GST Input Tax Credit – Definitions and Conditions for Claiming GST ITC

  • Blog|GST & Customs|
  • 1037 Views
  • |
  • 29 Min Read
  • By Taxmann
  • |
  • Last Updated on 18 June, 2022

Table of Contents:

1. Introduction
2. Meaning of Input Tax Credit
3. Rationale Behind ITC Under GST
4. Legal Framework of ITC
5. Eligibility for Availing ITC [Section 16(1)]
6. Conditions to be satisfied for Availing ITC [Section 16(2)]
7. Reversal of ITC in case of Non-Payment of Consideration
8. No ITC if Depreciation is claimed on Tax Component [Section 16(3)]
9. Time Limit for availing the Input Tax Credit [Section 16(4)]
10. Apportionment of Input Tax Credit

Input Tax Credit under GST

Check out Taxmann's flagship publication for GST & Customs Law which has been designed to bridge the gap between theory and application. This book is written in simple language, explaining the provision of the law in a step-by-step manner with the help of suitable examples, graded illustrations and question for practice. Updated till 1st January 2022, it also features questions of the university examination.

1. Introduction

When a registered person purchases goods or avails services, GST is paid on such inward supplies. These supplies are used for furtherance of business and the outward supplies are made. On such outward taxable supplies, GST is collected from the recipient. The total GST collected on outward supplies will not be payable to the Government in entirety, but it will get reduced on account of adjustment of tax paid on inward supplies, subject to certain conditions. This mechanism in which tax paid on inward supply is adjusted towards tax paid on outward supply is known as Input Tax Credit (ITC). The GST laws provide the benefit of ITC not only on input goods/services but also on capital goods. This ITC available reflects in the electronic credit ledger of the tax-payer maintained at the GST common portal. In this chapter, we will discuss the various aspects of ITC like conditions, circumstances, manner of computation, reversal etc.

2. Meaning of Input Tax Credit

As per Section 2 (63) of the CGST Act, 2017 “input tax credit” means the credit of input tax. Input-tax is defined under section 2(62) of the CGST Act as follows:—

It means 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 but does not include the tax paid under the composition levy.

It shall also include:—

(a) The integrated goods and services tax which is charged on import of goods

(b) The tax payable as per section 9(3) and (4) of the CGST Act

(c) The tax payable as per section 5(3) and (4) of the IGST Act

(d) The tax payable as per section 9(3) and (4) of the respective SGST Act

(e) The tax payable as per section 7(3) and (4) of the UTGST Act.

Example 1:
Suppose Mr. A is a registered wholesaler in Mumbai. He purchased goods worth Rs. 5,00,000 from Mumbai and paid GST @ 12%. After value addition and profit margin, Mr. A sold these goods to Mr. B (a registered dealer in Maharashtra state) for Rs. 9,00,000 and charged GST @ 12% on it. Now,

GST paid on Inward Supply GST collected on Outward Supply
CGST 6% of Rs. 5,00,000 = Rs. 30,000 6% of Rs. 9,00,000 = Rs. 54,000
SGST 6% of Rs. 5,00,000 = Rs. 30,000 6% of Rs. 9,00,000 = Rs. 54,000

It is clear that Mr. A has input tax credit of CGST and SGST for Rs. 30,000 each. Now, Mr. A will pay Rs. 24,000 each as net GST. This amount has been arrived at after deducting Rs. 30,000 already paid at the time of purchase of goods. This benefit or system of adjustment of “GST paid on inward supplies” towards “GST on outward supplies” is called as Input Tax Credit (ITC).

3. Rationale Behind ITC Under GST

The credit mechanism under the indirect tax aims to mitigate the cascading effect of duty on duties. It provides for credit of duties paid on goods or services which are used as inputs in production of output goods or provision of output services. This aim was not achieved to the fullest as various duties, taxes and cess were levied at the central and state levels and all were not adjusted against each other. With the introduction of GST, credit on goods and services is available across the entire supply chain barring a few exceptions. It may be noted that it is an auto populated feature.

Burden of Proof for claiming ITC
As per section 155 of CGST Act, 2017, where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

The various provisions related to INPUT TAX CREDIT (ITC) are given under Chapter V (Section 16-21) of the CGST Act, and CGST Rules. These provisions of ITC under CGST are also applicable to the IGST Act. Section 20 of the IGST Act has made the provisions applicable. The aspects covered under various sections are:—

Section 16: Eligibility and Conditions for taking Input tax credit
Section 17: Apportionment of credit and blocked credits
Section 18: Availability of Credits in Special Circumstances
Section 19: Taking input tax credit in respect of inputs and capital goods sent for job work.
Section 41: Utilization of ITC
Section 42: Matching, Reversal and Reclaim of ITC.

CGST RULES, 2017 RELATING TO ITC

The Chapter V of CGST Rules, 2017 contains the following rules in relation to ITC:

Rule 36: Documentary requirements & conditions for claiming ITC
Rule 37: Reversal of ITC in the case of Non-Payment of consideration
Rule 38: Claim of credit by a Banking Company or a Financial Institution
Rule 39: Procedure for distribution of ITC by Input Service Distributer (ISD)
Rule 40: Manner of claiming credit in special circumstances
Rule 41: Transfer of credit on sale, merger, etc.
Rule 42: Manner of determination of ITC in respect of inputs or input services & reversal
Rule 43: Manner of determination of ITC in respect of Capital goods & reversal thereof
Rule 44: Manner of reversal of credit under special circumstances
Rule 44A: Manner of reversal of credit of Additional Duties of Customs
Rule 45: Conditions and restrictions in respect of inputs and Capital Goods to the job worker

Utilisation of ITC

The provisions related with utilisation of ITC have been discussed in next Chapter (Payment of Taxes).

