Analysis of input tax credit (ITC)

Clipped from: https://taxguru.in/goods-and-service-tax/analysis-input-tax-credit-itc.html

INTRODUCTION

These days we are hearing a lot in news that India’s position in world’s bank ranking on ease of doing business has improved at a very good level, so what has been the reason behind it, it has been the goods and services tax and it has been the provisions of ITC I.e., input tax credit which form the backbone of GST allowing seamless flow of credit across the supply chain. One of the main purposes of bringing GST is that it would remove cascading effect by facilitating credit of tax paid on receipt of goods and services used in furtherance of business of further supply at each stage of value addition.

WHAT IS ITC?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs. Input tax credit in relation to GST to a registered person means, the CGST, SGST/UTGST or IGST charged on any supply of goods or services or both made to him. It includes IGST charged on imports & tax payable under reverse charge mechanism, but does not include the tax paid under composition levy.

Let’s take an example of a bakery, we all understand what a business model of bakery is all about, it will procure raw material in the form of sugar, gram floor etc. And then it will provide outward supply in the form of pastries, bread, rolls etc. So, the bakery has procured sugar for which it has paid the cost of sugar let’s say Rs 50 and GST of Rs 4 on it. And further it will sell pastries say for RS100 and charge GST of RS20 on it. It has recovered RS 20 from customers and paid RS 4 to the supplier so the amount to be paid to the government will be RS 16 (I.e., 20-4).

CONDITIONS FOR CLAIMING ITC

Paying GST on inputs is not enough for claiming ITC, there are 4 conditions which needs to be satisfied which are-

1. (a)Tax invoice/ Debit note or other taxpaying documents is in possession.

(aa) the details of the invoice or debit note referred to in (a)

1. has been furnished by the supplier in the statement of outward supplies and

2. such details have been communicated to the recipient of such invoice or debit note in a manner as specified under section 37

2. Should have received the goods or service or both.

There is an exception to this point 1. If goods are supplied on direction of third person, then goods are deemed to be received by third person when supplied by supplier to the recipient.

2. Where the services are provided by the supplier to any person on the direction of and on account of such registered person.

3. The tax charged in respect of such supply has been actually paid to the government.

4. Return under sec 39 needs to be filled.

Let’s take an example, Imagine, you brought an important tax invoice home from office for safe keeping and you put it on the living room table while you go wash up. Meanwhile, your annoying little nephew brought hot spicy samosas from outside. But instead of walking a couple steps to the kitchen, that lazy little kid drags your tax invoice and put his samosas on it (Facepalm). You come back and you see that chutney & oil stained, torn invoice. OHH SHIT!!!! Now you cannot claim ITC. So be careful, a little mistake can cost you your precious ITC.

BLOCK CREDIT

Is the ITC that we want to utilize will be available for utilization?

Even after fulfilling all 4 conditions still a person may not be able to claim ITC because of the concept of block credit. Input tax credit cannot be claimed on following goods and services when purchased or received:

1. Motor vehicles and conveyance for transportation of persons having approved capacity of not more than 13 persons (including the driver), except when they are used for making the following taxable supplies namely:

a) Further supply of such motor vehicles or

b) Transportation of passengers or

c) Imparting training on driving, such motor vehicle

2. Vessels and aircraft except when they are used:

i. For making following taxable supplies namely:

  • Further supply of such vessel or aircraft or
  • Transportation of passenger or
  • Imparting training on navigation of such vessel
  • Imparting training on flying such aircraft

ii. For transportation of goods

3. Food, beverages, club membership fees, beauty treatment, plastic surgery, rent a cab, life insurance, health insurance and others

4. Services of general insurance, servicing, repair & maintenance

5. Sale of membership in a club, health, fitness center

6. Travel benefits

7. Works contract

8. Constructing an immovable property on own account

9. Composition scheme

10. Nonresidents

11. Personal use

12. Goods disturbed as free samples or gift

13 Goods lost, destroyed, stolen or written off

14. Fraud cases

15. Restaurant

Now, I know it got a tad bit boring for you all. But bear with me everybody, for everything of value requires efforts. You just cannot afford to miss a point here, I will tell you why? Let’s continue with my previous example, this time you were very careful with all your tax invoices, you fulfilled all 4 conditions but still not able to claim ITC, WHY? Because this time it’s for motor car and the government said NOO that is covered under blocked credit! And you know when government said no means no. And hence the above points are of utmost importance. So rise and shine everybody and let’s move to the next topic.

