Introduction
Indirect taxes in India have evolved significantly, from the Salt Tax to MODVAT, and now to GST. In indirect taxes like GST, the government levies tax at every stage of the supply chain. Input Tax Credit (ITC) under GST allows businesses to deduct the tax paid on purchases from their final tax liability. The absence of ITC in the GST system will lead to a cascading effect of taxes. As a result, costs of goods and services would increase substantially. Consequently, profit margins would shrink, making businesses less competitive in the global market.
Eligible ITC Under GST
Section 16 of Central Goods And Services Tax Act, 2017 (CGST Act, 2017) prescribes eligibility and conditions for taking Input Tax Credit.
(1) A registered person can avail credit of GST paid on the purchase of any supply of goods or services only if used in the course or furtherance of his business.
(2) The registered person must have a tax invoice or debit note from the registered supplier.
(3) The supplier must report the invoice details in GSTR1, and the details should reflect in recipient’s form GSTR2B.
(4) The recipient must have received the goods or services. It includes goods or services supplied to another person on the recipient’s direction.
(5) There should be no restriction on the Input Tax Credit in respect of the said supply.
(6) The supplier must pay the GST on such supply to the Government.
(7) Buyer must file a return under section 39 to avail the ITC.
(8) Where the goods are received in lots or instalments, recipient will get ITC on the receipt of the last lot or instalment.
(9) ITC is available only when recipient makes payment to the supplier within 180 days, for the invoice amount plus GST.
(10) Time limit for recipient to claim ITC is up to 30th November following the end of the financial year to which the invoice pertains or after filing the annual return, whichever is earlier.
Ineligible ITC Under GST
CGST Act specifically prescribes the conditions when the recipient cannot claim the credit of GST paid on inputs. Let’s have a look at those conditions:
No ITC on following inputs (Section 17(5) of the CGST act, 2017)
1. Motor Vehicles
No ITC on Motor vehicles for transportation of persons with an approved seating capacity of a maximum of 13 persons. Exceptions are when recipient is using them for further supply of motor vehicles, passenger transportation or driver training for such vehicles.
2. Vessels and Aircrafts
No ITC on Vessels and aircraft except when used for further supply of same goods, passenger or goods transportation, or pilot training for such vessel or aircraft.
3. General insurance, servicing, repair and maintenance services
Recipient cannot avail ITC if these services relate to the motor vehicles, vessels or aircraft referred above.
Following are the exceptions:
(i) If used for the specified purposes (like further supply, passenger transport, training).
(ii) If used by manufacturers of such vehicles, vessels, or aircraft.
(iii) If used by providers of general insurance for these items.
4. Miscellaneous Items
Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, and leasing or hiring of motor vehicles, vessels, or aircraft, except when:
• Used for making a taxable supply of the same category
• Part of a composite or mixed supply
5. Clubs
Membership of a club, health and fitness centre
6. Travel of Employees
Employee travel benefits like leave or home travel concessions, except when provided because of mandatory conditions by law.
7. Works Contract Services
Works contract services for construction of immovable property except when used for further supply of works contract service.
8. Immovable Property
Goods or service received for construction of an immovable property on his own account even if used for business purpose.
9. Composition Scheme
Goods or services taxed under the composition scheme (Section 10).
10. Non-Resident Taxable Persons
No ITC for non-resident taxable persons, except for imported goods.
11. CSR Activities
Goods or services used for CSR activities as per section 135 of the Companies Act, 2013
12. Personal Expenses
Inputs used for personal consumption
13. Contingencies
Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
14. No ITC on taxes paid due to:
- Fraud (Section 74)
- Detention or seizure of goods (Section 129)
- Confiscation of goods (Section 130)
Mismatch in Input Tax Credit
A mismatch in ITC claims occurs when the ITC claimed by a taxpayer is different from the information available with GST department.
Mismatch in ITC credit reflects in following ways:
1. When the ITC claimed in GSTR-3B does not align with the ITC available in GSTR-2A or GSTR-2B.
2. When the details of outward supplies in GSTR-3B do not match the declarations in GSTR-1.
Common Causes of ITC Mismatch:
1. When the taxpayer claims more or less ITC than what is reflected in their purchases or the GST returns filed by their suppliers.
2. If suppliers submit their invoices late or if the taxpayer claims ITC before the supplier’s details are updated in the system.
