Transfer of input tax credit and its

related issues
Input credit means at the time of paying tax on output, you can reduce the tax you have already
paid on inputs and pay the balance amount.

Here’s how:

When you buy a product/service from a registered dealer you pay taxes on the purchase. On
selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of
output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to
be paid to the government. This mechanism is called utilization of input tax credit.

For example- you are a manufacturer: a. Tax payable on output (FINAL PRODUCT) is Rs
450 b. Tax paid on input (PURCHASES) is Rs 300 c. You can claim INPUT CREDIT of Rs 300
and you only need to deposit Rs 150 in taxes.

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfills ALL the conditions as
prescribed.

1. The dealer should be in possession of tax invoice

2. The said goods/services have been received
3. Returns have been filed.
4. The tax charged has been paid to the government by the supplier.
5. When goods are received in installments ITC can be claimed only when the last lot is received.
6. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

Reversal of Input Tax Credit

ITC can be availed only on goods and services for business purposes. If they are used for non-
business (personal) purposes, or for making exempt supplies ITC cannot be claimed. Apart from
these, there are certain other situations where ITC will be reversed.

ITC will be reversed in the following cases:

1) Non-payment of invoices in 180 days: ITC will be reversed for invoices which were not paid
within 180 days of issue.
2) Credit note issued to ISD by seller: This is for ISD. If a credit note was issued by the seller
to the HO then the ITC subsequently reduced will be reversed.

3) Inputs partly for business purpose and partly for exempted supplies or for personal
use: This is for businesses which use inputs for both business and non-business (personal)
purpose. ITC used in the portion of input goods/services used for the personal purpose must
be reversed proportionately.

4) Capital goods partly for business and partly for exempted supplies or for personal
use: This is similar to above except that it concerns capital goods.

5) ITC reversed is less than required: This is calculated after the annual return is furnished. If
total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed
during the year then the difference amount will be added to output liability. Interest will be
applicable.

Reconciliation of ITC
ITC claimed by the person has to match with the details specified by his supplier in his GST
return. In case of any mismatch, the supplier and recipient would be communicated regarding
discrepancies after the filling of GSTR 3. Please read our article on the detailed explanation of
the reasons for mismatch of ITC and procedure to be followed to apply for re-claim of ITC.

Documents Required for Claiming ITC

The following documents are required for claiming ITC: 1. Invoice issued by the supplier of
goods/services 2. The debit note issued by the supplier to the recipient (if any) 3. Bill of entry 4.
An invoice issued under certain circumstances like the bill of supply issued instead of tax invoice
if the amount is less than Rs 200 or in situations where the reverse charge is applicable as per
GST law. 5. An invoice or credit note issued by the Input Service Distributor(ISD) as per the
invoice rules under GST. 6. A bill of supply issued by the supplier of goods and services or both.

All these documents are to furnished at the time of filing form GSTR-2.

Special cases of ITC

A. ITC for Capital Goods
ITC is available for capital goods under GST.
However, ITC is not available for- i. Capital Goods used exclusively for making exempted goods
ii. Capital Goods used exclusively for non-business (personal) purposes.

Note: No ITC will be allowed if depreciation has been claimed on tax component of capital
goods.
 Eligible and ineligible Input tax credit
Eligible Input tax credit

“Input Tax” in relation to a taxable person, means the Goods and Services Tax charged on him
for any supply of goods and/or services to him, which are used or are intended to be used, for the
furtherance of his business. Input Tax Credit under GST Conditions to Claim ITC must be
fulfilled and forms one of the most critical activity for every business to settle its tax liability.

ITC is the backbone of GST and a major matter of concern for the registered persons. The
conditions for eligibility to ITC and eligible ITC have been prescribed which is more or less in
line with pre-GST regime. These rules are also quite particular and stringent in its approach.