APPORTIONMENT OF CREDIT

APPORTIONMENT OF INPUTS TAX ON INPUTS AND INPUT SERVICES

T= Total Input tax on Input and Input services

Input Services

APPORTIONMENT OF INPUT TAX ON CAPITAL GOODS

Input Tax On Capital Goods

WHO ARE ELIGIBLE TO TAKE INPUT TAX CREDIT

Section 16 of the CGST Act, prescribed every registered person shall, subject to such conditions and restrictions prescribed under section 49, be entitled take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business.

WHO ARE NOT ELIGIBLE TO TAKE INPUT TAX CREDIT

(a) A registered person working under composition scheme even when received goods or services are used in furtherance of his business

(b) A non-resident taxable person on receipt of goods and services except on goods imported by him.

AVAILMENT OF CREDIT

A. Person who has applied for registration within 30 days from the date on which he becomes liable for registration,

B. Person voluntary applied for registration Shall be entitled to take credit of

  • Input tax in respect of inputs held in stock
  • Inputs contained in semi-finished goods
  • Inputs contained in finished goods held in stock

on the day immediately preceding the date from which he becomes liable to pay tax or the date of grant of registration respectively.

C. Registered person switching from composition levy to normal tax payment

D. Registered person whose exempt supplies becomes taxable supplies Shall be entitled to take credit of

  • Inputs as such held in stock
  • Inputs contained in semi-finished goods
  • Inputs contained in finished goods held in finished goods held in stock
  • Capital goods

(ITC = Input tax –5% per quarter or part of these from the date of invoice)

MANNER OF UTILISATION OF ITC

The manner of availment and utilization of Input Tax credit of CGST, SGST, IGST and UTGST has explained in the following Table-

INWARD SUPPLYOUTWARD SUPPLY
1. IGSTIGST (first)CGST (any)SGST (any)
2. CGSTCGST (any)IGST (any)
3. SGSTCGST (any)IGST (any)

A. IGST should be first utilized fully then only the balance of CGST and SGST can be used.

B. It should be noted that CGST cannot be used against SGST/UGST or vice-versa.

TENURE TO AVAIL ITC

ITC has to be taken till:

  • Due date of the return for the month of September of next financial year
  • Annual return filed for relevant financial year Whichever is earlier.

A registered person can avail ITC only up to 1 year from the date of issue of tax invoice and up to 5 years in case of capital goods.

ITC UNDER REVERSE CHARGE (RCM)

A supplier cannot take Input Tax Credit of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax under reverse charge. Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit. The tax under reverse charge has to paid through cash only.

REVERSAL OF CREDIT

  • Registered person switching from normal scheme of payment of tax to composition scheme
  • Taxable supply becomes exempt supply
  • Cancellation of registration Amount to be reversed is equivalent to ITC on

1. Inputs as such held in stock

2. Inputs contained in semi-finished goods

3. Inputs contained in finished goods held in stock

4. Capital goods- reversal on prorate basis pertaining to remaining useful life in a month

(taking useful life as 5 years)

[After reversal balance if any in electronic credit ledger shall lapse]

CONCLUSION

Even though implementation of GST without the support of the proper database and computer knowledge among common people have led to the negative impact on it. Some provisions of ITC are even undue hardship on assesses like sec 16 putting restriction on availing ITC if payment not made to the government by supplier. However, when we see the organized sector which have integrated units the picture is quite different. They have been able to thrive and prosper in GST scenario as systematic working culture has been developed. Taxes have minimized and ITC also reduces the cost of producing/supplying goods/services and thereby reduces the cascading effect. So, the long term picture will be a win-win situation.

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