5. Eligibility for Availing ITC [Section 16(1)]

As per section 16(1), “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 business and the said amount shall be credited to the electronic credit ledger of such person.”

The analysis of above statutory provision reveals the following:

    1. Registered Person: As per Section 16(1), Input tax credit is available only to a registered person. When a registered person is supplied with goods or services or both, on which tax has been charged, he is allowed to take credit of the input tax paid. This is subject to the provisions relating to use of ITC under section 49 and the conditions & restrictions in the rules. This means, if a person is unregistered he will not be eligible to claim Input tax credit.

Exception: There is one exception wherein ITC is not available although the person is registered. This exception applies to a person who pays tax under section 10 of the CGST Act, under the compounded levy scheme. Such person cannot claim ITC in respect of inward supplies made by him. In-fact, the tax paid under Composition levy does not fall within the definition of Input tax.

    1. In the course of or in furtherance of business: The goods/services must be used or intended to be used in the course of or in furtherance of his business. However, no such credit is available in respect of inputs used for outward supply of exempted goods or services.

Explanation: The relation of inputs and input services with business can be direct or indirect. ‘Intention to use’ implies that ITC can be availed as soon as inputs or input services are received, though the same may be utilised later. However, if finally, the input goods or services are not utilised for intended purpose, ITC is disallowed, as provided in section 17(5) of CGST Act. [Provisions of section 17(5) are discussed in the ensuing pages of this Chapter in Para 10.10.] In fact, the tax paid on goods and/or services which are used or intended to be used for non-business purposes cannot be availed as credit.

Moulds and dies provided by the original equipment manufacturer (OEM) to component manufacturer on FOC basis – When not considered as being in the course or furtherance of business?
Whether moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case?
This is subject to the provisions relating to use of ITC under section 49 and the conditions & restrictions in the rules.

Moulds and dies owned by the original equipment manufacturer (OEM) which are provided to a component manufacturer (the two not being related persons or distinct persons) on free on cost (FOC) basis does not constitute a supply as there is no consideration involved.

Further, since the moulds and dies are provided on FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of ITC availed on such moulds and dies by the OEM.
However, where the contract between OEM and component manufacturer is for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the OEM will be required to reverse the credit availed on such moulds/dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business [Circular No. 47/21/2018 GST, dated 8-6-2018].
    1. Credit Ledger: The amount of ITC shall be credited to the Electronic Credit Ledger of the person entitled.
    2. Manner of Utilisation: The ITC shall be utilised in the manner specified in section 49. (Please refer Para 11.11 for detail)
    3. Rules under CGST Rules, 2017: The conditions and restrictions have been specified in Chapter V of CGST Rules, 2017 (Rule 36 to Rule 45). These rules have been mentioned under the appropriate heading throughout this chapter.

6. Conditions to be satisfied for Availing ITC [Section 16(2)]

The registered person is entitled to the credit of any input tax credit on a supply only if all the following FOUR conditions are fulfilled:

(a) Possession of Tax Invoice or Debit Note

(b) Receipt of Goods and Services

(c) Payment of tax to the Government

(d) Filing of Valid Return

NOTE: The above conditions are given in section 16(2), which starts with “Notwithstanding anything contained in this section….”. It means that it is an over-riding section. Moreover, these conditions are cumulative; therefore, they all must be satisfied in order to be eligible for availing tax credit.

(a) Possession of Invoice:

As per section 16(2)(a), 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, he is in possession of a tax invoice or debit note issued by a supplier registered under this Act.

Further section 16(2)(aa) provides that the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37.

This clause (aa) has been inserted by the Finance Act, 2021 w.e.f. 1st January, 2022.

Rule 36: Documents requirements & conditions for claiming ITC
36(1)

Documents

As per Rule 36, any of the following documents suffice the condition of possession of Invoice.

(a)   an invoice issued by the supplier of goods or services or both.

(b)   an invoice raised by the recipient in case of inward supplies from unregistered.

(c)   a debit note issued by a supplier of goods or services or both.

(d)   a bill of entry or any similar document prescribed under the Customs Act, 1962.

(e)   An Input Service Distributor invoice or Input Service Distributor credit note or any other document issued by the input service distributor for distribution of credit.

36(2) Prescribed particulars in documents
These documents must have all the particulars as specified in the provisions of Chapter VI and all relevant particulars prescribed in Rule 46 of the CGST rules such as the amount of tax charged, description of goods or services, total value of supply of goods and/or services, GSTIN of the supplier and recipient, place of supply in case of inter-State supply, etc.

The section does not specify which copy of the invoice will be the basis of taking ITC. However, Rule 48 does clarify that original copy should be kept by the recipient for the purposes of record.