Input Tax Credit under GST: Conditions to Claim

A registered person will be eligible to claim Input Tax Credit (ITC) on the fullfilment of the
following conditions:

1. Possession of a tax invoice or debit note or document evidencing payment

2. Receipt of goods and/or services
3. Goods delivered by supplier to other person on the direction of a registered person against a
document of transfer of title of goods
4. Furnishing of a return
5. Where goods are received in lots or installments ITC will be allowed to be availed when the last
lot or installment is received
6. Failure of the supplier towards supply of goods and/or services within 180 days from the date of
invoice, ITC already claimed by recipient will be added to output tax liability and interest to paid
on such tax involved. On payment to supplier, ITC will be again allowed to be claimed
7. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good
8. Time limit to claim ITC against an Invoice or Debit Note is earlier of below dates:

The due date of filing GST Return for September of next financial year

OR

Date of filing the Annual Returns relevant for that financial year

For instance, XY Corp, a buyer has a Purchase Invoice was dated 8th July 2017( FY 2017-18),
wants to claim GST paid on that purchase. As per the criteria laid down to reckon the time limit:

The Due date of filing GST return for September 2018( belonging to FY 2018-19) is 20th
October 2018 and the Date of filing GST Annual Return for FY 2017-18 is 31st December 2018,
whichever is earlier will be the time period within which XY Corp has to claim ITC. Therefore,
 the date is 20th October 2018 and XY Corp can claim this ITC in any of the months between
July 2017 to September 2018.

Note: For Debit Notes, above condition must be considered with respect to Original Invoice
Date.

9. Common credit of ITC used commonly for

 Effecting exempt and taxable supplies

 Business and non-business activity

10. Since 9 October 2019, a regular taxpayer can claim provisional ITC in GSTR-3B only to the
extent of 20% of the ITC available in GSTR-2A. It means the amount of ITC reported in GSTR-
3B from 9 October 2019 will be a total of Actual ITC in GSTR-2A and provisional ITC being
20% of actual ITC in GSTR-2A. Hence, matching purchase register or expense ledger with
GSTR-2A becomes crucial.

Ineligible Input tax credit

Cases when ITC is not available under GST

1. Motor vehicles & conveyances

ITC is not available for Motor vehicles used to transport persons, having a seating capacity of
less than or equal to 13 persons (including the driver).

Further, ITC is not available on vessels and aircraft.

For example, XYZ & Co. buys a car for their business. They cannot claim ITC on the same.

Exceptions to ITC on motor vehicles/vessels/aircrafts

ITC will be available when the vehicle is used for making taxable supplies by the following.

a) Supply of other vehicles or conveyances, vessels or aircrafts.

If you are in the business of supplying cars then ITC will be available.

For example, a car dealer purchases a car for Rs.50 lakh plus 14 lakh GST (ignoring cess
calculations). The same car was later sold for 70 lakhs along with Rs.19.60 lakh GST. Since he is
a dealer, he can claim ITC of 14 lakhs and pay only Rs.5.60 lakh (19.60 – 14).

b) Transportation of passengers
 If you are providing transportation of passengers then ITC will be allowed on the vehicle
purchased.

For example, Happy Tours purchased a bus for inter-city transport of passengers. ITC is
available.

c) Imparting training on driving, flying, navigating such vehicle or conveyances or vessels or

aircrafts, respectively.

A driving school purchases a car to give training to students. The school can claim ITC on the
GST paid on the car.

d) Transportation of goods

ITC will be allowed on motor vehicles (and other conveyances) used to transport goods from one
place to another. However, this is concerning other transporters and not goods transport agencies
(GTA).

2. Food, beverages, club memberships and others

ITC is not for the supply of following goods or services or both:

Food and beverages

Outdoor catering

Beauty treatment

Health services

Cosmetic and plastic surgery

However, ITC will be available if the category of inward and outward supply is same or the
component belongs to a mixed or composite supply under GST.

3. Services of general insurance, servicing, repair and maintenance

No ITC is allowed on services of general insurance, servicing, repair and maintenance in so far
as they relate to motor vehicles, vessels or aircraft referred to in (1).

