One of the key features of Goods and Service Tax (GST) in India is its uninterrupted and continuous chain of input tax credit (ITC). In the earlier indirect taxation system, cascading of tax is significant due to non-availability of ITC at various stages. For example ITC of CST, Entry Tax, Luxury Tax is not available. Similarly ITC of VAT is not available to manufacturers and service providers and ITC of Central Excise duty, service tax & CVD is not admissible to dealers in goods. Under GST law, the ITC will follow supply chain not only in intra-State transactions but also in inter-State transactions. Moreover, credit of tax paid at the time of import of goods and services would also be creditable. This is expected to result into significant reduction in cascading of taxes.

Meaning of Input Tax Credit in GST

The CGST Act, 2017 defines the ‘Input Tax Credit’ u/s 2(63) as the credit of input tax. The terms ‘Input Tax’ is defined u/s 2(62) as under:

“Input Tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

From above definition we may conclude that the term ‘Input Tax’ includes the CGST/SGST/IGST/UTGST paid on input services or input goods. Needless to mention that GST paid under reverse charge mechanism in relation to input services or goods is also covered under ‘Input Tax’.

Eligibility and Conditions for taking Input Tax Credit (ITC)

Following are the key points which should be kept in mind while determining eligibility of Input Tax Credit on Input Services and Inputs:

1.The registered person 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.

2.The registered person should in possession of a tax invoice or debit note issued by a registered supplier or such other tax paying documents as may be prescribed.

3.The registered person has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

4.The tax charged in respect of supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.

5.The registered person has furnished the return under section 39 of the CGST Act 2017.

6.Where the goods against an invoice are received in lots or installments, the registered person shall be entitled to take credit upon receipt of the last lot or installment.

7.Where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon.

8.The recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

9.Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

10.A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Manner of Utilization of Input Tax Credit

The amount of input tax credit available in the electronic credit ledger of the registered person on account of––

(a) IGST shall first be utilised towards payment of IGST and the amount remaining, if any, may be utilised towards the payment of CGST and SGST/UTGST, in that order;

(b) the CGST shall first be utilised towards payment of CGST and the amount remaining, if any, may be utilised towards the payment of IGST;

(c) the SGST shall first be utilised towards payment of SGST and the amount remaining, if any, may be utilised towards payment of IGST;

(d) the UTGST shall first be utilised towards payment of UTGST and the amount remaining, if any, may be utilised towards payment of IGST;

It may be noted that the CGST cannot be utilised towards payment of SGST or UTGST and similarly the SGST or UTGST cannot be utilised towards payment of CGST.

Blocked Credits in GST Law

The Following input tax credits are block credits which is specifically denied under section 17(2) of the CGST Act 2017:

(a) Motor vehicles and other conveyances except when they are used––

(i) for making the following taxable supplies, namely:—

(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;

(ii) for transportation of goods;

(b) The following supply of goods or services or both

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery 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;

(ii)  Membership of a club, health and fitness centre;

(iii) Rent-a-cab, life insurance and health insurance except where––

(A) 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; or

(B) 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; and

(iv) Travel benefits extended to Employees on vacation such as leave or home travel concession;

(c) Works Contract Services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) Goods or Services or both received by a taxable person for Construction of an Immovable Property (other than plant or machinery) on his own account including when such Goods or Services or both are used in the course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation.– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” 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.

(e) Goods or Services or both on which tax has been paid u/s 10 (Composition Levy);

(f) Goods or Services or both received by a non-resident taxable person except on goods imported by him;

(g) Goods or Services or both used for Personal Consumption;

(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i)  Any tax paid u/s 74, 129 and 130 (Assessment/ Search/ Seizure).

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