36(3) If tax is paid towards Demand involving Fraud
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.
36(4) Unmatched credit for details not uploaded by supplier u/s 37(1)
The rule 36(4) was introduced w.e.f. 9-10-2019 to specify the quantum of ITC that can be claimed against the invoices/debit notes NOT furnished by the supplier. At that time the ITC in respect of invoices/debit notes, the details of which have not been furnished by the supplier in GSTR-1 was allowed up to 20% of the eligible ITC available in respect of furnished invoices/debit notes. This limit was changed to 10% w.e.f. 1-1-2020 and finally to 5% w.e.f. 1-1-2021.
Position w.e.f. 1-1-2022:
As already stated, the Finance Act, 2021 has inserted section 16(2)(aa) w.e.f. 1st January, 2022. After this notification, it was necessary to amend existing rule 36(4) because its provisions are in contradiction of the provisions of newly inserted section 16(2)(aa). Therefore, vide Notification No. 40/2021 – CT dated 29th December 2021, w.e.f. 1-1-2022, the rule 36(4) has been substituted by the following:

No input tax credit shall be availed by a registered person in respect of invoices or debit notes the details of which are required to be furnished under sub-section (1) of section 37 unless,-

   (a)   the details of such invoices or debit notes have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility; and

   (b)   the details of such invoices or debit notes have been communicated to the registered person in FORM GSTR-2B under sub-rule (7) of rule 60.

Author’s Comment:

After insertion of section 16(2)(aa) and substitution of rule 32(4), w.e.f. 1-1-2022, the ITC claims will be allowed only when the details of such invoice/debit note have been furnished by the supplier in his GSTR-1 and subsequently it appears in GSTR-2A/2B. Thus, now the recipient can no longer claim provisional ITC. In other words, the ITC claimed should be reflected in GSTR 2A/2B.

(b) Receipt of Goods or Services or both:

As per section 16(2)(b), the registered person should have received the goods or services or both. This means the ITC will not be available unless the goods are received by the registered person.

Example 2
ABC Limited has purchased goods from XYZ Limited and PQR Limited for Rs. 90,000 and Rs. 2,00,000 respectively. In respect of both the supplies, the invoice has been received. The goods were received in April 2018 (from XYZ Limited) and in May (from PQR Limited). Now, in this example the ITC is admissible on Rs. 90,000 only for the month of April 2018. The ITC as regards supplies from PQR for Rs. 2,00,000 shall not be available in April. Since the goods are received in the month of May, the ITC shall be available in May, 2018.

When goods/Services are deemed to have been received:

Statutory Provisions:

As amended by the Central GST (Amendment) Act, 2018, the Explanation to section 16(2)(b) clarifies, for the purpose of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services—

(iWhere 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;

(iiWhere the services are provided by the supplier to any person on the direction of and on account of such registered person.

Analysis of the Provisions:

The above provision is related with “Bill to ship to” model.

Bill to Ship to Model: Under this model, the goods are delivered to a third party on the direction of the customer (registered person) who purchases the goods from the supplier.

Input Tax Credit under GST

Bill to Ship to Model

The ‘Bill to Ship to’ Model supplies include two supplies:

(a) From Supplier to Customer (i.e. from Mr. A to Mr. B)

(b) From Customer to third party (i.e. From Mr. B to Mr. C)

It is clear that goods/services may be provided to a third party by the supplier on the direction of the registered person. In this case, though the registered person does not receive the goods or services, but by virtue of Explanation to section 16(2)(b) it is deemed that the registered person has received the goods/services. Accordingly, ITC will be available to the registered person, on whose direction the goods/services are provided to a third party.

Example 3 [Deemed Receipt of goods]
X of Delhi agreed to supply goods to Mr. Y of Bombay. As a part of agreement, these goods are to be delivered to Z at Ahmedabad. This is “Bill to Ship to Model” and Y shall be treated as deemed recipient and shall be eligible for the ITC. In other words, Mr. Z who is actually receiving the goods will not be eligible for ITC on such transactions.

 

Example 3A [Deemed Receipt of services]
KM Ltd. (registered person) has head office in Mumbai and registered branch offices in Delhi and Faridabad. KM Ltd. enters into a contract with ABC Ltd. for repair and maintenance of machineries installed at its branches. The invoice for the same is issued by ABC Ltd. on KM Ltd. for the repair services provided by it. In this example, although the actual services are received by the branch office and not by the head office, but by virtue of Explanation to section 16(2)(b), ITC will be available to head office i.e. KM Ltd.

(c) Payment of Tax to the Government:

As per section 16(2)(c), the third essential condition is that the tax should have actually been paid to the government on the goods or services for which ITC is being taken. This payment can be done by the supplier either by:—

(a) Making the payment through cash or

(b) through utilization of ITC.

However, when the recipient claims ITC, it is provisionally allowed to be utilized for making the payment of self-assessed tax on outward supply, before matching in the common portal. It is later on verified after filing of GSTR 3.

(d) Filing of valid Return:

As per Section 16(2)(d), the fourth essential condition is that the registered person should have furnished the return under section 39.

The return has to be filed before 20th of the month succeeding the month in which the supplies were received. This return must be furnished in Form GSTR-3 and must contain all the details of inward supplies.

