Input Tax Credit under GST

Introduction:

As we all know that GST is going to be the biggest tax reform in the country since independence.

A much highlighted characteristic of GST is the seamless credit flow across the nation, due to which a dealer will not have to worry about the source from where he will purchase the inward supplies or the destination where he will be forwarding his supplies.

As per the latest news, the most realistic date for GST rollout is going to be 01/07/2017, and if it is successfully implemented, it will reduce the cascading effect to almost zero.

Eligibility for Input Tax Credit:

A registered taxable person can, subject to conditions and restrictions as may be prescribed, avail credit of input tax paid by him on any inward supply received, to be used or intended to be used in business.

No credit will be allowed to taxable person unless-

  • he has a tax invoice or debit note;
  • he has received the goods and/or services;
  • the tax charged for that supply has actually been paid to appropriate government and
  • he has furnished the return

The credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto shall not exceed-

  1. one-third of total input tax in the financial year in which the said goods are received,
  2. two-third of the total input tax, including the credit availed in the first financial year, in the financial year immediately succeeding the years referred to in clause (a) in which said goods are received, and
  3. the balance of the amount of credit in any subsequent financial year.

Where the goods against a single invoice are received in lots or installments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or installment.

Where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in the manner as may be prescribed.

In case of purchase of capital goods, a taxable person can either claim depreciation or input tax credit for the tax paid on purchase, simultaneously both are not possible as it will lead to double benefit.

If the credit in respect of any invoice is not availed till filing of return for September month of next year or filing of annual return, whichever is earlier, then credit shall lapse then and there itself and will not be allowed in any case.

Apportionment of credits:

Where the inward supplies are used by the registered taxable person partly for the purpose of any business and partly for any other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Where the inward supplies are used by the registered taxable person partly for effecting taxable supplies including taxable supplies zero-rated supplies and partly for effecting exempted supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the aforementioned provisions, or avail of, every month, an amount equal to 50% of the eligible input tax credit on inputs, capital goods and input services in that month. The option once exercised shall remain valid for balance of the year.

Negative list of credits:

Input tax credit shall not be available in respect of following:

a. motor vehicles and other conveyances except when they are used

  1. for making the following taxable supplies, namely
    • further supply of such vehicles or conveyances; or
    • transportation of passengers; or
    • imparting training on driving, flying, navigating such vehicles;
  2. for transportation of goods.  

b. supply of goods and services, namely,

  1. food and beverages, outdoor catering etc.
  2. membership of a club, health and fitness centre,
  3. rent-a-cab, life insurance and health insurance,
  4. travel benefits extended to employees on vacation

c. works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract;

d. goods or services received by a taxable person for construction of immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business.

Availability of credit in special circumstances:

A person who has applied for registration within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of GST law.

A person who takes voluntary registration shall be entitled to take credit of input tax in respect of inputs held in stock on the day immediately preceding the date of grant of registration.

Where any registered taxable person ceases to pay tax under composition scheme, he shall be entitled to take credit of input tax in respect of inputs held in stock and on capital goods on the day immediately preceding the date from which he ceases to pay tax under composition scheme.

Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable.

Input tax credit in respect of inputs and capital goods sent for job work:

A principal can avail credit in respect of inputs and capital goods which have been sent to job worker. It will be possible even in case these are sent directly to job worker without receiving these on the place of principal.

If inputs or capital goods are not received back by principal after completion of job work or are not supplied from place of business of job worker within 1 year (3 years for capital goods) from the date of sending these, it shall be deemed that inputs or capital goods had been supplied by the principal to job work on the date when these were sent out. The condition for receiving back is not applicable on moulds, dies, jigs, fixtures, tools etc.

Manner and conditions of credit distribution by Input Service Distributor:

Where the Input Service Distributor and the recipient of credit are located in different states, credit can be distributed in following manner-

  • CGST as CGST;
  • IGST as IGST or CGST;
  • SGST as SGST or IGST.

Where the Input Service Distributor and the recipient of credit are located in same state, credit can be distributed in following manner-

  • CGST as CGST or IGST;
  • SGST as SGST or IGST

The following conditions should be fulfilled for credit distribution-

  • credit should be distributed against a prescribed document;
  • amount distributed as credit shall not exceed amount available for distribution;
  • credit of input service for a particular recipient shall be distributed to him only;
  • in case, more than one recipient are availing services, credit will be distributed to only those recipients to whom the input service is attributable and such distribution shall be pro rata on basis of the turnover in a state of such recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period.

Manner of recovery of credit:

When an Input Service Distributor distributes credit in excess of the credit it is eligible to distribute, the excess credit distributed shall be recovered from the recipients along with interest.

When credit has been availed wrongly, same shall be recovered from registered taxable person in accordance with GST law.

Conclusion:

It can be clearly figured out that the credit regime under GST will be much simpler as of now, when there are number of taxes and separate bucket of credits form them.

The credit which will be carried forward in return for immediately preceding period before appointed day can be utilized to pay output tax under GST.

In GST, credit will be allowed for almost each penny of tax paid on inward supplies.

At the end, it can be said that the result will be abolition of cascading effect and will ensure seamless flow of credit, due to which India will be converted into a common national market.

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CA Diwakar Jha 
on 17 February 2017
Published in GST
Views : 7219
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