Welcome GST – Input Tax Credit Provisions under the Model GST Act (Revised Nov 2016)

“Goods and Services Tax” popularly known as ‘GST’ will soon be a new face of indirect tax legislation in India. It is a concept which will subsume various indirect taxes that are currently being imposed on goods and services under various Central and State laws and will lead to imposition of a single levy namely “goods and service tax” on all goods and services purchased or consumed anywhere in India. The idea is to convert the whole of India into one single uniform market, by eliminating differential tax treatments under different laws and different States. The concept of Value Added Tax is an inherent feature of GST. Whenever a commodity changes hand, there is a value addition. GST will be imposed in respect of every value addition made to goods and services from its origination till its final consumption.Needless to say, being an indirect tax, the ultimate burden of taxes on the entire value of the commodity/service will be transferred onto the final consumer of such commodity/service. To illustrate, if ‘A’ sells goods worth Rs.100 to ‘B’, A will pay tax of say 10% i.e. Rs.10 to Government and recover the same from ‘B’ by loading the same onto value of that commodity. ‘B’ will therefore pay Rs.110 to ‘A’. When ‘B’ further sells the commodity to ‘C’ by adding his profit margin of Rs.40, then he will pay tax @10% on the said value addition of Rs.40 say Rs.4 to Government and recover the entire amount from ‘C’ i.e. 110 paid by him to ‘A’ and Rs.44 being his value addition and taxes paid by him to Government on his value addition. In short he will recover Rs.154 from ‘C’ which comprises of Rs.140 as total value and Rs.14 as taxes. The bill issued by ‘B’ to ‘C’ will also clearly show Rs.140 as the value of commodity and Rs.14 as the taxes. Therefore, in a transparent value added system, the customer knows how much amount he has paid for a commodity as its economic value and how much by way of taxes.

The example looks very simple, when Rs.10 paid by ‘A’ and Rs.4 paid by ‘B’ are taxes under the same statute and are paid to same Government. However, the economics of commodity pricing will change, if these taxes are paid under different statutes and to different governments. To illustrate, let’s assume that in the above example Rs.100 is value addition by ‘A’ for sale of goods and Rs.40 is value addition by ‘B’ in the nature of service. In other words supply made by ‘A’ to ‘B’ is in the nature of ‘sale of goods’ and supply made by ‘B’ to ‘C’ is in the nature of provision of service. In this case, A will pay Rs.10 to State Government as VAT. Although value addition made by ‘B’ is only Rs.40, since the Authority recovering the taxes from ‘B’ is a Central Government, it will recover service tax on entire Rs.140 by taxing the entire value once again under different statute (‘double taxation’). Not only that, but it will also levy tax on Rs.10 which is in fact a tax paid to State Government (‘tax on tax’). The final outcome would be that, an economic supply having aggregate value addition of Rs.140 will be loaded with VAT of Rs.10 (Rs.100 x 10%), Service Tax of Rs.14 (Rs.140 x 10%) and a tax on tax (recovered as service tax) Rs.1 (VAT of Rs.10 x 10%), thereby making total price of the commodity Rs.165. (Rs.140 as Value addition and Rs.25 as taxes) as against Rs.154 computed earlier. Another most disturbing factor in this scenario would be that, ‘B’ will raise a bill on ‘C’ showing Rs.150 as the value addition and Rs.15 as service tax. The customer will therefore be under the impression that, he has paid only Rs.15 as taxes whereas in reality he pays Rs.25 towards taxes.

GST thus endeavours to reduce cascading effect of taxes i.e. eliminating double taxation (saving of Rs.10) and tax on tax (i.e. Rs.1). It also encourages transparency by separating economic value of a commodity from taxes. The concept of “value addition based taxation” is enshrined in provisions governing Input Tax Credit(‘ITC’). This article deals with the said provisions contained in Revised Model GST law (November 2016). The provisions dealing with eligibility of CENVAT credits or tax credits under the earlier laws in GST regime (i.e. transitory provisions) are not explained in this article.

2.    Definitions:

As per section 2(52), ‘inputs’ means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(19) “capital goods” means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

As per section 2(53) “Input service” means any service used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(55) “input tax” in relation to a taxable person, means the Integrated Goods and Service Tax (IGST), including that on import of goods, Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) charged on any supply of goods or services to him and includes the tax payable under sub-section (3) of section 8 [i.e. tax payable under reverse charge], but does not include the tax paid under section 9 [i.e. tax payable under composition scheme].

