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Early morning walk gives us Pleasant day and GST would give us Prosperous life. GST aims to increase our revenues by being a destination based tax thus eliminating tax-on-tax.

Input-Tax-Credit (ITC) is Our Cash account of GST which needs very clear understanding. Priority could be given to understand ITC, Place & Time of Supply and Transition provisions in the effort to gain benefits of GST.

Most of tax payers, under earlier State laws like VAT or Central Laws like Central Excise or Service Tax, must have already been registered with GST by now. They must have discovered how easy, convenient and efficient GST is provided we align our systems processes and records with GSTINL (Electronic records).  

Want to reduce costs? Understand ITC. "Input Tax (ITC) = IGST + CGST + SGST + Reverse-charge - Composition levy" charged on any supply of goods or services to Registered taxable person (RTP). RTP can use ITC to pay his Output tax on his outward supply of taxable goods.

RTP can take Credit of input tax charged on any supply of Goods or Services to him which are used or intended to be used in the course or furtherance of his Business. Intended and Furtherance are new and wider terms.

Goods mean, all movable property including those capitalised and actionable claims. Services means, anything other than goods.

Business has a wide definition including - any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit. Business specifically includes supply or acquisition of capital assets, including goods and service to build capital asset (except buildings). Even one-time activity of these would come under GST as "Casual taxable person". 

All RTP's, including RTP's making zero-rated supplies (e.g. exporters), can take credit of ITC, except RTP's

  • Availing composition scheme
  • Making exempt or non-taxable supplies (medical practitioner)
  • Agriculturist

Credit balances in earlier bank a/c's to be transferred. Cenvat & VAT return filed before appointed date are very critical as Cenvat & VAT credit in same is to be taken forward into GST. While filing last Cenvat & VAT returns we need to cross-check with Accounts and Physical stock to ensure all Credits ELIGIBLE under CENVAT, VAT and GST are recorded in Cenvat return. All Credit eligible concurrently under CENVAT, VAT and GST can be carried forward into GST. Example - Ensure C or F Forms under CST are filed else Credit would/may not be available. Ensure VAT returns are filed within 90 days from appointed date.

Credit on Stocks, Work-in-progress and Capital goods at Appointed date - Complete inventory of stocks and WIP at appointed date to be compared with Books; to check if Cenvat & Vat credit in Stocks and WIP, eligible under all 3 laws, is carried forward into GST. Valuation of stocks and WIP needs to be evaluated to ensure eligible credit is taken into GST. Unutilised credit on capital goods (other than Buildings) can be carried forward. 

Perils of Socialism - No commercial reason, but ITC cannot be taken on 

  • Motor vehicles  - unless used for further supply of vehicles, transportation of passengers or goods, driving or training schools
  • Food, beverages, health services, beauty and cosmetic treatment - unless used for making an outward supply of same (even when required and provided to employees by any law - like Factories Act)
  • club membership
  • Rent-a-cab, Life insurance, Health insurance - unless statutorily required
  • LTA to employees
  • Goods / services used in construction of immovable property (Other than Plant & Machinery).
  • Goods - given as free samples, gifts, lost or destroyed
  • Not claimed within prescribed time period (ie one year from date of tax invoice)

Hope ITC can be availed on services like vehicle insurance / repairs.

ITC on capitalised goods (including renovation) is allowed in same year except

  • If depreciation is claimed under Income tax act
  • Buildings and Civil structures
  • Pipelines and Telecommunication towers (1 / 3 is allowed in first year, 1 / 3 is second year and balance in subsequent year)

Thus, ITC on renovation or additions to Capital assets is allowable if Capitalised ELSE it would be disallowed. Can we claim ITC on Capital goods used for Supplying Exempt goods or non-business? - Answer could be No.

How to take ITC? RTP for taking ITC shall ensure:

  • He is in possession of a tax invoice or debit note issued by a supplier (RTP)
  • has received the goods and/or services (if goods received in lots - on receipt of last lot; ITC not available on advance);
  • Supplier has uploaded his return with correct invoice details and paid his GST on time; and
  • he has furnished the return under section 34;
  • he paid supplier of Services within 3 months of date of invoice (else ITC would be reversed and interest paid on ITC reversed)
  • he has not claimed Depreciation under Income tax act

Caveat emptor -  ie,‘let the buyer beware' - buyer purchases at his own risk in absence of express warranty. Should buyers include in PO's a warranty - if Supplier does not upload his records or does not pay GST, Supplier would reimburse Buyer ?  

Onus of clean record keeping on Supplier will upload every Invoice, Credit-note / Debit-note into GSTIN network which will be verified / validated by Customer.  Debit / Credit note are critical, as GST Returns can be amended only by these to correct mistakes in invoicing or otherwise. There would be hundred's/thousands of line items which would be have to be matched by Supplier and Customer on GSTIN to ensure they get all ITC. Suppliers will upload - GSTR-1 return ‘outward supplies' by 10th of succeeding month. Customers will upload - GSTR-2 return for ‘inward supplies', accepting GSTR-1, by 15th of succeeding month. GSTIN network is on RTP's.

There is Expiry date even for life? ITC must be availed before September of the following FY to which invoice pertains or date of filing of annual return, whichever is earlier. Example - For FY Mar'18 due date for Annual Return is Dec'18

If Invoice dt 15 Jan'18,- ITC needs to be availed by 20 Oct'18, unless Annual return is filed before 20 Oct'18; If annual return is filed before 20 Oct'18, then date of filing annual return.  

Cheque signing is given to trusted people.  Few enlightened persons consider ITC as Bank a/c. Efficient Availing /Credit and Utilisation of ITC is left for historical reporting of internal auditors, leaving the Govt richer. A pro-active planning and understanding of GST procedures could be beneficial.

ITC can be used for making payment of GST on Outputs but not Interest, Penalty, Fee and Reverse charge. Presently there is No time limit on utilisation of ITC, but there is a provision for giving a time limit in GST. Balance in ITC a/c may be refunded in case of Exports or rate-of-tax on Inputs is higher than Outputs.

Is there really free flow of ITC Credit? We all know:

IGST balance is used for: first - payment of IGST; second - payment of CGST; balance - payment of SGST;
CGST balance is used for: First - payment of CGST; balance - payment of IGST;
SGST balance is used for: first - payment of SGST; balance - payment of IGST;

Can arrears under earlier laws be paid using ITC?
No, as GST can be used to be pay taxes under GST only.

Can IGST / CGST / SGST Balance in one State be used to pay Output liability in another State of IGST / CGST / SGST?
No, presently there is no mechanism for such set-off of credit.   

Want to reap benefits of GST? - Align/Update Accounting and ERP records with GST Else you lose money. 

If M/s X has operations in 2 states - then X has to maintain 3 ITC a/c and 3 OTC a/c for each State;
i.e. X has to maintain 6 x 2 = 12 input/output accounts.
Minimum of 3 returns every month for each State have to be filed by each RTP.

GST credit is available only on matching / accepting concept - by customer of every supplier invoice. We need to wake-up and upgrade our ERP/Records to run alongside GSTN. 

Happy GST time and learning, hope I could raise some hopes for additional incomes in readers minds.

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