TOPIC: Input Tax Credit and Registration

Introduction:

Input tax credit is one of the basic features of GST. The amount of the tax paid receipt of any
goods or services in the course or furtherance of business is eligible for credit to the recipient.
The provisions in respect of input tax credit as contained in Sec 16 to 22 in CGST Act are
covered under the ITC.

ITC 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.

Here’s how-

When you buy a product/service from a registered dealer you pay taxes on the purchase. On
selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount
of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase)
has to be paid to the government. This mechanism is called utilization of input tax credit.

Input Tax Credit (ITC) is the core concept of GST as GST is destination-based tax. ITC
avoids cascading effect of taxes and ensures that tax is collected in the State in which goods
or services or both are consumed. “Input tax credit” means credit of ‘input tax’- section 2(56)
of CGST Act. Burden of proof on taxable person availing input tax credit - Where any person
claims that he is eligible for input tax credit under this Act, the burden of proving such claim
shall lie on such person - section 155 of CGST Act.

Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, “ITC”) is one
of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading of
taxes. Cascading of taxes, in simple language, is ‘tax on tax’. Under the present system of
taxation, credit of taxes being levied by Central Government is not available as set-off for
payment of taxes levied by State Governments, and vice versa. One of the most important
features of the GST system is that the entire supply chain would be subject to GST to be
levied by Central and State Government concurrently. As the tax charged by the Central or
the State Governments would be part of the same tax regime, credit of tax paid at every stage
would be available as set-off for payment of tax at every subsequent stage.
Let us understand how ‘cascading’ of taxes takes place in the present regime. Central excise
duty charged on inputs used for manufacture of final product can be availed as credit for
payment of Central Excise Duty on the final product.

For example, to manufacture a pen, the manufacturer requires plastic granules, refill tube,
metal clip, etc. All these ‘inputs’ are chargeable to central excise duty. Once a ‘pen’ is
manufactured by using these inputs, the pen is also chargeable to central excise duty. Let us
assume that the cost of all the above-mentioned inputs is say, Rs.10/- on which central excise
duty @10% is paid, means Rs.1/-. The cost of the manufactured pen is say Rs.20/-, the
central excise duty payable on the pen @10% will be Rs.2/-.

Now the manufacturer of the pen can use the duty paid on inputs, i.e. Rs.1/- for payment of
duty on the pen. So he will use Rs.1 paid on inputs and he will pay Rs.1/- through cash
(1+1=2), the price of the pen becomes Rs. 22/-. In effect he actually pays duty on the ‘value
added’ over and above the cost of the inputs. This mechanism eliminates cascading of taxes.
However, when the pen is sold by the manufacturer to a trader, he is required to levy VAT on
such sale. But under the present system, the manufacturer cannot use the credit of central
excise duty paid on the pen for payment of VAT, as the two levies are being levied by
Central and State government respectively with no statutory linkage between the two.

Hence, he is required to pay VAT on the entire value of the pen, i.e. Rs.22/-, which actually
includes the central excise duty to the tune of Rs.2/-. This is cascading of taxes or tax on tax
as now VAT is not only paid on the value of pen i.e. Rs.20/- but also on tax i.e. Rs.2/-.

Goods and Services Tax (GST) would mitigate such cascading of taxes. Under this new
system most of the indirect taxes levied by Central and the State Governments on supply of
goods or services or both would be combined together under a single levy.

Concept of Input Tax Credit:

The concept of ITC means making tax paid on inputs available as credit (deduction) from the
tax payable on sale/transfer of that item. In the ideal taxation system, there should not be
situations in which tax is levied on tax, which is called cascading effect. In the pre-GST
system of taxation there were many instances in which tax was levied on tax., Central Sales
tax was the most glaring one. Every time an inter- state sale was made, 2% CST paid became
part of the cost for buyer of goods. When he further sold those goods, tax was charged on the
sale price, which comprised (Cost of item + CST of 2% + profit margin). Thus, tax was
charged on CST also. Which was cascading. Provision of seamless Input tax credit is one of
the main features of GST.

