Welcome GST Input Tax Credit Under GST Regime – Model GST Law

Invoice-to-invoice Matching

“An
important item in our agenda for 1986-87 is to initiate reform in the system of
indirect taxes. … In excise taxation a vexatious question which has been often
encountered is the taxation of inputs and the cascading effect of this
on the value of the final product. … . This scheme, which has been referred as
Modified Value Added Tax (MODVAT) scheme … allows the manufacturer to
obtain instant and complete reimbursement of the excise duty paid on
the components and raw materials. … Introduction of MODVAT will decrease the
cost of the final product considerably through the availability of instant
credit of the duties paid on the inputs and consequential reduction of interest
costs. The MODVAT scheme will be in force from 1st March, 1986.”

–  Shri V. P. Singh, union minister of finance,
on introducing the union Budget for 1986-87

Instant
credit was the cardinal principle when MODVAT scheme was first introduced in
1986.   Under the Central excise law, the
credit has been available instantly on receipt of goods in the premises of the
manufacturer.  Under the State-vat laws
also, credit is available to the dealer on the purchase of goods. under the
service tax law, this cardinal principle is followed currently, subject to
specified condition viz. payment of invoice is made within specified period.
However, under the proposed GST  regime,
input tax credit would not be instant; it would be subject to
‘invoice-to-invoice matching’. The 
invoice-to-invoice matching requires the details of the inward supply of
the recipient to be matched with that of corresponding details of the outward
supply of the supplier; so as to claim input tax credit in respect of invoices
relating to inward supply.

Global
leader for indirect taxes of a large accounting firm was recently quoted
saying, “Invoice-to-invoice matching under the proposed goods and services tax
in India will make it harder for the cash economy and other parts of the world
will soon like to emulate this feature. India is the only country that is doing
it (invoice-to-invoice matching). This is unique ….people will to comply or
they will fall out of the GST chain. 
Only those who play in the cash economy will feel the pressure as they
will lose credit. Is it the right time to do as it’s a new tax.”

Missing
trader fraud (also known as missing trader intra- Community fraud) within the
european union (eu), abusing the vat rules on cross-border transactions within
the eu or the ‘missing trader’ fraud as seen in the case of Mahalaxmi Cotton
Ginning Pressing and Oil Industries vs. The State of Maharashtra & Others
51 VST 1 (Bom.) could also be the added reasons for this proposed change.

The
recommendations in the report of the technology advisory Group for unique
Projects, january 2011, included that the Common GST Portal would also act as a
tax booster, matching the input tax credits in the returns to detect tax
evasion. Hence, this change is being considered and designed since 2011. The businesses in India, however, are still
not in a position to assimilate the proposed change and the change is perceived
as inconceivable; possibly in view of the current practice and mind frame to
take credit instantly.

The
Common GST  Portal created and managed by
GSTn is suppose to do this matching on the basis of invoice level data filed as
part of return by all taxpayers, including for inter-state supplies.

Detailed
provisions are there in the model CGST / SGST law  to deal with situations –

 -Where
the input tax credit claimed by the recipient in respect of an inward supply is
in excess of the tax declared by the supplier for the same supply (Section 29);

–
Where the input tax credit claimed by the recipient in  respect 
of  an  inward 
supply  is  not 
declared  by the  supplier 
as  outward  supply 
in  his  valid 
returns (Section 29);

–
For duplication of claims of input tax credit (Section 29);

–
Reduction of input tax credit by the recipient where the output tax is reduced
by output supplier by issuing a credit note (Section 29A).

Manner of Taking input Tax credit

(Section 16 of the model CGST / SGST law)

“Input
tax credit” is defined in Model CGST / SGST Law to mean credit of ‘input tax’.

“input
tax” in relation to a taxable person, means the {iGST and CGST}/{iGST and
SGST}   charged on any supply of goods and/or services to him which are used, or
are intended to be used, in the course or furtherance of his business and
includes the tax payable under reverse charge mechanism.

