INPUT TAX CREDIT UNDER GST LAW

Input Tax Credit (ITC) is one of the core concepts of GST as ITC on goods and ITC on services were not allowed to be set off against each other under the earlier law. This welcome provision will avoid the cascading effect of taxes.

What is ITC ?

“Input Tax” means: a) CGST b) SGST c) IGST d) UTGST e) Tax paid under reverse charge

Tax paid under Composition Levy is ineligible.

Broad definition of Inputs

Under GST, ITC paid on any payment made for the furtherance of business is admissible. This could even be ITC on stationery, audit fees, etc., which was not available under the earlier law.

Blocked Credits

Though definition of Inputs is broad, ITC shall not be available in respect of those items that have been specifically identified as “Blocked credits” under the Act. Some examples are

· Motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (unless used for making an outward taxable supply of the same category)

· Membership of a club, health and fitness center

· Rent-a-cab (with certain exceptions), Life Insurance and Health Insurance (unless used for making an outward taxable supply of the same category)

· Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery (unless used for making an outward taxable supply of the same category)

· Works Contract service for construction of an immovable property other than plant & machinery (except where it is an input for further supply of works contract service)

Manner of taking Credit

Section 49 deals with the manner of utilization of input. It was amended and new sections 49A and 49B were inserted. Representations were received from trade and industry about challenges faced due to accumulation of ITC under one Act (eg.SGST) and payment of tax under another (eg.CGST). Therefore Rule 88A was introduced which supersedes the Act. Under the new rule, IGST credit should first be utilized for meeting IGST liability and balance if any may be utilized for either CGST or SGST/UTGST in any order.

Care should be taken during setting off of liability to optimize input utilization and reduce cash outflow.

Documents required for claiming Input Tax Credit

Input Tax Credit can be availed by a registered person on the basis of any of the following documents:

An invoice issued by the supplier of goods or services or both
A debit note issued by a supplier
A bill of entry or any similar document prescribed under the Customs Act
An Input Service Distributor invoice or Input Service Distributor credit note or any document issued by the Input Service Distributor in accordance with the provisions of sub-rule (1) of rule

Reversal of ITC

The Act also states that the ITC claimed should be reversed in certain cases

· Where the goods or services are used for the purpose of business and partly for other purposes, credit should be restricted to so much of the input tax as is attributable to business

· Similarly, if a registered person provides taxable and exempted supply, then ITC shall be restricted to so much of input tax as is attributable to taxable supplies made. i.e., a proportionate amount should be reversed in the case of exempted supply

· ITC availed on goods lost, stolen or destroyed shall be reversed

· ITC availed on free samples

· ITC on Capital goods should be reversed if depreciation has been claimed on the tax

component

· ITC claimed should be reversed along with interest if payment is not made to the supplier within 180 days from the date of invoice. If proportionate payment is made then the reversal should also be in such proportion

ITC reversals should be disclosed in Form GSTR3B and in the annual return.

Restriction on Eligible Input

In order to curb the practice of availing input on the basis of fake invoices, the Act was amended to restrict availing input on those invoices not appearing in Form GSTR2A. With effect from 1st January 2020, Input tax Credit in respect of invoices or debit notes not appearing in Form GSTR2A shall be restricted to 10% of the eligible credit available in GSTR2A (This was earlier 20%).

This makes it very important to match the Input available in GSTR2A with the Input being claimed in GSTR3B. A practical difficulty is that, when a business deals with small tax payers filing GSTR1 on quarterly basis, those invoices will not appear in GSTR2A every month.

Other Important Considerations

· Input tax credit cannot be taken after one year from the date of invoice, or filing of annual return whichever is earlier

· However, Input already claimed and available in credit ledger can be carried and utilized without any time limit

· Unlike in the earlier regime, ITC on Capital Goods shall be availed in one installment.

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