Meaning of Input

The term ‘Input’ has been defined under Sec 2(59) of CGST Act to mean

 Any goods other than capital goods,

 Used or intended to be used by supplier,
 In the course or furtherance of business,

It may be noted that goods under the CGST Act has been either classified as input or capital
goods. But Capital goods are first inputs and then on the basis of their accounting treatment,
they get classified as Capital goods.

Meaning of Capital goods:

The term ‘Capital goods’ has been defined under sec 2(19) of CGST Act to mean

 Goods
 The value of which is capitalized
 In the books of accounts
 Of the person claiming the credit
 Which are used or intended to be used
 In the course or furtherance of business.

Thus, as per provisions of GST law, any goods will become capital goods in case their value
is capitalized in the books of the person and such goods are intended to be used in the course
or furtherance of business.

Meaning of Input service:

The term ‘Input Service’ has been defined under sec 2 (60) of the CGST Act to mean:

 Any service,
 Used or intended to be used by supplier,
 In the course or furtherance of business.

Thus, any service which is used or intended to be used in the course or furtherance of
business of recipient of such service will be termed Input Service.
Meaning of Input tax and Input tax credit:

The term ‘Input tax’ has been defined under sec 2(62) of CGST Act, as follows:

Input tax in relation to a registered person means:

a) Central tax
b) State tax
c) Integrated tax
d) Union territory tax
e) Charged on supply of goods and or services and includes:
 Integrated tax charged on import of goods;
 The tax payable under provision of sub-sec (3) and (4) of sec 9 of
CGST/SGST Act - i.e. tax paid on reverse charge basis on receipt of notified
goods and services and tax paid on reverse charge basis on receipt of goods
and services from non-registered persons
 The tax payable under provision of sub-sec (3) and (4) of Sec 7 of UTGST Act
 The tax payable under provision of sub-sec 3 and 4 of Sec 5 of IGST Act - i.e.
tax paid on reverse charge basis on notified goods and services and tax paid on
reverse charge basis on receipt of goods and services from non – registered
persons

And excludes tax paid under Sec 10 i.e. composition levy.

The term ‘input tax credit’ has been defined under sec 2(63) of the CGST Act to mean credit
of input tax as defined under sec 2(62).

Thus, from the definition of input tax and Input tax credit, it is important to note that:

a) The credit of CGST, SGST, IGST and tax paid under reverse charge mechanism in
terms of sec 9(3) and 9(4) shall be available as Input Tax Credit (ITC).
b) The tax credit is available to registered taxable person only.
c) Tax credit is a tax charged on goods and services supplied to taxable person.

Eligibility Conditions for Availing Input Tax Credit:

As per sec 16(1) of the CGST Act, every registered taxable person is eligible to take input tax
credit. Thus, registration and being taxable under the GST law is the prerequisite for claiming
the input tax credit. Therefore, a person will not be eligible to take input tax credit before the
period of his registration and also a person dealing in non – taxable goods and or services will
also not be eligible to claim input tax credit.

The eligible input tax credit is credited in electronic credit ledger maintained on the common
portal of GST. Such electronic ledger balance is available for use by the registered taxable
person for payment of tax under the GST law.

Entitlement Conditions for Input Tax Credit:

As per sec 16(2) of the CGST Act, following are the basic requirements for availing input tax
credit on inputs or input services received by the registered taxable person.

a) He is in possession of a tax invoice; debit note or other tax paying document issued by
a registered taxable supplier.
b) He has received the relevant the goods and or services
 In case goods have to be received in lots or instalments, then last lot or
instalment of such goods have been received.
c) The tax charged on such supply has actually been deposited in the appropriate
Government account.
d) He has furnished the return under sec 39.

These can be considered as basic conditions without the compliance of which input tax credit
will not be available to a registered taxable recipient. The documentary requirements for the
purpose of availing input tax credit has been provided in Rule 36 of Central Goods and
Service Tax Rules. Rule 36 prescribes the following documents on the strength of which
input tax credit can be availed by the registered taxable person.

a) An invoice issued by supplier of goods and or services.

b) An invoice issued by the recipient of goods and or services in pursuance of sec 9(3) or
9(4) of the Act. Such invoices are required to be issued by recipient of goods and
services for payment of tax on reverse charge basis.
c) A debit note issued by supplier of goods and or services.
d) A bill of entry or other similar document issued under the Customs Act in respect of
IGST credit on imported goods.
e) An ISD invoice, ISD credit note or any other document issued by input service
distributor.
Further Conditions:

In case of availment of input tax credit on eligible inputs and input services, there is a further
condition that the payment of the invoice value together with the tax component will be paid
within a period of 180 days of such invoice.

