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Input Tax Credit Under GST – All You Need to Know

Input Tax Credit Under GST – All You Need to Know

by Sanjeev Archak

Input Tax Credit under GST has been introduced in order to avoid the cascading of taxes that’s prevalent in the present tax regime. It’s one of the key features of the Goods and Services Tax. In simple terms, the cascading of taxes means ‘tax on tax’.

As per the present taxation regime, the credit of taxes that is being levied by the Central Government is not available as a set-off for payment of taxes that is being levied by the State Governments and vice-versa.

Under the GST regime, the entire supply chain would be subjected to GST being levied by both Central and State Governments concurrently. Since the tax charged by the Central or the State Governments would be part of the same tax regime, the credit of tax being paid at every stage would be available as a set-off for payment of tax at every subsequent stage.

Before we understand the whole mechanism of the Input Tax Credit under GST, let’s first understand how the cascading of taxes takes place under the present tax regime.

Cascading of Taxes

Central excise duty charged on Inputs used for manufacturing of final product can be availed as credit for payment of central excise duty on the final product.

Let’s consider an example to further understand this. Suppose you are a manufacturer of pens and in order to manufacture a pen you need the following materials i.e plastic granules, refill tube, metal clip, etc. These materials are part of the ‘Inputs’ and are chargeable to central excise duty.

After you are done manufacturing the pen using the above-mentioned inputs, now the final product is again chargeable to central excise duty.

Now let’s break the entire process using numerals. Let’s consider the total cost of all the above-mentioned inputs is Rs. 10 and now the central excise duty is levied on it is at a rate of 10% i.e Re 1.

Let’s consider the total cost of the manufactured pen (final product) to be Rs. 20 and the central excise duty payable on it is at the rate of 10% i.e Rs 2.

Now the manufacturer of the pen can use the duty paid on inputs, i.e. Re.1 for payment of duty on the pen. So he will use Re.1 paid on inputs and he just has to pay the remaining balance of Re. 1. In effect, he actually pays duty on the ‘value added’ over and above the cost of the inputs. This mechanism eliminates cascading of taxes.

However, when the pen is sold by the manufacturer to a trader, he is required to levy VAT on such sale. But under the present regime, the manufacturer cannot use the credit of central excise duty paid on the pen for payment of VAT, as the two levies are being levied by Central and State government respectively with no statutory linkage between the two.

Hence, he is required to pay VAT on the entire value of the pen, i.e. Rs.22/-, which actually includes the central excise duty to the tune of Rs. 2. This is cascading of taxes or tax on tax, as now VAT is not only paid on the value of pen i.e. Rs. 20 but also on tax i.e. Rs. 2.

Input Tax Credit Under GST

Under the GST regime, the cascading of taxes, as shown above, will be mitigated. As per the GST regime, most of the indirect taxes that is being levied by the Central and State governments on the supply of goods or services or both would be combined together under a single tax levy.

The following image shows the number of centre and state taxes that is going to be subsumed under the GST regime.

GST comprises of the following levies:

a. Central Goods and Services Tax (CGST) [also known as Central Tax] on intra-state or intra-union territory without legislature supply of goods or services or both.

b. State Goods and Services Tax (SGST) [also known as State Tax] on the intra-state supply of goods or services or both.

c. Union Territory Goods and Services Tax (UTGST) [also known as Union territory Tax] on intra-union territory supply of goods or services or both.

d. Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] on the inter-state supply of goods or services or both. In the case of import of goods also, the present levy of Countervailing Duty (CVD) and Special Additional Duty(SAD) would be replaced by the integrated tax.

The protocol to avail and utilize the credit of the above taxes are as follows:

Note: Credit of CGST cannot be used for payment of SGST/UTGST and credit of SGST/UTGST cannot be utilized for payment of CGST.

Technical Aspects of the Input Tax Credit under GST

1) Eligibility of availing Input Tax Credit under GST –

Any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business.

2) Requirements for availing Input Tax Credit under GST –

a) The registered taxpayer should have tax invoice or any other relevant tax paying document.
b) The registered taxpayer should have received the goods or services. “Bill to ship” scenarios also included.
c) The supplier has paid the tax.
d) The taxpayer has furnished the return,
e) If the inputs are received in lots, the taxpayer will be eligible to avail the credit only when the last lot of the inputs is received.
d) The taxpayer should pay the supplier, the value of the goods or services along with the tax within 3 months from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 2(1) & (2)
of ITC Rules]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, a proportionate credit would be allowed.

3) Documents needed for availing Input Tax Credit under GST –

a) Invoice issued by a supplier of goods or services or both
b) Invoice issued by recipient along with proof of payment of tax
c) A debit note issued by supplier
d) Bill of entry or similar document prescribed under the Customs Act
e) Revised invoice
f) Document issued by Input Service Distributor

4) Conditions in which Input Tax Credit under GST is not available –

a) motor vehicles and other conveyances except under specified circumstances.
b) goods and/or services provided in relation to:

i. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;
ii. Membership of a club, health and fitness center;
iii. Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;
iv. Travel benefits extended to employees on vacation such as leave or home travel concession

c) Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;
d) Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;
e) Goods and/or services on which tax has been paid under composition scheme;
f) Goods and/or services used for private or personal consumption, to the extent they are so consumed;
g) Goods lost, stolen, destroyed, written off, gifted, or free samples;
h) Any tax paid due to short payment on account of fraud, suppression, misdeclaration, seizure, detention.

5) Special circumstances under which Input Tax Credit under GST is available –

a) A person who has applied for registration within 30 days of becoming liable for registration is entitled to Input Tax Credit of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date of which he becomes liable to pay tax.

b) A person who has taken voluntary registration under Section 23(3) of the CGST Act, 2017 is entitled to Input Tax Credit of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day, immediately preceding the date of registration.

c) A person switching over to normal scheme from composition scheme under section 10 is entitled to Input Tax Credit in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date of which he becomes liable to pay tax as normal taxpayer.

d) Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take Income Tax Credit in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt
supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply, subject to reductions for the earlier usage as prescribed in the rules.

e) Input Tax Credit, in all the above cases, is to be availed within 1 year from the date of issue of an invoice by the supplier.

f) In the case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilised Input Tax Credit shall be allowed to be transferred to the transferee.

g) A person switching over from composition scheme under section 10 to normal scheme or where a taxable supply becomes exempt, the Input Tax Credit availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid.

h) In the case of supply of capital goods or plant and machinery, on which Input Tax Credit is taken, an amount equivalent to Input Tax Credit availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on transaction value of the supply is more, the same would have to be paid.

For more information on Input Tax Credits under GST, talk to our experts at IntegraBooks.

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