Practical FAQs on Input Tax Credit under GST

To avoid cascading effect, input tax credit is available. It is based on VAT concept of allowing input tax credit on inputs, input services and capital goods. Output supplier of goods/services can avail credit of CGST, SGST, UTGST and IGST charged by input supplier of goods, services and capital goods. Before beginning study of input tax credit provisions, one should know the following –

1. Input means any goods other than capital goods¹. Capital goods means goods, value of which is capitalised in books of account. Input tax credit on capital goods can be availed at one shot (i.e., 100 per cent² at the time of capitalisation in books of account). There is no requirement to defer some portion of input tax credit on capital goods to the subsequent year. In other words, there is no distinction between inputs and capital goods under GST for the purpose of availment of input tax credit.
2. Basic condition for availing input tax credit is that input/input services/capital goods are used (or intended to be used) in the course of or furtherance of business.
3. In GST regime, IGST is levied on inter-State supply. CGST and SGST/UTGST are levied on intra-State supply. These taxes on inward supply are creditable. However, one has to keep in mind that there is no centralized registration under GST. Registration is required in all States/Union Territories from where one makes taxable supplies of goods/services. Each registration is treated as distinct person. Consequently, input tax credit of one State cannot be used to set off output GST liability of another State.
4. GST which is paid by recipient of supply under reverse charge mechanism during the current month, will become eligible input tax credit.
5. Tax on inward supply paid by a person who is registered under Composition Scheme/Alternative Composition Scheme, is not eligible for input tax credit.
6. Input SGST credit cannot be used to pay output CGST. Likewise, input CGST credit cannot be used to pay output SGST. Barring this limitation, input tax credit can be used to pay any output tax liability. For instance –

• • IGST input credit can be used to set off output liability of IGST/CGST/SGST (in the same sequence).
  • CGST input credit can be used to set off output liability of CGST/IGST.
  • SGST input credit can be used to set off output liability of SGST/IGST.

7. Input tax credit is available only when GST is leviable on outward supply of goods/services. To put it differently, if GST is not leviable on outward supply of goods/services, input tax credit is not available. Those transactions where input tax credit is not available (because outward supply of goods/services is exempt) can be termed as exempt transactions. There are certain output supplies which are “zero rated”. In such cases, GST is not payable on outward supply (because applicable rate is zero) even then input tax credit is available. The following transactions are zero rated transactions –

• • Export of goods/services.
  • Supply of goods/services to special economic zone (SEZ).

These two supplies are zero rated supplies (applicable GST rate is zero). In the case of zero rated supplies, input credit is available. However, input credit is not available in the case of exempt transactions.

Provisions Illustrated

X Ltd. manufactures electric-detonators in Maharashtra for domestic and export markets. Raw material is supplied by different persons located in Gujarat and Tamil Nadu. GST rate is 18 per cent. The following information is given by X Ltd. for January 2024 –

• Supply of 10,000 pieces at the rate of Rs. 120 to Y Ltd. of Kerala.
• Export of 25,000 pieces at the rate of Rs. 140 to A Inc., Holland.
• Input credit available in electronic credit ledger (on inputs/input services procured from Gujarat/Tamil Nadu): Rs. 1,50,000 (Situation 1) or Rs. 2,90,000 (Situation 2).

In this case, GST payable by X Ltd. will be as follows –

In the aforesaid two cases, there is no GST on exported goods (no GST on input as well as output).

8. Goods/services are purchased. Benefit of input tax credit has been taken. Out of goods/services so acquired, taxpayer makes taxable supply as well as exempt supply. In such a situation, proportionate input tax credit (which he has already availed) pertaining to exempt supply, shall be reversed (formula for reversal of input tax credit is given in GST Rules). Similar reversal is required when capital goods are used for making taxable and non-taxable supplies.
9. Entire input tax credit is available even if a part of input goes in waste or by products like sludge which is not taxable.
10. Input credit is available as soon as inputs/input services are received (there is no need to wait till these inputs are actually used in production or actually sold). Moreover, entire input tax credit forms a common pool (law does not require invoice to invoice co-relation between input and output).
11. “Input tax” is defined by section 2(62). According to this definition, “input tax” in relation to a registered person means CGST, IGST, UTGST on supply of goods/services to him. Further it includes the following –

• • IGST charged on import of goods.
  • CGST/IGST/SGST/UTGST payable on reverse charge mechanism.

However, it does not include tax paid under Composition Scheme/Alternative Composition Scheme.

One has to satisfy the following conditions –

1. Registered person

Input tax credit is available only to a registered person. Moreover, it is available in respect of input supplies of goods/services which are used (or intended to be used) in the course (or furtherance) of the business of the person who wants to claim the benefit of input tax credit. To avail the benefit of input tax credit, it should be credited in the electronic credit ledger.