Example 4 [Based on section 16(1) & (2)]
Nishant Limited is a manufacturer of Surat, Gujarat. It provides the following information in respect of various inputs purchased during the month of July 2018:

SN Particulars of Inward Supplies GST (Rs. )
(1) Goods purchased with valid tax paying invoice 18,000
(2 Goods purchased without invoice 20,000
(3) Goods purchased but not used for business purposes 7,000
(4) Goods purchased and used for supplying exempted goods and services 6,000
(5) Goods purchased from Vimal against which full payment is made by Nishant Limited to Vimal but tax has not been deposited by Vimal. 31,000
(6) Purchase of goods from PQR Limited (Invoice of PQR Limited is received in July 2018 but goods were received in the month of August, 2018. 11,000
(7) Goods imported from China in respect of which Bill of Entry is available with Nishant Limited. 6,000
(8) Goods purchased against valid invoice in respect of which tax has been deposited. 10,000
You are required to determine the amount of ITC admissible to Nishant Limited for the month of July, 2018.

Solution:

Computation of admissible ITC to Nishant Limited for the month of July, 2018

SN Particulars of Inward Supplies WN ITC (Rs. )
(1) Goods purchased with valid tax paying invoice (1) 18,000
(2) Goods purchased without invoice (1) NA
(3) Goods purchased but not used for business purposes (2) NA
(4) Goods purchased and used for supplying exempted goods and services (3) NA
(5) Goods purchased from Vimal against which full payment is made by Nishant Limited to Vimal but tax has not been deposited by Vimal. (4) NA
(6) Purchase of goods from PQR Limited (Invoice of PQR Limited is received in July 2018 but goods were received in the month of August, 2018. (5) NA
(7) Goods imported from China in respect of which Bill of Entry is available with Nishant Limited. (6) 6,000
(8) Goods purchased against valid invoice in respect of which tax has been deposited. (7) 10,000
Total admissible ITC for the month of July 2018 34,000

Working Notes:

(1)  ITC is available if and only if Nishant Limited is in possession of valid tax paying document. Therefore, Rs. 18,000 is available whereas Rs. 20,000 is not available as ITC.

(2) The ITC is not available as Nishant Limited has purchased the goods for Non-Business purpose.

(3) The goods have been used for exempted supplies; therefore, no ITC can be claimed.

(4) Since, tax has not been deposited to the credit of Government, ITC cannot be claimed.

(5) The goods are received in the month of August 2018. ITC cannot be taken in the month of July 2018.

(6) As per Rule 36(1), a bill of entry suffices the conditions of possession of invoice.

(7) ITC shall be admissible in the month of July 2018.

When Goods are received in instalments
Sometimes, the goods covered under an invoice are not received in a single consignment but are received in lots/instalments. In this case, as per the first Proviso to Section 16(2), the registered person shall be entitled to take credit upon the receipt of the last lot or instalment.

 

Example: 5
A received 500 tons of sugar from B against a tax invoice, to be delivered in instalments. The first lot of 300 tons was received on 20.1.2018 and second lot of 200 tons was received on 18th February 2018. Here, “A” can avail Input tax credit only after receipt of the final lot on 18th February.

 

Example: 5A
KRVV Limited, a registered manufacturer of Delhi entered into a contract with Varad Limited for supply of 5,000 units of a product @ Rs. 80 each (plus 18% GST) in March 2020. The product is to be delivered in lots over a period of 3 months as per the following details:
First Lot on 21-3-2020 1,000 Units
Second Lot on 16-4-2020 2,000 Units
Third Lot on 26-5-2020 2,000 Units

Varad Limited raises the invoice for the entire amount (i.e. Rs. 4,72,000) on 20-3-2020 and KRVV Limited makes the payment on 24-3-2020 but the supply is completed in May 2020. Now, in this case, though invoice has been raised and payment also made in March 2020, but recipient can take the ITC of the same only on receipt of last instalment of the product in the month of May 2020.

Restriction on availment of ITC in respect of invoices/debit notes not furnished by the suppliers in their GSTR-1 [Rule 36(4) inserted in rule 36 of the CGST Rules]

Section 16(2) of the CGST Act provides certain conditions for availing ITC wherein one of the conditions is that the taxpayer must be in possession of the tax invoice or other Tax paying document in respect of which he is claiming the ITC. Rule 36 of CGST Rules lays down the documents and other conditions basis which the registered person can claim ITC.

Reason behind Rule 36(4):

As per Circular No. 123/42/2019 GST, dated 11-11-2019, it is observed that some taxpayers take inflated or bogus ITC, even if proper tax invoices or debit notes in respect of inputs or input services are not available. To exercise control over the malpractice of availing bogus ITC by the taxpayers, rule 36(4) has been placed on availment of ITC.

With effect from 09.10.2019, rule 36(4) has been introduced in rule 36 to specify the quantum of ITC that can be claimed against the invoices/debit notes furnished and invoices/debit notes not furnished, by the supplier. As per this sub-rule, the ITC to be availed by a registered person in respect of invoices or debit notes, the details of which have not been furnished by the suppliers in GSTR-1, cannot exceed 20% of the eligible credit available in respect of invoices or debit notes the details of which have been furnished by the suppliers in GSTR-1. This limit of 20% has been reduced to 10% w.e.f. 1-1-2020 by the Government vide Notification No. 75/2019-Central Tax, dated 26th December, 2016. This limit has been further reduced from 10% to 5% w.e.f. 1-1-2021 vide Notification No. 94/2020-CT, dated 22-12-2020.

