TAX LAWS-II PROJECT

ON

INPUT TAX CREDIT

Mohammad Hasnain
Sem.: - VII, (S/F),
B.A., LL. B (Hons.),
Faculty of Law,
Jamia Millia Islamia.

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 TABLE OF CONTENT

Sl. No. CONTENT PAGE NO

1. ACKNOWLEDGEMENT 3

2 INTRODUCTION 4

3 ELIGIBILITY AND CONDITIONS FOR TAKING 5

4 AVAILABILITY OF CREDIT IN SPECIAL 9

5 MECHANISM OF INPUT TAX CREDIT 10

6 CONCLUSION 14

2
 ACKNOWLEDGEMENT

Firstly, I would like to express my profound sense of gratitude towards the

Further, I am also thankful to Mr. Ekramuddin sir for his invaluable support,
encouragement, supervision and useful suggestions throughout this research work.
His moral support and continuous guidance enabled me to complete my work
successfully. His intellectual thrust and blessings motivated me to work rigorously
on this study. In fact, this study could not have seen the light of the day if his
contribution had not been available. It would be no exaggeration to say that it is his
unflinching faith and unquestioning support that has provided the sustenance
necessary to see it through to its present shape.

MOHAMMAD HASNAIN

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 INPUT TAX CREDIT

I. INTRODUCTION

Input Tax Credit can be said to be one of the key elements of the entire Goods and Service
Tax (GST) framework with one of the major USPs i.e. seamless flow of credit in the entire GST
chain. The present indirect taxation system suffers from a cascading tax effect due to non-
availability of credit at various points in the supply chain.1 However, under the GST regime, the
credit of GST is expected to be available at every stage in the entire supply chain. Input Tax
Credit (ITC) is the core concept of GST as GST is a destination-based tax. "Input tax credit"
means a credit of ‘input tax'- section 2(56) of CGST Act, 2017. The burden of proof on taxable
person availing input tax credit - Where any person claims that he is eligible for input tax credit
under this Act, the burden of proving such claim shall lie on such person - section 155 of CGST
Act.2 Further, it avoids the cascading effect of taxes and ensures that tax is collected in the State
in which goods or services or both are consumed. Moreover, Section 2(62) of CGST Act defines
‘input tax’ as follows:

“Input tax” in relation to a registered person, means the Central tax (CGST), State tax
(SGST), Integrated tax (IGST) or Union territory tax (UTGST) charged on any supply of
goods or services or both made to him and includes—

 The integrated goods and services tax charged on the import of goods,
 The tax payable under the provisions of sub-sections (3) and (4) of section 9 [reverse
charge of CGST],
 The tax payable under the provisions of sub-sections (3) and (4) of section 5 of the
Integrated Goods and Services Tax Act [reverse charge of IGST],
 The tax payable under the provisions of sub-section (3) and sub-section (4) of section
9 of the respective State Goods and Services Tax Act [reverse charge of SGST], or
 The tax payable under the provisions of sub-section (3) and sub-section (4) of section
7 of the Union Territory Goods and Services Tax Act [reverse charge of UTGST],

1
Raju Choudhary, ITC Under GST, Input Tax Credit Under GST Eligibility & Utilisation of ITC, GSTINDIAHELP
(Apr. 15, 2017, 11:25 PM), https://www.gstindiahelp.com/itc-input-tax-credit-gst-law/
2
Raja Babu, Input Tax Credit, SIMPLET AXINDIA (Apr. 16, 2017, 11:46 PM),
http://www.simpletaxindia.net/2017/04/input-tax-credit--get-goods-and-service-tax.html

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 but does not include the tax paid under the composition levy. Input Tax Credit is eligible
only when it is credited to electronic credit ledger of taxable person.

II. ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT

Section 16(1) of CGST Act, 2017 says that every registered taxable person shall, subject to
such conditions and restrictions as may be prescribed and within the time and manner specified
in Section 49 of CGST Act, 2017, be entitled to take credit of input tax charged on any supply of
goods and services to him which are used or intended to be used in the course or furtherance of
his business and the said amount shall be credited to the electronic credit ledger of such person.
A proviso to Section 16(1) of CGST Act, 2017 specifically provides that credit of input tax in
respect of pipelines and telecommunication tower fixed to earth by a foundation or structural
support including foundation and structural support thereto shall not exceed: -

 1/3 of the total input tax in the financial year in which the said goods are received,
 2/3 of the total input tax, including the credit availed in the first financial year, in the
financial year immediately succeeding the year, referred to in clause (a) in which the
said goods are received, and
 The balance of the amount of credit in any subsequent fiscal year.