2. Tax invoice

The input tax credit shall be availed by a registered person (including the Input Service Distributor), on the basis of any of the following documents –

• An invoice issued by the supplier of goods/services.
• An invoice issued (when tax is payable by the registered dealer under reverse charge mechanism).
• A debit note issued by a supplier.
• A bill of entry (or any similar document prescribed under the Customs Act) for the assessment of IGST on imports.
• An Input Service Distributor invoice (or Input Service Distributor credit note or any document issued by an Input Service Distributor).

3. Uploading

Input tax credit shall be availed by a registered person only if all the applicable particulars (as specified in rules pertaining to issue of tax invoice) are contained in the aforesaid document.

3.1 Restrictions Imposed by Rule 36(4)

Rule 36(4) has been inserted with effect from October 9, 2019. To understand the implication of rule 36(4), one has to understand the mechanism of filing Form GSTR-1 by input supplier and reflection of this data in Form GSTR-2A of the recipient.

Form GSTR-1 – GSTR-1 is the return to be furnished for reporting details of all outward supplies. GSTR-1 is to be filed by all normal taxpayers who are registered under GST. It is to be filed monthly (in some cases, quarterly).

Form GSTR-2A – On the basis of data uploaded by input supplier in Form GSTR-1, Form GSTR-2A is generated for the recipient. For the recipient, data of GSTR-2A is auto-populated based upon GSTR-1 uploaded by all input suppliers of a dealer for a tax period. GSTR-2A is a read-only return and no action can be taken.

Legal position before insertion of rule 36(4) – Before insertion of rule 36(4) (i.e., before October 9, 2019), one can take input tax credit on the basis of suppliers’ invoices (regardless of data appearing in Form GSTR-2A or GSTR-2B).

Legal position after insertion of rule 36(4) – Rule 36(4) has been inserted with effect from October 9, 2019. After insertion of rule 36(4), one cannot take input tax credit without examining the credit available in Form GSTR-2A. Under rule 36(4), input tax credit pertaining to input invoices/debit notes which is available to a registered dealer for a tax period cannot exceed the following –

• 120 per cent of eligible credit available in his Form GSTR-2A (applicable on or after October 9, 2019 but before January 1, 2020); or
• 110 per cent of eligible credit available in his Form GSTR-2A (applicable on or after January 1, 2020 but before January 1, 2021); or
• 105 per cent of eligible credit available in his Form GSTR-2A (applicable on or after January 1, 2021 but before January 1, 2022).
• 100 per cent of eligible credit balance available in GST-2B (applicable from January 1, 2022).

Provisions Illustrated

1. X Ltd. is a registered GST dealer. It gives the following information pertaining to January 2024 –

Outward supply – During January 2024, GST on outward supply made by X Ltd. is Rs. 54,90,000 (it is aggregate GST liability of 59 invoices issued by X Ltd. during January 2024).

Inward supply – During January 2024, X Ltd. receives 30 tax invoices (pertaining to taxable inward supply of inputs, input services and input capital goods). Input tax credit pertaining to these invoices is as follows –

• Eligible input tax credit (29 invoices) – Quantum of eligible input tax credit for January 2024 as per records of X Ltd. is Rs. 46,20,000.
• Ineligible input tax credit (1 invoice) – X Ltd. has purchased a car during January 2024 for its executives (GST paid is Rs. 7,80,000).
• Inward supply subject to reverse charge – X Ltd. is also eligible for input tax credit of Rs. 60,000 pertaining to GST of January 2024 (it is paid by X Ltd. on inputs which are under reverse charge mechanism).

Credit reflected in Form GSTR-2A – Eligible input credit reflected in Form GSTR-2A for January 2024 is –

• Situation 1 – Rs. 36,00,000 (total invoices: 24).
• Situation 2 – Rs. 44,00,000 (total invoices: 26).
• Situation 3 – Rs. 45,00,000 (total invoices: 27).
• Situation 4 – Rs. 46,00,000 (total invoices: 28).

Moreover, GSTR-2A of January 2024 of X Ltd. shows input tax credit pertaining to the car purchased by X Ltd. for its executives (amount of input tax as per GSTR-2A is Rs. 7,80,000).

