Changes are subtle and then only it is natural. GST finally appears to have arrived after lots of discussion within and outside parliament. All changes are required to be encouraged and so let us welcome GST. Model GST law as declared by GST Council Secretariat is available now and in this paper I will try to explore the issues regarding Input Tax Credit (ITC), its extent and limitation under the GST regime.
Availing the tax credit runs on the basic fundamental according to which any goods or services should not be taxed repeatedly. It means that all the taxes earlier paid on inputs/input services, the credit of the same to be given to the tax payer. In legal parlance it is said as reducing the "cascading effect" of the taxes. Like any other financial statute GST also has provision for input tax credit as enumerated in Section 16 to 22 in Chapter V of the Model GST Law. Before we delve into the provisions and complexities of the input tax credit, certain basic definitions are required to be looked into. They are as follow:
1. Section 3 defines the word supply and its scope, the same read as follow:
Meaning and scope of supply
(1) Supply includes-
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
(b) importation of services, for a consideration whether or not in the course or furtherance of business, and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.
(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.
(3) Notwithstanding anything contained in sub-section (1),
(a) activities or transactions specified in schedule III; or
(b) activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities as specified in Schedule IV, shall be treated neither as a supply of goods nor a supply of services.
(4) Subject to sub-section (2) and sub-section (3), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as-
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods; or
(c) neither a supply of goods nor a supply of services.
(5)The tax liability on a composite or a mixed supply shall be determined in the following manner -
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;
(b) a mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax.
2. Section 2 (73)- It defines person and the same is read under:
(73) "person" includes-
(a) an individual;
(b) a Hindu undivided family;
(c) a company;
(d) a firm;
(e) a Limited Liability Partnership;
(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
(g) any corporation established by or under any Central, State or Provincial Act or a Government company as defined in section 2(45) of the Companies Act, 2013 (18 of 2013);
(h) any body corporate incorporated by or under the laws of a country outside India; (i) a co-operative society registered under any law relating to cooperative societies; (j) a local authority;
(l) society as defined under the Societies Registration Act, 1860 (21 of 1860);
(m) trust; and
(n) every artificial juridical person, not falling within any of the preceding sub-clauses;
3. Section 2 (52)- It defines input and sub-clause- 53 defines input services, the same are read as under:
(52) "input" means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;
(53) "input service" means any service used or intended to be used by a supplier in the course or furtherance of business;
If we look at the above said definitions we find that the words are defined in the new Act in the widest amplitude and it appears to include everything related with the business. So everything is input or input service which is used by the supplier "in the course or furtherance of business". The definition of input is all inclusive. Similarly the definition of supply is also defined in inclusive manner and includes sale, transfer, barter, exchange, license, rental, lease or disposal against any consideration by a person during the period of his business.
ELIGIBILITY & CONDITION:
In the above said background let us examine the eligibility and conditions for taking input tax credit as defined in Section-16 of the Model GST law. The same read as follow:
16. Eligibility and conditions for taking input tax credit:
(1) Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 44, be entitled to 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 and the said amount shall be credited to the electronic credit ledger of such person:
PROVIDED that 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-
(a) one-third of the total input tax in the financial year in which the said goods are received,
(b) two-third of the total input tax, including the credit availed in the first financial year, in the financial year immediately succeeding the year referred to in clause (a) in which the said goods are received, and
(c) the balance of the amount of credit in any subsequent financial year.
(2) Notwithstanding anything contained in this section, but subject to the provisions of section 36, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless,-
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying document(s) as may be prescribed;
(b) he has received the goods and/or services;
(c) the tax charged in respect of such supply has been actually paid to the account of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 34:
PROVIDED that where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or installment:
PROVIDED FURTHER that where a recipient fails to pay to the supplier 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 by the supplier, 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.
Explanation.-For the purpose of clause (b), it shall be deemed that the taxable person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such taxable 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.
(3) Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961(43 of 1961), the input tax credit shall not be allowed on the said tax component.
(4) A taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services after furnishing of the return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.
If we look at the definition we find that credit is available only to the registered taxable person for the tax charged either on supply of goods or services which are to be used during the course or furtherance of his business.