Section 16(2) of CGST, 2017 says that in spite of anything contained in Section 16, but
subject to the provisions of Section 36 of CGST, 2017, no registered taxable person shall be
entitled to the credit of any input tax in respect of any supply of goods and/or services to him
unless –

 He is in possession of a tax invoice or debit note issued by a supplier registered under

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  He has furnished the return under section 39.

Further, the first proviso to Section 16(2) of CGST, 2017 says that where the goods
against an invoice are received in lots or instalments, the registered taxable person shall be
entitled to take a credit upon receipt of the last lot or instalment. Moreover, the second
proviso to Section 16(2) of CGST, 2017 says that 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 input tax credit availed by the recipient shall be added to his
output tax liability, along with interest thereon, in the manner as may be prescribed. An
explanation is also there to section 16(2) of CGST, 2017 which says,

that for the purpose of section 16(2)(b), 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.

Where the goods against an invoice are received in lots or instalments, the registered
taxable person shall be entitled to the credit upon receipt of the last lot or instalment - first
proviso to section 16(2) of CGST Act. 3 Further, Section 39(1) of Sale of Goods Act, 1930 states
that delivery of goods to the carrier is prima facie delivery to the buyer. As per section 23(2) of
Sale of Goods Act,1930 if in pursuance of the contract, the seller delivers the goods to the buyer
or to a carrier or other bailee, for the purpose of transmission to the buyer, and does not reserve
the right of disposal, he is deemed to have unconditionally appropriated the goods to the
contract. It does not make difference whether the bailee or buyer was named by the buyer or not.
In Manwar Tent Factory v. UOI4, it was held that when contract stipulates for delivery of goods
F.O.R. basis at the place of dispatch, risk passes from consignor to consignee as soon as goods
are loaded at the place of dispatch. Thus, the transporter is an agent of buyer for the collection of

3
Dinesh Kumar, Deep Analysis of Section 16- Input Tax Credit, TAXGURU (Jun. 25, 1016),
https://taxguru.in/goods-and-service-tax/deep-analysis-section16-input-tax-credit-gst.html
4
AIR 1990 SC 1735

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goods. Hence, in my view, delivery to transporter is delivery to the agent and ITC can be taken
even if goods do not physically reach the place of a taxable person.

Moreover, of course, the supplier has to upload the invoice in his GSTR-1 and the
recipient has to accept it and include it in his GSTR-2. Furthermore, the receiver (of goods and
services) can take provisional credit on basis of return filed by the supplier. However, he will be
eligible to take final Input Tax Credit only after the supplier of such goods and services has paid
the tax. Input tax credit is available in respect of goods sent for job work and brought back for
further use. Further, in the case of Essel Propack Ltd. v. Commissioner of CGST, Bhwandi5, the
tribunal held that if CSR can be considered as input services and be included within the
definition of “activities relating to business” and if in doing, a company’s image before corporate
world is enhanced so as to increase its credit rating as found from the handbook of CSR activities
discussed above. The answer is in the affirmative since to win the confidence of the stakeholders
and shareholders including the people affected by the supply of raw material from their locality
say natural resources like mines and minerals etc., the hazardous emission that may result in
production activities which Tribunal allowed.

REVERSAL OF INPUT TAX CREDIT IF PAYMENT NOT MADE TO THE SUPPLIER WITHIN 180 DAYS

Where a recipient fails to pay to the supplier of goods or services or both (other than the
supplies on which tax is payable on a reverse charge basis), the amount towards the value of
supply along with tax payable thereon within a period of 180 days from the date of issue of
invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be
added to his output tax liability, along with interest thereon, in such manner as may be prescribed
- second proviso to section 16(2) of CGST Act. 6 If partial payment is made, the reversal will be
proportionate to the amount not paid to the supplier. If the recipient later makes payment to the
supplier, he can take credit of input tax - third proviso to section 16(2) of CGST Act. The
recipient can take input tax credit only if the tax has been actually paid by the supplier. Then
how Government is concerned about payment of invoice amount to the supplier? Why
Government is acting as recovery agent? It seems that the intention is to avoid bogus transfers of

