CHAPTER XIX

Input Tax Credit Mechanism in GST

Uninterrupted and seamless chain of input tax credit(hereinafter referred
to as, “ITC”) is one of the key features of Goods and Services Tax. ITC is
a mechanism to avoid cascading of taxes. Cascading of taxes, in simple
language, is‘tax on tax’. Under the present system of taxation, credit of
taxes being levied by Central Government is not availableas set-off for
payment of taxes levied by State Governments,and vice versa. One of the
most important features of theGST system is that the entire supply chain
would be subject to GST to be levied by Central and State Government
concurrently. As the tax charged by the Central or the State Governments
would be part of the same tax regime, credit of tax paid at every stage
would be available as set-off for payment of tax at every subsequent stage.

Let us understand how ‘cascading’ of taxes takes place in the present
regime. Central excise duty charged on inputs used for manufacture of final
product can be availed as credit for payment of Central Excise Duty on the
final product. For example, to manufacture a pen, the manufacturer
requires, plastic granules, refill tube, metal clip, etc. All these
‘inputs’ are chargeable to central excise duty. Once a ‘pen’ is
manufactured by using these inputs, the pen is also chargeable to central
excise duty. Let us assume that the cost of all the above mentioned inputs
is say, Rs.10/- on which central excise duty @10% is paid, means Re.1. The
cost of the manufactured pen is say Rs.20/-, the central excise duty
payable on the pen @10% will be 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 will pay Re.1/- through cash
(1+1=2), the price of the pen becomes Rs. 22/-. 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 system, 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/-.

Goods and Services Tax (GST) would mitigate such cascading of taxes. Under
this new system most of the indirect taxes levied by Central and the State
Governments on supply of goods or services or both would be combined
together under a single levy. The major taxes/levies which are going to be
clubbed together or subsumed in the GST regime are as under:

Central Taxes	State Taxes
Central Excise duty Additional duties of excise Excise duty levied under Medicinal & Toilets Preparation Act Additional duties of customs (CVD & SAD) Service Tax Surcharges &Cesses	State VAT / Sales Tax Central Sales Tax Purchase Tax Entertainment Tax (other than those levied by local bodies) Luxury Tax Entry Tax (All forms) Taxes on lottery, betting & gambling Surcharges &Cesses

GST comprises of the following levies:

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

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

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

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

The protocol to avail and utilise the credit of these taxes is as follow

Credit of	To be utilised first for payment of	May be utilised further for payment of
CGST	SGST/UTGST	IGST
CGST	SGST/UTGST	IGST
IGST	IGST	CGST, then SGSt/UTGST

Credit of CGST cannot be used for payment of SGST/ UTGST and credit of SGST / UTGST cannot be utilised for payment of CGST.

Some of the technical aspects of the scheme of Input Tax
Credit are as under:

a) 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.

b) The prerequisites for availing credit by registered per-
son are:

a) He is in possession of tax invoice or any other
specified tax paying document.

b) He has received the goods or services. “Bill to ship”
scenarios also included.

c)Tax is actually paid by the supplier.

d) He has furnished the return.

e) If the inputs are received in lots, he will be eligible
to avail the credit only when the last lot of the in-
puts is received.

f) He should pay the supplier the value of the goods
or services along with the tax within 180 days
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, proportionate credit would be allowed.

a) Documents on the basis of which credit can be availed
are:

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
Customs Act

e) Revised invoice

f) Document issued by Input Service Distributor

a) No ITC beyond September of the following FY to
which invoice pertains or date of filing of annual re-
turn, whichever is earlier

b) The Input Service Distributor (ISD) may distribute the
credit available for distribution in the same month in
which it is availed. The credit of CGST, SGST, UTGST
and IGST shall be distributed as per the provisions of
Rule 4(1)(d) of ITC Rules. ISD shall issue invoice in
accordance with the provisions made under Rule 9(1)
of Invoice Rules.

c)ITC is not available in some cases as mentioned in section 17(5) of CGST
Act, 2017. Some of them are as follows:

a) motor vehicles and other conveyances except
under specified circumstances.

b) goods and / or services provided in relation to

• food and beverages, outdoor catering,
  beauty treatment, health services, cosmet-
  ic and plastic surgery, except under speci-
  fied circumstances;

• membership of a club, health and fitness
  center;

• Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;

• travel benefits extended to employees on
  vacation such as leave or home travel con-
  cession;

a) 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;

b) 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;

c) goods and/or services on which tax has been paid under composition scheme;

d) goods and/or services used for private or personal consumption, to the extent they are so consumed;

e) Goods lost, stolen, destroyed, written off, gifted, or free
samples;

f ) Any tax paid due to short payment on account of fraud,
suppression, misdeclaration, seizure, detention.

a) Special circumstances under which ITC is available:

a) A person who has applied for registration within
30 days of becoming liable for registration is en-
titled to ITC 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 from 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 ITC 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 section10 is entitled
to ITC 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 from 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 ITC in respect
of goods held in stock (inputs as such and inputs
contained in semi-finished or finished goods) re-
latable 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) ITC, in all the above cases, is to be availed within
1 year from the date of issue of invoice by the sup-
plier

f) In case of change of constitution of a registered
person on account of sale, merger, demerger etc,
the un utilised ITC 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 tax-
able supply become exempt, the ITC availed in re-
spect of goods held in stock (inputs as such and in-
puts contained in semi-finished or finished goods)
as well as capital goods will have to be paid.

h) In case of supply of capital goods or plant and
machinery, on which ITC is taken, an amount
equivalent to ITC availed minus the reduction as
prescribed in rules (5% for every quarter or part
thereof0 shall have to be paid. In case the tax on
transaction value of the supply is more, the same
would have to be paid.