INPUT TAX CREDIT – NOTES

I. INTRODUCTION

Input taxes are taxes paid on the incoming supply of inputs, capital goods, and services.
These can include Integrated GST, Central GST, State GST, and Union Territory GST. It also
includes taxes paid on a reverse charge basis and integrated goods and services taxes imposed
on imports. However, this does not include composition levy tax.

Note that GST paid on a reverse charge basis is treated as an input tax. Input tax consists of
taxes (CGST/IGST/SGST) paid on input goods and services, as well as capital goods. The
credit of the aforementioned taxes is known as input tax credit, meaning that the taxes paid
on inputs can be offset against the taxes payable on taxable outputs. The 2017 Central Goods
and Services Tax (CGST) Act contains provisions regarding ITC, its availability, utilisation,
and conditions and restrictions attached thereto.

II. DEFINITIONS

Section 2(62) defines “input tax” as the Central tax, State tax, Integrated tax or Union
Territory tax charged on any supply of goods or services or both made to a registered
person, 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; and

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

Section 2(63) defines “input tax credit” as the credit of input tax; Input Tax Credit (ITC) is
regarded as the linchpin of the Goods and Services Tax (GST). In the previous tax regime,
there was a lack of credit at various points in the supply chain, which resulted in a cascading
effect of tax, i.e., tax on tax, and increased the price of goods and services.

This flaw has been eliminated by the GST, allowing for a seamless flow of credit throughout
the value chain and eliminating the cascading effect of taxes.

The recipient of ITC must be registered for GST in order to claim this benefit. A person who
is not registered is not eligible to receive ITC. Section 155 of the CGST Act, 2017 states that
the burden of proving eligibility for input tax credit under this Act rests with the individual
making the claim.

Section 49(5) of the 2017 CGST Act permits the use of ITC in Electronic Credit Ledger for
payment of GST. Chapter V of the CGST Act, 2017 consists of Sections 16-21 and Rules
36 through 45 of the CGST Rules, 2017.

III. CONDITION PRECEDENTS FOR ITC – SECTION 16

 Section 16(1) – Every registered person shall, subject to such conditions and
restrictions as may be prescribed and, in the manner, as 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.

Only tax paid on supplies that are or would be used in the course or furtherance of the
registered person's business is eligible for a tax credit. In section 2(17) of the CGST Act
of 2017, the term "business" is defined.

At each stage, a credit for the tax paid at an earlier stage is granted. For example, A provides
goods to B, who then provides goods to C. B will receive the input tax credit for A's tax
payment, C will receive the credit for B's tax payment, and so on.

 Section 16(2) – 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;

(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.

Section 16(2) of CGST Act 2017 specifies the basic conditions for availing of input tax
credit. It specifically requires that besides the other conditions, the recipient can take credit
only if tax has actually been paid to the Government by the supplier.

It is pertinent to note that where the recipient fails to make payment to the supplier of goods
or services or both (other than the supplies on which tax is payable on reverse charge basis)
the amount of value of supply along with tax payable thereon within 180 days from the date
of issue of invoice, amount equal to the Input Tax credit availed by the recipient will be
added to his output liability along with interest thereon. If the recipient later makes the
payment to the supplier, he can take the credit of the input tax.
Thus, if the net value of capital goods is Rs. 100 lakhs and GST paid is Rs. 18 lakhs, the
taxable person should not claim Input Tax Credit on the tax component.

No input tax credit is available to recipient of goods/service if value declared by supplier in

invoice/debit note is zero (APPELLATE AUTHORITY FOR ADVANCE RULING, WEST
BENGAL, Assistant Commissioner, CGST & CX, In Re APPEAL CASE NO.
05/WBAAAR/APPEAL/2018, SEPTEMBER 27, 2018)

 Section 16(3) – 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.

 Section 16(4) – 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

o 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
o furnishing of the relevant annual return

whichever is earlier.

The purpose of the restriction under sub-section (4) is to define a time limit for availing of
input tax credit. Thus, in view of Section 16(4), in case of invoices received after October,
taxable person gets less than one year to take input tax credit.
 ELIGIBILITY &
CONDITIONS
TO AVAIL ITC

He should have Should have

he should be in received the good, furnished the return Supplier should
possession of tax or service, or both under Section 39 have actually paid
invoice or debit the tax in respect of
note the supply made
or such other
taxpaying
documents as may
be prescribed

IV. APPORTIONMENT OF CREDIT AND BLOCKED CREDITS [SECTION 17]

Goods and Services Tax aims at providing seamless flow of credit throughout the 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:
 (1) Where the goods or services or both are used by the registered person partly
for the purpose of any business and partly for other purposes, the amount of
credit shall be restricted to so much of the input tax as is attributable to the
purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for
effecting taxable supplies including zero-rated supplies under this Act or under
the Integrated Goods and Services Tax Act and partly for effecting exempt
supplies under the said Acts, the amount of credit shall be restricted to so much of
the input tax as is attributable to the said taxable supplies including zero-rated
supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be
prescribed, and shall include supplies on which the recipient is liable to pay tax on
reverse charge basis, transactions in securities, sale of land and, subject to clause
(b) of paragraph 5 of Schedule II, sale of building.

(4) A banking company or a financial institution including an NBFC, engaged in

supplying services by way of accepting deposits, extending loans or advances shall
have the option to either comply with the provisions of sub-section (2), or avail
of, every month, an amount equal to 50 % of the eligible input tax credit on
inputs, capital goods and input services in that month and the rest shall lapse

Provided that the option once exercised shall not be withdrawn during the remaining part of
the financial year: Provided further that the restriction of 50% shall not apply to the tax paid
on supplies made by one registered person to another registered person having the same
Permanent Account Number.