As per section 2(71) “output tax” in relation to a taxable person, means the CGST/SGST chargeable under this Act on taxable supply of goods and/or services made by him or by his agent and excludes tax payable by him on reverse charge basis

As per section 2(54) “Input Service Distributor” means an office of the supplier of goods and / or services which receives tax invoices issued u/s. 28 towards receipt of input services and issues a prescribed document 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.

3.    Principal Eligibility Test:

The concept of ITC, presupposes that the preceding supply (i.e. inwards supply) as well as the subsequent supply (i.e. outward supply’) both are charged with GST. If inward supply is not charged with GST, the question of ITC does not arise. Similarly, if outward supply is not charged with GST (Nil rated or fully exempted supply, non-taxable supplies), the ITC gets accumulated and eventually becomes a part of the cost. However in certain cases, due to policy reasons, refund of ITC is permissible. Under GST, there are only two cases where refund of ITC is permissible viz. exports including zero rated supplies and cases involving inverted duty structure i.e. where the credit is accumulated on account of rate of tax on inward supplies being higher than the rate of tax on outward supplies (other than Nil/ fully exempted supplies). Except for the said two cases, if the outward supply does not attract levy of GST, then ITC of corresponding inward supply cannot be allowed and therefore necessarily forms the part of cost. This may be taken as principal eligibility test under GST.

For instance, the outward supply of goods and services which is not made by a supplier in the course of his business or commerce, is not treated as ‘supply’ for the purpose of levy of GST. There is thus no GST on such ‘non-business outward supplies’. A supplier may have been charged GST on goods and services procured and used by him for the purpose of making a ‘non-business outward supply’. However, ITC in respect of such goods/services is not allowed. What is ‘non-business outward supply’ is therefore important for the purpose of determining eligibility of ITC of corresponding goods/ services. Definition of ‘business’ is contained in section 2(17) of the GST Act. A ‘non-business’ outward supply is therefore to be interpreted accordingly.

Section 16(1) provides that, entitlement of ITC is subject to certain conditions relating to restrictions, time and manner. These conditions, restrictions and the manner, to the extent they are contained in section 16 and section 44 of the GST Act are mentioned below. In addition thereto certain additional conditions may be contained in rules which are yet to be prescribed.

4.    ITC Eligibility Conditions:

As per section 16(1) of the Model GST Act, the ITC can be taken only by a registered taxable person. In other words, registration under GST is a pre-condition for availing ITC.

As per section 16(2) of the Model GST Act, the ITC shall not be allowed if the fulfillment of following conditions is in question.

–    possession by claimant dealer of a tax invoice or debit note or such other prescribed taxpaying document(s) issued by a supplier registered
under this Act, against inward supply made by claimant dealer.

–    The supplier issuing such documents has actually paid to the account of appropriate government, tax charged in respect of such supply, either in cash or through utilisation of ITC availed by such supplier. 
–    receipt of goods and/or services by claimant dealer. [The purpose of this clause is to prevent misuse of ITC provision by indulging into practices like issuing ‘accommodation bills’].
–    the claimant dealer has furnished the returns u/s. 34.

Considering the provisions of ‘time of supply’ a question may arise that whether a claimant dealer would be eligible for ITC on advance payments made by him for inward supply. In this respect, it may be noted that the conditions mentioned in section 16(2) are anti-avoidance provisions. Hence as long as a supply (past or future) underlying any tax paid document (tax invoice, debit note etc.) is not doubted, ITC cannot be denied. Besides, as per Explanation 1 to Section 12 (2) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment. It’s also worthwhile to note that, provisions of section 16(2) are subject to provisions of section 36 of the GST Act. As per section 36(1) credit shall be allowed to the registered taxable person on provisional basis as self-assessed in his return. It may further be noted that, Table 11 of the GSTR-1 (statement of outward supply) requires supplier to disclose the cases where tax is paid on advance basis and identifying such tax payment qua a person from whom the advance is received. However, the identification of such advance qua invoices given in Table 12 of GSTR-1 may happen in the subsequent tax period. Till the time such invoice identification takes place, it is doubtful whether ITC will be available in GSTR-2 of the receiver.

