INPUT TAX CREDIT (ITC)

Input Tax Credit under GST:

Input Tax Credit (ITC):

ITC stands for Input Tax Credit under GST. 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.

Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be 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 and the said amount shall be credited to the electronic credit ledger of such person.

Input tax credit can be availed only in respect to tax paid on any supply which are or would be used in the course or furtherance of the business of the registered person. The term “business” has been defined in section 2(17) of the CGST Act 2017. Input tax credit is given at each stage of the tax paid at earlier stage. For example A supplies goods to B and B further supplies goods to C. B will get the input tax credit of tax paid by A, C will get the credit of tax paid by B and so on.

Repeal of Central & State Enactments post GST:

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. The major taxes/levies which are going to be clubbed together or subsumed in the GST regime are under:

Central Taxes State Taxes
Central Excise duty State VAT / Sales Tax
Additional duties of excise Central Sales Tax
Excise duty levied under Medicinal & Toilets Preparation Act Purchase Tax
Additional duties of customs (CVD & SAD) Entertainment Tax (other than those levied by local bodies)
Service Tax Luxury Tax
Surcharges & Cesses Entry Tax (All forms)
Taxes on lottery, betting & gambling
Surcharges & Cesses

GST Types & Input Tax Credit Availability:

Following are four types of GSTs in India and the utilisation of input tax credit:

CGST:

Central Goods and Services Tax (CGST)[also known as Central Tax] on intra-state or intra-union territory without legislature supply of goods or services or both.

SGST:

State Goods and Services Tax (SGST) [also known as State Tax]on intra-state supply of goods or services or both.

UTGST:

Union Territory Goods and Services Tax (UTGST) [also known as Union territory Tax] on intra-union territory supply of goods or services or both.

IGST:

Integrated Goods and Services Tax (IGST)[also known as Integrated Tax] on inter-state supply of goods or services or both. In case of import of goods also the present levy of Countervailing Duty (CVD) and Special Additional Duty (SAD) would be replaced by Integrated tax.

Input Tax Credit Utilisation:

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.The following table shows the input tax credit utilistaion:

Credit of To be utilised first for payment of May be utilised further for payment of
CGST CGST IGST
SGST/UTGST SGST/UTGST IGST
IGST IGST GGST, then SGST/UTGST

Technical aspects of Input Tax Credit:

Credit of CGST cannot be used for payment of SGST/ UTGST and credit of SGST / UTGST cannot be utilised for payment of CGST. Any registered person can avail credit of tax paid on the inward supply of goods or services or both which is used or intended to be used in the course or furtherance of business. Some of the technical aspects and pre-requisites of the scheme of Input Tax Credit are as under:

  • He is in possession of tax invoice or any other specified tax paying document.

  • He has received the goods or services. “Bill to ship” scenarios also included.

  • Tax is actually paid by the supplier.

  • He has furnished the return.

  • If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received.

  • He should pay the supplier the value of the goods or services along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 2(1) & (2) of ITC Rules]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed.

  • No ITC beyond September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier.

  • The Input Service Distributor (ISD) may distribute the credit available for distribution in the same month in which it is availed. The credit of CGST, SGST, UTGST and IGST shall be distributed as per the provisions of Rule 4(1)(d) of ITC Rules. ISD shall issue invoice in accordance with the provisions made under Rule 9(1) of Invoice Rules.

Input Tax Credit Restrictions:

Goods and Services Tax aims at providing seamless flow of credit throughout supply chain. However, below is a list of few situations as mentioned in section 17 of Central GST Act, 2017 where input tax credit will not be available:

  • Goods or services partly used for business purpose: The Act specifically states that input tax credit can only be taken for the amount of input tax paid on goods or services or both used for the purpose of business. Thus, if goods or services or both are used partly for purpose of business and partly for other purpose, only that amount of input tax which is attributable to the purpose of business will be allowed as credit.

  • Zero rated and Exempted Supplies: Where Goods or services or both are used partly for taxable supplies including zero rated supplies under IGST or under CGST Act, and partly for exempted supplies, only that amount of input tax which is attributable to the taxable supplies including zero rated supplies will be allowed as credit.

  • Motor Vehicle and other conveyance: Input tax credit is not available on motor vehicle and other conveyance. However,if motor vehicle and other conveyance are used for taxable supply of transportation of such vehicles/conveyances, transport of passengers or imparting training on flying,driving and navigating such vehicles or conveyances or for transportation of such goods, Input Tax Credit will be allowed.

  • Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery: Input tax credit is not available on supply of above mentioned services except where an inward supply of goods or services or both of a particular category 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. Thus, if a caterer uses a service of another caterer, Input Tax Credit will be allowed.

  • Membership of a club, health and fitness centre: Input tax credit is not available on supply of membership of a club, health and fitness centre.

  • Rent-a-cab, life insurance and health insurance: Input tax credit is not available on supply of services of rent-a-cab, life insurance and health insurance. However, wherethe Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force or such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply, input tax credit will be available.

  • Travel benefits extended to employees on vacation such as leave or home travel concession: Input tax credit is not available on travel benefits extended to employees on vacation such as leave or home travel concession.

  • Works contract services: Input tax credit is not available on works contract services when supplied for construction of an immovable property (other than plant and machinery). However, Input Tax Credit will be allowed when it is an input service for further supply of works contract service.

  • Construction on own account: Input tax credit on goods or services by a person for construction of immovable property, other than plant and machinery, is not allowed.

  • Tax paid under Composition Scheme: If tax has been paid under composition scheme on supply of goods or services or both, input tax credit is not allowed.

  • Goods or services or both received by a non-resident taxable person: Input Tax Credit is not allowed when goods or services or both are received by a nonresident taxable person, however, if goods are imported by such non-taxable person, input tax credit will be allowed.

  • Goods or services or both used for personal consumption: Input tax credit is not allowed for goods or services or both used for personal consumption.

  • Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples: Input tax credit is not allowed with respect to goods lost, stolen, destroyed or written off as well as on goods given as gifts or free samples will also be not allowed.

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