Input Tax Credits under GST : Meaning and Conditions


In the current regime of Indirect Taxes in India, Input Tax Credits has crucial role to correctly impose such taxes. Practice of input tax credits provides a reasonable assurance that there is no cascading effect of charging of such taxes. Before this practice evolves, tax was levied on multiple times and also levied on taxes paid in previous stage. With the implementation of Input Tax Credits, it is being assured that tax would be levied only on profit margins of supplier of every stage right from importer/manufacturer to end retailer.

In GST, ITC has the same role as was in previous Indirect Tax Laws like VAT, Excise. Generally, tax liability of a supplier of goods or services or both is calculated by sum up of all his sales and applying relevant rate of tax rate on such sum of sales value. After this, accumulated amount of Input Tax Credit (ITC) is allowed to reduced from such calculated tax liability. And, hence, such supplier has to discharge his remaining balance of tax liability to the government by payment in cash.

In this article, we will go through the provisions relating to Input Tax Credits under GST Laws.

Definition of Input Tax Credits:

Input Tax Credits means the credit of Input Tax.  {Section 2(63) of CGST Act}

As per Section 2(62) of CGST Act, 2017, Input tax means:

  • Any of following tax charged on any supply of goods or services or both made to him :-
    • Central Goods and Services Tax (CGST)
    • State Goods and Services Tax (SGST)
    • Integrated Goods and Services Tax (IGST)
    • UT Goods and Services Tax (UTGST)
  • Integrated Tax paid on import of goods
  • CGST/SGST/IGST/UTGST paid in respect of purchases for which:
    • Such taxes are paid under reverse charge mechanism
    • Such taxes are paid on purchases from un-registered dealer

but it does not include tax paid under Composition Levy.

In simple words, Input Tax Credits are those credits which are accumulated on payment of above said taxes on purchases/expenses incurred by a registered person. Input tax credit means credit of any tax paid in due course of business whether under forward charge mechanism or whether under reverse charge except tax paid on purchases from a dealer/manufacturer registered under Composition Levy provisions.

As per Section 16 of CGST Act, credit of Input tax is allowable to every registered person (except to those who are specifically restricted like dealer registered under Composition levy).


Conditions to claim ITC :

To claim Input Tax Credits paid on purchases, all of following conditions should be fulfilled by a dealer:-

  • Dealer have registration under GST law
  • Goods/services/both should be used or intended to be used in the course or furtherance of business
  • Tax invoice/ Debit note /other document specifying GST must be possessed
  • Goods/services/both must be received. (i.e. if goods are received in lots against a single invoice, then ITC will be claimable only when all lots received by assessee).
  • Tax charged by supplier has been actually paid to government by such supplier
  • Supplier has lodged/filed his GST returns

Time Limit to claim Input Tax Credits {Section 16(4) of CGST Act}

A registered person shall not be entitled to claim ITC in respect of any invoice or debit note:

  • after the due date of furnishing of GST return for the month ending September of next year following the end of financial year :
    • to which such invoice relates; or
    • to which invoice of such debit note relates;

or

  • after furnishing annual return of such financial year:
    • to which such invoice relates; or
    • to which invoice of such debit note relates;

whichever is earlier.

For Example:

  1. If an invoice issued in the month of March, then maximum period to claim is “due date of next September’s return” or “date of furnishing of annual return”, whichever is earlier.
  2. If a debit note given in November 2018 in respect of original invoice issued in March 2018. In this case, ITC will not be eligible because time limit as per above rule expired to claim ITC.

For Financial Year 2017-18, it has been provided to extend the time limit to claim the Input Tax Credits of Financial year 2017-18 till 31st March 2019. ?

Refer :  Removal of Difficulties  Order CGST-02/2018 (ROD) dated 31st December 2018


Time Limit for payment to supplier {Section 16(2) of CGST Act}

  • Where recipient of Goods or services or both fails to pay the supplier of such goods/services or both within 180 days from the date of issue of invoice by supplier, then recipient have to add in his Output Tax liability the amount equal to the input tax credits and interest will also be applied thereon. Interest will be applicable from the date of availing credit to the date when such credit reversed and added as output liability.

  • If recipient of goods or services or both has paid tax under reverse charge, this provision will not apply.

  • However, as and when such recipient pays the dues to its supplier, he will be eligible to claim such Input tax credit. There is no time limit in this case to re-claim input tax credits revered under this section.

By inserting this provision, government is trying to provide a safe cover to suppliers by ensuring payments in time bound manner from recipients of goods or services or both.


ITC not allowed where depreciation claimed {Section 16(3) of CGST Act}

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

As per Section 2(19) of CGST Act, “capital goods” 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.


ITC for Banking Company or a financial institution {Section 17(4) of CGST Act}

A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to avail ITC out of followings:

  • Claim ITC only on taxable supplies and zero-rated supplies, where ITC will be bifurcated in exempt supplies and taxable supplies in the manner prescribed in ITC rules (will discuss later); or
  • avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

This restriction of fifty per cent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

However, the option once exercised shall not be withdrawn during the remaining part of the financial year.


Utilisation of GST Credits:

GST Credits paid under different laws can be utilized only to pay ‘Output Tax’ liabilities in the following manner:
Nature of Credits Utilisation of Credits
for payment of tax
under respective head
IGST Ist Pref : IGST
2nd Pref: CGST/SGST/UTGST, any order
(IGST can be used for SGST before settlement against CGST)
   
CGST Ist Pref : CGST
2nd Pref: IGST only
   
SGST/UTGST Ist Pref : SGST/UTGST
2nd Pref: IGST only

However, w.e.f. 1st February, 2019, ITC utilisation order/pattern has been amended. Please follow the link given below for the amended pattern:-

http://www.ca-sunilkumar.com/itc-utilisation-pattern-order-amended-w-e-f-1-february-2019/

Input tax credits are not allowed to use for the purpose of making payments of taxes payable under reverse charge.

Also, input tax credits can’t be used for making payment of Interest/penalty/fee or any other amount of same nature.


All the provisions discussed above will be applicable mutatis mutandis to IGST, SGST and UTGST.

 

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