Input tax credit as per rule 36(4) – Number of invoices (given in above data) is not relevant for calculating input tax credit. Input tax credit (pertaining to car) is not considered, as it is blocked by section 17(5)(a). It is not eligible for input tax credit even if it is reflected in GSTR-2A. Quantum of input tax credit available as per rule 36(4) to X Ltd. is as follows –

Amount payable by X Ltd. for January 2024 in cash – It is as follows –

• Under forward charge – X Ltd. will have to pay in cash Rs. 54,90,000 minus eligible input tax credit as per rule 36(4) [i.e. (d)] minus input tax credit pertaining to amount paid under reverse charge (i.e., Rs. 60,000).
• Under reverse charge – Rs. 60,000 is payable in cash under reverse charge.

2. X Ltd. can claim the blocked input tax credit [i.e., (e)] in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers in their GSTR-1 and subsequent reflection (i.e., auto-populated) of the same in GSTR-2A of X Ltd. Suppose, in Situation 1, data submitted by the suppliers of X Ltd. (pertaining to January 2024 supplies) in their GSTR-1 for February 2024 which is auto-populated in GSTR-2A of X Ltd. (for February 2024) shows eligible input tax credit of Rs. 4,00,000 (Case 1) or Rs. 9,00,000 (Case 2). Amount available as eligible input tax credit to X Ltd. for the month of February 2024 (pertaining to January 2024 input supplies) will be as follows –

Note – Amount, as shown in (i) above, can be claimed as input tax credit in March 2024 (or any subsequent month) provided relevant data of invoices/debit notes is uploaded by the suppliers of X Ltd. in their GSTR-1. As and when, invoices/debit notes are uploaded by suppliers, X Ltd. will be able to claim credit.

3.2 Other Points

The following additional points pertaining to rule 36(4) are relevant –

1. Restriction of 100 per cent is not supplier wise – The restriction imposed by rule 36(4) is not supplier wise. The credit available under rule 36(4) is linked to total eligible credit from all suppliers against all supplies whose details have been uploaded by the suppliers.
2. Ineligible input tax credit – The calculation of 100 per cent³ is based on only those invoices which are otherwise eligible for input tax credit. Accordingly, those invoices on which input tax credit is not available (or blocked) under any of the provisions [maybe given by section 17(5) or any other section/rule] are not be considered for calculating 105 per cent of the eligible credit available.
3. Separate restriction – The above restriction of rule 36(4) is applicable even in SGST. Consequently, the limit of 105 per cent shall apply separately for CGST, SGST/UTGST and IGST and not on total input tax credit.
4. Reversal of input tax credit in the case of non-payment of tax bn the supplier – Where input tax credit has been availed by a registered person, on the basis of data appearing in Form GSTR-2B, but the return in Form GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such supplier till September 30 (following the end of financial year in which the input tax credit in respect of such invoice or debit note has been availed), the said amount of input tax credit shall be reversed by the said registered person. It will be reversed while furnishing a return in Form GSTR-3B on or before November 30 following the end of such financial year.

When the aforesaid amount of input tax credit is not reversed by the registered person (till November 30 as stated above), such amount shall be payable by the said person along with interest thereon under section 50.

Where the said supplier subsequently furnishes the return in Form GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in Form GSTR-3B for a tax period thereafter.

4. Fraud

No input tax credit can be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, wilful misstatement or suppression of facts.

5. Receipt of goods/services

Input tax credit is available only if the registered person has received goods/services. For this purpose, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to an agent of recipient (or any other person on the direction of such registered person). If goods are delivered to such person before or during movement of goods (either by way of transfer of documents of title to goods or otherwise), it shall be deemed that registered person has received goods. Likewise, it shall be deemed that the registered person has received services where services are provided by the supplier to any person on the direction of, and on the account of, such registered person.

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.

6. Time-limit to avail input tax credit

Input tax credit is available as soon as goods/services are received. However, a registered person shall not be entitled to take input tax credit in respect of any invoice (or debit note) for supply of goods/services after –

• November 30 following the end of financial year to which such invoice or debit note pertains); or
• furnishing of the relevant annual return,

whichever is earlier.

Provisions Illustrated

1. X Ltd. is a registered person under GST. It has received goods/services on November 12, 2023 (eligible input tax credit is Rs. 1,12,500). Credit of this input tax can be availed at any time after November 12, 2023. However, it cannot be claimed after –

a. November 30, 2024; or

b. date of filing of annual return for the financial year 2023-24 (due date is December 31, 2024),

whichever is earlier.

If annual return for 2023-24 is uploaded on December 31, 2024, aforesaid tax credit can be claimed on or before November 30, 2024. Conversely, if annual return is uploaded on October 15, 2024, the aforesaid tax credit can be claimed on or before October 15, 2024.

2. A debit note has been issued on November 15, 2023 in respect of an invoice dated July 15, 2023. The relevant financial year for availment of input tax credit pertaining to the debit note is the financial year 2023-24. Accordingly, the registered person can avail input tax credit on the same till November 30, 2024 or furnishing of the annual return for financial year 2023-24, whichever is earlier.