It
is key to note that though the law has defined the terms‘ input’, ‘input
service’ and ‘capital goods’, these terms have not been used in the definition
of ‘input tax’ / ‘input tax credit’. “input tax” is the tax charged on any
supply of goods and/ or services and it is not a tax charged on ‘input’ /
‘input services’ / ‘capital goods’. 
Hence, wherever the provision, in model GST law,  deals with input tax credit, it would have to
be read currently in the context of supply of goods and/ or services.  Wherever the model GST  law 
has referred to input / input service / capital goods with reference to ‘input
tax credit’, either that should get rectified in the final law in favour of
goods and/or services or the definition of ‘input’, ‘input service’ and
‘capital goods’ should be revisited considering one of the objects of GST  to remove cascading effect of taxes.

Every
registered taxable person is entitled to take credit of input tax admissible to
him, subject to the followings:

-He
is in possession of a tax invoice, debit note, supplementary invoiceor such
other taxpaying document as may be prescribed, issued by a supplier registered
under the GST law;

–
He has received the goods and/or services (where the goods are received in lots
or instalments, upon receipt of the last lot or instalment) – for this purpose,
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;

–
The tax charged in respect of such supply has been actually paid to the credit
of the appropriate Government, either in cash or through utilisation of input
tax credit admissible in respect of the said supply; and

–
He has furnished valid returns, as required

In
case the goods and/or services are used partly for business purposes / taxable
supplies and zero-rated supplies and partly for other purposes / non-taxable
supplies and exempted supplies, input tax shall be restricted to so much as it
is attributable to business purposes / taxable supplies and zero-rated
supplies. The manner of attribution for such purposes would be prescribed.

The
input tax credit in respect of any invoice needs to be taken before

-Filing
of the return u/s. 27 for the month of September following the end of financial
year to which such invoice pertains or

-Filing
of the relevant annual return whichever is earlier.

Negative list for input Tax credit

Input
tax credit will not be available in respect of the following (Section 16(9) of
the model CGS / SGST law):

-Motor
vehicles, except when they are supplied in the usual course of business or are
used for providing the following taxable services

 (i) Transportation of passengers, or

 (ii) Transportation of goods, or

 (iii) Imparting training on motor driving
skills;

-Goods
and / or services provided in relation to food and beverages, outdoor catering,
beauty treatment, health services, cosmetic and plastic surgery, membership of
a club, health and fitness centre, life insurance, health insurance and travel
benefits extended to employees on vacation such as leave or home travel
concession, when such goods and/or services are used primarily for personal use
or consumption of any employee;

–  Goods and/or services acquired by the
principal in the execution of works contract when such contract results in
construction of immovable property, other than plant and machinery;

–
Goods acquired by a principal, the property in which is not transferred
(whether as goods or in some other form) to any other person, which are used in
the construction of immovable property, other than plant and machinery;

–
Goods and/or services on which composition tax has been paid; and

–
Goods and/or services used for private or personal consumption, to the extent
they are so consumed

–
Capital goods, where depreciation is claimed under the income tax act, 1961 on
the tax component of the cost of such capital goods[the restriction specified
herein is not on all goods but only on ‘capital goods’; capital assets and
capital goods, both are defined separately and have different meaning]

Supply (Removal) of capital Goods on Which input Tax credit
Was Taken

On
supply of capital goods on which input tax credit has been taken, higher of the
following is required to be paid:

–  An amount equal to the input tax credit taken
on the said capital goods reduced by the percentage points as may be specified
in this behalf; or

–  Tax on the transaction value of such capital
goods

Transfer of input Tax credit

in
case there is change in the constitution of a registered taxable person on
account of sale, merger, demerger, amalgamation, lease or transfer of the
business with the specific provision for transfer of liabilities, the input tax
credit that remains unutilised in its books of accountsof the registered
taxable person (transferor) would be allowed to be transferred such sold,
merged, demerged, amalgamated, leased or transferred business.

Utilisation of input Tax credit

Every
taxable person would be entitled to take input tax credit; however, till he
discharges his self-assessed tax liability vide valid tax returns he will not
be allowed to utilize such input tax credit (Section 28 of model CGST/SGST law).   Such restriction on utilisation of input tax
credit is not prevalent in the current indirect tax regime.

The
input tax credit is to be utilised as follows (Section 35(5)

Input
tax credit on account of CGST cannot be utilised for payment of SGST and
vice-versa.

Unutilised
input tax credit at the end of the tax period can be claimed as refund (Section
38(2) of model CGST  / SGST law)  in cases of:

–  Exports (other than the goods exported which
are subject to export duty)

–  Credit accumulation is on account of rate of
tax on inputs being higher than the rate of tax on outputs. [‘input’ has been
defined to mean goods other than capital goods. ‘Output’ has not been defined.]

Input Tax credit on stock, When registration is applied for

The
following persons are entitled to take credit of input tax within one year from
the date of issue of the tax invoice in respect of inputs held in stock and
inputs contained in semi- finished or finished goods held in stock, to be
calculated as per Generally accepted accounting Principles:

The
provisions currently are silent in respect of capital goods held on the date of
registration / date he becomes liable to pay tax under regular scheme and in
respect of credit of input tax on services received before the date of
registration / date he becomes liable to pay tax.

Switching To composition levy / Goods or services become
exempt

On
switching over from the regular mechanism to composition levy, or the goods and
/or services become exempt, the registered taxable person is required to pay an
amount equal to the input tax credit in respect of inputs held in stock and
inputs contained in semi-finished or finished goods held in stock on the day
immediately preceding the date of such switch over or, as the case may be, the
date of such exemption, to be calculated as per Generally accepted accounting
Principles.  Balance of input tax credit,
if any, would lapse.

Input Tax credit of Goods sent for Job Work (section 16a of
The Model CGS / SGST law)

The
principal is entitled to take input tax credit on inputs / capital goods sent
to job worker, including sent directly without being first brought to the
premises of the principal, if the said inputs / capital goods are received back
by the principal within the specified period.

Input service Distributor (section 17 of The Model CGS /
SGST law)

“Input
Service Distributor”(ISD) means an office of the supplier of goods and / or
services which receives tax invoices issued u/s. 23 towards receipt of input
services and issues tax invoice or such other document as prescribed for the
purposes of distributing the credit of CGST 
(SGST in State acts) and / or IGST paid on the said services to a
supplier of taxable goods and / or services having same PAN as that of the
office referred to above.

Explanation. – for the purposes of distributing the
credit of CGST  (SGST  in State acts) and / or IGST, input Service
distributor shall be deemed to be a supplier of services.

An
ISD is allowed to distribute the credits as follows

 The
manner for computing the credit to be distributed is not yet prescribed.

Account and records for input Tax credit

Every
registered person is required to keep and maintain a true and correct account
of input tax credit availed (Section 42 of model CGST / SGST law).

An
input tax credit ledger in electronic form would be maintained at the common
portal for each registered taxable person, to be called as “electronic credit
ledger”. The amount of input tax credit will be credited to electronic credit
ledger of the registered taxable person.

Transition provisions

A
registered taxable person is entitled to take credit of the amount of Cenvat
credit / vat credit carried forward in the return furnished under the earlier
law.  A registered taxable person is also
entitled to take credit of the unavailed Cenvat credit / vat credit in respect
of capital goods, not carried forward in the return furnished under the earlier
law. Such credits can be taken only if the amount was admissible as Cenvat
credit / vat credit under the earlier law and is also admissible as input tax
credit under the GST law.

Transition
provisions have been provided for situations:

–         –Where the goods manufactured / traded were exempted under
earlier law and are liable to tax under GST law

 –      
–Where the person is going to be
taxable person under the regular mechanism under GST law, however, was under
the composition scheme under the earlier law

Transition
provisions have not been provided for situations:

–       –Cenvat
credit was taken on input services, however the invoice was not paid within
three months, hence Cenvat credit taken was reversed; the invoice would be paid
after the appointed date or the invoice would be paid after the filing of
return u/s. 27 for the month of September following the end of first financial
year under GST Law andafter filing of the relevant annual return

 –     
–Unavailed Cenvat credit in respect
of natural resources (where Cenvat credit is currently availed over the period
of three years)

Disputes under earlier law for claim / recovery of Cenvat
credit / VAT credit

The
proceedings relating to claim / recovery of Cenvat credit / vat credit under
the earlier law shall be disposed of in accordance with the provisions of earlier
law. Any amount of credit found to be admissible to the claimant shall be
refunded to him in cash and any amount of credit becomes recoverable shall be
recovered as an arrear of tax under GST law. The said amount admissible /
recovered would not be admissible as input tax credit under the GST law.