5
2018 (9) TMI 247 - CESTAT MUMBAI
6
Abhay Desai, ITC Reversal due to Non-Payment within 180 days, TAXGURU (Mar. 18, 2018, 11:08 PM),
https://taxguru.in/goods-and-service-tax/itc-reversal-due-nonpayment-180-days.html

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input tax credit e.g. if a person has excess input tax credit, he can pass on this credit to others.
However, the remedy thought of seems to be worse than the disease as many genuine
transactions will get affected. Often in case of large works contracts, some retention money is
kept which is released after the warranty period. Further, some deductions from invoice for
various reasons is common. In such a case, this provision will create a great nuisance to taxable
persons.

The interpretation of Section 16(3) of CGST, 2017 is that 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, the input tax credit shall not be allowed on the said tax component.
And as per Section 16(4) of CGST says that a taxable person shall not be entitled to take input
tax credit in respect of any invoice or debit note for supply of goods or services after furnishing
of the return under Section 39 of CGST, 2017 for the month of September following the end of
financial year to which such invoice or invoice relating to such debt note pertains or furnishing
of the relevant annual return, whichever is earlier.

THE MANNER OF TAKING INPUT TAX CREDIT

Every registered taxable person shall, subject to such conditions and restrictions as may be
prescribed and, in the manner, specified in Section 49 of CGST Act, 2017 be 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 and the said amount shall be
credited to the electronic credit ledger of such person. Electronic Credit Ledger means the
electronic credit ledger referred to in Section 49(2) of CGST Act - section 2(46) of CGST Act.
“Electronic Credit Ledger” is the input tax credit ledger in electronic form maintained at the
common portal for each registered taxable person. 7 This credit can be utilized for GST liability
as specified in section 49(4) of CGST Act. “Input” 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(59) of CGST Act, 2017. Further, “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(60) of CGST Act.
“Outward supply” in relation to a person, means supply of goods or services, whether by sale,
7
Sukrati Agrawal, Input Tax Credit, TALLY (May. 24, 2018, 8:09 PM),
http://community.tallysolutions.com/custom_news/input-tax-credit-itc/

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 transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to
be made by such person in the course or furtherance of business - Section 2(83) of CGST Act.
Further, the documentary requirements and conditions for claiming input tax credit are that 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 as mentioned in Rule 36 of CGST and SGST
Rules, 2017: -

o an invoice issued by the supplier of goods or services or both in accordance with the
provisions of Section 31 [Invoice of the supplier of goods or services or both]
o an invoice issued in accordance with the provisions of section 31(3)(f), subject to
payment of tax [tax paid on reverse charge basis]
o a debit note issued by a supplier in accordance with the provisions of section 34.
o a bill of entry or similar document prescribed under Customs Act or Rules for assessment
of IGST
o an invoice or credit note issued by an Input Service Distributor in accordance with rule
54(1) of CGST Rules, 2017.

Input tax credit shall be availed by a registered person only if all the applicable particulars as
prescribed in Invoice Rules are contained in the said document, and the relevant information, as
contained in the said document, is furnished in form GSTR-2 by such person - Rule 36(2) of
CGST and SGST Rules, 2017.8 Normally, Input Tax Credit is taken on basis of ‘Electronic
Credit Ledger'. However, if advance payment was made before receipt of goods and services,
input tax credit cannot be taken as goods and services are not received. At the time of payment of
GST on the advance, the supplier of goods and services cannot issue a tax invoice. He has to
issue only ‘receipt voucher'.

III. AVAILABILITY OF CREDIT IN SPECIAL CIRCUMSTANCES

As we all know Section 18(1)(a) of CGST, 2017 says that a person who has applied for
registration under the Act within 30 days from the date on which he becomes liable to
registration and has been granted such registration shall, subject to such conditions and

8
S Baulani, Input on Credit Goods, CACLUBINDIA (May. 09, 2017, 01:35 PM),
https://www.caclubindia.com/experts/input-on-capital-goods-2472544.asp

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 restrictions as may be prescribed, 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 from which he becomes liable to pay tax under the provisions of
this Act.9 But the issue with this section is as follows: -

 The law does not provide a seamless credit of input service/capital goods.
 In case a taxpayer applies late for reasons beyond his control, a legitimate claim of input
tax credit may be denied to him.

