Concept of Input Tax credit-PART I - Sinewave Computer Services Pvt Ltd

Under the Indirect taxes mechanism, the taxes are levied at every stage of value addition. This is applicable in case of supply of goods as well as services. Thus it is important to understand that tax and the value addition will be always coupled together. Value addition continues till the time the goods or services reach the ultimate consumer. The ultimately generated value of goods or services is going to be a cost to the consumer. This cost will be a composition of (Value generated + Tax levied at each stage). Now if the tax at every stage is absorbed as a part of value of goods or services, there would be a case of “cascading effect of tax” (levy of tax on already levied tax). As a result of this the ultimate consumer would be the one who would suffer the most. As consumer would be liable to bear the entire load of taxes along with the value of goods. This has been a known issue under the Indirect tax structure in our country. Therefore, even in the Pre-GST regime, there were certain counter measures undertaken to deal with the problem of hefty pricing in the hands of consumers. Under the Central Excise and Service tax, there were “Modvat credit” / “Cenvat credit” provisions whereby the concept of “Input tax credit” was incorporated. Likewise under the VAT provisions, the concept of Input VAT credit was incorporated.
Firstly, let us try to understand, what is the meaning of “Input tax credit”? Input tax credit means, the credit of taxes paid on purchase of goods, services or capital goods. The tax component on the purchase of goods or services will not form a part of cost of purchases, but will be recorded as a pre-paid tax. This pre-paid tax will be utilized to pay the liability of tax on outward supply of goods or services. In order to understand this, let us look at the under mentioned illustration.

Determination of availability of Input tax credit:

We have considered two scenarios in the below mentioned tables. In the Case-1, we are assuming that there is “No Input tax credit available”. In this case, one can observe that the Input tax is becoming a part of “Total cost of purchase” which is fondly known as “cascading effect of taxes”. In the Case-2, the Input tax is not becoming part of cost of purchase. As a result of this there is no levy of tax on tax unlike under Case-1. In Case-2, even if the profits are assumed to be on absolute terms like Case-1, still it can be observed that with the elimination of “cascading effect”, the “Consumers Purchase price” is less in Case-2 as compared to Case-1.

Thus, it is pertinent to note that the availability of Input tax credit reduces the consumer purchase price. Even when the profit amount was kept same in absolute terms in Case-2, still the buyer will be benefitted. Thus under the Input tax credit there are also economic benefits such as “reduction in consumer price”. Reduction in overall prices also would contribute towards reducing “Inflation”.

Input tax credit under GST

Under the Pre-GST regime, although Input tax credit was available, there was an issue as far as cross utilization of taxes across the Excise/Service tax with VAT laws. The same was not available under the cross utilization basis. Under the GST regime, availability of “seamless credit” is one of the prime objectives. Basis this let us now analyze the provisions of Section 16, 17, 18 and 19 of the CGST Act 2017.

Eligibility to claim Input tax credit Section 16:

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, 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.
The provisions of this section provide for a generic eligibility for availing input tax credit. Based on the above, it can be noted that “Every registered person “, is entitled to claim Input tax credit in respect of goods and or services, which are used or intended to be used in the course or furtherance of business. Thus reading the provisions of this section, one would conclude that the Input tax credit in respect of anything and everything ie (goods or services) which are procured can be made eligible for claiming credit if the same has been used in the course or furtherance of business. However, it is not so the case. Thus let us further take a look at the conditions.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,
The under mentioned conditions are to be followed compulsorily. As per the sub section 2 of Section 16 of the CGST Act 2017 the under mentioned conditions are
- (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
- In order to avail Input tax credit in respect of goods or services or both, it is mandatory to have the physical possession of Invoice or any other tax paying document. Where it is also important to note that the invoices or the tax paying documents should be as per the specifications mentioned down under the provisions of Section 31 of the CGST Act and the rules in respect of the same.
- (b) he has received the goods or services or both. The physical possession of goods and the actual receipt of services are the key factors. This is to ensure that the input tax credit is not being availed merely on the basis of documents in the name of the registered persons, but also has the authenticity by virtue of actually procured goods or services or both.
- Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods or services where the goods or services are delivered by the supplier to a recipient or any other person on the direction of such registered 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;
- The above explanation has been considered on a modified basis to the extent covered as per the CGST Amendment Act 2018. Earlier the above explanation was applicable only in case of goods whereas the same is applicable in case of goods as well as services post the amendments. The basis of the explanation is that where the law applies the deeming fiction to assume the compliance of condition for receipt of goods or services.
- Eg: Mr Siddharth of Bharuch (GJ), orders certain quantity of goods from the seller Mr Sandeep of (Surat). However Mr Siddharth asks Mr Sandeep to deliver the goods to one Mr Suresh of Mumbai (MH). In this case, Mr Suresh is only the recipient of goods under a “Bill-to Ship-to contract”. However for the purpose of the law it would be deemed that Mr Siddharth has received the said goods and thus will be entitled to claim the Input tax credit on deemed receipt basis. However there would be an obvious question that if the goods are ultimately consumed in Maharashtra, by Mr Suresh, how will he be able to get the Input tax credit? Well as GST is a destination based consumption tax, in this case, Mr Siddharth (the buyer) will be required to raise an Invoice on Mr Suresh, as this would enable Mr Siddharth to collect GST and also enable Mr Suresh to claim Input tax credit.
- Similarly the provisions of “Bill-to and Ship-to contracts” exist in case of supply of services.
- (c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
- As per the above clause, one of the conditions for claiming input tax credit is that, the tax in respect of a supply of goods or services or both, has been actually paid to the credit of Governments account. Meaning thereby, if the tax is not duly received by the Government, the Input tax credit of such amount cannot be passed on towards the tax payer.
- (d) he has furnished the return under section 39.
  Under the GST mechanism, it is absolutely clear that “matching concept” is the basis. Thus one of the conditions is that the returns shall be filed in order to avail Input tax credit. The returns filed under section 39 will provide an assurance that the person who has availed the Input tax credit has a legitimate claim, as the same will be matched with the outward supply reported by the supplier in his return.
- Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment.
- Eg: Mr Mit, has supplied a consignment of 500 chairs to Ms Vinita. The lot of 500 chairs was received by Ms Vinita in 3 installments. The installments were on 29/08/2019, 30/08/2019 and 3/09/2019. Thus the last lot was received on 3/9/2019. Therefore in the given case, Ms Vinita will be entitled to claim Input tax credit in respect of 500 chairs only on or after 03/09/2019 ie after receipt of last installment.
- Provided further that 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 reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty 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.
- Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
- In the pre GST regime, there have been many instances where the honest tax payer has ended up suffering on account of a defaulting customer. That is to say that the tax payers have ended up paying taxes as per the provisions of law but their amounts were not duly realized from customers leading to a loss. In order to safeguard the interest of the supplier, the GST law has prescribed the above proviso. Also, in order to ensure that a transaction is genuine in terms of intent and not merely a paper transfer or a book entry. Thus in respect of purchase of goods or services, a registered person is required to pay to the supplier, the value of goods and or services, within 180 days. If Input tax credit is availed but the payment is not made within 180 days, then the amount of Input tax credit so claimed will have to be reversed along with interest payable thereon. However if the amount which was due, is subsequently paid, then the Input tax credit which was reversed, can be availed. Interest paid however will not be eligible for reclaiming and would be a permanent loss to the business.
- (3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
  - Eg: If an asset is purchased for Rs 10,00,000 + GST @ 18% ie Rs 1,80,000 then the Invoice value of purchased asset is Rs 11,80,000/-. In this case as per sub-section 3 of Section 16 of the CGST Act 2017, if the asset is capitalized at Rs 10,00,000, then Input tax credit will be eligible of Rs 1,80,000 and the depreciation can be claimed only on Rs 10,00,000. However if the asset is capitalized at Rs 11,80,000, then the input tax credit cannot be claimed, and the depreciation in such case can be claimed on Rs 11,80,000.
- (4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.
  - Eg: Due date for filing return for the month of September 2019: 20th October 2019. Due date of filing annual return for the financial year 2018-2019 is 31st December 2019.
- Case 1: If Annual return for FY 2018-2019, is filed on 15th September 2019, ie before 20th October 2019 (due date of filing monthly return for September 2019), then the Input tax credit can be claimed maximum up to 15th September 2019 for any invoice or tax paying document pertaining to FY 2018-2019.
- Case 2: If Annual return for FY 2018-2019, is filed on 15th November 2019, ie after 20th October 2019 (due date of filing monthly return for September 2019), then the Input tax credit can be claimed maximum up to 20th October 2019 for any invoice or tax paying document pertaining to FY 2018-2019.
- In this part we have discussed the basics of Input tax credit concept and also the Eligibility of Input tax credit as per Section 16 of the CGST Act 2017. In the next parts we shall be discussing the concepts of Blocked credits.
- Disclaimer: The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above