In case the recipient of such inputs or input services fails to pay the invoice value to the
supplier of such inputs or services within a period of 180 days from the date of invoice, the
amount equal to the input tax credit together with interest thereon will be added to the output
tax liability of such recipient with interest thereon will be added to the output tax liability of
such recipient of input tax. It is important to note that it is the obligation of the recipient of
input tax. It is important to note that it is the obligation of the recipient to declare the invoices
which have not been paid within 180 days of date of invoice and offer for reversal the input
tax credit already availed on such invoices in the return GSTR 2 for the month immediately
following the month of expiry of 180days. However, such person would be eligible to avail
of input tax credit on payment of such invoice along with tax thereon. It is important to note
that the interest paid at the time of reversal would not be allowed back to such taxable person.

Rule 37 of Central Goods and Service Tax Rules provide for this condition, this rule further
provides that the input tax credit so reversed will be added to the output tax liability of such
person and such person would be liable for payment of tax at a rate not exceeding 18%.
Notification no. 13/2017 dated 28/06/2017 has notified rate of interest 18% in this respect.
The recipient of goods and services who is required to reverse the input tax credit due to non-
payment of invoice value together with tax thereon. The period of 1 year or before the filing
of return for the month of September or date of filing of annual return applicable for availing
the input tax credit generally will not be applicable for taking of such input tax credit.

Clause 3 of Rule 36 of Central Goods and Service Tax Rules provide that the input tax credit
will not be available in case of tax paid in pursuance of an order where demand has been
confirmed on account of fraud, willful misstatement or suppression of facts.

The GST system is going to be backed by a massive and robust information technology
platform wherein all the transactions of all registered persons will be captured. It has been
framed on the basis of logical flow of transactions in a commercial world.
EXAMPLE:

For each recipient of goods or services by a taxable person, there has to be registered supplier
of such goods or services and so on.

The conditions of availment of input tax credit as provided in sec 16 of the CGST Act will be
electronically checking is called Concept of Matching in GST.

EXAMPLE:

One of the conditions for availing input tax credit as provided in sec 16(2) is that tax charged
in respect of such supply has been actually paid to the credit of appropriate Government. let
us consider that Ram and Co. had bought 30 fans from Sham and Co. vide invoice no. 341
dated 12 October 2016 and paid a tax of INR 12,500. While processing returns for the month
of October 2016, the GST IT system while allowing credit of INR 12,500 to Ram and Co.
will check the return of Sham and Co. for the transaction of invoice 341 to Ram and Co. In
case this transaction is found in the return of Sham and Co., GST system will treat this
transaction as matched and allow the credit of INR 12,500 to Ram and Co. This amount of
INR 12,500 will be credited to electronic ledger of Ram and Co.

Input Tax Credit on Goods supplied to a Third Person

The taxable person would be eligible to claim ITC on the goods delivered to someone else by
the supplier on the request of the taxable person. Such taxable person would be deemed to
have received the goods at the time of its delivery to the third person.

Even for goods supplied to job worker by the supplier on the instruction of the taxable person
would make such taxable person eligible for availing input tax credit.

The receipt of such goods by job worker would be considered as receipt of goods by such
taxable person.

EXAMPLE:

Raj Industries, a taxable person agreed to buy 1 ton of steel from Mukul Industries. Before
the delivery of steel by Mukul Industries, raj Industries agreed to sell steel to Anil Industries.
Raj Industries instructs to Mukul Industries to bill him the supply of 1 ton steel in the name of
Raj Industries but name of Anil Industries was mentioned in the invoice for delivery of this 1
ton of steel. The delivery was also made to Anil Industries. Raj industries will be eligible to
claim ITC on such invoice of Mukul Industries even without receiving such 1 ton of steel as
they will be deemed to have received it at the time of receipt by Anil Industries.