While Section 18(1)(b) of CGST, 2017 says that a person, who takes registration under
Section 25(3) of CGST, 2017 shall, subject to such conditions and restrictions as may be
prescribed, 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. However, the law does not provide seamless credit of input
service/capital goods Section 18(1)(c) of CGST, 2017 says that where any registered taxable
person ceases to pay tax under Section 9, he shall, subject to such conditions and restrictions as
may be prescribed, 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 and on capital goods on the day
immediately preceding the date from which he becomes liable to pay tax under Section 8 of
CGST. A proviso to section 18(1)(c) of CGST, 2017 says that the credit on capital goods shall be
reduced by such percentage points as may be prescribed in this behalf. But it is pertinent to note
that The law does not provide a seamless credit of input service.

IV. MECHANISM OF INPUT TAX CREDIT

Since this article focuses on basic concepts and framework of Input Tax Credit under the
GST regime. The bifurcation of the basic terms and mechanism are as follows: -

 Input –Any goods other than capital goods used/intended to be used by a supplier for
business purpose.

9
What is the procedure to claim input tax credits on stock at the time of registration under GST, GSTINDIA (Nov. 5,
2017), http://www.ca-sunilkumar.com/what-is-the-procedure-to-claim-input-tax-credits-on-stock-at-the-time-of-
registration-under-gst/

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  Input Service – Any service used/intended to be used by a supplier for business purpose.
 Input Tax – IGST/CGST/SGST/UGST charged on the supply of goods/services to a
person and includes tax payable on imports and under reverse charge mechanism but
excludes tax paid under composition scheme.
 Capital Goods – capital goods mean goods, the value of which is capitalised in the books
of accounts of the person claiming the credit and which are used/intended to be used for
business purpose.
 Conditions for Credit allowability-
Input Tax Credit can be availed only if:
o Such person possesses Tax Invoice, Debit note, Bill of Entry, ISD Invoice, or
Invoice issued by service recipient under Reverse charge mechanism.
o Prescribed particulars are mentioned on the Invoice and the recipient furnishes
relevant information in Form GSTR-2.
o Goods/Services have been received by such person.
o Tax charged in respect to such supply has been actually paid to the Government.
o The return has been furnished.
 Blocked Credits [Section 17(5), CGST ACT, 2017]
Input Tax Credit shall not be available in respect of the following10:
o motor vehicles and other conveyances, except when they are used for providing
the taxable supplies of further supply of vehicles/conveyances, transportation of
passengers/goods, or imparting training on driving, flying, navigating such
vehicles/conveyances;
o goods/services provided in relation to food and beverages, outdoor catering,
beauty treatment, health services, cosmetic and plastic surgery except when used
for providing similar taxable supplies;
o membership of club, health and fitness centre;
o Rent-a-cab, life insurance, health insurance (except where mandated by
Government), except when they are used for providing similar services;
o Travel benefits extended to employees on vacation;

10
Abhutpurv Shukla, Blocked Input Tax Credit, TAXGURU (Oct. 11, 2018, 06:09 PM), https://taxguru.in/goods-and-
service-tax/blocked-input-tax-credit-gst.html

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 o Works contract services supplied for construction of immovable property, other
than plant and machinery, except when used for similar service;
o Goods/services received for construction of immovable property (excluding plant
& machinery) on own account;
o goods/services on which tax has been paid under Composition scheme;
o goods/services received by a non-resident taxable person except on goods
imported by him;
o goods/services used for personal consumption;
o goods lost, stolen, destroyed, written off or disposed of by way of gift or free
samples;
o any tax not paid/credit wrongly availed by reasons of fraud/willful
misstatement/suppression, etc.
 Credit Disallowance on non-payment
If a recipient fails to pay to the supplier of goods/services (other than supplies taxable
under reverse charge mechanism), the amount towards value of supply along tax payable
thereon within a period of 180 days from the date of issue of invoice, the availed input
tax credit shall be added to the output tax liability of such recipient. Interest shall be
liable to be paid from the date of availing credit till the reversal. Such credit can be
availed on payment made later towards the value of supply of goods/services and tax
thereon.