This can be further understood as under –

S. No. Case Amount of ITC to be claimed by recipient
(i) Where invoice/debit note has been furnished  by the supplier in his GSTR-1 Full ITC, if all other conditions of availing ITC are fulfilled.
(ii) Where invoice/debit note has not been furnished by supplier in his GSTR-1 From 9th October, 2019 to 31st December, 2019

20%  of the eligible ITC available in respect of the furnished invoices/debit notes. However, the ITC so claimed should not exceed the actual eligible ITC available in respect of the invoices not furnished.

From 1st January 2020 to 31st December, 2020

The limit of 10% is applicable.

From 1st January, 2021 onwards:

The limit of 5% is applicable instead of 5%

Additional Important Points:

    1. The balance ITC may be claimed by the taxpayer in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers. He can claim proportionate ITC as and when details of some invoices are uploaded by the suppliers provided that ITC on invoices, the details of which are not uploaded in GSTR-1 remains under 10% of the eligible ITC, the details of which are uploaded by the suppliers. In other words, taxpayer may avail full ITC in respect of a tax period, as and when the invoices are uploaded by the suppliers to the extent eligible.
    2. Restricted amount of ITC claimed on invoices/debit notes not uploaded by suppliers in their GSTR-1 should not exceed the actual eligible ITC available in respect of the invoices not uploaded.
    3. Invoices on which ITC is not available under any of the provisions e.g., under section 17(5), are not to be considered for calculation of 10% of the eligible credit available.
    4. Full ITC can be availed in respect of IGST paid on imports, documents issued under reverse charge credit received from ISD etc., which are outside the ambit of section 37(1).
    5. Restricted ITC (10%) is calculated on a consolidated basis on total eligible ITC from all suppliers against all supplies whose details have been uploaded by the suppliers.
Example 8.8 [Based on provision applicable from 9th Oct. 2019 to 31st Dec. 2019]
Mr. Shyam, a registered supplier, receives 100 invoices (for inward supply of goods/services) involving GST of ` 10 lakh, from various suppliers during the month of December, 2019. Compute the ITC that can be claimed by Mr. Shyam in his GSTR-3B for the month of December, 2019 to be filed by 20th January, 2020 in the following independent cases assuming that GST of ` 10 lakh is otherwise eligible for ITC:

Case I Out of 100 invoices, 80 invoices involving GST of ` 6 lakh have been furnished by the suppliers in their respective GSTR-1 filed on the prescribed due date.
Case II Out of 100 invoices, 75 invoices involving GST of ` 8.5 lakh have been furnished by the suppliers in their respective GSTR-1 filed on the prescribed due date.

Answer

Case I

ITC to be claimed by Mr. Shyam in his GSTR-3B for the month of December, 2019 to be filed by 20th January, 2020 will be computed as under-

In respect of Amount of ITC involved in the invoices (`) Amount of ITC that can be availed (`) Remarks
80 invoices furnished in GSTR-1 6 lakh 6 lakh In respect of invoices furnished by the suppliers in their GSTR-1, full ITC can be availed.
20 invoices not furnished  in GSTR-1 4 lakh 1.2 lakh The ITC in respect of invoices not furnished has to be restricted to 20% of eligible ITC in respect of invoices furnished in GSTR-1. Thus, in respect of 20 invoices not furnished in GSTR-1, the ITC has been restricted to ` 1.2 lakh [20% of ` 6 Lakh].
Total 10 lakh 7.2 lakh ITC available as per Rule 36(4)

Case II

ITC to be claimed by Mr. Shyam in his GSTR-3B for the month of December, 2019 to be filed by 20th January, 2020 will be computed as under-

In respect of Amount of ITC involved in the invoices (`) Amount of ITC that can be availed (`) Remarks
75  invoices furnished in GSTR-1 8.5 lakh 8.5 lakh In respect of invoices furnished by the suppliers in their GSTR-1, full ITC can be availed
25 invoices not furnished in GSTR-1 1.5 lakh 1.5 lakh The ITC in respect of invoices not furnished has to be restricted to 20% of eligible ITC in respect of invoices furnished in GSTR-1. However, since in this case, the actual ITC (` 1.5 lakh) in respect of 25 invoices not uploaded in GSTR-1 does not exceed 20% of the eligible ITC in respect of invoices furnished in GSTR-1 [` 1.7 Lakh being 20% of ` 8.5 Lakh], actual amount of ITC can be availed.
Total 10 Lakh 10 Lakh ITC available as per Rule 36(4)

 

Example 8.9 [Based on provisions applicable w.e.f. 1st Jan. 2021]
Mr. Sumit, a registered supplier, receives 50 invoices (for inward supply of goods/services) involving GST of ` 6 lakh, from various suppliers during the month of January, 2020. Consider the following independent cases:

Case Furnishing of invoices by suppliers in their GSTR-1
Yes No
No. of Invoices Corresponding ITC No. of Invoices Corresponding ITC
I 20 ` 2,60,000 30 ` 3,40,000
II 30 ` 4,00,000 20 ` 2,00,000
III 45 ` 5,60,000 5 ` 40,000
Compute the ITC that can be claimed by Mr. Sumit in his GSTR-3B for the month of January 2021 to be filed by 20th February, 2021 in all the above cases.