Another issue which may arise as regards receipt of goods/services will be, whether ‘actual receipt’ of goods is essential or ‘constructive delivery’ can be said to be enough as a fulfillment of aforesaid condition. For example, ‘A’ located in Maharashtra directs ‘B’ located in Gujarat to supply goods to ‘C’ located in Delhi. In such case, although there is a single movement of goods from ‘B’ to ‘C’ and goods are never actually received by ‘A’,explanation to section 16(2) provides that, ‘A’ shall be deemed to have received goods.
Similarly, in case of job work transactions, section 20 provides that, the “principal” shall be entitled to take credit of input tax on inputs and capital goods even if the inputs/capital goods are directly sent to a job worker for job-work without their being first brought to his place of business.

In case of input service distributor (ISD) also, section 16(2)(b) may not be applicable, for such ISD is not a receiver of service, but only a distributor of credit. Conditions of section 16(2) are therefore required to be fulfilled by the respective units under the same PAN at which such credit is distributed.
   
5.    Reduction in ITC Set off
In following cases, ITC is not allowed fully, but is reduced to certain extent.

–    Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes. [As discussed above, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business only] – section 17(1). The manner of computation is yet to be prescribed.
–    Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting exempt supplies. In such case, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies- section 17(2). In this case, ‘zero rated’ supplies are treated as taxable supplies and supply on which recipient is liable to pay tax on reverse charge are regarded as exempt supply. For Example: ‘A’ supplies commodity X which is taxable at 5% (Turnover = Rs.50 Lakh), commodity ‘Y’ which is exempt from tax (Turnover = Rs.20 Lakh), Commodity ‘X’ and ‘Y’ are supplied to SEZ unit (Turnover = Rs.15 Lakh) and supply of commodity ‘Z’ on which the receiver is liable to pay tax under RCM (Turnover = Rs.10 Lakh). In this case, for the purpose of section 17(2) Taxable supply and Exempt supply shall be computed as under:

Taxable Supply = Rs.50 Lakh + Rs.15 Lakh = Rs.65 Lakh
Exempt Supply = Rs.20 Lakh + Rs.10 Lakh = Rs.30 Lakh.

If there is any inward supply in the hands of ‘A’ on which he is liable to pay tax under reverse charge, then such inward supply shall not be considered for the purpose of aforesaid calculation. The manner of computation u/s. 17(2) is yet to be prescribed.

–    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), or avail of, every month, an amount equal to 50% of the eligible ITC on inputs, capital goods and input services in that month.

6.    Ineligible / Negative List Items
In respect of inward supply of following goods/ services specified in section 17(4), the ITC shall not be allowed.

As regards the aforesaid goods and services, following observations may be noted:-

–    There is a need to expand the relaxation given against services mentioned in Sr. No.4 above, to all government notified services. Presently, supply of food and beverages, outdoor catering and health services (Sr. No.2) would not be eligible for ITC, even if it’s obligatory for an employer to provide these services to its employees as Government notified services under any law for the time being in force.
–    Presently, ITC of membership of a club, health and fitness centre, will also be denied to film and media industry, actors, sportsman, agencies providing personal security services etc., for whom inward supply of such services is a business necessity.
–    The term ‘construction’ includes capitalised expenditure, even though expenditure is incurred on renovation, additions or alterations or repairs. A business man may have to face a situation, where after the year end, at the time of audit the auditor may require him to capitalise certain expenses, which have been earlier debited to revenue accounts. In such case, he may be required to reverse the ITC availed earlier.

In addition to aforesaid cases, the ITC is also not available in following cases:

–    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 ITC shall not be allowed on the said tax component.

–    Where any tax is paid in terms of section 67, 89 or 90, such tax shall not be regarded as eligible ITC. Section 67 of the Act deals with payment of taxes as a result of determination by the tax authorities, in cases involving non-payment/ short payment by reason of fraud or any wilful misstatement or suppression of facts to evade tax. Section 89 deals with payment of taxes by any person who transports any goods or stores any goods while they are in transit in contravention of the provisions of this Act. Section 90 deals with payment of taxes in circumstances leading to confiscation of goods/ conveyance.

7.    Timing for the purpose of Taking ITC

–    As mentioned above, as per section 36, the ITC can be claimed by the assessee (‘Tax Payer’) in his tax returns on provisional basis and can be used for payment of self-assessed output tax liability. Section 37 deals with provisions relating to Matching, reversal and reclaim of ITC. The matching takes place, by comparing the details of inward supplies and tax credit furnished by assessee (as a receiver of supply) with the details furnished by his supplier in his return. The claim of ITC that match with the details of corresponding supplier’s returns are finally accepted and communicated to the assessee. Where the ITC claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy is communicated to both such persons. Similarly, duplicate claims of ITC are also communicated to receiver. The amount in respect of which any discrepancy is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in his return for the month succeeding the month in which the discrepancy is communicated. However, as regards duplicate claims, the excess ITC claimed shall be added to the output tax liability of the recipient in his return for the month in which the duplication is communicated.

