Input Tax Credit (ITC)

Preface

Input Tax Credit or to say ITC mechanism is the backbone of
any system of Value Added Taxation (Vat). Goods and Services Tax (GST) being
based upon the principles of Vat, it has to provide for an appropriate
mechanism by which the basic concept of Vat remains intact. As we are well
aware, GST is a destination based tax, the burden of tax has to be borne by the
ultimate consumer of goods or services as the case may be. Neither there should
be any cascading of taxes nor any burden of such tax should fall on businesses.
Governments have to collect taxes from their subjects and the people have to
pay. While direct taxes are collected directly by the Government from all those
who are liable to pay such tax, in case of indirect taxes it may not be
possible for the Government to collect directly from the consumers. It is in
these circumstances, that responsibility is cast upon the businesses to collect
tax from consumers and deposit it into the Government Treasury. The businesses
as such are performing the role of a mediator. It is necessary therefore, that
such a mediator should not be burdened to pay any amount of such tax from his
own pocket. While the businesses will collect tax from consumers and deposit
into Government Treasury, it is necessary to ensure that Government gets
correct amount of taxes, as being paid by the consumers, and there is no
leakage of revenue.

Businesses, in any country, operate through a chain of people
performing different activities, and, sometimes it is a very long chain between
origin of goods and its consumption in the hands of ultimate consumer. An
importer or manufacturer may be the first person in the chain of production and
distribution of goods. Thereafter, there may be a distributor, a stockist, a
whole seller or a trader and the retailer, etc. Thus, before the goods reach in
the hands of ultimate consumer, they pass through various hands, and, each such
person may be adding some value to such goods whether by way of enhancing its
utility or otherwise whereby the price of such goods gets increased at each
stage in that chain of production and distribution. To take a simple example
suppose a manufacturer sells his goods at 100 rupees, the distributor adds his
expenses of transportation, etc. and after adding his margin sells at 110,
whole sellers sells at 120 and the retailer sells the same goods to the
consumer at 150 rupees. And if the rate of tax applicable is 10%, the consumer
is required to pay 15 rupees by way of tax (10% of 150), the Government should
get this 15 rupees in its treasury neither less nor more. One method of
collection of tax may be that Government collects 15 rupees directly from the
retailer and all other persons i.e. manufacturer, distributor, whole seller,
etc. need not  collect or pay any tax.
Such a system is called last stage taxation, which was prevailing long back but
discontinued due to large scale of revenue leakages. The system of first stage
taxation (i.e. collecting the intended amount of tax from the manufacturer
himself), which was there under the earlier sales tax laws, had to be
discontinued because of low tax base, and the MRP based system of collecting
taxes from the first stage dealer also does not find favour under a fair and
equitable system of taxation. However the system of Vat provides all such
benefits which we can expect from a fair and transparent system of taxation.
Under this system taxes are collected at each stage of production and
distribution at a predetermined rate of tax. Thus, in the above example: the
manufacturer has to collect a sum of Rs. 10 (10% of 100) from his purchaser
(the distributor). He has to deposit the same amount into Government treasury.
The distributor will collect Rs. 11 (10% of 110) from the whole seller. As he
has already paid Rs. 10 to the manufacturer, he will deposit Rs. 1 into the
treasury (11-10). Here Rs. 11 is the amount of output tax and Rs. 10 is the
input tax credit. Similarly whole seller will collect Rs. 12 (10% of 120) and
will pay into the treasury Rs. 1 (i.e. 12-11) and the retailer will collect Rs.
15 from the consumer (10% of 150) and he will deposit a net sum of Rs. 3
(15-12) into the treasury. Thus, Government will get a total sum of Rs. 15
(10+1+1+3) through all these persons involved in the production and
distribution chain. The consumer has paid Rs. 15 as tax for consuming the
product, the Government is getting the exact amount into its treasury, and,
none of the businesses have paid any amount out of their own pocket. They have
deposited the entire amount of tax that they have collected from their customer
after deducting there from the amount of tax which they have already paid
through their supplier/s. Neither any gain nor any loss to the businesses.
Thus, the amount of tax paid on supplies received in the business may be
considered as advance payment of tax, which in Vat terminologies is called as
Input Tax Credit. (Credit of taxes paid on inputs).

This concept of ITC is not new to all those who have been
dealing with Excise Duty, Service Tax and State Vat laws, wherein it already
exits either partially or fully in the form of Cenvat (earlier called Modvat)
and setoff, etc. But, as these taxes are being levied at different stages and
by different Government/s, there is no inter connectivity of these taxes and
therefore taxes paid under one or more enactments are not cenvatable against
the other. It is fragmented Vat, which is in practice in our country at
present. To overcome this difficulty the concept of GST was suggested long back
and now the stage has come that our country is ready to implement GST, although
it is dual GST, to begin with, due to federal structure, but in this form also
it will overcome several disadvantages and in future we may hope for a single
GST across the country. Thus, let all of us together ‘Welcome GST’.

