Input Tax Credit

INPUT TAX CREDIT

The basic concept of Input Tax Credit (ITC) is to avoid the cascading effect of duty. Cascading effect of duty (i.e. duty on duty) happens where tax is levied at every stage of supply.

The following examples will help us understand this.

If the duty is based on the manufacture of a product, the tax burden keeps increasing as raw material and final product passes from one stage to another.

Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, “ITC”) is one of the key features of Goods and Services Tax. As the tax charged by the Central or the State Governments would be part of the same tax regime, the credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.

Input (Sec. 2(59) of the CGST Act, 2017): It means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Capital Goods (Sec. 2(19) of the CGST Act, 2017): It means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

Input Service (Sec 2(60) of the CGST Act, 2017): It means any service used or intended to be used by a supplier in the course or furtherance of business.

Input Tax (Sec. 2(62) of the CGST Act, 2017): In relation to a registered person, it 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 Sec 9(3) and Sec. 9(4) of the CGST Act, 2017;

(c) the tax payable under Sec 5(3) and Sec. 5(4) of the IGST Act, 2017;

(d) the tax payable under SGST Act (i.e. person liable to pay GST under RCM);

(e) The tax payable under UTGST Act (i.e. person liable to pay GST under RCM),

But does not include the tax paid under the composition levy.

Input Tax Credit (Sec 2(63) of the CGST Act, 2017): It means the credit of input tax.

Inward supply (Sec. 2(67) of the CGST Act, 2017): “Inward supply” in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration;

Outward supply (Sec 2(83) of the CGST Act, 2017): “Outward supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business;

ELIGIBILITY TO AVAIL INPUT TAX CREDIT (ITC)

As per Section 16(1) of the CGST Act, 2017 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.

ITC is an integration of Goods and Services:

Since GST is charged on both goods and services, input tax credit can be availed on both goods and services (except those which are on the exempted/negative list).Input tax credit is allowed on capital goods.

Conditions for taking ITC:

Section 16(2) of the CGST Act, 2017: Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he 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;

Note: Further explanation has been provided for Sec 16(2)(b) explanation vide CGST Amendment Act,2018 that: For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services–

(i) 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;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

(c) subject to the provisions of section 41, the tax charged in respect of such 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; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that 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 one hundred and eighty 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, in such manner as may be prescribed:

Provided also that 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.

Ref:

1. Balachandran V - Indirect Taxes

2. ICAI - Indirect Taxes

3. ICSI - Indirect Taxes

4. ICMAI - Indirect Taxes

5. LPU - Indirect Taxes