    For Example: A return for the month of July 2017 is filed on 20th August 2017. The discrepancies are communicated in August 2017. Such discrepancy will be required to be rectified in return pertaining to month of August 2017, which will be filed on 20th September 2017. If discrepancy is not rectified, then demand pertaining to excess ITC claimed will be added in the tax liability for the month of September 2017. However, if this was a case of duplicate claim, then such demand will be added in the tax liability for the month of August 2017 itself.

    It is important to note that, recipient shall be entitled to reclaim the credit only if the discrepancies communicated to suppliers are subsequently rectified by him in his valid returns within the time limit specified in section 34(9) i.e. earlier of due date for furnishing of return for the month of September following the end of the financial year or the actual date of furnishing of relevant annual return.

–    As per section 16(4), A taxable person shall not be entitled to take ITC in respect of any invoice or debit note for supply of goods or services after furnishing of the return u/s. 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit notepertains or furnishing of the relevant annual return, whichever is earlier. In other words, if debit note pertaining to invoice is issued by the supplier after the aforesaid period, the benefit of ITC pertaining to such debit note may not be available to the receiver.
–    Where the goods against an invoice are received in lots or instalments, the entire credit becomes eligible only 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 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 ITC availed by the recipient shall be added to his output tax liability, along with interest thereon. This condition is applicable only in respect of inward supply of services and not in respect of goods.
–    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 is allowed in staggered manner over a period of not less than 3 years. The claim in the first year not to exceed 1/3rd of the total credit and claim in second year not to exceed 2/3rd of the total credit.

8.    Availability of ITC in special circumstances – Section 18.

In following cases, a registered taxable person shall be allowed to take credit subject to certain prescribed conditions and provided that the ITC is claimed within the expiry of one year from the date of issue of tax invoice relating to such supply.

–    If a person applies for registration under the Act within 30 days from the date on which he becomes liable to registration, after registration, he shall be entitled to take credit of ITC 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 from which he becomes liable to pay tax under the provisions of this Act. For Example: if threshold turnover exceeds Rs.20 Lakh on 2nd October 2017. The person applies for registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 1st October 2017. The provision does not cover the ITC in respect of capital goods held in stock.
–    If a person applies for voluntary registration, he shall be entitled to take credit of input tax 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 grant of registration. For Example: if a person applies for voluntary registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 23rd October 2017. The provision also does not cover the ITC in respect of capital goods held in stock.
–    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, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under normal levy. This provision covers the credit ITC in respect of capital goods held in stock reduced by such percentage as may be prescribed.
–    Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person shall be entitled to take ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable. The credit of such capital goods is allowed on percentage reduction method.

9.    Transfer of ITC in certain situations.

Section 18(6) provides for transfer of ITC, where there is a 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. In such case, the said registered taxable person shall be allowed to transfer the ITC that remains unutilised in its books of accounts to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed. It is however surprising to note that, there are no similar provisions for transfer of credit, when business is succeeded as a going concern by legal heir or representative of a deceased taxable person.

10.    Payment of amount of ITC in respect of goods held in stock, or payment of higher amounts in certain cases:

–    Cancellation of Registration: As per section 26(7), every registered taxable person whose registration is cancelled shall pay an amount, equivalent to the ITC 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 cancellation or the output tax payable on such goods, whichever is higher. In case of capital goods, an amount equal to the ITC taken on the said capital goods reduced by the percentage points as may be prescribed in this behalf or the tax on the transaction value of such capital goods, whichever is higher shall be paid.
–    Supply of capital goods: As per section 18(10), in case of supply of capital goods or plant and machinery, (other than refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap) on which ITC has been taken, the registered taxable person shall pay an amount equal to the ITC taken on the said capital goods or plant and machinery reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods or plant and machinery, whichever is higher.
–    From Normal Levy to Composition Scheme or From Taxable to Exempt Supply: As per section 18(7), where any registered taxable person, who has availed ITC, switches over as a taxable person for paying tax under composition scheme or, where the goods and / or services supplied by him become exempt absolutely u/s.11, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of such switch over or, as the case may be, the date of such exemption.