7. Failure to make payment to supplier of input goods/services

If above conditionsare  satisfied, the recipient of input goods/services can avail input tax credit (as soon as goods/services are received and relevant amount is credited in electronic credit ledger). Law requires that recipient of input goods/services should make payment to the supplier within 180 days from the date of issue of invoice by the supplier. If payment is not made within 180 days, input tax credit will have to be reversed. The relevant provision is explained in a case study given below.

Provisions Illustrated

X Ltd. is a registered person under GST. It has received goods/services from A Ltd. vide invoice dated July 20, 2022 [value of input taxable supply Rs. 1,00,000, GST on input (i.e., IGST or CGST + SGST) Rs. 18,000]. This input tax is credited in electronic credit ledger. X Ltd. avails the benefit of credit for payment of tax for September 2022. Law requires that X Ltd. should make payment of Rs. 1,18,000 to A Ltd. on or before January 16, 2023 (i.e., within 180 days from July 20, 2022). The following consequences should be noted if X Ltd. makes payment after January 16, 2023 (suppose, actual payment is made on May 18, 2023) –

1. X Ltd. will have to show Rs. 18,000 as output tax for February 2023.
2. X Ltd. will have to pay interest at the rate of 18 per cent per annum from July 20, 2022 till the date of payment of tax of Rs. 18,000.
3. X Ltd. can re-avail Rs. 18,000 as input credit on May 18, 2023 (i.e., the date of payment of Rs. 1,18,000 to A Ltd.). Time-limit discussed is not applicable for utilisation of this reavailed input tax credit.

8. Tax component of capital goods on which depreciation is claimed under income-tax

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

9. Items not eligible for input credit

Input tax credit is available on almost all inward supply of goods/services used for making outward taxable supply. However, a negative list of a few items is given by section 17(5). This negative list is given below –

9.1 Motor Vehicles for Transportation of Persons [Sec. 17(5)(a)] – If a person acquires a motor vehicle for transportation of persons (having approved seating capacity of 13 persons or less, including driver), input tax credit is not available. This rule is applicable even if such motor vehicle is used for the purpose of carrying on his business or profession. However, when such motor vehicle is used for making the following taxable supplies, input tax credit is available –

1. further supply of such motor vehicles,
2. transportation of passengers; or
3. imparting training on driving such motor vehicles.

Similar rule for motor vehicle taken on lease – The above rules are also applicable when motor vehicle is not purchased but taken on lease [sec. 17(5)(b)(i)].

Similar rule for input services of general insurance, servicing, repair and maintenance of motor vehicle – The above rules are also applicable for input services pertaining to motor vehicle (being input services of general insurance, servicing, repair and maintenance) [sec. 17(5)(ab)].

Provisions Illustrated

1. X (or X Ltd.) is registered under GST from Andhra Pradesh. He/it purchases a motor vehicle on April 6, 2023. GST paid at the time of acquisition is Rs. 9,10,000 (it is total of CGST, SGST and GST cess). The point for consideration is whether X (or X Ltd.) can claim input tax credit of Rs. 9,10,000 in the following situations –

Notes –

1. Input tax credit is denied only in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver) or when motor vehicle is used for personal purposes. Moreover, in the case of a motor vehicle [which is not for transportation of persons (e.g., truck, fork-lift truck, crane, digger, dozer, dumper, etc.)], input tax credit is available if such vehicle is used for business purposes (i.e., for making taxable supplies).
2. Suppose in the above case of X (or X Ltd.), motor vehicle is not purchased but it is taken on lease or rent. GST is paid on input service of leasing, renting or hiring motor vehicle. By virtue of section 17(5)(b)(i), tax credit for input service will be available (or not available) as given in Column 5 of the table (supra).

2. Y Ltd. is engaged in transportation of cash from currency chest to bank branches and for this purpose it purchased a cash carry van after payment of GST (including GST cess). Input tax credit is available.

Under the old provisions applicable up to January 31, 2021, input tax credit was not available, as transportation of cash is not transportation of goods (under the provisions applicable from February 1, 2021, as given above, input tax credit in the case of motor vehicle is blocked only when such vehicle is used for transportation of persons).

9.2 Vessels and Aircraft [Sec. 17(5)(aa)] – If a person acquires vessels or aircraft, input tax credit is not available, except when it is used for the following purposes –

When input tax credit is available – When vessel or aircraft is used for the following taxable supplies, input tax credit is available –

1. further supply of such vessels or aircraft; or
2. transportation of passengers; or
3. imparting training on navigating such vessels; or
4. imparting training on flying such aircraft;
5. transportation of goods.