The second condition as enumerated in sub-clause-2 of Section-16 is that credit is available only if the taxable person is in the possession of tax invoice or debit note coupled with receipt of goods or services and actual payment of tax either in cash or through input credit. The registered taxable person is also required to file return under Section-34 of the Act. The Act has also taken into consideration of a situation if the goods are received in lots or an installment then the credit is available only after receipt of the last lot or installment.
There is a word of caution in further proviso which says after availing the tax credit the person availing the credit must pay the supplier of services the amount equal to value of supply along with tax otherwise the input tax credit availed by the recipient shall be add to his output tax liability along with interest. The time prescribed for the payment is three months from the date of issue of invoice. Here legislature intends to protect the supplier of goods and services and the same is definitely a welcome move.
CREDIT REGARDING EXEMPTED OR NON-TAXABLE GOODS OR SERVICES:
Here the scheme appears to be same which is available in Cenvat Credit Rules 2004. The amount of credit available to the registered taxable person is restricted to the extent of input related with his business. The exempted category of supplies under this act are kept outside the ambit of input tax credit scheme, however the amount of credit is available to all taxable supplies and it also includes zero rated supply and supplies on which recipient is liable to pay tax on reverse charges.[ Section-17 (1) & (2) of Model GST Law].
RESTICTIONS ON AVAILING CREDIT:
Section-17(4) of the Model GST law starts with non-obstante clause and excludes input tax credit, the same read as follows:
(4) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1), (2), (3) and (4) of section 18, input tax credit shall not be available in respect of the following:
(a) motor vehicles and other conveyances except when they are used
(i) for making the following taxable supplies, namely
(A) further supply of such vehicles or conveyances ; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) for transportation of goods.
(b) supply of goods and services, namely,
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of goods or services;
(ii) membership of a club, health and fitness centre,
(iii) rent-a-cab, life insurance, health insurance except where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; and
(iv) travel benefits extended to employees on vacation such as leave or home travel concession.
(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 service;
(d) goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business;
Explanation 1.- For the purpose of this clause, the word "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.
Explanation 2.- 'Plant and Machinery' means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.
(e) goods and/or services on which tax has been paid under section 9;
(f) goods and/or services used for personal consumption;
(g) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
(h) any tax paid in terms of Sections 67, 89 or 90.
So regarding the above said headings input tax credit is not available.
INPUT TAX CREDIT FOR THE NEW-COMERS:
A taxable person newly registered is entitled to avail the tax credit regarding inputs available in stocks including semi-finished or finished goods from the date he becomes liable to pay tax under the Model GST law. The above said availment is of course subject to such conditions and restrictions as may be prescribed time to time. [Section-18 (1) & (2) Model GST Law]
INPUT TAX CREDIT OF THE EXEMPTED SUPPLY WHICH BECAME TAXABLE SUPPLY LATER ON:
Any supply which is not taxable, the tax credit is not available but when it becomes taxable in future, the tax credit will be available regarding the inputs held in stock including semi-finished or finished goods. The time limit for availing such credit is one year from the date of issue of tax invoice.
TRANSFER OF CREDIT:
Like earlier Rule-10 of the Cenvat Credit Rule in the new regime also credit can be transferred in case there is change in constitution of the registered taxable person on account of sale, merger, de-merger, amalgamation, transfer of business etc. [Section-18 (6) Model GST Law.]
SALE OF CAPITAL GOODS:
In case any capital goods, plant or machinery on which input tax credit has been taken and the same is removed from the business, the registered person will have to reverse the input tax credit reduced by percentage as maybe specified later on or pay the tax on transaction value of such capital goods, whichever is higher. [Section-18 (10) Model GST Law.]
If the capital goods are sold as scrap taxable person will pay tax on the basis of transaction value of such goods in terms of Section-15(1) Model GST Law.
INPUT TAX CREDIT REGARDING JOB WORK:
The principal (registered taxable person) is entitled to avail the input tax credit on the goods supplied to job worker even if the goods are directly send to the job worker without being first brought to the place of business. [Section -20 (1) & (2) Model GST Law.]
The principal can also avail input tax credit on capital goods send to job worker for job work. The time limit prescribed for return of the goods from the job worker premises is one year.
The law regarding input tax credit (ITC) in the Model GST Law is at nascent stage and will mature only with the passage of time. Let us welcome the new law with a hope that the same will streamline the fractured and multi-layered Indirect Tax System.