Input Tax Credit on Capital Goods

The input tax credit on capital goods in GST will be allowed in one instalment.

In case tax component on the capital assets is also capitalized and depreciation is claimed on
such portion, in such cases input tax credit will not be available of such tax capitalized.

In case some items of inputs have been used for manufacture (fabrication) of some capital
asset the cost of which is capitalized in the account books of taxable person. The input tax
credit of tax paid on such inputs will be available to the taxable person.

In the case of CCE, Balgaum v. Hindalco Industries Limited, 1 the assessee took cenvat credit
on steel plates and strips used in fabrication of storage tank, it was held that the cenvat credit
is eligible as capital goods as said items were used in the manufacture of capital goods being
storage tanks.

In- eligible or Blocked Input Tax Credits

In respect of items of goods and services and also the circumstances in which input tax credit
will not be eligible are contained in sec 17 of CGST Act. In case the goods or services fall in
sec 17 of CGST Act, input tax credit will not be eligible.

Services not eligible for input tax credit

According to sec 17(4) of CGST Act, the input tax credit is not available on following goods
and or services:

a) Motor vehicles and other conveyances except when they are used for making the
following taxable supplies, namely

i.e. ITC is not available for Motor vehicles used to transport persons, having a seating
capacity of less than or equal to 13 persons (including the driver).

Further, ITC is not available on vessels and aircraft.

For example, XYZ & Co. buys a car for their business. They cannot claim ITC on the same.

1
(2012) 37 STT 219 (Karnataka)
 a) Further supply of such vehicles or conveyances; or
b) Transportation of passengers; or
c) Imparting training on driving, flying, navigating such vehicles or conveyances;
d) For transportation of goods.
b) Supply of goods and services, namely,
a) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic
and plastic surgery except where such inward supply of goods or services of a
particular category is used by a registered taxable person for making an outward
taxable supply of the same category of goods or services;
b) Membership of a club, health and fitness centre
c) Rent- a- cab, life insurance, health insurance except where the Government
notifies the services which are obligatory for an employer to provide to its
employees under any law for the time being in force; and such inward supply of
goods and/ or services of a particular category are used by taxable person for
making an outward supply of same category of goods and/ or services or as part of
mixed or composite supply.
d) Travel benefits extended to employees on vacation such as leave or home travel
concession.
c) Works contract services when supplied for construction of immovable property, other
than plant and machinery, except where it is an input service for further supply of works
contract service; It is important to note that the word ‘construction’ includes addition,
renovation, repairs etc. to the extent capitalized. Thus, any construction which is not
capitalized will not suffer from blocking of credit.
d) Goods or services received by a taxable person for construction of an immovable property
on his own account, other than plant and machinery, even when used in course or
furtherance of business;
e) Goods and/ or services on which tax has been paid under sec 10 as composition levy;
f) Goods and/ or services used for personal consumption;
g) Goods lost, stolen, destroyed, written off or disposed of by way gift or free samples; and
h) Any tax paid in terms of sec 74, 129 or 130 providing for determination of tax on account
of fraud, willful misstatement or suppression of facts, detention, seizure and release of
goods and confiscation of goods.

Goods and/ or Services Partly used for Business

According to provisions of sec 17(1) of CGST Act, where the goods and/ or services of a
taxable registered person are partly used for business purposes and partly for non- business or
personal purposes, such registered taxable person will be allowed proportionate credit of
input tax in proportion to the usage for business purpose only.

EXAMPLE:

Anand and Co. hired a Charted Accountant for the income tax consultancy of their business.
Besides the same CA provided income tax consultancy to Mrs. Anand also and raised an
invoice of INR 50,000/- for 10 hours, one hour was spent on the job of Mrs. Anand. In this
case, Anand and Co. will be eligible for input tax credit of INR 9,000/- after disallowance of
proportionate 10% credit on time spent for personal purposes.

Taxable and Exempt Supplies

According to provisions of sec 17(2) of CGST Act, where goods and/ or services are used by
a registered taxable person for making supply of taxable goods including zero rated goods
and also goods exempt from tax. Such person would be eligible to take input tax credit on
such goods and/ or services as is attributable to supply of taxable goods including zero rated
goods.