Similar rule for vessels/aircraft taken on lease – The above rules are also applicable when vessels or aircraft is not purchased but taken on lease [sec. 17(5)(b)(i)].

Similar rule for input services of general insurance, servicing, repair and maintenance of vessels or aircraft – The above rules are also applicable for input services pertaining to vessels or aircraft (being input services of general insurance, servicing, repair and maintenance) [sec. 17(5)(ab)].

Provisions Illustrated

1. Wipro Chemicals purchases an aircraft for the purpose of transportation of senior executives when they perform official duties. IGST paid at the time of acquisition is Rs. 92 crore. Input tax credit for Rs. 92 crore is not available.
2. Sky Airways operates a fleet of Airbus and Boeing aircraft serving different domestic destinations in India. It purchases an aircraft on June 10, 2024 for transportation of passengers (or goods). Input tax credit is available.
3. Reliance Industries purchases an aircraft for the purpose of transportation of goods manufactured by it. Input tax credit is available.

9.3 Services of General Insurance, Servicing, Repair and Maintenance Relating to above Motor Vehicles, Vessels or Aircraft [Sec. 17(5)(ab)] – Services of general insurance, servicing, repair and maintenance insofar as they relate to motor vehicles, vessels or aircraft referred to in section 17(5)(a)/(aa) is not eligible. To put it differently, when input tax credit on purchase of motor vehicle, vessel or aircraft is not available (under the provisions given above), tax credit on input service pertaining to repairs, insurance and maintenance of such motor vehicle, vessel or aircraft is also not available. However, input tax credit in respect of repair, insurance and maintenance is available where such service is received by a taxable person who is engaged –

1. in the manufacture of such motor vehicles, vessels or aircraft; or
2. in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him.

Provisions Illustrated

1. X Ltd. purchases a Honda City car for its senior executives. Input tax credit (for GST paid on purchase of car) is not available, even if the car is used for official purposes by employees of X Ltd. Likewise, tax credit for input services of general insurance, servicing, repair and maintenance of the car is not available.
2. Y Ltd. purchases a bus [seating capacity as per registration certificate 14 persons (or more)]. The bus is used by employees of Y Ltd. for performing official duties or for journey between office and residence. Input tax credit (for GST paid on purchase of bus) is available. Likewise, tax credit for input services of general insurance, servicing, repair and maintenance of the bus is available.
3. Taxmann Consultancy (P.) Ltd. purchases an AgustaWestland helicopter for its senior executives. Input tax credit (for GST paid on purchase of helicopter) is not available, even if it is used for official purposes by employees of Taxmann. Likewise, tax credit for input services of general insurance, servicing, repair and maintenance of the helicopter, is not available.

1. 9.4 Supply Of Goods/Services Pertaining to Food, Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic and Plastic Surgery, Leasing Of Vehicles, Vessels or Aircraft [Sec. 17(5)(b)(i)] – Input tax credit is not available in respect of the following supply of goods/services –

1. food and beverages;
2. outdoor catering;
3. beauty treatment;
4. health services;
5. cosmetic and plastic surgery;
6. leasing (or renting or hiring) of motor vehicles, vessels or aircraft referred to in section 17(5)(a)/(aa)⁴ except when used for the purposes specified therein;
7. life insurance and health insurance.

Input tax credit available if input supply is used for making outward taxable supply of same category – Input tax credit is available where an inward supply of above goods/services is used by a registered person for making an outward taxable supply of the same category of goods/services or as an element of a taxable composite or mixed supply.

Input tax credit available where service is provided by an employer under legal obligation – Input tax credit in respect of above goods/services is available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Provisions Illustrated

1. X Ltd., a chemical manufacturing company, purchases 100 packets of lunch for its employees. Input tax credit is not available.
2. ITC Maratha, a 5-star hotel in Mumbai, purchases 10 one kg. chocolate cakes for one of its restaurants (to be used for Sunday Buffet lunch). Input tax credit is available.
3. Y Ltd., a manufacturing company (having more than 250 workers), is required to provide canteen facility to its employees as per section 46 of the Factories Act, 1948. Input tax credit pertaining to canteen facility is available to Y Ltd.
4. Medical service and health insurance service are provided by Z Ltd. to its employees under contractual obligations (i.e., as per employment agreement with employees). There is no legal obligation to provide medical service and/or health insurance service to employees. In this case, input tax credit is not available.
5. Z Ltd. provides medical services for its staff in a Government hospital in Hyderabad (annual payment to hospital includes GST of Rs. 14,000). Providing such facility is compulsory under Telangana Government regulations. Input tax credit can be claimed. If, however, there is no legal requirement, input tax credit is not available.

9.5 Membership of Club, Health and Fitness Centre [Sec. 17(5)(b)(ii)] – Input tax credit is not available in respect of input supply of goods/services pertaining to membership of a club, health and fitness centre.

Input tax credit available where service is provided by an employer under legal obligation – Input tax credit in respect of above goods/services is available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Provisions Illustrated

1. X Ltd., a software consultancy company, provides health club and sports club facility to its employees under contractual obligations. There is no legal obligation under any government regulations for the same. Input tax credit is not available to X Ltd. pertaining to these facilities.
2. Y Ltd. pays corporate membership fees of GymKhana Club for its managing director (fee includes GST of Rs. 82,000). As there is no legal requirement to provide corporate membership of GymKhana Club to the managing director, Y Ltd. cannot claim input tax credit of Rs. 82,000.

9.6 Travel Benefits to Employees [Sec. 17(5)(b)(iii)] – Input tax credit is not available in respect of the input supply pertaining to travel benefits to employees on vacation (such as leave or home travel concession).

Input tax credit available if provided under legal obligation – Input tax credit in respect of the above input service is available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Provisions Illustrated

A company pays leave travel concession (LTC) to B (one of its employee). Payment covers air fare of B and his family for going on leave. GST on fare is not eligible for input tax credit.

9.7 Works Contract Input Services Pertaining to Construction of an Immovable Property [Sec. 17(5)(c)] – Works contract services when taken as input supply for construction of an immovable property (other than plant and machinery) is not eligible for input tax credit.

Input tax credit available for further supply of works contract service – If the above input supply is used for further supply of works contract service, input tax credit is available. For instance, a contractor can take input tax credit pertaining to works contract services which he has obtained from a sub-contractor.

Construction includes renovation, alteration, etc. – For the above purpose, “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property. If cost of reconstruction, renovation, addition, alteration or repairs is not capitalised in the books of account of the registered person, input tax credit can be taken.

Plant and machinery – Input tax credit of GST paid on purchase of plant and machinery is available.

9.8 Goods/Services Received by a Taxable Person for Construction of an Immovable Property [Sec. 17(5)(d)] – Goods/services received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account (including when such goods/services are used in the course or furtherance of business) is not available.

Construction includes renovation, alteration, etc. – For the above purpose, “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property. If cost of reconstruction, renovation, addition, alteration or repairs is not capitalised in the books of account of the registered person, input tax credit can be taken.

Plant and machinery – Input tax credit of GST paid on purchase of plant and machinery is available.

Provisions Illustrated

1. X, a registered GST dealer, is an architect. To construct a building for his personal use, he purchases marble stone and air-conditioners. GST paid on these goods is not eligible for input tax credit.

In the above example, if the building is used for the purpose carrying on his profession, input tax credit is not available for purchase of marble stone. However, input tax credit for purchase of air-conditioners is available.

9.9 Input Goods/Services Received by a Person Covered by Composition Scheme/Alternative Composition Scheme [Sec. 17(5)(e)] – Input tax credit on goods/services received by a person who is registered under section 10 and covered by Composition Scheme/Alternative Composition Scheme, is not available.

Provisions Illustrated

X has opted under section 10 for Composition Scheme or Alternative Composition Scheme. Tax on inputs paid by him is not eligible for input tax credit.

9.10 Goods/Services Received by a Non-resident Taxable Person [Sec. 17(5)(f)] – Input tax credit is not available in respect of goods/services received by a non-resident taxable person. If, however, goods are imported by him, tax credit is available.

9.11 Goods/Services used for Personal Consumption [Sec. 17(5)(g)] – Input tax credit is not available in respect of goods/services used for personal consumption.

Provisions Illustrated

1. If goods/services are used only for personal consumption of the registered dealer, input tax credit is not available (maybe for personal consumption of sole proprietor, partners or directors of the registered person).
2. If above goods/services are partly used for personal purpose and partly used for business purposes, input tax credit will be disallowed on proportionate basis.

9.12 Goods Lost, Stolen, Gift, Free Samples [Sec. 17(5)(h)] – Input tax credit pertaining to goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples, is not available.

Provisions Illustrated

1. A pharma company gives free samples to doctors. No GST is applicable on outward supply [supplier and recipients are not “related”, consideration is absent, GST is nil. Input tax credit is not available.
2. Free gifts are sent by head office to branch office. This activity of distribution of gifts or free samples falls within the scope of “supply” on account of the provisions contained in Schedule I. On supply of gift by head office to branch office, GST is applicable. Consequently, the supplier would be eligible to avail of the benefit of input tax credit.
3. On July 1, 2023, Reliance Digital offers “buy one mobile, get a power bank free”. It may appear at first glance that in such a case, power bank is being “supplied free of cost” without any consideration. In fact, it is not an individual supply of free goods but a case of two supplies where a single price is being charged for the entire supply (of mobile and power bank). It can at best be treated as supplying two goods for the price of one. Since it is not free supply, input tax credit is available.

9.13 Any tax paid in accordance with the provisions of Sections 74, 129 and 130 [Sec. 17(5)(i)] – Any tax paid in accordance with the provisions of sections 74, 129 and 130 is not eligible for input tax credit. No input tax credit shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, wilful misstatement or suppression of facts.

If above parameters are satisfied, input tax credit can be utilised as follows –

The following points should be noted –

1. Input tax credit of SGST/UTGST cannot be used for payment of CGST.
2. Similarly, input tax credit of CGST cannot be used for payment of SGST/UTGST.
3. Barring a few exceptions, tax credit is available for all input goods, services and capital goods used (or intended to be used) in the course (or furtherance) of business.
4. If a person supplies taxable goods/services and exempt goods/services, he can avail only proportionate tax credit.

Order of utilization of input tax credit [Rule 88A] – Order of utilization of input tax credit is given by rule 88A. It allows utilization of input tax credit of IGST towards the payment of CGST and SGST/UTGST in any order subject to the condition that the entire input tax credit on account of IGST is completely exhausted first before the input tax credit on account of CGST or SGST/UTGST can be utilized. After the insertion of rule 88A, the order of utilization of input tax credit will be as per the order given below –

Problems

1. On August 20, 2023, X Ltd. (of Chennai) supplies goods/services to Y Ltd. (of Vellore). Taxable value of supply is Rs. 26,80,000. On August 26, 2023, X Ltd. supplies goods/services to Z Ltd. (of Bengaluru). Taxable value of supply is Rs. 5,00,000. GST rate is 18 per cent. X Ltd. has the following balance in his electronic credit ledger –

• IGST: Rs. 92,000.
• CGST: Rs. 5,000.
• SGST: Rs. 9,00,000.

On August 21, 2023, X Ltd. purchases Honda City (seating capacity as per RC: 5 persons) from a dealer in Chennai for its officers/auditors. The car will be used by these persons only for performing official duties. GST paid for purchasing the car (which is not included in the above figures) is as follows – CGST Rs. 1,68,000, SGST Rs. 1,68,000. There is no other transaction for the month of August 2023. Find out GST on supply of goods to Y Ltd./Z Ltd. and prepare a statement for availment of input tax credit.

Solution :

Note – On purchase of Honda City car, input tax credit is not available (as seating capacity of motor vehicle is not more than 13 persons).

2. On May 1, 2023, X (of Maharashtra) supplies goods/services to A Ltd. (of Odisha). Taxable value of supply is Rs. 28,30,000. On May 6, 2023, X supplies goods/services to B Ltd. (of Mumbai). Taxable value of supply is Rs. 58,00,000. GST rate is 18 per cent. X has the following balance of input tax credit available in his electronic credit ledger – IGST: Rs. 7,60,000, CGST: Rs. 3,40,000, SGST: Rs. 3,70,000. There is no other transaction for the month of May 2023. Find out the amount of GST payable for May 2023.

Solution :

Computation of GST on outward supply –

SGST payable for May 2023 is Rs. 1,52,000. Unutilised input tax credit of CGST of Rs. 68,600 cannot be utilised for payment of SGST (it can be carried forward). However, after utilising input IGST for payment of outward liability of IGST, the balance of Rs. 2,50,600 can be utilised in the above case partly for payment of CGST and partly for payment of SGST as follows

Note – Rs. 2,50,600 can be utilised (in any manner) for payment of CGST and SGST. As no restriction is imposed by the relevant legal provision as given in rule 88A, the amount to be utilised towards payments of CGST, in this case, should not be more than Rs. 1,82,000 (i.e., Rs. 5,22,000 – Rs. 3,40,000) to make minimum payment in cash.

Where goods/services are used by the registered person partly for business purposes and partly for other purposes, the amount of input credit will be reduced proportionately. Similarly, where goods/services are used by the registered person partly for affecting taxable supplies (including zero rated supplies) and partly for exempt supplies, input credit will be reduced proportionately. In such cases, if the registered person has already availed input credit, the amount calculated proportionately will have to be reversed. The mode of calculating proportionate amount in such cases is explained in the paras and examples given below.

