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Input Tax Credit in GST

Goods and services tax (GST) is likely to be introduced from 1 July 2017. ‘Seamless credit’ is being emphasized by government and industry spokespersons alike as one of the most attractive features of this new system of indirect taxation. This essay looks at the basic framework of input tax credit in GST – what can be taken as credit, and how, what cannot be taken as credit, and how the credit can be used. (Transitional provisions, job work provisions, zero-rating and input service distributor are not covered here.)

Three legislative pillars of GST

The GST architecture is based on three pillars:

(i) the Central GST Act 2017 (CGST Act), which has been passed by Parliament and received the assent of the President and will come into force when notified;
(ii) the (name of state) GST Act, of which a model has been approved and has to be passed by each state: so far, Telangana and Bihar have passed it; and

(ii) the Integrated GST Act 2017 (IGST Act), which has been passed by Parliament and received the assent of the President and will come into force when notified.

The discussion here is based mainly on the provisions of the CGST Act, unless specified otherwise. The state GST Acts have identical provisions on input tax credit. The Union Territory GST Act 2017 is applicable to union territories: it is a brief enactment, and as per section 2(10) thereof, definitions in the CGST Act will apply to the UTGST Act.

Important definitions

The four important definitions for the purpose of input tax credit are as follows.

  1. “Input” is defined in section 2(59) of the CGST Act as “any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.”
  2. “Capital goods” are defined in section 2(19) as “goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.”
  3. “Input service” is defined in section 2(60) as “any service used or intended to be used by a supplier in the course or furtherance of business.”
  4. “Input tax” is defined in section 2(62), in relation to a registered person, as “the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes–

    (a) the integrated goods and services tax charged on import of goods;
    (b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
    (c) the tax payable under the provisions of sub-section (3) and (4) of section 5 of the Integrated Goods and Services Act;
    (d) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 9 of the respective State Goods and Services Act; or
    (e) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 7 of the Union Territory Goods and Services Act, but does not include the tax paid under the composition levy.”

The definitions contain some noteworthy features.

  1. The current artificial definition of ‘capital goods’ in the Cenvat Credit Rules 2004 is discarded in the GST Acts. In GST, ‘capital goods’ refers to whatever is capitalised in the books of accounts. (Of course, it also needs to be used in business, and must not be on the negative list for input tax credit.) This does away with many problems with one stroke, because the present mismatch in the common meaning and the definition in the Cenvat Credit Rules has been leading to needless litigation
  2. Inputs will be all goods other than capital goods, used in the course or furtherance of business; similar is the case with input services, which are all services used in the course or furtherance of business.
  3. Input tax, under all the enactments, covers taxes paid under the central, state and union territory acts as well as the integrated tax.

Conditions for taking Input Tax Credit

The conditions for taking Input Tax Credit are as follows, as per section 16:

  1. GST Registration
  2. Tax paying document (invoice or debit note);
  3. Receipt of the goods /services (-this includes delivery to another person on the instructions of the person taking the credit);
  4. If the goods covered by a single invoice are received in lots or installments, the credit is to be taken only when the last lot or consignment is received;
  5. Tax must be paid by the supplier on the Goods / Services;
  6. The person taking credit must have filed his monthly return;
  7. Payment against the invoice must be made within 180 days (if not, the credit must be paid back with interest);
  8. The credit must be taken before the annual return is filed for the year, or before the return for September of the next FY is filed, whichever is earlier;
  9. In the case of capital goods, benefit of depreciation on the tax component must not be claimed in income-tax;
  10. The input / input service must be used for business on which GST is paid;

Restrictions on Credit

The main restrictions on credit are (section 16 of the CGST Act) :

  1. Use of the input /service / capital goods for taxable business: if it is solely used for non-business purposes or for exempt outward supply, the credit is not available and will not be credited to the electronic ledger.
  2. If the inward supply is used in common for non-business as well as business use, or for taxable /zero-rated supply as well as exempt supply, the credit has to be taken proportionately, for the portion used in taxable business only, in the manner prescribed in the Rules: the manner is roughly similar to the current one in the Cenvat Credit Rules, Rule 6(3B);
  3. Banking and financial institutions including non-banking financial companies, have the option of restricting their input tax credit to fifty per cent of the inward tax, instead of following the formula for apportionment of credit.
  4. A non-resident Indian taxable person is not allowed to take credit except of IGST on imported goods.
  5. There is a negative list of services on which input tax credit is not available.