It is important to note that the exempt supplies would include the supplies which are liable to
be taxed on reverse charge basis, transaction in securities, supply of land and building.

Bank, financial institution or NBFC supplying exempt services

Extending loans and advances and accepting deposits is one of the primary functions of
banking company, financial institution or non- banking financial company but this is an
exempt service provided by these persons. These persons also provide various taxable
services. These persons in respect of availment of input tax credit on various goods and or
services received by them are given following two options:

a) To take proportionate input tax credit in proportion of taxable activities as per sec
17(2) or
b) Take fifty percent input tax credit in a month on inputs, capital goods or services in
that month.

It is important to note that option once exercised will not be withdrawn during the remaining
part of the financial year. Further it is important to note that this 50% would exclude the
payment of tax on supply of goods and services made to other persons having the same
permanent account number (PAN).

Construction Services

The tax paid on construction services is not eligible for input tax credit. The term
construction would include re- construction, renovation, additions or alterations or repairs, to
the extent of capitalization, to the said immovable property. Therefore, any amount relating to
construction services will not be eligible for input tax credit. Thus, any amount relating to
construction services in case not capitalized will be eligible for input tax credit.

EXAMPLE:

Annual repair and maintenance activity is carried out of factory building, the expenditure of
which is charged to profit and loss account. The amount of service tax paid on such activity
will be eligible for input tax credit. In case the factory building is extended to accommodate
more machines, the amount of such construction is capitalized in factory building, the amount
of GST on such construction activity will not be eligible for input tax credit.

Person applying for Registration in GST for First Time

As per sec 18(1) of CGST Act, a person who applies for registration under the GST law
either voluntarily or compulsorily on reaching the threshold exemption limit would be
eligible to claim input tax credit on stocks of taxable goods held by him on the day preceding
the date of his registration. He would be entitled to the credit on inputs held in stock, inputs
contained in semi- finished goods or inputs contained in finished goods. The quality of inputs
in stock would be calculated by applying generally accepted accounting principles.

However as per the provision of sec 18(2) of CGST Act, no such input tax credit will be
available on goods or services on expiry of one year from the date of issue of tax invoice
relating to such supply.

EXAMPLE:

Anand and Co. applied for registration on 15 th July for the registration with effect from 1 st
July. Anand and company would be eligible to take input tax credit on stocks of inputs held
by them on 30th June.

Person making Late Application for Registration

Any taxable person is required to make an application of registration within a period of 30
days of his becoming liable for registration. In case such application for registration is made
within the permitted period of 30 days, such person becomes entitled to claim input tax credit
on the stocks of inputs carried by him on a day preceding the date of his registration. But in
case any person makes a late application, then he loses the right to claim credit of input tax
credit on stocks of inputs held by him on a preceding day as the registration in his case
becomes effective from the date of grant of registration certificate to him.

EXAMPLE:

Anand and Co. was liable to be registered on 15th July. They made an application for
registration under GST on 27th August and the certificate of registration is granted to Anand
and Co. On 30th August the registration of Anand and Co. would be effective from 30 th
August and they would not be eligible for any input tax credit on the stocks of inputs held by
them on 14th July.

Registered Taxable Person Switching over from Composition Levy

As provided in sec 18(1) (c) of CGST Act, where any registered taxable person who had
opted for composition levy under Section 10, switches over to regular scheme, he would be
eligible for the claim of input tax credit on inputs held in stock, stock of semi- finished goods
or finished goods and on capital goods on a day immediately preceding the date which of
switch over. As per the provisions of sec 18 (1) (c) of CGST Act, his eligibility of availing
input tax credit on capital goods will be reduced by such percentage points as may be
prescribed. Rule 40 (1) (a) of Central Goods and Service Tax Rules prescribe a deduction of
5% for each quarter of use of capital asset.

However as per provision of sec 18(2) of CGST Act, no such input tax credit will be
available on goods or services on expiry of one year from the date of issue of tax invoice
relating to such supply.