3. Mistakes in the GST return, such as incorrect GSTIN, invoice number, or tax amounts.
4. Deliberate attempts to claim ITC on fake or non-existent purchases result in mismatches.
5. Lack of proper reconciliation between the books of accounts and GST returns.
6. ITC mismatches can lead to legal and financial consequences, including denial of ITC, penalties, and increased scrutiny from Department.
ITC Reconciliation: Importance and Best Practice
The process of ITC Reconciliation is essential to ensure that a registered taxpayer receives the correct credit for their purchases under GST.
Best Practices for ITC Reconciliation:
1. Consistently compare your purchase register with GSTR-2A and GSTR-2B to quickly identify and address any discrepancies.
2. Ensure that each entry in your records is backed by valid documents such as invoices, debit notes, credit notes, and any necessary amendments.
3. Maintain regular and clear communication with suppliers to ensure they file accurate and timely returns.
4. Implement GST reconciliation software to automate the reconciliation process.
5. Regularly cross-verify data from e-way bills with invoices to reconcile taxable amounts and identify any discrepancies.
6. Reconcile annual returns with monthly or quarterly returns to ensure consistency in the data reported throughout the year.
7. Include amendments made to GST returns from the previous financial year in the current financial year’s reconciliation process.
8. Match the export data reported in Table 6A of GSTR-1 with the corresponding declarations in GSTR-3B. Additionally, verify export details in GSTR-1 against the shipping bills submitted on ICEGATE to ensure consistency and accuracy in reported export transactions.
9. Keep a close watch on the utilization of ITC claimed and ensure it matches the ITC available as per GSTR-2A and GSTR-2B.
10. Conduct periodic internal audits to ensure that the reconciliation process is robust and all ITC claims are legitimate.
Reversal of ITC Under GST
A registered person who pays GST on the goods and services purchased can use this tax in discharge of his output tax liability. This is the basic premise of Input Tax Credit.
However, in certain circumstances, the recipient must reverse the ITC availed on inputs. Reversal of ITC means the recipient must pay the GST used as Input Tax Credit in the form of Output Tax Liability.
Specific Cases Requiring ITC Reversal:
1. When recipient fails to pay the supplier for the value of supply plus GST within 180 days from the invoice date. (Section 16(2) of the CGST Act, read with Rule 37 of the CGST Rules)
2. If the recipient avails ITC on goods and services not allowed as per section 17(5) of the CGST Act, 2017.
3. Where the recipient used capital goods partly for exempt supplies and partly for taxable supplies. In such case, recipient should follow Rule 43 of the CGST Rules, 2017 to reverse the ITC.
4. When the recipient claims depreciation on the GST component of capital goods as per Income-tax Act, 1961.
5. Where a supplier issues credit note to the Input Service Distributor.
6. The recipient must reverse the ITC if the supplier fails to deposit the GST by the due date of filing GSTR-3B. (Rule 37A of CGST Rules, 2017)
7. Rule 38 of CGST Rules provides that banking companies, financial institutions, and NBFCs can only avail 50% of the eligible ITC on inputs. The remaining 50% ITC must be reversed
8. Rule 42 and 43 of CGST Act provides for reversal of ITC credit when the recipient uses Capital goods and inputs to make an exempt supply or for manufacturing supplies for personal purposes.
9. Rule 44 of CGST Rules stipulates conditions when registered person opts for the composition scheme or goods/services supplied by him become exempt. In such cases, they must reverse the ITC on inputs held in stock, semi-finished goods, and finished goods as on the date of the switch or exemption.
10. Where a registered person supplies capital goods on which ITC has been availed, they must pay an amount equal to the ITC taken reduced by a specific percentage for each quarter or part thereof from the invoice date or date of use of capital goods, whichever is later. (Rule 44A)
We have discussed some of these cases in detail later in the blog.
ITC Reversal On Non-Payment of Invoice Within 180 days
Section 16(2) of the CGST Act, 2017 and Rule 37 of the CGST Rules, 2017 detail the conditions for Input Tax Credit (ITC) reversal if recipient does not make payment within 180 days.
1. A registered person must pay the supplier the value of the supply plus GST within 180 days from the invoice date.
2. If the recipient fails to pay within 180 days, they should reverse the ITC along with interest as per Section 50 of the CGST Act, 2017. They must report the same in GSTR-3B for the period immediately following the expiry of 180 days. (Notification 19/2022-CT dt. Oct 2022)
3. As per clarification via notification 26/2022-CT proportionate reversal of ITC needs to be done in case of partial payment.