No phased taking of credit on capital goods

It may be noted from the list of restrictions above that the current deferral of part of the credit on capital goods will end with GST. Under GST, the full credit of tax paid on capital goods will be available at the outset.

Negative list for Input Tax Credit

Under all the GST Acts / Bills, the negative list on which input tax credit is not available is as follows [section 16(5) of the CGST Act]:

  1. Motor vehicles and other conveyances.
    • Exceptions to this: such vehicles / conveyances as are –

      • Resold
      • Used for transporting passengers
      • Used in training in driving, flying or navigating such vehicles / conveyances
      • Used for transporting goods.
  2. The following goods and /or services –
    • Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery,
    • Except when used for making an outward supply of goods and /or services of the same category or as an element of a taxable composite or mixed supply
  3. Membership of a club, health and fitness centre;
  4. Rent-a-cab, life insurance and health insurance
    • Except when notified by the government as obligatory for an employer to provide for his employees, and
    • Except when used for making an outward supply of goods and /or services of the same category or as an element of a taxable composite or mixed supply;
  5. Travel benefits to employees on vacation, like leave travel or home town travel;
  6. Works contract services for construction of immovable property other than plant and machinery –
    • Except when it is an input service for further supply of works contract service
  7. Goods and /or services received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account even if such goods and / or services are used in the course of or furtherance of business;
  8. Goods and / or services on which tax has been paid under the composition levy;
  9. Goods and / or services used for personal consumption
  10. Goods that are lost, stolen, destroyed, written off or given away as free gifts or samples;
  11. Tax paid upon investigation or adjudication;
  12. Tax on inward supplies used for telecommunication towers, and for pipelines laid outside the factory;

How to take Credit

Input tax credit is first taken provisionally and reported in the GSTR-2, filed by the 15th of the next month. This requires invoice-level reporting of details. The information in the GSTR-2 will be verified by the system with the GSTR-1 (return of outward supplies and tax paid) of the supplier, which is filed by the 10th of each month for the previous month. Mismatches will be reconciled and final GSTR-3 return for the month will be filed by the 20th of the succeeding month

If there is an unreconciled mismatch, that is, the putative supplier does not upload details of tax payment on the invoice on which the recipient has taken credit, the credit taken gets added to the tax payable on outward supply by the said recipient. Interest will also be payable

(Source: draft Rules on Input Tax Credit)

How to use the Credit

The credit amount as validated by the matching process described above will be maintained in the cloud by the GSTN network, in the form of the electronic credit ledger for that registered person. The electronic ledger will maintain the CGST, SGST and IGST separately. The registered person can access his electronic credit ledger to make payment of tax on outward supplies. He must use each category of tax first towards payment of tax under that same category, that is CGST for payment of CGST, SGST for payment of SGST, and IGST for payment of IGST. Thereafter, CGST if available can be used for payment of IGST, SGST if available can be used for payment of IGST, and IGST if available can be used for payment of CGST and then SGST.

SGST will never be used for payment of CGST. CGST will never be used for payment of SGST. To this extent a bow is made towards the federal system enshrined in the Constitution

IGST is the tax payable on inter-state supply of goods and / or services. It is the sum of the rates of CGST and SGST. As seen above, it can be paid either out of existing credit of IGST (earned on some inward inter-state supply) or can be paid out of credit of CGST and, if not enough CGST credit is available, out of SGST. This is the crucial mechanism by which inter-state credit is made available. Naturally, when tax paid in state ‘A’ is used to reduce the tax payable in cash in state ‘B’, as will happen with this credit system, state ‘B’ will suffer corresponding loss of revenue. This loss will be compensated by transfer of funds by the union government. A cess is proposed to be levied to provide funds for this. The cess will be levied under section 8 of the GST (Compensation to States) Act 2017.

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Ms. Radha Arun
Consultants to Udyog Software (India) Ltd.
radha.arjuni@gmail.com

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