Concept of Input Tax Credit in GST

 

Concept of Input Tax Credit in GST

‘Input Tax Credit’ (ITC) is the tax paid by a registered person under the Goods and Services Tax (GST) whether as a forward charge or reverse charge basis for the use of goods or services or both in the course or furtherance of his business.

Uninterrupted and seamless chain of input tax credit ITC is one of the key features of GST. ITC is the amount of tax paid on the input goods and services utilized while ascertaining the tax liability on the output of the taxpayer. When the goods or services are received from a registered seller, buyer has to pay GST on such purchase to the seller and such GST paid can be utilized against his output tax liability. ITC can be claimed only for the supplies made for business purposes and will not be available for personal use, exempt use and other supplies for which ITC is not specifically available.

Conditions for availing ITC

Every registered person subject to certain conditions 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. The ITC is credited to the electronic credit ledger. ITC can be claimed if all the following conditions are fulfilled:

1. Seller possess tax invoice of the amount paid including GST paid.
2. Tax paid has been deposited with the government by the supplier
3. Goods/Services should have been received
4. GST returns should be filed to claim credit
5. If goods are received in installments, credit can be claimed only after the lot has been received
6. If goods are received in installments, credit can be claimed only after the lot has been received

Blocked Tax Credit

GST law imposes restrictions on utilization of GST input credit with respect to certain specified goods. This is also known as blocked credit. A registered person is not entitled to avail the credit of taxes paid in respect of certain goods or services, even if these goods or services are used in the course of furtherance of business which are as follows:

1. GST paid on purchase of Motor Vehicles

No ITC can be claimed with respect to the GST paid on the purchase of Motor Vehicles having capacity of not more than 13 persons except in case the purchaser is engaged in any of the following activities:

1. Further supply of Motor Vehicles
2. Transportation of Passengers
3. Imparting training to drive such motor vehicles

2. GST paid on purchase and repairs of Vessels and Aircrafts:

GST paid on purchase or repairs vessels and aircrafts are not eligible for claiming ITC with respect to the GST paid on them except the goods are received by a taxable person engaged in any of the following activities:

1. Manufacturing of such motor vehicles, vessels or aircrafts;
2. Rendering general insurance services in respect of such motor vehicles, vessels or aircrafts insured by them.

3. GST paid on personal care services:

GST paid on any of the following activities will not be allowed unless these services are used by registered person for making or outward supply of the same category of goods or services: -

1. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic, plastic surgery
2. Leasing, renting or hiring of motor vehicles, vessels or aircrafts (i.e., cab or taxi services, etc.)
3. Life insurance and health insurance

No ITC can be claimed with respect to GST paid on any of the following services irrespective of the business of the taxpayer:

1. Membership of a club, health and fitness center
2. Travel benefits extended to employees on vacation such as leave or home travel concession.

4. Works contract service:

GST paid in respect of works contract services, when supplied for construction of immovable property is not eligible for ITC. However such ITC can be claimed if these are used for further supply of works contract.

5. Construction services:

GST paid on construction of immovable property on his own account or in the course or furtherance of business shall not be eligible for input tax credit.

6. GST paid under composition scheme:

Goods or services on which tax has been paid under composition scheme are not eligible for input tax credit.

7. Services received by non-resident taxable person:

GST received by a non-resident taxable person is not eligible for ITC. However he can avail the credit of tax paid on goods imported by him.

8. Supply for personal consumption:

GST paid for supplies received for personal consumption is not eligible for ITC.

9. Loss of goods for free sample:

GST paid in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples are not eligible for input tax credit.

10. Fraudulent claim or contravention of law:

No credit shall be available for any tax paid after detection of fraud or suppression of facts or goods removed in contravention of GST law.

Capping on Unmatched Credit

In order to ensure that the returns of all the registered suppliers are filed in time and tax has been deposited with the Government, sub-rule 4 has been inserted under Rule 36 of the CGST rules, 2017. Here, we have discussed the restriction on claiming the input tax credit after insertion of this new sub rule:

The text of the sub-rule inserted is as follows: -

“Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 10 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37”.

This means that the input tax credit can be availed only with respect to the supplies made by the registered user, invoices of which are uploaded on the GSTIN portal and are reflected in their GSTR2A of recipient. However, a relaxation has been granted to the recipients of services and products to avail input tax credit up to 10% of the eligible credit as uploaded by the supplier and reflected in the GSTR 2A.

Earlier before the amendment, the recipient could avail the Income tax credit irrespective of the fact whether the same was reflecting in the supplier’s return or not. Then amendment was made under Rule 36 and a sub-rule (4) was inserted via notification No. 49/2019 Central Tax, dated 09-10-2019, to provide that the recipient can claim the ITC for a maximum of 20% with respect of which no return was furnished by the supplier. Further amendment was made in the said sub-rule via Notification No. 49/2019, Dated 9-10-2019 to bring down the percentage to 10% for availment of ITC which is not shown in the return of supplier.

Clarifications issued by CBIC

After the insertion of the Sub-rule, many doubts were arising in the minds of the taxpayers, so to remove those queries, CBIC issued another Circular No. 123/42/2019-GST dated 11-11-2019 to remove such qualms in the minds of the taxpayers.

Circular clarified the following issues:

1. Restriction of availment of ITC will be applicable only with respect to those invoices/ debit notes, details of which are required to be uploaded by the supplier u/s 37(1).
2. The amendment will be applicable only with respect to invoices/ debit notes on which credit is availed after 09/10/2019.
3. Provision of Rule 36(4) will not be applicable in case of supplies in respect of which no ITC can be availed.
4. The limit of 10% will be applicable to the aggregate of supplies made not the supplier wise.
5. The balance ITC which was not claimed earlier due to non-filing of return can be claimed afterword when return is filed by the supplier.