CREDIT RESTRICTION

 Input Tax Credit of goods/services attributable to only supplies effected for business
purpose can be availed. Where goods/services are used partly for effecting taxable
supplies and partly for effecting exempt supplies, or party used for business and partly for
other purposes, the amount of credit shall be restricted as specified in Rule 7 of Input Tax
Credit Rules:
o Total Input Tax: - Input Tax on inputs/input services used exclusively for
nonbusiness/exempt purposes or where credit not allowed specifically Less: Input
Tax Input Tax on inputs and input services used exclusively for taxable supplies
including zero-rated supplies (T).

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 o Common Input Tax Credit: - Input Tax Credit attributable to exempt/non-
business supplies
o Eligible Common Input Tax Credit(C)
o Eligible Total Input Tax Credit = T+ C

CREDIT ON CAPITAL GOODS

 Input Tax Credit on capital goods used exclusively for effecting taxable/zero-rated
supplies shall be available.
 Credit on common capital goods used partly for business and partly for other purposes or
partly for effecting taxable supplies and partly for nontaxable/exempt supplies shall be
calculated as specified in the Input Tax Credit Rules.
 A banking company/financial institution shall have the option to comply with aforesaid
provisions or to avail 50% of eligible input tax credit in that month, with the balance
being lapsed. This option once exercised cannot be withdrawn during the same financial
year.
 Where depreciation is claimed on the tax component of the cost of capital goods under
the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on
the said tax component.11

TIME LIMIT OF AVAILING CREDIT

 Input tax credit in respect of any invoice/debit note for the supply of goods/services, shall
not be available after the due date of filing of the return for the month of September
following the end of financial year to which such invoice pertains or relevant annual
return, whichever is earlier.
 However, in cases of credit in special circumstances on inputs in stock, credit shall not be
available after the expiry of one year from the date of issue of tax invoice.

11
Raja Babu, Input Tax Credit, SIMPLET AXINDIA (Apr. 16, 2017, 11:46 PM),
http://www.simpletaxindia.net/2017/04/input-tax-credit--gst-goods-and-service-tax.html

13
 PROCEDURE FOR CLAIMING A CREDIT OF INPUTS IN STOCKS/CAPITAL GOODS

 A declaration in Form GST ITC-01 shall be made by the registered person within thirty
days of from the date of credit entitlement.
 Details of inputs and capital goods on which credit is being availed to be specified.
 Details shall be duly certified by a practising Chartered Accountant or Cost Accountant if
the aggregate credit claim exceeds Rs.2 lakhs.
 Input Tax Credit claimed by the person in specified cases shall be verified with
corresponding details furnished in the supplier’s outward supply return.12

CREDIT REVERSAL UNDER SPECIAL CIRCUMSTANCES

In specified cases where Input Tax Credit is required to be reversed, the same shall be
calculated as below:

 For inputs in stock, the input tax credit reversal amount shall be calculated
proportionately on the basis of corresponding invoices on which credit had been availed.
 Where aforesaid tax invoices are not available, credit reversal amount shall be based on
the prevailing market price of the goods on the date of the relevant event, based on which
reversal is required.
 For capital goods, the input tax credit involved in the remaining residual life in months
shall be computed on a pro-rata basis, taking the residual life as five years.

V. CONCLUSION

It is well known to all about the malpractices over CENVAT or VAT being made to one by
way of only billing and supply to another in cash would certainly be curbed. There is ample
litigation pertaining to eligibility or availability of Cenvat Credit with a large proportion in Rule
6 reversals. The author is expecting a seamless credit mechanism under the proposed GST
regime. However, the carry forward or the presence of blocked credits goes against the principle
of having a seamless GST credit scenario.13

12
Id.
13
Raja Babu, Input Tax Credit, SIMPLET AXINDIA (Apr. 16, 2017, 11:46 PM),
http://www.simpletaxindia.net/2017/04/input-tax-credit--gst-goods-and-service-tax.html

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 Nevertheless, with the rough edges being fairly dealt with and the expectation of limited
exemptions coupled with entire credit mechanism to be system driven along with real-time
matching through the GSTN, it is hoped that the GST regime would simplify the entire credit
availing process curbing future litigations. However, we have to accept that the Input Tax Credit
under the GST regime has benefited the businesses and would ensure the expansion of the tax
base.

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