Input Tax Credit

This presentation covers only those Input tax credit

topics which are not covered in the class.
 In our last class on ITC, we have covered Section
16(1), 16(2), Reversal of ITC due to non-payment of
consideration, ITC where invoices are not uploaded by
supplier, 16(3), 16(4) and Blocked credit Section 17(5)
Section 17(1), CGST Act, 2017
Where input goods or services are used partly for business
purposes and partly for non-business purposes
Proportionate credit is available in this case. ITC
would be available to an extent that is attributable for
business purposes.
Section 17(2), CGST Act, 2017
Where input goods or services are used partly for
effecting taxable supply and partly for exempted supply
Proportionate credit is available in this case. ITC would be
available to an extent that is attributable in respect of inputs used
for providing taxable supplies including zero-rated supplies.

For example, If common ITC* is Rs.10,000, turnover of taxable

and exempted supply are Rs. 6,00,000 and Rs. 4,00,000
respectively.
Then ITC allowed would be:
(6,00,000/10,00,000) X 10,000 =Rs. 6000

*Note to students: Common ITC calculation would be covered in

subsequent slides.
For the purposes of this section, exempted supplies include
-Supplies on which recipient is liable to pay tax under RCM
- Transactions in securities
- Sale of land and sale of building (when entire consideration is received after
completion certificate)*
- Nil-rated supplies
-Non-taxable supplies

NO ITC IS AVAILABLE IN RESPECT OF INPUTS EXCLUSIVELY USED

FOR EFFECTING EXEMPT SUPPLIES OR USED EXCLUSIVELY FOR
NON-BUSINESS PURPOSES, OR USED EXCLUSIVELY FOR EFFECTING
NON-TAXABLE SUPPLIES.

• Note to students: These supplies are covered under Schedule III. This means that
these are neither treated as supply of goods nor supply of services. It is included in
the meaning of “exempted supplies for the purpose of Section 17(2)” just to avoid
any confusion.
 Section 17(4)
ITC in case of Banks or Financial Institutions including
NBFCs engaged in supplying services by way of accepting
deposits or providing loans or advances
These institutions have the option of
1. Either follow the provisions as per Section 17(2)
Or
2. Avail 50% of the eligible input tax credit on input goods, services and
capital goods for every month. Rest of the ITC will lapse.

Please note that if any financial institution opts for second option,
then this 50% limit will not be applicable on input supplies
between registered persons having same PAN. For instance, a
bank in Delhi receiving input services from its branch in
Maharashtra (assuming both have same PAN), then 100% ITC
would be allowed on this input supply.
Important points
 This option 2 must be exercised by the financial
institutions before the beginning of the financial year. Once
the option is exercised, it can not be withdrawn in the
middle of the financial year.
Rule 42(1) APPORTIONMENT OF COMMON CREDIT
Manner of determination of ITC in respect of input or input services partly used for
business purposes and partly for other purposes as per Section 17(1) OR partly for
effecting taxable supplies and partly for effecting exempted supplies as per Section
17(2)

If inputs are exclusively used for non-business

purposes or exclusively for effecting exempted
supplies, then, one can easily determine the amount of
ITC which is not allowed.
This rule covers common credits i.e. where inputs are
used partly for business purpose and partly for non-
business purpose (or partly for effecting taxable
supplies and partly for effecting exempted supplies.
STEP-1: To find out ITC credited to electronic credit ledger

Total input tax on input goods/ services during a tax period XX

(Less)
Input tax exclusively used for non-business purposes (XX)
Input tax exclusively for making exempt supplies (XX)
Input tax pertaining to inputs covered under Blocked credit as
per section 17(5) (XX)
---------------------------------------------------------------------
ITC credited to electronic credit ledger: XX (Lets name it C1 )
STEP-2: To find out Common credit
ITC in respect of inputs exclusively used for effecting taxable supplies including zero-rated
supplies :T (naming it T)
Common credit (naming it C2) = C1 -T

STEP-3: Computation of Inadmissible credit as per Rule 42

Aggregate value of exempt supplies in the tax period: EX
Total turnover in a tax period: TT
Credit attributable to exempt supplies: A= (EX/TT) X C2

Credit attributable to non-business purposes: It is taken as 5% of C2.

lets name it B

Total inadmissible credit = A + B

Note: This inadmissible credit must be reversed by the registered

person in FORM GSTR3B.
STEP 4: Computation of eligible common credit and
total credit eligible
Eligible Common credit (naming it X) = C2- (A+B)

Eligible credit = Eligible common credit + ITC exclusively

used for effecting taxable supplies
=X+T
Section 18(1)(a) Fresh registration
 A person who has applied for registration within 30 days of
becoming liable for registration is entitled to ITC of input
tax in respect of goods held in stock (or inputs contained in
semi-finished or finished goods) on the day immediately
preceding the date from which he becomes liable to pay
tax.
Important point:
1. A registered person shall not be entitled to take ITC in respect of
any supply of goods/ services to him after the expiry of 1 year from
the date of issue of tax invoice relating to such supply.
2. In this case, ITC is not available on capital goods.
Section 18(1)(b) Voluntary registration
A person who has taken voluntary registration is
entitled to ITC of input tax in respect of goods held in
stock (or inputs contained in semi-finished or finished
goods) on the day, immediately preceding the date of
registration.