EXAMPLE:

Ram Kumar and company had a machine valuing INR 3,00,000 and their turnover in the first
year was less than INR 75,00,000 so they had opted for scheme of composition levy under
sec 10 of GST law. In the second year of their operation, their turnover exceeded INR
75,00,000 so they needed to switch over as regular taxable person. As per Rule 40 of Central
Goods and Service Tax Rules 5% per quarter is required to be deducted from the cost of
capital asset. Ram Kumar and Company besides credit of inputs, inputs contained in semi-
finished and finished goods would also be eligible for 80% credit of tax on machine i.e. tax
equal to value of INR 2,40,000.

Registered Taxable Person Switching over to Composition Levy

As per sec 18 (4) of CGST Act, any registered taxable person who decides to switch over to
composition levy under Section 10 pf the CGST Act, would be required to pay an amount
equivalent to input tax credit contained in inputs in the stocks held by him or in stock of
semi- finished goods or finished goods and on capital goods reduced by such percentage
points as may be prescribed held by him on the day preceding the day of his switch over. The
Central Goods and Service Tax Rules has prescribed a 5% percentage per quarter of use. The
amount to be paid by him would be payable by way of debit to his electronic credit ledger or
cash ledger. The balance, if any, left in his credit ledger would lapse.

Exempt Supply of Goods becoming Taxable

As per provisions of sec 18(1)(d) of CGST Act, where an exempt supply of goods and/ or
services by any registered taxable person becomes taxable, he would be eligible for the claim
of input tax credit on inputs held in stock, stock of semi- finished goods or finished goods
relatable to such exempt supply and on capital goods exclusively used for such extent supply.

However as per provision of sec 18(2) of CGST law, no such input tax credit will be
available on goods or services on expiry of one year from the date of issue of the tax invoice
relating to such supply.

It is important to note in this regards that the credit on capital goods would be reduced by
such percentage points as may be prescribed in this regard. Central Goods and Service Tax
rules in this regard has prescribes a percentage of 5% per quarter rate of depreciation.

Taxable Supply of Goods becoming Exempt

Where a taxable supply of goods and/ or services by any registered taxable person becomes
exempt absolutely. As per sec 18(4) of CGST Act, such registered taxable person would be
required to pay an amount equivalent to input- tax credit contained in inputs in the stocks
held by him or in stock of semi- finished goods or finished goods and on capital goods
reduced by such percentage points as may be prescribed held by him, on the day preceding
the day of his switch over. As per Central Goods and Service tax Rules, a percentage of 5%
per quarter has been prescribed in respect of depreciation on capital assets. The amount to be
paid by him would be payable by way of debit to his electronic credit ledger or cash ledger.
The balance, if any, left in his credit ledger would lapse.

Change in the Constitution of Registered Taxable Person

As per sec 18(3) of the CGST Act, in case there is a change in the constitution of a registered
taxable person on account of sale, merger, de merger, amalgamation, lease or transfer to
another taxable entity, such registered person would be allowed to transfer the unutilized
balance of input tax credit lying in his books of accounts to the transferee entity provided the
liabilities of such transferor registered person are also transferred to such new entity.
According to Rule 41(2) of Central Goods and Service Tax Rules, the transferor in this case
would be required to submit a copy of the certificate signed by a practicing chartered
accountant or a cost accountant certifying that the sale, merger, demerger, amalgamation,
lease or transfer of business has been done with a specific provision for transfer of liabilities
as well.

It is important to note that in the case of demerger, the value of input tax credit will be
apportioned between demerged entities in the ratio of value of assets of new unit as provided
in demerger scheme.

Supply of Capital Goods on which Input Tax Credit has been Availed

In case capital goods or plant and machinery on which input tax credit ha s been availed is
transferred by a registered taxable person, such registered taxable person as per provisions of
sec 18(6) of CGST Act, shall pay an amount equal to input tax credit taken on such capital
asset or plant and machinery reduced by such percentage as may be prescribed or, the tax on
the transaction value of such transfer, whichever is higher. It is to be noted that the Central
Goods and Service Tax rules has prescribed a percentage of 5% per quarter of use.

However, in case refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap,
than tax on such transfer will be payable on transaction value only.