Exceptions to ITC on insurance, repair or maintenance

 Same as expections mentioned for motor vehicles/vessels/aircrafts where received by a taxable
person engaged:

(I) In the manufacture of such motor vehicles, vessels or aircraft

(II) In the supply of general insurance services in respect of such motor vehicles, vessels or
aircraft insured by him

4. Sale of membership in a club, health, fitness centre

No ITC will be allowed on any membership fees for gyms, clubs etc.

Example:

X, a Managing Director has taken membership of a club and the company pays the membership
fees. ITC will not be available to the company or Mr. X.

5. Rent-a-cab, life insurance, health insurance

ITC is not available for rent-a-cab, health insurance and life insurance.

However, the following are exceptions, i.e., ITC is available for:

Any services which are made obligatory for an employer to provide its employee by the Indian
Government under any current law in force

For example, assuming the government passes a rule for all employers to provide mandatory cab
services to female staff in night shifts. ABC Ltd. hires a rent-a-cab to provide to transportation to
its female staff on night shifts. Then ITC will be available to ABC Ltd. on the GST paid to the
rent-a-cab service.

If the category is same for the inward supply and outward supply or it is a part of the mixed or
composite supply

For example, ABC Travels lends out a car to XYZ Travels. Then XYZ Travels can claim ITC on
the same.

leasing, renting or hiring of motor vehicles, vessels or aircraft with exceptions same as those
mentioned for (1).

6. Travel

ITC is not available in the case of travel, benefits extended to employees on vacation such as
leave or home travel concession.
 7. Works contract

ITC shall not be available for any work contract services. ITC for the construction of an
immovable property cannot be availed, except where the input service is used for further work
contract services.

For example, XYZ Contractors are constructing an immovable property. They cannot claim any
ITC on the works contract. However, XYZ hires ABC Contractors for a portion of the works
contract. XYZ can claim ITC on the GST charged by ABC Contractors.

8. Composition Scheme

No ITC would be available to the person who has made the payment of tax under composition
scheme in GST law.

10. No ITC for Non-residents

ITC cannot be availed on goods/services received by a non-resident taxable person. ITC is only
available on any goods imported by him.

11. No ITC for personal use

No ITC will be available for the goods/ services used for personal purposed and not for business
purposes.

12. Free samples and destroyed goods

No ITC is available for goods lost, stolen, destroyed, written off or given off as gift or free
samples.

13. No ITC in fraud cases

ITC will not be available for any tax paid due to fraud cases which has resulted into:

 Non or short tax payment

 Excessive refund
 ITC utilised

Fraud cases include fraud or willful misstatements or suppression of facts or confiscation and
seizure of goods.

14. No ITC on restaurants

 As per Notification No. 46/2017-Central Tax (Rate), dated 14th November 2017, standalone
restaurants will charge only 5% GST but cannot enjoy any ITC on the inputs.

However, restaurants as part of hotels with room tariffs exceeding Rs. 7,500 still continue pay
18% GST and enjoy ITC.

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfills ALL
the conditions as prescribed.

1. The dealer should be in possession of tax invoice

2. The said goods/services have been received
3. Returns have been filed.
4. The tax charged has been paid to the government by the supplier.
5. When goods are received in installments ITC can be claimed only when the last lot is
received.
6. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

Reversal of Input Tax Credit

ITC can be availed only on goods and services for business purposes. If they are used for
non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed.
Apart from these, there are certain other situations where ITC will be reversed.

ITC will be reversed in the following cases:

1) Non-payment of invoices in 180 days: ITC will be reversed for invoices which were not
paid within 180 days of issue.

2) Credit note issued to ISD by seller: This is for ISD. If a credit note was issued by the
seller to the HO then the ITC subsequently reduced will be reversed.

3) Inputs partly for business purpose and partly for exempted supplies or for
personal use: This is for businesses which use inputs for both business and non-business
(personal) purpose. ITC used in the portion of input goods/services used for the personal
purpose must be reversed proportionately.