11.    Lapse of ITC in certain situations

If after making such payment u/s. 18(7) above, any amount remains in the electronic credit ledger, then such balance amount shall lapse.

12.    Input Service Distributor (ISD)

The concept of ISD is applicable only in case of inward supply of services and not in case of goods. The ISD is not an actual supplier, but he is merely a distributor of credit. For instance, A has administrative office in Maharashtra and factories at Maharashtra, Gujarat and Tamil Nadu. In such case, it may happen that all the input services are paid from administrative offices at Maharashtra and bill for such services will be raised by the supplier of services in the name of Administrative office, although the actual services are performed at Gujarat, or that the benefit of service is received at factories located at Maharashtra, Gujarat as well as Tamil Nadu. In such case, administrative office will work as ISD, and distribute all the ITC to all the beneficiary units in a prescribed manner. The manner in which ISD can distribute the credit is given in section 21 of the Act. Where the ISD and units to which the ITC is to be distributed are located in the same State, then credit of CGST shall be distributed as CGST and Credit of SGST shall be distributed as SGST. The credit of IGST shall be distributed as CGST as well as SGST, in a manner prescribed. If the ISD and units to which the ITC is to be distributed are located in the different States, then the credit of CGST shall be distributed as IGST or CGST and the credit of SGST shall be distributed as IGST or SGST. (However, it is not clear as to how the credit of CGST/SGST of one State shall be distributed to unit located at other State as CGST/SGST of that State).

As per Explanation 2 to section 21, recipient of credit means the supplier of goods and / or services having the same PAN as that of Input Service Distributor. Therefore, unless the job worker’s premises is registered as additional place of business of the Principal, the distribution of ISD to a job-worker seems difficult.

13.    Payment of Tax using ITC

–    As per section 44 of the Act, the ITC as self-assessed in the return of a taxable person shall be credited to his electronic credit ledger on provisional basis. The amount available in the electronic credit ledger may be used for making any payment towards output tax payable in such manner and subject to such conditions and within such time as may be prescribed. It, therefore, appears that, there may be rules for utilisation of ITC within a specific time period. Under the current tax regime, there is no limit of utilsation of Cenvat Credit under Central Excise/Service Tax laws. However, in State laws, there is time limit for carry/forward of tax credits subject to provisions for refund of unutilised credits.
–    The amount of IGST-ITC shall first be utilised towards payment of IGST and the amount remaining, if any, may be utilised towards the payment of CGST and SGST, in that order. The amount of CGST-ITC shall first be utilised towards payment of CGST and the amount remaining, if any, may be utilised towards the payment of IGST. Similarly, the amount of SGST-ITC shall first be utilised towards payment of SGST and the amount remaining, if any, may be utilised towards the payment of IGST. The ITC on account of CGST shall not be utilised towards payment of SGSTand vice versa.
–    The amount in electronic credit ledger shall not be used for the purposes of making payment of interest, penalty, fees, or any other amount. Similarly, such amount shall not be used for making payment of liability under reverse charge or composition tax.
–    It may be noted that, in case of excess claim due to mismatch of ITC, taxable person shall be liable to pay interest on such excess claim at the prescribed rate for the prescribed period. In cases mentioned in section 37(8), interest shall be payable, from the date of availing of credit till the corresponding additions are made. If however, any excess claim of ITC added earlier is later on found to be correct due to acceptance of additional liability by the supplier of such goods/services, then such interest paid by the assessee shall be refunded to him to the extent it does not exceed the amount of interest paid by the said supplier.
 
14.     Conclusion:

    ITC and its eligibility are the key constituents of Value Addition Based Taxation Regime on which the concept of GST is designed. It is desirable that there should not be any undue restrictions on its eligibility and admissibility. The seamless flow of ITC credit will result in lower commodity price and  the prices so arrived at will be better indicators of economic value of a particular commodity. The ‘matching concept’ demands highly sophisticated and very responsive Information Technology software tools and facilities. With a tax base of around 70-80 Lakh tax payers, there will be hundreds of crores of invoices which will be required to be processed every month by the GST network. Although ‘failure of matching concept’, faulty place of supply rules, composition taxes, restricted or negative list goods and services, reverse charge etc are some of the hindering factors, the Revised Model GST law has made an attempt to facilitate better credit flow as compared to the existing tax laws. But, finally, it is the implementation which will  determine whether the effect of cascading of taxes on price will be minimised and reduction in prices will be achieved or not. Let us hope for the best.