Answer:

Particulars Case I Case II Case III
Eligible ITC as per books (A) 6,00,000 6,00,000 6,00,000
Eligible ITC regarding uploaded invoices (i.e. Furnished) (B) 2,60,000 4,00,000 5,60,000
5% of ITC of furnished invoices (C) 13,000 20,000 28,000
ITC regarding invoices not furnished (D) 3,40,000 2,00,000 40,000
Eligible ITC for invoices not furnished as per Rule 36(4) as amended w.e.f. 1-1-2021 [Lower of (C) or (D)] (E) 13,000 20,000 28,000
Total Eligible ITC after amended Rule 36(4) [(B) + (E)] (F) 2,73,000 4,20,000 5,88,000
ITC restricted as per amended Rule 36(4) [(D) – (E)] (G) 3,27,000 1,80,000 12,000

Note: W.e.f. 01.01.2021, a new rule 86B has been inserted in the CGST Rules to restrict the amount available in electronic credit ledger which a registered person can use to discharge his output tax liability to 99% of such tax liability in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds Rs. 50 lakh.

7. Reversal of ITC in case of Non-Payment of Consideration

The following are the relevant provisions given under CGST Act, 2017 and CGST Rules, 2017:

(1)  ITC availed to be paid along with Interest [Second Proviso to Section 16(2)]: Where a recipient fails to pay to the supplier of goods or services or both, the amount towards the value of supply along with tax payable thereon, within 180 days from the date of issue of invoice by the supplier, an amount equal to ITC availed by the recipient shall be added to his output tax liability, along with interest thereon, in the manner as may be prescribed.

Related provisions as prescribed under Rule 37 of CGST Rules, 2017
As per Rule 37(1), a registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to section 16(2), shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2# for the month immediately following the period of 180 days from the date of the issue of the invoice:

When Supply is made without consideration: The value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

Deemed Receipt: Any amount, which the supplier was liable to pay, but has been paid by recipient is added in the value of Taxable Supply as per section 15(2)(b). The Notification No. 26/2018-CT (dated 13-06-2018) provides that it shall be deemed to have been paid for the purpose of second proviso to section 16(2).

As per Rule 37(2), the amount of ITC availed [referred to in rule 37(1)] shall be added to the output tax liability of the registered person for the month in which the details are furnished.

Rule 37(3) further provides that such person shall be liable to pay @ 18% p.a. for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, is paid.

 

Example 8: [Proportionate reversal of ITC]
Mr. Sanskar received a tax invoice on 12.08.2017 of Rs. 4,00,000 on which IGST of Rs. 72,000 was payable, and he availed Input tax credit in the return for the month of August 2017 (filed in the month of September 2017). The part payment of Rs. 3,54,000 was made on 28th December, 2017 and a balance of Rs. 1,18,000 inclusive of tax was pending. As per second proviso to section 16(2), the payment should be made within 180 days from the date of invoice. This period of 180 days expires on 8th of February, 2018. Since the recipient has not made the payment, he will have to furnish the details in GSTR 2 for the month of February (to be filed in the month of March, 2018) and pay the amount of proportionate ITC availed. Thus, one fourth of Rs. 72,000 (i.e. Rs. 18,000) along with interest @ 18% will be added to the outward tax liability. [Please refer example 10.7 for computation of interest in case of reversal of ITC.]

(2)  Re-Entitlement when 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. In case part payment has been made, proportionate credit would be allowed.

Related provisions as prescribed under Rule 37(4) of CGST Rules, 2017
The time limit of availing credit as specified in section 16(4) shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter that had been reversed earlier.

(3)  Exceptions to the Limitation Period of 180 days: The condition of payment of value of supply plus tax within 180 days does not apply in the following cases:

(a)  The supplies on which tax is payable under Reverse Charge.

(b)  Deemed supplies without consideration.

(c)  Additions made to the value of supplies on account of suppliers liability, in relation to such supplies, being incurred by the recipient of the supply.

The value of supply is deemed to have been paid, in situations given in (b) and (c) above.

Example 9: [Comprehensive example on reversal of ITC due to non-payment]
M/s Saroj Traders is a registered dealer in GST. The firm deals in taxable goods covered under forward charge. It has made the following inward supplies from five different wholesalers.

Supplier Date of issue of invoice Date of availing credit by recipient ITC availed by the recipient (Rs.) Date of payment by recipient
A 12-11-2017 15-12-2017 18,250 17-08-2018
B 14-08-2017 15-09-2017 26,064 11-04-2018
C 17-10-2017 15-11-2017 29,000 08-02-2018
D 08-12-2017 15-01-2018 54,750 24-07-2018
E 10-01-2018 15-02-2018 16,000 10-05-2018

You are required to answer the following:

   (a)   What is the date up to which payment should have been made by the recipient so that the reversal of ITC is not attracted as per the second proviso to section 16?

   (b)   Also calculate the amount of ITC that shall be added towards the output tax liability of M/s Saroj Traders together with Interest.

Solution:
   (a)   Determination of date up to which payment should be made:

          As per second proviso to section 16, the payment should be made by the recipient within 180 days from the date of invoice. The following table shows the determination of the date, on which 180 days expires.