4. The recipient must add the reversed ITC plus interest amount to their output tax liability.
5. Once the recipient makes the payment, they can reclaim the ITC in the subsequent tax period.
When Seller Issues Credit Note to the ISD
When a supplier issues a credit note to an Input Service Distributor (ISD), Rule 39(1) of the CGST Rules, 2017 applies. This rule outlines the treatment of Input Tax Credit (ITC) in such cases:
Manner of ITC Re-Adjustment As Per the Rules
1. Firstly, the ISD must allocate the ITC reduction to each recipient. They should allocate it in the same ratio as the original ITC distribution.
2. Next, subtract the apportioned ITC from the ITC distribution of the month when the credit note is included in the FORM GSTR-6 return.
3. If the apportioned amount exceeds the available ITC, add the difference to the recipient’s output tax liability.
ITC Under RCM
Under normal cases, a supplier of goods/service collects the GST from recipient and pays to the government. Subsequently, the recipient uses this as ITC in the discharge of his output tax liability.
However, Reverse Charge Mechanism is a unique tax collection process. Here, the onus to collect GST shifts from supplier to the recipient. Consequently, it is the recipient who collects the GST and makes the payment of the same.
Provisions of ITC Under Reverse Charge Mechanism:
• Section 16 of CGST act, 2017 governs the provisions of ITC under Reverse Charge Mechanism. It says that the recipient can claim ITC of GST under Reverse Charge only if inputs are used for business purposes.
• The recipient is eligible to claim the ITC under Reverse Charge and not the supplier.
• The recipient cannot use ITC for payment of output tax liability under RCM. They must pay the tax in cash only.
ITC on Capital Goods
Section 2(19) of the CGST Act, 2017 defines Capital Goods as those goods whose value is capitalized in the books of account of the person claiming the ITC. Furthermore, the registered person should use such capital goods in the course of or furtherance of business.
Rule 43 of CGST Rules, 2017
A registered person can claim ITC on Capital Goods the same as on inputs subject to some conditions. Specifically, Rule 43 prescribes the manner in which a registered person can claim ITC on capital goods;
1. The registered person should use the Capital Goods for business purposes.
2. Taxpayers cannot claim ITC if they claim depreciation on the GST component of the capital asset.
3. Taxpayers cannot claim ITC if they use capital goods exclusively for personal purposes or 100% exempted sales.
4. The principal manufacturer is eligible to claim ITC if a capital asset has been sent to a job worker for job work.
5. In some cases, taxpayers use capital goods partly for personal and partly for business purposes or partly for normal sales and partly for exempt sales. In such cases, they must calculate ITC using the below method:
(i) First, identify the total input tax paid on the capital goods.
(ii) Next, assume the useful life of the capital asset as 5 years.
(iii) Next, divide the total input tax by 60. Here you get the monthly ITC amount.
(iv) Finally, subtract the ITC attributable to personal use and exempt supplies from the total ITC to get the net eligible ITC.
Recent Amendments in ITC
1. An office receiving input services on behalf of deemed distinct persons is now classified as an ‘ISD’ (Section 2(61) of CGST Act). Accordingly, as per Section 20 of the CGST Act;
- A person receiving common ITC for the deemed distinct persons must register as an ISD.
- Additionally, for the distribution of ITC of the services liable to RCM, the tax must be paid by the normal registration in the State of ISD.
2. An e-commerce operator can now opt for the composition scheme. However, this is only applicable if the aggregate turnover in the preceding financial year does not exceed 50 lakhs, as per Section 10 of the CGST Act, 2017.
3. Companies cannot claim Input Tax Credit for GST paid on goods or services used for CSR activities under section 135 of the Companies Act, 2013. (Section 17(5) of CGST Act)
4. Restriction on filing of returns/statements under Section 37 (GSTR 1), section 39 (GSTR 3B), Section 44 (GSTR 9) and Section 52 (GSTR 8) to a maximum period of three years from the due date of return filing. (Finance act, 2023)
5. ‘Supply of custom bonded warehoused goods before clearance for home consumption’ is now included which is used in computation of the value of exempt supplies. This is for the ITC reversal under Rules 42 and 43 of the CGST Rules, 2017. (Finance Act, 2023)
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