Important note:
1. A registered person shall not be entitled to take ITC in respect of
any supply of goods/ services to him after the expiry of 1 year
from the date of issue of tax invoice relating to such supply.
2. In this case, ITC is not available on capital goods.
 Section 18(1)(c)
Shifting from Composition scheme to normal
scheme
A person switching over to normal scheme from
composition scheme under section 10 is entitled to ITC
in respect of goods held in stock (or inputs contained
in semi-finished or finished goods) and capital
goods on the day immediately preceding the date from
which he becomes liable to pay tax as normal taxpayer.

A registered person shall not be entitled to take ITC in respect of any

supply of goods/ services to him after the expiry of 1 year from the
date of issue of tax invoice relating to such supply.
In this case, ITC is available on capital goods but depreciation for use of capital
asset till the time registered taxpayer was covered under composition scheme
must be allowed. Calculation of available ITC will be as follows- Total ITC on
capital goods gets reduced by 5% for use of every quarter or part thereof.
Quarter of the year to be computed in terms of three consecutive calendar
months i.e. quarter ending March, June, September and december of the
calendar year.

For example, Capital good such as machinery was purchased on 18/08/2017

and CGST and SGST was Rs. 24,000 each. Registered taxpayer was covered
under composition scheme. He becomes eligible to pay tax under normal
scheme w.e.f. 10th July, 2018. As per the Section 18(1)(c), this taxpayer is
eligible to claim ITC on capital goods. Computation of ITC available to be
done as follows-

5% depreciation for 5 quarters (July-sep, 2017, oct –dec,2017, Jan-march,2018,

April-june2018 and July-sept, 2018)=
[5/100 x 48000 x 5] =12,000

ITC available= Rs. 36,000; (CGST and SGST= 18,000 each)

Section 18(1)(d)
When an exempt supply becomes a taxable supply
Where an exempt supply of goods or services or both
become taxable, the person making such supplies shall
be entitled to take ITC in respect of goods held in
stock (or inputs contained in semi-finished or finished
goods) and capital goods held on the day immediately
preceding the date from which supply becomes
taxable.
In this case, ITC is available on capital goods but
depreciation for use of capital asset till the time supply
was exempt supply must be allowed. Calculation of
available ITC to be done as mentioned in previous
slides.
A registered person shall not be entitled to take ITC in respect of any supply
of goods/ services to him after the expiry of 1 year from the date of issue of
tax invoice relating to such supply.
 Section 18(4)
Switching to Composition Scheme or taxable supplies become
exempt supplies
A person switching over from composition scheme
under section 10 to normal scheme or where a taxable
supply become exempt, the ITC availed in respect of
goods held in stock (or inputs contained in semi-
finished or finished goods) as well as capital goods on
the day immediately preceding the date of exercising
section 10 or the date of exemption of supply, as the
case may be must be reversed.
Reversal of ITC may happen by way of debit in
electronic credit ledger or electronic cash ledger. After
reversal from electronic credit ledger, if any balance is
left in that ledger, then it shall lapse.
Computation of Reversal of ITC on capital goods to be
done as follows- [This method is different from the
calculations as done in Section 18(1)(c) and 18(1)(d)]
Under this method, useful life of capital asset is
assumed as 60 months, which is fixed by law.
Illustration in the next slide would be useful
inunderstanding the calculation
Source: Dr. V.K. Singhania, GST and Customs Laws book, Taxmann
Section 18(6) Removal of capital goods
In case capital goods or plant and machinery, on which ITC
is taken, is supplied to another person, then reversal of ITC
takes place.
Reversal of ITC on removal of capital goods shall be:-
--an amount equivalent to ITC availed minus the reduction
as prescribed in rules (5% for every quarter or part thereof)*
or
--tax on transaction value of the supply,
WHICHEVER IS MORE
*Note: this computation is done in the same manner as
mentioned in section 18(1)(c) and 18(1)(d)
Important Point:
Where refractory bricks, moulds and dies, jigs and
fixtures are supplied as scrap, the taxable person may
pay tax on transaction value of such goods (by
ignoring first point of the previous slide i.e. 5% for
every quarter)
References and Suggested readings

Books:
CA K.M. Bansal, GST & Customs Laws, Taxmann
Dr. V.K. Singhania, GST and Customs Laws, Taxmann

E-resources:
http://cbic.gov.in/resources//htdocs-cbec/gst/ITC%20_
Mechanism.pdf