Working showing the calculation of 180 days from the date of invoice. Last Date up to which payment should be made
Format used is No. of days (Name of Month)
A 18 (Nov.) + 31 (Dec.) + 31 (Jan.) + 28 (Feb.) + 31 (Mar.) + 30 (April) + 11 (May) 11-5-2018
B 17 (Aug.) + 30 (Sep.) + 31 (Oct.) + 30 (Nov.) + 31 (Dec.) + 31 (Jan.) + 10 (Feb.) 10-2-2018
C 14 (Oct.) + 30 (Nov.) + 31 (Dec.) + 31 (Jan.) + 28 (Feb.) + 31 (Mar.) +15 (Apr.) 15-4-2018
D 23(Dec.) +31(Jan.) +28 (Feb.) +31(Mar.) +30 (April) +31(May) + 6 (June) 06-6-2018
E 21(Jan.) +28 (Feb.) +31(Mar.) +30 (April) +31(May) +30 (June) + 9 (July) 09-7-2018
          Reversal of ITC (Applicability of Second Proviso to section 16)

Supplier Date on which 180 days expires Date of payment to supplier Whether above Proviso attracts
A 11-5-2018 17-08-2018 Yes
B 10-2-2018 11-04-2018 Yes
C 15-4-2018 08-02-2018 No
D 06-6-2018 24-07-2018 Yes
E 09-7-2018 10-05-2018 No

          It is clear that the reversal of ITC is not required in case of supplies made from “C” and “E” as the payment has been made before the expiry of 180 days from the date of issue of invoice.

(b)   Amount to be added in Output Tax Liability

          As per Rule 37(2) of CGST Rules, 2017, the registered person shall be liable to pay interest @ 18% p.a. for the period starting from the date of availing credit on such supplies till the date when the amount is added to the output tax liability.

          Table showing the amount to be added in liability (Reversal of ITC + Interest)

Supplier ITC Availed Interest @ 18% p.a. from the date of availing credit till the date it is added to Output Tax Liability (Refer W. Note 1) Total Amount
A 18,250 18,250 × 18% × 182/365 = Rs. 1,638 Rs. 19,888
B 26,064 26,064 × 18% × 181/365 = Rs. 2,326 Rs. 28,390
D 54,750 54,750 × 18% × 181/365 = Rs. 4,887 Rs. 59,637

Working Note 1:

The number of days for interest calculation has been determined in the following manner:

Determination of the period starting from the date of availing credit till the date when the amount is added to the output tax liability Total No. of days
Format used is No. of days (Name of Month)
A 16(Dec.) +31(Jan.) +28 (Feb.) +31(Mar.) +30 (April) +31(May) + 15 (June) 182
B 15 (Sep.) + 31 (Oct.) + 30 (Nov.) + 31 (Dec.) + 31 (Jan.) + 28 (Feb.)+15 (Mar.) 181
D 16(Jan.) +28 (Feb.) +31(Mar.) +30 (April) +31(May) + 30 (June) + 15 (July) 181

8. No ITC if Depreciation is claimed on Tax Component [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. It is clear that in respect of tax paid on such items, double benefit cannot be claimed under GST laws and Income-tax Act, 1961 simultaneously. Therefore, the assessee has the option to either claim depreciation on tax component of capital goods by capitalizing the capital goods inclusive of tax in the books of account or to claim ITC. A person is not allowed to take the dual benefit under two different laws simultaneously.

Example 10.12 [No ITC if Depreciation is claimed on tax component]
Z limited purchased a machine for Rs. 15,00,000 plus GST @ 18%. The machine has been capitalized in the books at Rs. 17,70,000 (i.e. inclusive of GST paid). Accordingly, the depreciation was claimed for Rs. 2,65,500 (i.e. 15% of Rs. 17,70,000) under the Income-tax Act. Since depreciation is claimed on tax (GST) component of cost of machinery, the ITC shall not be allowed.

9. Time Limit for availing the Input Tax Credit [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:

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 debit note pertains.

or

Furnishing of the relevant annual return.

Whichever Is earlier

Note: The words strikethrough have been omitted by Finance Act, 2020. Due to such amendment, now the actual date of debit note shall be taken into account rather than the date of issue of invoice relating to debit note. (Refer point 1 given after example 10.10)

As per section 39(1), due date of filing of return for every calendar month is 20 days from the end of the calendar month. It means the return for the month of September is to be furnished by 20th October.
As per section 44(1), annual return for every financial year is to be furnished on or before the 31st December following the end of such financial year.

It is clear that return for the month of September is to be filed by 20th October and Annual return of a financial year is to be filed by 31st December of the succeeding financial year. So, the upper time limit for taking ITC is 20th October of the next financial year or the actual date of filing annual return, whichever is earlier. Hence, the ITC on invoices which pertains to a particular financial year must be availed before the earlier of the following:

Earlier of 20th October of the next financial year
Date of filing Annual Return

 

Example 10:
The date of invoice for supply of goods is 24-10-2017 for which ITC is available. Determine the time limit for availing ITC if the annual return has been furnished:

(a)   On the last date (31-12-2018)

(b)   On 5-10-2018

Solution:

The time limit for taking ITC in respect of invoice dated 24-10-2017 shall be the earlier of the following:

Particulars CASE I CASE II
Date of filing of return 31-12-2018 5-10-2018
Due Date of filing return for the month of September 2018 20-10-2018 20-10-2018
Last date by which ITC can be claimed (Earlier of the above two dates) 20-10-2018 5-10-2018

The following additional points may be noted as regards the time limits for claiming ITC.

