Point-wise Guide for GST Input Tax Credit with FAQs

Eligibility and Conditions for taking Input Tax Credit

1. General Power to take credit [Section 16(1)]

Every registered person shall, subject to such conditions and restriction as may be prescribed and in the manner specified in section 49, be entitled to take credit or 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.

2. Conditions for taking credit [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) Invoice: He is in possession of a tax invoice or debit not issued by supplier registered under this Act, or such other tax payment documents as may be prescribed;

(b) Receipt: He has received the goods or services or both;

(c) Tax actually paid: 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 utilization of input tax credit admissible in respect of the said supply; and

(d) Return furnished: He has furnished the return under section 39.

The following points may also be taken:

1. Receipt of goods in lots against an Invoice: 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.

2. ITC availed to be paid along with interest if payment not made in 180 days of date of invoice: 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.

3. Credit can be availed if Payment is made subsequently: 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.

4. Section 16(3) – ITC not allowed in respect of tax component of capital goods if depreciation claimed on in under Income-tax Act: 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.

5. Section 16(4) – Time limit for availing of Input Tax Credit: 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 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 furnishing of the relevant annual return, whichever is earlier.

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 (Proviso to section 16(2) of CGST Act, 2017).

Under 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.

Thus, in principle, input tax credit is available on all goods provided they are used or intended to be used in the course of or in furtherance of business.

As such, section 9(2) of CGST Act, 2017 provides that tax on supply of few petroleum products viz. petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.

However, pet coke and furnace oil are not excluded from the scope of GST.

In light of Section 16(1) CGST read with section 9(2) of the said Act, input tax credit of GST charged on pet coke and furnace oil shall be available, if such goods are used or intended to be used in the course of or in furtherance of the business.

Apportionment of credit and blocked credits

Section 17 of the CGST Act deals with the apportionment of credit and blocked credits. Where the goods or services or both are used by the registered person partly for the purpose of 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.

Where the goods or services or both are used by the registered person partly for taxable supplies including zero rated supplies and partly for exempt supplies, 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.

The value of exempt supply shall be such amount 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.

A banking company or financial institution engaged in supplying services by way of accepting the deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2) viz. proportionate input tax credit or avail of every month 50% of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

Provided that once the option is exercised by a banking company or financial institution, it shall not be withdrawn during the remaining part of the financial year. This restriction of 50% also shall not apply to the tax paid on supplies made by one registered person to another registered person having the same PAN.

Section 17(5) of CGST Act, 2017 deals with blocked credits. Notwithstanding anything contained in section 16(1) & section 18(1) of CGST Act, 2017, ITC is not allowed on goods and/or services mentioned in this sub-section i.e. even if such goods/services are  used in course or furtherance of business.

Goods and/or services on which Input Tax Credit (ITC) is blocked as per section 17(5) of the CGST Act, 2017:

(A) Motor vehicle (except few cases)

(B) Goods and/or services provided in relation to:

(i) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;

(ii) Membership of a club, health and fitness center;

(iii) Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;

(iv) Travel benefits extended to employees on vacation such as leave or home travel concession;

(C) Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;

(D) Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

(E) Goods and/or services on which tax has been paid under composition scheme;

(F) Goods or services or both received by a non-resident taxable person except on goods imported by him;

(G) Goods and/or services used for private or personal consumption, to the extent they are so consumed;

(H) Goods lost, stolen, destroyed, written off, gifted, or free sample;

(I) Any tax paid due to short payment on account of fraud, suppression, misdeclaration, seizure, and detention.

As per Section 2(119) of the CGST Act, 2017, “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Section 17(5)(c) of the CGST Act, 2017 states that Input Tax Credit is blocked on works contract service when supplied for construction of an immovable property.

Section 17(5)(d) of the CGST Act, 2017 states that input tax credit is blocked on goods or services received by a taxable person for construction of an immovable property on own account.

In re KSR & Company (GST AAR Andhra Pradesh) (14/02/2019):

In this case it was held that the Applicant is eligible for Input Tax Credit (ITC) in respect of the GST paid on goods and services used as inputs in execution of “Works Contracts”.

Input Tax Credit restriction under section 17(5)(c) and 17(5)(d) of the CGST Act, 2017 will not apply to the applicant as his output is works contracts service.

Thus, if a supplier is engaged in providing further supplies of works contract services, input tax credit can be availed.

There is no specific provision under the Act prohibiting transfer of such unutilized credit.

Rather, Section 18(3) of the CGST Act, 2017 specifically provides that when there is a change in constitution of a registered person on account of sale, merger, or amalgamation of business with specific provision of transfer of liabilities, the registered taxable person shall be allowed to transfer the input tax credit which remains unutilized, provided registered person furnish the details of sale, merger, demerger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee.

Therefore, if the recipient is registered under the Act, he should be eligible to claim such unutilized credits. In a situation, where the recipient is not registered under the Act, he may have to make a fresh application for registration and claim such unutilized credits after making intimation to the department.

Section 18(6) of the CGST Act, 2017 read with rule 40(2) of the CGST Rules, 2017 provide that if capital goods or plant and machinery on which input tax credit has been taken are supplied outward by the registered person, he must pay an amount that is the higher of the following:

(a) Input tax credit taken on such goods reduced by 5% per quarter of a year or part thereof from the date of issue of invoice for such goods, or;

(b) Tax on transaction value.