Input Tax Credit under GST – Brief Concept

Abdulla Pettiwala

Indirect tax is in effect a tax a person pays on purchase of goods or availment on services for consumption as opposed to tax on income. The challenge for the regulator lies in avoiding the cascading effect of taxes from the first point to the final point of tax in the hands of the consumer. 

Multiple taxes often result in cascading effect of taxation since it is difficult to set off across different statutes. Case in point being Excise levy on manufacturing, Municipal / Local levies on movement of goods from one jurisdiction to another, Sales tax / VAT on sale of goods within a state, Central Sales tax on sale of goods across state lines, Service tax on services with each of these laws containing some credit mechanism to avoid a cascading tax impact, though charge.

The advent of Goods and Service Tax Law subsumed these laws into a unified code to levy GST on supply of goods and/or services with a credit mechanism, to mitigate the cascading effect of tax in hands of the final consumer. Codified under Chapter V (Sec 16 to 22) of the CGST Act and Chapter V (Rule 36 to 45) of the CGST Rules.

GST is a levy on supply of all Goods and Services other than those exempt or excluded from the scope of the Act. India having its complexity of being a union of states and its diversity has many exemptions and exclusions from levy of tax depending on the region or class of persons / business.

The credit of taxes on the inputs (aka Input Tax Credit) utilised in the course of business or the furtherance of a business can flow seamlessly provided the output is fully taxable and the rate of taxes on the output are equal to or higher than those on inputs.

The elaborate codification of law on Input Tax Credit is required to ensure that credit on inputs without corresponding taxable output is avoided. This is required to ensure that the principle of tax on value addition without cascading effect is maintained to benefit consumer and there is no loss of revenue for the government.

Before we dive into the what and how of the availability or otherwise of the credit mechanisms, it would be pertinent to discuss the difference between “claim”, “availment”, “utilisation” and “reversal” of Input tax credit, to have a better understanding of ITC.

Claim is the entitlement, availment is the credit in the electronic credit ledger, utilisation is the actual reduction in the tax payment by debit in the electronic credit ledger and reversal is the debit in the electronic credit ledger without reduction of output tax.

Eligibility and Conditions for availment [Sec 16 rw Rule 36 and 37]

The Eligibility and the conditions for availment of ITC is governed by Sec 16 read with Rule 36 and 37.

Who can claim –

A person registered under the GST law.

What can be claimed –

Input tax charged by the supplier of goods and / or services.

On What to claim –

Inputs used in the course of business OR for furtherance of business.

How to claim –

Credit to the electronic credit ledger by filing the required returns on the GSTN Portal.

When to claim (conditions for availment) –

1. Possession of a valid document (any oneof the following)
   1. Invoice issued by supplier u/s 31
   1. Invoice issued u/s 31(3)(f), subject to payment of tax
   1. Debit note issued by the supplier u/s 34
   1. BoE or similar document under Customs law basis which IGST has been paid
   1. ISD invoice/ credit note or documents issued under Rue 54(1)
2. The goods and / or services have been received by him or by person authorised by him. Where goods are to be received in instalments, then on receipt of the last instalment.
3. Returns as required u/s 39 have been filed by him.

The documents mentioned in point 1 above must contain details of –

1. Amount of tax charged
   1. Description of goods and services
   1. Total value of supply
   1. GSTIN of supplier and recipient
   1. Place of supply in case of inter-state supply

ITC would not be available on –

The depreciation claimed on the tax component of the cost of capital goods and plant and machinery under the Income Tax Act.

ITC should not be availed on –

The tax paid in pursuance of any order where demand has been confirmed on account of any fraud, wilful misstatement or suppression of facts.

ITC to be added in the output tax liability –

Where the ITC has been availed and the value of supply along with tax is not paid to the vendor within 180 days.

Interest u/s 50(1) would be payable from the date of availment of ITC till date when added to the output tax liability.

The value of supplies made under Schedule I and value of supply u/s 15(2)(b) shall be deemed to have been paid for the purpose of Sec 16(2)

Time limit for claim of ITC –

ITC for all invoices in a financial year is to be claimed within six months of the end of the financial year or before filing of the annual return, whichever is earlier.

The time limit for availment of credit will not apply for re-availment of ITC on payment to vendor which was earlier reversed due to payment of vendor beyond 180 days.