The Indian GST law i.e. The Central Goods and Services Act
(CGST Act), IGST Act, UTGST Act as well as State GST Acts contain elaborate
provisions regarding input tax credit and claim thereof by eligible taxable
persons. The Rules made there under provide conditions for such claim. As the
provisions and the conditions are on the same line in all such enactments, the
provisions contained in CGST Act and the Rules may be discussed in brief as
follows: 

Input, Input Tax and Input
Tax Credit

Section 2 of the Central Goods & Services Act defines
various terminologies. Relevant definitions for the purposes of our discussion
are reproduced herein as follows:-

(59) “input” means any goods other than capital goods
used or intended to be used by a supplier in the course or furtherance of
business;

(60) “input service” means any service used or
intended to be used by a supplier in the course or furtherance of business;

(62) “input tax” in relation to a registered person,
means the central tax, State tax, integrated tax or Union territory tax charged
on any supply of goods or services or both made to him and includes—

(a)
the integrated goods and services tax charged on import of goods; (b) the tax
payable under the provisions of sub-sections (3) and (4) of section 9;

(c)
the tax payable under the provisions of sub-sections (3) and (4) of section 5
of the Integrated Goods and Services Tax Act;

(d)
the tax payable under the provisions of sub-sections (3) and (4) of section 9
of the respective State Goods and Services Tax Act; or

(e)
the tax payable under the provisions of sub-sections (3) and (4) of section 7
of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

(63) “input tax credit” means the credit of input tax;

(67) “inward supply” in relation to a person, shall
mean receipt of goods or services or both whether by purchase, acquisition or
any other means with or without consideration;

(19) “capital goods” means goods, the value of which
is capitalised in the books of account of the person claiming the input tax
credit and which are used or intended to be used in the course or furtherance
of business;

(94) “registered person” means a person who is
registered u/s. 25 but does not include a person having a Unique Identity
Number;

(105) “supplier” in relation to any goods or services
or both, shall mean the person supplying the said goods or services or both and
shall include an agent acting as such on behalf of such supplier in relation to
the goods or services or both supplied;

(106) “tax period” means the period for which the
return is required to be furnished;

(107) “taxable person” means a person who is
registered or liable to be registered u/s. 22 or section 24;

(108) “taxable supply” means a supply of goods or
services or both which is leviable to tax under this Act;

(47) “exempt supply” means supply of any goods or services or
both which attracts nil rate of tax or which may be wholly exempt from tax u/s.
11, or u/s. 6 of the Integrated Goods and Services Tax Act, and includes
non-taxable supply;

(78) “non-taxable supply” means a supply of goods or
services or both which is not leviable to tax under this Act or under the
Integrated Goods and Services Tax Act;

Eligibility to claim Input
Tax credit

Section 16(1) of the CGST act provides that: Every registered
person is entitled to take credit of input tax charged on any supply of goods
or services or both to him which are used or intended to be used in the course
or furtherance of his business.

Thus, to claim Input Tax Credit (ITC) it is necessary that
the claimant is a ‘registered person’. All such persons who are registered
under the Act (other than persons holding UIN) are eligible to claim ITC in
respect of taxes paid (i.e. CGST, SGST or UTGST and IGST) on all inward
supplies of goods and services received, which are used or intended to be used
in the course of his business or for furtherance of business. 

Such inward supplies may be of inputs, input services or
capital goods. All such supplies are eligible for claim of ITC. Thus, whether
it is raw material, packing material, trading goods, consumables, capital goods
or items of expenditure (debited to profit & loss a/c under various heads)
all such items are eligible provided the same are used or intended to be used
in the course or furtherance of business (subject to such conditions and
restrictions as may be prescribed).

Conditions & Restrictions

Apart from the basic condition i.e. used or intended to be
used in the course or furtherance of business, section 16(2) provides for
certain conditions, which may be summarised as follows:

(a) Goods
and/or services (as the case may be) must have been received.

(b) He must
have in possession a Tax Invoice (issued by the supplier) in respect of such supply

(c) Tax
charged on such inward supply must have been paid to the Government (whether in
cash or by way of utilisation of ITC).

(d) A return
(in accordance with section 39) has been furnished

(e) In
respect of capital goods, if the registered person has claimed depreciation
(under the Income Tax Act) on tax component of such assets (capital goods), ITC
shall not be admissible. That would mean that if tax component has been added
to the cost of such capital goods, ITC to that extent is not eligible.   

It has further been provided that if the recipient fails to
make payment to the supplier in respect of supplies so received (on which ITC
has been claimed) within a period of 180 days from the date of issuance of Tax
Invoice, the ITC so claimed has to be reversed. And such amount can be
reclaimed after making due payment to the supplier.

Reduction in ITC

Section 17 provides for certain conditions in which the claim
of ITC may get reduced to certain extent or proportionate reduction may have to
be worked out in following circumstances:-

(1)  If the taxable
supplies received are used partly for the purposes of business and partly for
any other purposes (may be for personal use). ITC will be admissible to the
extent of business uses only. If the exact amount is not ascertainable then
proportionate reduction method will be applicable.