Input Tax Credit is available only on those goods and services used for business. Exports
and supplies to SEZ fall under the category of zero-rated supplies. ITC is available on zero
rated supplies and taxable supplies but not on exempt supplies.
 the amount of credit shall be restricted to
Where the goods or services or so much of the input tax as is attributable
both are used by the to the purposes of his business
registered person partly for
the purpose of any business
and partly for other purposes

option to either comply with the

A banking company or a provisions of sub-section (2), or avail of,
financial institution including every month, an amount equal to 50 % of
an NBFC, engaged in the eligible input tax credit on inputs,
supplying services by way of capital goods and input services in that
accepting deposits, extending month and the rest shall lapse
loans or advances

Where the goods or services or

both are used by the registered the amount of credit shall be restricted to so
person partly for effecting much of the input tax as is attributable to
taxable supplies including the said taxable supplies including zero-
zero-rated supplies under this rated supplies.
Act or under the IGST Act
and partly for effecting
exempt supplies under the
said Acts

For Blocked Credits – Read Section 17(5).

V. TRANSFER OF ITC

Existing taxpayers can migrate to GST in a transparent and precise manner thanks to the
GST's inclusion of transitional provisions. There are elaborate provisions for carrying
forward the ITC earned under the existing law. Such a credit should be allowed by the GST
law.

The individual opting for the composition scheme would not be eligible to carry forward the
existing ITC, however. ITC of various taxes under the existing laws (CENVAT credit, VAT,
etc.) would be carried forward as follows:

 A registered person shall be entitled to take, in his electronic credit ledger, Credit of
any VAT amount carried forward in the return preceding the appointed day.
 A registered person may enter into his electronic ledger the unutilized input tax credit
for capital goods that was not carried forward in a return he filed under existing law
for the period preceding the effective date.
 The registered person shall not be entitled to ITC unless the said credit was admissible
under the existing law and is also admissible under the SGST Law.
 A registered, person who was not liable to be register under the existing law or who
was engaged in the sale of exempted goods or tax-free goods, shall be untitled to take
in his electronic ledger, credit of VAT in respect of inputs held in stock and inputs
contained in semi-finished or finished goods held in stock on the appointing day
subject to the following condition –
 (a) Such inputs or goods are used or intended to be used for making taxable
supplies under this Act;
 (b) The said registered person is not paying tax under composition scheme
(Section 10);
 (c) The said registered person is eligible for input tax credit on such inputs
under this Act;
 (d) The said registered person is in possession of invoice or other prescribed
documents evidencing payment of the under the existing law in respect of such
inputs;
 (e) Such invoices or other prescribed documents were issued not earlier than
twelve months immediately preceding the appointed day;
 A registered person, who was engaged in the sale of taxable goods as well exempted
goods or tax-free goods, under the existing law but which are liable to tax under this
Act, shall be entitled to take, in his electronic ledger
 a) The amount of credit of VAT, if any carried forward in a return furnished
under the existing law;
 b) The amount of credit of VAT, if any in respect of inputs held in stock and
inputs contained in semi-finished or finished goods held in stock, relating to
such exempted goods or tax-free goods
 A registered person shall be entitled to VAT in respect of inputs received on or after
the appointed day but the tax in respect of which had been paid by the supplier under
the existing law.
 The above credit shall be subject to the condition that the invoice or any other tax
paying documents of the same was reported in the books of account of such person
within a period of 30 days from the appointed day or any period extended by the
Commissioner.
 Every registered person entitled to take credit of input tax shall, within ninety days or
more as extended by the Commissioner of the appointed day, submit a declaration
electronically in FORM GST TRAN1, duly signed, on the Common Portal specifying
therein, separately, the amount of input tax credit to which he is entitled.
 A registered person, holding stock of goods which have suffered tax at the first point
of their sale in the State and the subsequent sales of which are not subject to tax in the
State availing credit in accordance with the proviso to sub-section (3) of section 140
shall be allowed to avail input tax credit on goods held in stock on the appointed day
in respect of which he is not in possession of any document evidencing payment of
value added tax.
 Such credit shall be allowed at the rate of sixty per cent. on such goods which attract
State tax at the rate of nine per cent or more and forty per cent for other goods of the
State tax applicable on supply of such goods after the appointed date and shall be
credited after the State tax payable on such supply has been paid: Provided that where
integrated tax is paid on such goods, the amount of credit shall be allowed at the rate
of thirty per cent and twenty per cent respectively of the said tax.
 The scheme shall be available for six tax periods from the appointed date.
 Such credit of State tax shall be availed subject to satisfying the following conditions,
namely, –
(a) such goods were not wholly exempt from tax under Haryana the Value
Added Tax Act 2003;
(b) the document for procurement of such goods is available with the
registered person;
(c) the registered person availing of this scheme and having furnished the
details of stock held by him in accordance with the provisions of clause (b) of
sub-rule (2) of rule 1, submits a statement in FORM GST TRAN 2 at the end
of each of the six tax periods during which the scheme is in operation
indicating therein the details of supplies of such goods effected during the tax
period;
 (d) The amount of credit allowed shall be credited to the electronic credit
ledger of the applicant maintained in FORM GST PMT-2 on the Common
Portal;
(e) The stock of goods on which the credit is availed is so stored that it can be
easily identified by the registered person;
 Every person having sent goods on approval under the existing law and to whom sub-
section (12) of section 142 applies shall, within ninety days of the appointed day,
submit details of such goods sent on approval in FORM GST TRAN-1.
 Recovery of credit wrongly availed the amount credited under sub-rule (3) of rule 1
may be verified and proceedings under section 73 or, as the case may be, section 74
shall be initiated in respect of any credit wrongly availed, whether wholly or partly.