4) Capital goods partly for business and partly for exempted supplies or for personal
use: This is similar to above except that it concerns capital goods.

5) ITC reversed is less than required: This is calculated after the annual return is
furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC
actually reversed during the year then the difference amount will be added to output liability.
Interest will be applicable.
 Documents Required for Claiming ITC
The following documents are required for claiming ITC: 1. Invoice issued by the supplier of
goods/services 2. The debit note issued by the supplier to the recipient (if any) 3. Bill of
entry 4. An invoice issued under certain circumstances like the bill of supply issued instead
of tax invoice if the amount is less than Rs 200 or in situations where the reverse charge is
applicable as per GST law. 5. An invoice or credit note issued by the Input Service
Distributor(ISD) as per the invoice rules under GST. 6. A bill of supply issued by the supplier
of goods and services or both.

All these documents are to furnished at the time of filing form GSTR-2.

Special cases of ITC

A. ITC for Capital Goods
ITC is available for capital goods under GST.
However, ITC is not available for- i. Capital Goods used exclusively for making exempted
goods ii. Capital Goods used exclusively for non-business (personal) purposes.

Note: No ITC will be allowed if depreciation has been claimed on tax component of
capital goods.

TDS, TCS in GST

People are responsible for deducting tax:

(a) A department or establishment of the Central or State Government

(b) Local authority

(c) Governmental agencies

(d) Such persons or category of persons as may be notified, by the Central or a State Government
on the recommendations of the Council.

For example: If the Finance department, Government of India, enters into a contract with
Reliance then the department would be liable to deduct TDS.

 The max rate of TDS is 2% under GST, to be notified by CBIC.

 If the total value of supply under a contract exceeds Rs 2.5 lakhs then the person/entity would be
liable to deduct TDS.
 The deductor would be liable to make the payment of TDS by the 10th day of the next month.

Impact of TDS on Government civil contractors

The Indian government, on an average, gives out more than 10,000 civil contracts every year
throughout the country. The contract for constructing/repairing of the national highways average
more than Rs 100 crores. These contracts are acquired by big construction companies and then
sub-contracted to smaller firms and then again further sub-contracted to another small firm. This
loop will face problems due to GST and in particular due to the TDS liability.

The government would need to deduct TDS from the contractor which would ensure tax
compliance by the contractors and all the other sub-contractors. Currently, many small
civil/labour contractors do not fulfill tax compliance. Under GST it will be imperative for them
to get registered and fulfill tax compliance.

TCS compliance for e-commerce sector

A clause has been inserted under GST law for all the e-commerce aggregators. E-commerce
aggregators are made responsible under the GST law for deducting and depositing tax at the rate
of 1% from each of the transaction. Any dealers/traders selling goods/services online would get
the payment after deduction of 1% tax. It is a significant change which would increase a lot of
compliance and administration cost for online aggregators like Flipkart, snapdeal, amazon etc.
They would need to deposit the tax deducted by the 10th day of the next month.

All the traders/dealers selling goods/services online would need to get registered under GST
even if their turnover is less than 20 Lakhs for claiming the tax deducted by Ecommerce
operators.

TDS and TCS under GST

TDS rule will help in achieving transparency in the operations of government contracts and tax
compliance. Online sellers like Amazon, Flipkart, Snapdeal etc would need to make certain
changes in their online payment process and administration/finance department to incorporate
the TCS rule inserted under GST.

Job work
a) Meaning & Nature of job work:

The definition of job work has been defined in the Section 2(68) of CGST Act, “Job work”
means any treatment or process under taken by a person on goods belonging to another
registered person.
For the purpose of this article, ‘Principal’ will be the persons who sends the goods for job work.

Treatment or process include packing, labelling, testing, re-conditioning, re-packing, inspection

etc.,

Schedule II clause 3 of CGST Act, considers any treatment or process applied to another person
goods as a supply of services.

To determine the value of job work charges, value of goods sent by the principal shall not be
included.