(2) If the taxable supplies received are used partly for the
purposes of outward supply of taxable goods and/or services (including zero
rated supplies) and partly for exempt supplies. ITC will be admissible to the
extent of use in taxable supplies including zero rated supplies). If the exact
amount is not ascertainable then proportionate reduction method will be
applicable.

Note: ‘Zero Rated supplies’ are defined u/s. 16 of IGST Act
as follows:-

“16. (1) “zero rated supply” means any of the following
supplies of goods or services or both, namely:–  

(a) export
of goods or services or both; or

(b) supply of goods or services or both to a
Special Economic Zone developer or a Special Economic Zone unit.”

Thus, although there is no tax payable on outward supplies,
which are zero rated, input tax credit is available in full (without any
reduction).

(3) 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 provisions of section 17(2) (i.e. bifurcation of taxable and
exempt supplies), or avail of, every month, an amount equal to fifty per cent.
of the eligible input tax credit on inputs, capital goods and input services in
that month and the rest shall lapse.

No ITC

Section 17(5) of the CGST Act provides that; Notwithstanding
anything contained in sub-section (1) of section 16 and sub-section (1) of
section 18, input tax credit shall not be available in respect of the
following, namely:-

(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) the following supply of goods or services or both—      

(i) food and
beverages, outdoor catering, beauty treatment, health services, cosmetic and
plastic surgery except    where an inward
supply of goods or services or both of a particular category is used by a
registered person for making an outward taxable supply of the category of goods
or services or both or as an element of a taxable composite or mixed  supply;

(ii) membership
of a club, health and fitness centre;

(iii)
rent-a-cab, life insurance and health insurance except where––              

(A) 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; or

(B) such inward supply of goods or services or
both of a particular category is used by a registered person for making an
outward taxable supply of the same category of goods or services or both or as
part of a taxable composite or mixed supply; 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
an 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 or both received by a taxable person
for construction of an immovable property (other than plant or machinery) on
his own account including when such goods or services or both are used in the
course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d),
the expression “construction” includes re-construction, renovation, additions
or alterations or repairs, to the extent of capitalisation, to the said immovable
property;

(e) goods or services or both on which tax has been paid u/s.
10 (composition schemes);

(f) goods or services or both received by a non-resident
taxable person except on goods imported by him; 

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of
by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of
sections 74, 129 and 130 (specific cases).

Explanation.––For the purposes of Chapter V (Input Tax
credit) and Chapter VI (registration), the expression “plant and machinery”
means apparatus, equipment, and machinery fixed to earth by foundation or
structural support that are used for making outward supply of goods or services
or both and includes such foundation and structural supports but excludes-

(i) land,
building or any other civil structures;

(ii)
telecommunication towers; and

(iii)
pipelines laid outside the factory premises.

It may further be noted that following persons are not entitled
to claim input tax credit in respect of any of the items of inward supply of
goods or services:

1. An un-registered person

2.
Registered persons who have opted for Composition Scheme/s

3. Persons holding Unique Identification Number
(UIN)

4. A registered person whose registration is
cancelled (in respect of inward supplies on or after the date of cancellation).

Documentation requirements and conditions for claiming ITC

The input tax credit shall be availed by a registered person,
including the Input Service Distributor, on the basis of any of the following
documents, namely:-

(a) Tax invoice issued by the supplier of goods or
services or both in accordance with the provisions of section 31;

(b) An invoice issued in accordance with the provisions
of clause (f) of sub-section (3) of section 31, subject to payment of tax (i.e.
in respect of purchases from un-registered dealers, where tax is payable under
reverse charge scheme); 

(c) A debit note issued by a supplier in accordance
with the provisions of section 34 (in respect
of goods return, rate difference, etc.);

(d) A bill of entry or any similar document
prescribed under the Customs Act, 1962 or rules made there under for assessment
of integrated tax on imports;

(e) An ISD invoice or ISD credit note or any
document issued by an Input Service.

     Distributor in accordance with the
provisions of sub-rule (1) of rule invoice 7.

Time Limit for claim of ITC

The procedure to claim ITC
by a registered person is that the same can be claimed immediately in
respective month (Tax Period) to which the Tax Invoice relates (subject to
actual receipt of such goods/services). Each such claim of ITC is credited to
the Electronic Credit Register of such registered person. He may utilise the
credit as and when he would like to adjust the same against his output tax
liability.

However, if a person has not claimed ITC in the respective
month, for any reason, he may claim the same any time (i.e. in any tax period)
within 6 months from the end of financial year or before the time limit for
submitting Annual Return for the said financial year, whichever is earlier.
(The time limit prescribed for submitting annual return, at present is 31^st
December of next financial year. Thus, practically a person can claim the
unclaimed amount of ITC till he submits his return for the month of September
of next financial year).