1. When input credit available/not-available

The table given below highlights when input tax credit is available/not available –

2. Common credits

If input goods/services are exclusively used for purposes other than business purposes, one can easily find out the quantum of input tax credit not available. Likewise, if input goods/services are exclusively used for making non-taxable supplies/exempt supplies, determination of input credit not available is not difficult. Problem arises where input goods/services are not exclusively used for aforesaid purposes. Apportionment of common credit in such cases is governed by rule 42. The mechanism given by rule 42 is illustrated in the case study given below.

Provisions Illustrated

The following information is given by X Ltd., a pharmaceutical company, located in Mumbai. The data given below pertains to IGST credit (tax period January 2024) –

Notes –

1. Tl, T2, T3 and T4 shall be calculated as above for the purpose of declaration in GSTR-3B. The amount C3, Dl and D2 shall be computed separately for input tax credit of CGST, SGST/UTGST and IGST and declared in Form GSTR-3B or through Form GST DRC-03.
2. If X Ltd. does not have any turnover for January 2024, then the value of E and F shall be considered for last tax period for which data is available.
3. The above calculation shall be made by X Ltd. (or any other registered person) for each tax period and also for the whole year. In case of calculation for the whole year, if there is any shortfall in tax credit availed, the necessary credit can be claimed in the electronic ledger. Similar, adjustment can be made in cash of excess credit.
4. Where the amount of input tax relating to goods/services used partly for the purposes (other than business) and partly for effecting exempt supplies has been identified and segregated at the invoice level by the registered person, the same shall be included in Tl and T2 respectively, and the remaining amount of credit on such inputs or input services shall be included in T4.
5. In the case of construction of complex, building, etc., the value of T4 shall be zero during the construction phase (because inputs and input services will be commonly used for construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the project, whichever is earlier) and those which are not booked by the said date.
6. In the case of construction of complex, building, etc. (as covered by the above Note), the value of E + F (for the purpose of calculating Dl) for a tax period shall be calculated for each project separately, taking value of E and F as under –
   E = aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the apartments, construction of which is not exempt from tax, but are identified by the promoter to be sold after issue of completion certificate or first occupation, whichever is earlier;
   F = aggregate carpet area of the apartments in the project.
7. Similar calculation will be made for CGST, SGST and UTGST.

If capital goods are acquired by a registered person, he can immediately avail input tax credit. If, however, these goods are used for non-business purposes or for the purpose of making exempt supplies, reversal of credit is required. The mode of computation of such reversal is given in rule 43 and explained in the case study given below.

Provisions Illustrated

The following information is given by Y Ltd., a paper manufacturing company, located in Chennai for September 2023 –

Y Ltd. has the following plant and machinery –

Manner of distribution of common input tax credit of capital goods –

Note – Information pertaining to Tl, T2 and T3 should be declared in GSTR-3B. But no credit pertaining Tl and T2 should be recorded in electronic credit ledger. Credit pertaining to Plant C, Plant D and Plant E should be taken immediately. However, Plant D and Plant E are not exclusively used for effecting taxable supplies. Therefore, for the month of September reversal of Te is required. The amount Te shall be computed separately for input tax credit of CGST, SGST/UTGST and IGST and declared in Form GSTR-3B. Similar calculation can be done for different tax period.

The head office of X Ltd. at Mumbai has taken computer networking service from B Ltd. This service will be utilised by Delhi, Chennai and Kolkata branches. Head office has received tax invoice from B Ltd. Payment is also made by head office. Head office can distribute this input tax credit to its branches at Delhi, Chennai and Kolkata. This can be done by issue of bill/challan by head office of X Ltd. to Delhi, Chennai and Kolkata branches. After this, branches can claim input tax credit on inward supply for payment of GST on outward supplies. In this example, X Ltd. is “Input Service Distributor”. “Input Service Distributor” is defined by section 2(61). Input Service Distributor shall make a separate application for registration as Input Service Distributor. A few conditions should be satisfied –

• Input tax credit available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in Form GSTR-6.
• Input Service Distributor shall separately distribute the amount of ineligible input tax credit [ineligible under the provisions of section 17(5) or otherwise] and the amount of eligible input tax credit.
• Input tax credit on account of IGST shall be distributed as input tax credit of IGST to every recipient.
• Input tax credit on account of CGST and SGST/UTGST shall-

1. 1. In respect of a recipient located in the same State/Union Territory in which the Input Service Distributor is located, be distributed as input tax credit of CGST and SGST/UTGST respectively.
   2. In respect of a recipient located in a different State/Union Territory, be distributed as IGST (the amount of distribution will be equal to total of CGST + SGST/UTGST).

• Input Service Distributor shall issue an Input Service Distributor invoice, clearly indicating in such invoice that it is issued only for distribution of input tax credit.