 

Example 11:
Ramesh purchased goods worth Rs. 4,00,000 (exclusive of CGST and SGST @ 9% each) under the cover of invoice dated 8-12-2017. The payment was made to the supplier on the same date. The claim for ITC on this transaction was not taken by Ramesh till 3-6-2018. Ramesh, now wants to avail ITC. The annual return for 2017-2018 has been filed by Ramesh on 19-8-2018. Do you think ITC is available on 3-6-2018.

Solution: In the given case, the ITC can be taken on earlier of the following dates:

(a)   20-10-2018 (Being the due date of furnishing return of month of September, 2018) or

(b)   19-8-2018 (Being the date of furnishing of Annual Return by Ramesh).

Therefore, Ramesh can avail credit of GST on 3-6-2018.

Additional points as regards the time limits for claiming ITC

The following additional points may be noted as regards the time limit for claiming ITC:

  1. Relevant Date for Debit Note: After the amendment made by Finance Act, 2020 w.e.f. 1-1-2021, the date of issue of invoice relating to debit note is of no relevance for determining time limit to take ITC of GST charged on Debit Note.
Example 12
Kamal purchased a special machine from ABC Ltd. in March 2021 under Invoice dated 5th March 2021 for Rs. 1,00,000 plus GST @18%. After delivery, ABC Ltd. undertook trial runs as per the requirements of Kamal (recipient). The amount chargeable for the post-delivery activities was raised by ABC Ltd. through debit note dated 12th April 2021. It is given that Kamal filed its annual returns for FYs 2020-21 and 2021-22 on 18-12-2021 and 16-11-2020.

Time limit to take ITC of GST on Invoice:

It shall be 20th October, 2021 (being earlier of date of filing annual return for 2020-21 or due date for filing return for September 2021 month.)

Time limit to take ITC of GST on Debit Note:

After the amendment made by Finance Act, 2020, w.e.f. 1-1-2021, the date of issue of invoice relating to debit note is of no relevance, rather the actual date of debit note is taken into account. Thus, the time limit to take ITC of GST charged on debit note shall be 20th October, 2022 (being earlier of date of filing annual return for 2021-22 or due date for filing return for September 2022 month.)

  1. No time limit for reclaiming ITC reversed due to non-payment within 180 days:

As per rule 37 the time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, which has been reversed earlier, in accordance with the provisions of the Act. Therefore, the amount so added to the output tax liability can again be re-claimed as ITC, once the payment is made. If part payment is made after the expiry of 180 days and after the ITC availed has been added to output liability, the proportionate ITC can be reclaimed without any limitation of time.

  1. One Year from the date of Invoice in special cases:

The Section 18(2) provides that in special circumstances, like new registration or voluntary registration, the registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply. For Example: Subhash enterprises obtained voluntary registration on 31-8-2018. He had purchased inputs for furtherance of business invoice dated 14-8-2017. The input tax on the same was Rs. 30,000. Although Section 16(4) allows to claim ITC by 20th October 2018 (assuming annual return for the financial year 2017-18 is not yet filed), but if it is read together with section 18(2), the ITC cannot be claimed beyond 14-8-2018 i.e. one year from the date of invoice.

10. Apportionment of Input Tax Credit

As regards the apportionment of ITC, the provisions are contained in section 17 of CGST Act, 2017, which are as follows:

    (1Where goods or services are used partly for business purposes and partly for other purposes [Section 17(1)]

    (2Where goods or services are used partly for effecting taxable supply including zero rated supply and partly for exempted supply [Section 17(2)]

    (3Items included in exempted supplies [Section 17(3)

    (4Optional method for Banks for taking ITC [Section 17(4)]

    (5Blocked Credits [Section 17(5)]

The following rules under CGST Rules, 2017 prescribe the procedure for claiming ITC.

    (1)  ITC by a banking company or a financial institution [Rule 38]

    (2)  Manner of determination of ITC in respect of Inputs or input services and reversal [Rule 42]

    (3)  Manner of determination of ITC in respect of Capital Goods and Reversal [Rule 43]

The provisions have been discussed as under:-

10.1 Where goods or services are used partly for business purposes and partly for other purposes [Section 17(1)]

The registered person may use the input supplies either for business or non-business purposes. As per Section 17(1), “Where the goods and/or services are used by the registered person partly for the purposes 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.” This means that no ITC will be available in respect of those inputs which are used for non-business purposes.

For Example: Suman owns a Business entity and deals in textiles. She has purchased goods for the business, in respect of which ITC admissible is Rs. 42,500. If 15% of such goods have been used by her for personal purposes, then ITC will not be available in relation to such goods which are used for non-business purposes. Therefore, as per section 17(1), Suman shall be entitled to take credit of Rs. 36,125 (calculated as 85% of Rs. 42,500).

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

2 thoughts on “GST Input Tax Credit – Definitions and Conditions for Claiming GST ITC”

  1. I have purchased some goods from ABC and I have availed ITC on that Invoice, Now I will not pay any amount to ABC for that Invoice and I want to Keep invoice as credit, How long can I put this Invoice as credit and is there any effect in ITC,

    1. The GST provisions provide reversal of ITC where the recipient fails to make payment of the value of supply along with tax payable thereon within 180 days from the date of issue of invoice by the supplier. Such amount shall be added to the output tax liability of the supplier along with the interest thereon. Therefore, you can keep this credit maximum up to the above timelines. Post the above period, you would be required to reverse the credit along with interest.

Leave a Reply

Your email address will not be published. Required fields are marked *

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied