thereof and such amount will be credited to electronic credit ledger

II. Similarly in case of change from exclusive use of taxable supplies (including zero rated supplies) to common use, credit will be computed by reducing ITC @ 5 % per quarter or part thereof and such amount will be added to TC as computed as computed in step 1

  • Step 5: – Restrict Ineligible Credit

TE as calculated in step 4 will be added to the output tax liability along with interest during every tax period of the useful life of capital goods considered. 

Optional method for banks instead of reversing credit as per Rule 42 and Rule 43 explained above

• As an alternative to above methods, a banking company or financial institution including NBFC, which accepts deposits, or extends loans or advances, has the option to limit its availment of ITC to 50% of eligible ITC on inputs, input services and capital goods each month and remaining amount shall lapse. They will not be required to reverse any amount as per Rule 42 and Rule 43 if opted for this option

• Credit of tax paid in inputs and input services that are used for non business purposes and ineligible credit as per Section 17(5) cannot be availed

• The restriction of availing 50 % shall not apply on supplies procured from another registration of the same entity and 100 % ITC can be availed on such transactions

• The option once availed cannot be changed during the remaining part of the financial year

Ineligible ITC :- ITC of tax paid on almost every input and input service used for supply of taxable goods or services is allowed under GST except a list of items provided under Section 17(5) which mainly covers items of personal consumption, inputs use of which results into formation of an immovable property (except plant and machinery), telecommunication towers, pipelines etc.

Motor Vehicles

Foods and beverages, outdoor catering,

Rent a cab, life insurance and health insurance

Membership of a club, health and fitness centre

Travel benefits to employees on vacation such as LTA or home travel concession

Works contract service for construction of an immovable property

Inward supplies for construction of an immovable property (other than plant and machinery) on his own account

Inward supplies on which tax is paid under Composition Scheme

Inward supplies received by a Non Resident taxable person

Goods or Services used for personal consumption

Goods that are lost, stolen, destroyed, written off or disposed of by way of gift or free samples

beauty treatment, health services, cosmetic and plastic surgery

As per Section 16(2), the amount of tax to be claimed as credit must be paid to the Government. Further, Section 42 requires matching of the tax credit with the details submitted by the vendors in their GSTR-1 (returns to report outwards supplies or sales). Thus, a view transpires that the intent of the government is to allow credits of only of such money actually received by the treasury of India and disclosed by the vendor.

In order to accomplish this intent/ purpose, the Government introduced reports in form of GSTR-2A viz. report of all purchases made by the taxpayer and disclosed by the vendors in their respective GSTR-1 against the GSTIN of the taxpayer. The original format in which returns were to be furnished required the taxpayer to match the GSTR-2A report with their purchase register and report the actual matched and reconciled input tax credited under the return for inward supplies i.e. GSTR-2. However, due to various factors involved GSTR-2 has been suspended.

Relevant to note that while GSTR-2 has been suspended, the GSTR-2A reports are still provided by the GST Network for taxpayers to match credit. Further, with a suspension of GSTR-2, there is no utility where the assessee can match reconcile credits. Whilst the machinery provisions are still inactive, the requirement under Section 16(2) of the GST law remains viz. input tax credit shall only be allowed of that GST which is deposited with the Government.

In this regard, the department has been issuing notices to taxpayers having differences in ITC claimed with the amount of tax as per GSTR 2A. The taxpayers are required to explain the differences to the department, failing which the differential amount is required to be paid by the taxpayer with interest/ penalty.

As required by Section 16(4), the due date for claiming credit for a financial year is 30th September of the following financial year. It is imperative for the company to claim all eligible credits within this time. The reconciliation activity will highlight the invoices uploaded by the vendors on which the taxpayer has not availed credit. This could be due to invoices paid but ITC was not accounted in the ITC ledger or it could be on account of invoices pending in the processing queue. Hence reconciliation will create a positive impact on the working capital.

However, while availing such credit to meet the timelines under Section 16(4), it worthwhile to discuss the amendment under Rule 36 (4) of CGST Rules which was introduced vide Notification No 49/2019 – Central Tax dated 09/10/2019. As per the notification, an Input tax credit to be availed by the taxpayer in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under Section 37(1), shall not exceed twenty percent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under Section 37(1). The restriction of twenty percent explained above was further substituted to ten percent of eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under 37(1) vide Notification No 75/2019 – Central Tax dated 26/12/2019.

The impact of Rule 36(4) impacts the way the business and the tax function operates. The taxpayers before this notification were claiming credit suo moto. However, now they are required to reconcile the invoices with GSTR-2A data on a monthly basis before availing credit. This has increased the role of taxation function. Additionally, the company has to select the vendors who are tax compliant in order to avail ITC and have no impact on working capital. Payment terms of the existing vendor need to be relooked to secure tax credits.

  • Blocked Credit tab on the GSTN portal

The Government acknowledges the negative impact on working capital caused on account of the introduction of Rule 36(4) and understands the difficulties faced by the industry in accounting for such credits which are eligible as per Section 16 but cannot be claimed due to limitations of Rule 36(4). These amounts are not ineligible but the company is required to differ the availment of such credit till the time the details are not submitted by the vendor in GSTR-1. Such differed credits were leading to the difference between ITC as per books and ITC as per the portal.
With the introduction of the blocked credit tab, the taxpayer can enter the amounts blocked on account of Rule 36(4) and ensure balances as per books and as per portal are in complete sync. The blocked credit tab was activated on the GSTN portal on 22nd February 2020.

As discussed above, the intent of the Government to eliminate the cascading effect of taxes on consumers was implemented with GST and input tax credit provisions under GST law. However, to ensure that this purpose is fulfilled and the actual benefit is received by consumers, it appears that Section 171 of the CGST Act was instituted under the GST law also known as the provision for Anti-profiteering. This provision mandates a taxpayer to pass on the benefit of input tax credit to the recipient by way of commensurate reduction in prices.

Further, the Finance (No 2) Act, 2019 has levied a penalty of 10 % on the amount profiteered on account of GST if amount not paid within 30 days of investigation order in case of default.

However, the government noticed multiple industries where the benefit was either not passed on or was partially passed on. To monitor the anti-profiteering measure, the Central Government constituted a committee that examines the input tax credits availed by the taxpayer or the reduction in the tax rate has actually resulted in a commensurate reduction in the prices.

As per a press release issued in July 2019, as on 20.06.2019 the National Anti-profiteering Authority (NAA) has passed 67 orders out of which 26 cases were confirmed for profiteering by businesses, with profiteering amounting to Rs. 600.51 crores.

Accordingly, while claiming the input tax credit is important to avoid cascading effect of taxes, it is also relevant to adjust input costs to allocated to input tax credit thus passing on benefits to consumers/ customers.

Few of the advance rulings in relation to ITC in the GST regime have been tabulated below: –
Sr. No Advance Ruling Order No Brief facts of the case and Ruling Announced
   1 51/ARA/2019 dated 25.11.2019 – Tamilnadu Advance ruling authority Facts:- The applicant had procured inputs and input services in construction of a marriage hall on his own account and such marriage hall was let out to customers for varied locations on which GST was chargeable at 18 %. The applicant sought to rule whether ITC could be claimed on inputs and input services used in construction Ruling Announced: – Section 17(5) states that no ITC is available in respect of any goods or services received by a taxable person for construction of an immovable property on his own account even if such inputs and input services are used in the course and furtherance of business
   2 GST-ARA-36/2018-19/B-110 – Maharashtra Authority for Advance Ruling Facts: – The applicant has paid ITC on a hotel stay in case of free hotel accommodation to General manager (GM) and Managing Director (MD) of the company and is included as a prerequisite in the salary of GM and MD Ruling: – It was held that the hotel stay was being used as a residential premise for GM and MD which is for personal comfort. Hence ITC was ineligible as per Section 17(5)(g) which states ineligible ITC on account of services used for personal consumption
   3 KAR ADRG 109/2019 – Authority for Advance Rulings in Karnataka Facts: – The applicant is engaged in building and managing industrial warehouse space and procures goods and services from various contractors for fitting out of the warehouse spaces such as electrical works, pumps, pumping systems, tanks, lifting system, etc. and eligibility of ITC on such procurement was questioned Ruling: – ITC was ineligible on the grounds that the above is in the nature of the immovable property and the accounting treatment in the books as the movable property will have no bearing. Accordingly, ITC was ineligible as per Section 17(5)(c) and 17(5)(d)
   4 KAR ADRG 62/2019 – Authority for Advance Rulings in Karnataka Facts: – The company was registered with effect from 1.04.2018 and had received the invoices for services procured for the period Jul’2017 to Mar’2018. The company intends to seek clarification on eligibility of such ITC for services received before the date of registration Ruling: – The applicant is not eligible to take ITC on account of Section 18(1) which clearly states that a person who has been granted registration, where the person has applied for registration within 30 days from the date on which he becomes liable to obtain registration, would be allowed to take ITC of goods held in stock. There is no provision for input services. There is no bearing of invoice date and last date for availing credit. The condition of having stock in hand on the previous day of the effective date of registration needs to be fulfilled.
   5 GST-ARA-79/2018-19/B-168 – Maharashtra Authority for Advance Rulings` Facts: – The company is incurring expenditure on the upkeep of the garden outside the factory and several facilities for the use of employees and their families. Additionally, the company operates a hospital for the treatment of employees wherein medicines and maintenance expenses are incurred by the company. Also, the company operates a guest house on which maintenance expenditures are incurred. The company is running a canteen for the employees and charging consideration for the same. The LPG cylinders are purchased by the company The company seeks clarification on the eligibility of ITC on such expenditure Ruling: – The above expenses excluding purchase of cylinders are ineligible to avail ITC as they are not intended or furtherance of business and are primarily for personal consumption. Hence it was pronounced that the company cannot avail ITC on such transactions. In regards to the purchase of cylinders for canteen, it was held that the canteen services were chargeable to GST and hence ITC on inputs, in this case, cylinders can be availed by the company.

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