Input Tax Credit (ITC) - GST PDF

CHAPTER 7 INPUT TAX CREDIT The section numbers referred to in the Chapter pertain to CGST Act and rule numbers referred to in the Chapter pertain to CGST Rules, unless otherwise specified. For the sake of brevity, input tax credit has been referred to as ITC in this C...

CHAPTER 7 INPUT TAX CREDIT The section numbers referred to in the Chapter pertain to CGST Act and rule numbers referred to in the Chapter pertain to CGST Rules, unless otherwise specified. For the sake of brevity, input tax credit has been referred to as ITC in this Chapter. Examples/Illustrations/Questions and Answers given in the Chapter are based on the position of GST law existing as on 30.04.2023. LEARNING OUTCOMES After studying this Chapter, you will be able to –  describe what are inputs, input services, capital goods and other relevant terms in relation to ITC  explain the various conditions, timelines and restrictions for taking ITC on goods and services in general and in special circumstances  identify the items on which ITC is available as also the blocked items on which ITC is not available  explain the concept relating to availing of proportionate ITC when common inputs or input service or capital goods are used or intended to be used for exempted and taxable supplies or business and non-business activities  comprehend the concept of an input service distributor and the manner of distribution of credit by him  describe the manner of recovery of credit distributed in excess  comprehend, analyse and apply all the above provisions as also the provisions relating to utilization of ITC in problem solving  compute the GST liability of a registered person. © The Institute of Chartered Accountants of India  1.2 7.2 GOODS AND SERVICES TAX 1. INTRODUCTION In earlier indirect tax regime, the credit mechanism for indirect taxes levied by the Union Government, (central excise duty and service tax) was governed by the CENVAT Credit Rules, 2004; and the credit mechanism for State-level VAT on sale of goods was governed by the States under their respective VAT laws. The VAT legislations allowed ITC of VAT on inputs and capital goods in transactions within the State, but not on inputs and capital goods coming in the State from outside the State, on which central sales tax was paid. CENVAT Credit Rules, 2004 allowed availing and utilizing credit of duty/tax paid on both goods (capital goods and inputs) and services by the manufacturers and the service providers across the country. The credit across goods and services was integrated vide the CENVAT Credit Rules, 2004 in the year 2004 to mitigate the cascading effects of central levies namely, central excise duty and service tax. However, the credit chain remained fragmented on account of State-Level VAT as the credit of central taxes could not be set off against a State levy and vice versa. The chain further got distorted as ITC was not available on inter-State purchases. This resulted in cascading of taxes leading to increase in costs of goods and services. The GST regime promises seamless credit on goods and services across the entire supply chain with some exceptions like supplies charged to tax under composition scheme, blocked credits and supply of exempted goods and/or services. ITC is considered to be the lifeline of the GST regime. In fact, it is the provisions of ITC which essentially make GST - a value added tax i.e., collection of tax at all points of supply chain after allowing credit of tax paid at earlier points. Chapter V of the CGST Act [Sections 16 to 21] & Chapter V: Input Tax Credit of the CGST Rules [Rules 36-45] prescribe the provisions relating to ITC. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.3 7.3 Further, section 41 contains provisions for availment of ITC, sections 49(5), 49A, 49B and rule 88A together prescribe the sequence of utilisation of ITC and rules 86A and 86B stipulate the conditions of use of amount available in electronic credit ledger and restrictions on use of amount available in electronic credit ledger. State GST laws also prescribe identical provisions in relation to ITC. First the statutory provisions of these sections together with the relevant rules have been extracted followed by their analysis 1. Provisions of ITC under CGST Act have also been made applicable to IGST Act vide section 20 of the IGST Act. Scheme of ITC - At a Glance Given below are the salient features of the scheme of ITC. The scheme has been discussed in detail in the ensuing pages of this Chapter.  The scheme is designed to avoid cascading effect of taxes and make GST a destination-based tax.  Broadly, ITC is available on all inputs, input services and capital goods used for purposes of business by a taxable person. The exception is ‘blocked credit’, where ITC is not available even when these goods or services are used for the purposes of business.  ITC is used for payment of tax on taxable output supply to avoid cascading effect of taxes.  GST law does not require ‘one to one’ co-relation between inputs/input services and final products/services. Any eligible ITC can be used for payment of tax on any taxable output supply.  IGST is another core aspect of GST. It is a transitory tax to enable transfer of ITC when goods or services move from one State to another. This is a unique feature of Indian GST. 1 The provisions of section 19 relating to taking ITC on inputs and capital goods sent for job work have been discussed in Chapter 16: Job Work in Module 3 of this Study Material. © The Institute of Chartered Accountants of India  1.4 7.4 GOODS AND SERVICES TAX  Since ITC can be availed & utilized for payment of tax on taxable output supply, as a natural corollary, ITC cannot be availed in respect of exempt output supply on which tax is not payable.  The exception to the above principle is ‘zero rated supply’, i.e. exports or supplies to a special economic zone (SEZ) developer/unit for authorised operations, where ITC is available even if no tax is payable on output supply as zero-rated supplies are not exempt supplies. Such ITC can be utilized either for making supplies by paying tax or refund of the unutilized ITC can be obtained. This simple mechanism is used to make exports and supplies to SEZ completely tax free.  If a taxable person is making both taxable and exempt supply, he is entitled to avail full credit of ITC in respect of inputs, input services and capital goods exclusively used for taxable supply and no credit at all can be availed for inputs, input services and capital goods exclusively used for exempt supply.  If common inputs, input services and capital goods are used for taxable as well as exempt supply, only proportionate ITC attributable to the taxable supply is available. The common ITC is apportioned in the ratio of value of taxable supply and exempt supply. Elaborate provisions have been made in the GST law to prescribe the manner of calculation of proportionate ITC.  ITC can be availed on inputs and capital goods sent for job work; ITC is available even if the inputs and capital goods are sent directly to the job worker without being first brought to the place of business of the supplier. 2  Input services received at head office or branch offices are ultimately indirectly used for supplies made from manufacturing or trading or business premises. ITC of such input services can be availed through mechanism of ‘input service distributor’. Before proceeding to understand the statutory provisions relating to ITC, let us first go through few relevant definitions. 2 The provisions relating to taking ITC on inputs and capital goods sent for job work have been discussed in Chapter 16: Job Work in Module 3 of this Study Material. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.5 7.5 2. RELEVANT DEFINITIONS  Agent means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another [Section 2(5)].  Business includes (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; (b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); (c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction; (d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business; (e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; (f) admission, for a consideration, of persons to any premises; (g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation; (h) activities of a race club including by way of totalisator or a licence to book maker or activities of a licenced book maker in such club; and (i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities [Section 2(17)]. © The Institute of Chartered Accountants of India  1.6 7.6 GOODS AND SERVICES TAX  Capital goods means goods, the value of which is capitalized in the books of account of the person claiming the ITC and which are used or intended to be used in the course or furtherance of business [Section 2(19)].  Conveyance includes a vessel, an aircraft and a vehicle [Section 2(34)].  Exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the IGST Act, and includes non-taxable supply [Section 2(47)].  Input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business [Section 2(59)].  Input service means any service used or intended to be used by a supplier in the course or furtherance of business [Section 2(60)].  Input service distributor means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office [Section 2(61)].  Input tax in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes— (a) the integrated goods and services tax charged on import of goods; (b) the tax payable under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-section (3) and (4) of section 5 of the IGST Act; (d) 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; or © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.7 7.7 (e) 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, but does not include the tax paid under the composition levy [Section 2(62)].  Input tax credit means the credit of input tax [Section 2(63)].  Invoice or tax invoice means the tax invoice referred to in section 31 [Section 2(66)].  Inward supply in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration [Section 2(67)].  Motor vehicle shall have the same meaning as assigned to it in clause (28) of section 2 of the Motor Vehicles Act, 1988 [Section 2(76)]. Motor vehicle or vehicle under the Motor Vehicles Act, 1988 means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding 25 cubic centimetres. [Section 2(28) of Motor Vehicles Act, 1988].  Non-resident taxable person means any person who occasionally undertakes transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India [Section 2(77)].  Output tax in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis [Section 2(82)].  Outward supply in relation to a taxable person, means supply of goods or services or both, whether by sale, 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)]. © The Institute of Chartered Accountants of India  1.8 7.8 GOODS AND SERVICES TAX  Place of business includes–– a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or a place where a taxable person maintains his books of account; or a place where a taxable person is engaged in business through an agent, by whatever name called [Section 2(85)].  Quarter shall mean a period comprising three consecutive calendar months, ending on the last day of March, June, September and December of a calendar year [Section 2(92)].  Recipient of supply of goods or services or both, means— (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied [Section 2(93)].`  Registered person means a person who is registered under section 25 of CGST Act but does not include a person having a Unique Identity Number [Section 2(94)]  Supplier in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied [Section 2(105)].  Taxable person means a person who is registered or liable to be registered under section 22 or section 24 [Section 2(107)]. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.9 7.9  Taxable supply means a supply of goods or services or both which is leviable to tax under CGST Act [Section 2(108)].  Turnover in State or turnover in Union territory means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union [Section 2(112)].  Works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract [Section 2(119)].  Zero-rated supply means any of the following supplies of goods or services or both, namely:–– (a) export of goods or services or both; or (b) supply of goods or services or both for authorised operations to a Special Economic Zone (SEZ) developer or a Special Economic Zone unit [Section 16(1) of the IGST Act]. 3. ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT [SECTION 16] STATUTORY PROVISIONS Section 16 Eligibility and conditions for taking input tax credit Sub-section Clause Particulars (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 © The Institute of Chartered Accountants of India  1.10 7.10 GOODS AND SERVICES TAX 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. (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,– (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; (aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37; (b) he has received the 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, as the case may be, services– (i) where the goods 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; (ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person. (ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted; © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.11 7.11 (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 (d) he has furnished the return under section 39: 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: 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 paid by him along with interest payable under section 50, 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 to the supplier of the amount towards the value of supply of goods or services or both along with tax payable thereon. (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. (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 thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. Section 41 Availment of input tax credit (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and © The Institute of Chartered Accountants of India  1.12 7.12 GOODS AND SERVICES TAX such amount shall be credited to his electronic credit ledger. (2) The credit of input tax availed by a registered person under sub- section (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed. Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him in such manner as may be prescribed. Chapter V: Input Tax Credit of the CGST Rules Rule 36 Documentary requirements and conditions for claiming input tax credit Sub-rule Clause Particulars (1) 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, namely:- (a) an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31; (b) an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to the payment of tax; (c) a debit note issued by a supplier in accordance with the provisions of section 34; (d) a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for the assessment of integrated tax on imports; (e) an input service distributor invoice or input service distributor credit note or any document issued by an input service distributor in accordance with the provisions of sub-rule (1) of rule 54. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.13 7.13 (2) Input tax credit shall be availed by a registered person only if all the applicable particulars as specified in the provisions of Chapter VI are contained in the said document. Provided that if the said document does not contain all the specified particulars but contains the details of the amount of tax charged, description of goods or services, total value of supply of goods or services or both, GSTIN of the supplier and recipient and place of supply in case of inter-State supply, input tax credit may be availed by such registered person. (3) No input tax credit shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, willful misstatement or suppression of facts. (4) (a) the details of such invoices or debit notes have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility; and (b) the details of input tax credit in respect of such invoices or debit notes have been communicated to the registered person in FORM GSTR-2B under sub-rule (7) of rule 60. Rule 37 Reversal of input tax credit in the case of non-payment of consideration Sub-rule Particulars (1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply whether wholly or partly, along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall pay or reverse an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for © The Institute of Chartered Accountants of India  1.14 7.14 GOODS AND SERVICES TAX the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice. Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16. Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16. (2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1). (4) The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier. Rule 37A Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof Where input tax credit has been availed by a registered person in the return in FORM GSTR-3B for a tax period in respect of such invoice or debit note, the details of which have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility, but the return in FORM GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such supplier till the 30th day of September, following the end of the financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.15 7.15 said registered person, while furnishing a return in FORM GSTR-3B on or before the 30th day of November following the end of the financial year. Provided that where the said amount of input tax credit is not reversed by the registered person in a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year during which such input tax credit has been availed, such amount shall be payable by the said registered person along with interest thereon under section 50. Provided further that where the said supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter. ANALYSIS (i) Eligibility for taking ITC [Section 16(1)] (a) Registration under GST Every registered person shall be entitled to ITC of GST charged on inward supply [See definition of inward supply] of goods and / or services. This is subject to the provisions relating to use of ITC under section 49 and the conditions and restrictions in the rules. [Section 49 prescribes provisions relating to payment of tax, interest, penalty & other amounts. The same has been discussed in detail in Chapter 11: Payment of Tax in this Module of the Study Material. Relevant portion is discussed in this Chapter subsequently.] (b) Goods/services to be used for business purposes ITC of GST will be available on goods and/or services which are used or intended to be used in the course or furtherance of the business [See definition of business]. The scope of the definition of ‘business’ is very wide. It is also an inclusive definition. The relation of inputs and input services with business can be direct or indirect. © The Institute of Chartered Accountants of India  1.16 7.16 GOODS AND SERVICES TAX The “intention to use” the goods and/or services in the course or furtherance of business would also suffice for availing ITC on such goods and/or services. However, if finally, the input goods or services are not utilised for intended purpose, ITC is disallowed, as provided in section 17(5) of CGST Act. [Section 17(5) specifies the inputs or input services in respect of which ITC is not allowed. Provisions of section 17(5) are discussed in the ensuing pages of this Chapter.] Thus, tax paid on goods and or/services which are used or intended to be used for non-business purposes cannot be availed as credit. ITC will be credited to electronic credit ledger. [Provisions relating to electronic credit ledger have been discussed in detail in Chapter 11: Payment of Tax in this Module of the Study Material.] Moulds and dies provided by the original equipment manufacturer (OEM) to component manufacturer on FOC basis – when not considered as being in the course or furtherance of business? Moulds and dies owned by the original equipment manufacturer (OEM) which are provided to a component manufacturer (the two not being related persons or distinct persons) on free on cost (FOC) basis does not constitute a supply as there is no consideration involved. Further, since the moulds and dies are provided on FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of ITC availed on such moulds and dies by the OEM. However, where the contract between OEM and component manufacturer is for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the OEM will be required to reverse the credit availed on such moulds/ dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.17 7.17 of the former’s business [Circular No. 47/21/2018 GST dated 08.06.2018 3]. (ii) Conditions for taking ITC [Section 16(2)] This sub-section starts with a non-obstante clause and hence all the conditions specified therein must be fulfilled irrespective of fulfillment of any other conditions given under any other sub-section of section 16 for the purpose of taking of input tax credit. The registered person will be entitled to ITC on an inward supply only if ALL the following six conditions are fulfilled: (a) Possession of tax paying document [Section 16(2)(a) read with rule 36] ITC can be availed on the basis of any of the following documents: (i) Invoice or revised invoice 4 issued by the supplier of goods and/or services (ii) Invoice issued by the recipient receiving goods and/or services from unregistered supplier in case of reverse charge, subject to payment of tax (iii) Debit note issued by the supplier (iv) Bill of entry or similar document prescribed under the Customs Act 5 (v) Document issued by input service distributor The documents on the basis of which ITC is being taken should contain at least the following details:  Amount of tax charged  Description of goods or services  Total value of supply of goods and/or services 3 Circular No. 47/21/2018 GST dated 08.06.2018 also clarifies aspects relating to valuation of moulds and dies provided by the OEM to component manufacturer on FOC basis. The same are covered in Chapter 6: Value of Supply in Module 1 of this Study Material. 4 Provisions relating to invoice/revised invoice have been discussed in detailed in Chapter 9: Tax Invoice: Credit and Debit Notes in this Module of the Study Material. 5 Provisions relating to the Customs Act, 1962 have been discussed in Module 4 of this Study Material. © The Institute of Chartered Accountants of India  1.18 7.18 GOODS AND SERVICES TAX  GSTIN of the supplier and recipient  Place of supply in case of inter-State supply No ITC of tax paid towards demands involving fraud [Rule 36(3)]: Tax paid in pursuance of any order where any demand has been confirmed on account of any fraud, willful misstatement or suppression of facts cannot be availed as ITC. (b) Details of invoices/debit notes uploaded by the supplier in his GSTR-1 or using IFF and details communicated in Form GSTR-2B [Section 16(2)(aa) read with rule 36(4)] ITC in respect of any supply of goods or services or both can be taken by a registered person only if the details of the invoice/debit note in respect of said supply have been furnished by the supplier in the statement of outward supplies (Form GSTR-1 or using IFF) and such details have been communicated to the recipient of such invoice/debit note in Form GSTR-2B. GSTR-1 is a monthly/quarterly statement containing details of outward supplies made by a registered supplier. In case where GSTR-1 is furnished quarterly under QRMP (Quarterly Return Monthly Payment) scheme, supplier can furnish such details for 1st two months of the quarter using invoice furnishing facility (IFF). This facility is provided to the taxpayer, to pass on the credit to their recipients. Such details of outward supplies furnished by the supplier are communicated and made available electronically (auto populated) to the respective recipient(s) in GSTR- 2B. GSTR-2B is an auto-generated ITC statement for every registered person based on details furnished in GSTR-1/using IFF by the supplier 6. Thus, in respect of invoices/debit notes the details of which are not furnished by the suppliers in their GSTR-1s or using IFF (and thus they are not visible in GSTR-2B of the recipient), ITC cannot be availed by such recipient. 6 The provisions relating to QRMP, filing of GSTR-1/IFF and GSTR-2B have been discussed in detail in Chapter 13: Returns in this Module of the Study Material. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.19 7.19 ITC on such invoices/debit notes, not reflected in GSTR-2B of the current month, may be claimed by the taxpayer in any of the succeeding months when the details of said invoices/debit notes are furnished by the suppliers. The above concept has been illustrated as follows: ITC on invoices/debit FULL ITC can be claimed notes which have on such invoices/debit been furnished by the notes, if all other suppliers in their conditions of availing GSTR-1s/using IFF ITC are fulfilled and reflected in GSTR-2B of recipient ITC on invoice/debit NO ITC can be claimed note which have not in respect of such been furnished by invoices/debit notes. suppliers in their GSTR-1s/using IFF and thus, not reflected in GSTR-2B of recipient. ✪ Invoices on which ITC is not available under any of the provisions e.g., under section 17(5), are not to be considered for claiming ITC even though furnished by the suppliers. ✪ On the other hand, full ITC can be availed in respect of IGST paid on imports, documents issued under reverse charge, credit received from ISD etc., which are outside the ambit of section 37(1). (1) Atlas Pvt. Ltd. is a manufacturer of taxable goods. It has received 50 invoices for inputs and input services from various suppliers during the month of September. Invoices involve © The Institute of Chartered Accountants of India  1.20 7.20 GOODS AND SERVICES TAX ITC of ` 5 lakh. Suppliers have furnished in their GSTR-1s 40 invoices involving ITC of ` 3 lakh as on the due date of furnishing of GSTR-1s and are reflected in GSTR-2B of Atlas Pvt. Ltd. ITC that can be claimed by Atlas Pvt. Ltd. in its GSTR-3B for the month of September is ` 3 lakh. (c) Receipt of the goods and / or services [Section 16(2)(b)] The registered person taking the ITC must have received the goods and / or services. “Bill to Ship to” Model: Under this model, the goods are delivered to a third party - ‘C’ on the direction of the customer (registered person) – ‘B’ who purchases the goods from the vendor (supplier) – ‘A’. In other words, ‘A’ bills to ‘B’ but ships the goods to ‘C’ on direction of ‘B’. In effect, two supplies take place in this scenario viz., from ‘A’ to ‘B’ and from ‘B’ to ‘C’. Thus, under this model, the customer (registered person) who receives such goods does not actually receive the said goods. For such cases, by virtue of explanation to section 16(2)(b), it is deemed that the registered person (customer) has received the goods. In other words, goods delivered to another person on the direction of the registered person by way of transfer of documents of title or otherwise, either before or during the movement, are deemed to have been received by such registered person. So, ITC will be available to the registered person, on whose order the goods are delivered to a third person. Similarly, services may also be provided to a third party by the service provider (supplier) on the direction of the service recipient (registered person). In this case also, though the service recipient (registered person) does not receive the service, by virtue of explanation to section 16(2)(b) it is deemed that the registered person (service recipient) has received the service. In other words, service provided to any person on the direction of and on account of the registered person, is deemed to have been received by such registered person. So, ITC will be available to the registered person, on whose direction the services are provided to a third person. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.21 7.21 (2) A is a trader who places an order on B for a consignment of soda ash. A receives a buying order from C for the same quantity of soda ash. A instructs B to deliver the goods to C, and in turn he raises an invoice on C. Though the goods are not physically received at the premises of A, section 16(2)(b) allows ITC of such goods to A. (3) The registered head office (New Delhi) of ABC Pvt. Ltd. enters into a contract with DEF Pvt. Ltd. of New Delhi for repair and maintenance of computers systems installed at its registered branch office in Bengaluru, Karnataka. DEF Pvt. Ltd. issues an invoice on ABC Pvt. Ltd., New Delhi for the services provided by it. Though the actual services are received by the branch office and not by the head office, section 16(2)(b) allows ITC of such repair and maintenance services to head office. (d) Details of ITC in respect of the said supply communicated to the registered person under section 38 not restricted [Section 16(2)(ba)] Section 38 stipulates that the details of outward supplies furnished by the registered suppliers in GSTR-1/using IFF and an auto- generated statement - GSTR-2B - containing the details of ITC is made available to the recipients of such supplies every month. GSTR-2B contains the details of inward supplies (i) on which ITC is available to the recipient as well as (ii) on which ITC cannot be availed, whether wholly or partly, by the recipient. Accordingly, ITC will not be available in respect of inward supplies details of which have been furnished by a registered supplier:  who is a new registrant. (Specified period from taking registration will be prescribed for this purpose.)  who has defaulted in payment of tax for a prescribed period.  whose output tax payable as per GSTR-1/IFF exceeds the output tax paid in GSTR-3B for a particular tax period by prescribed limit (Rule 88C).  who has availed ITC of an amount that exceeds the credit that © The Institute of Chartered Accountants of India  1.22 7.22 GOODS AND SERVICES TAX can be availed by him as per GSTR-2B during prescribed period and by prescribed limit.  who has defaulted in discharging his tax liability in accordance with the provisions of section 49(12) read with rule 86B, i.e. who has discharged more tax liability from electronic credit ledger than prescribed under rule 86B 7.  other specified classes of persons. (e) Tax leviable on supply actually paid to Government [Section 16(2)(c)] The supplier should have actually paid the tax charged on the goods and/or services, for which ITC is being taken, either in cash or by utilizing ITC, subject to the provisions of section 41. Availment of self-assessed ITC [Section 41] A registered person can avail the credit of eligible ITC as self-assessed in his return. Such amount shall be credited to his electronic credit ledger. Reversal of ITC in the case of non-payment of tax by the supplier and re-availment thereof [Section 41 read with rule 37A] (I) Reversal of ITC: If the tax payable corresponding to such ITC availed is not paid by the supplier to the Government, ITC so availed shall be reversed by the said person along with applicable interest. A registered person (recipient) can avail ITC in GSTR-3B for a tax period in respect of such invoice/debit note, the details of which have been furnished by its supplier in the statement of outward supplies (in GSTR-1/using IFF). However, if supplier does not furnish return in Form GSTR-3B for the tax period corresponding to the said statement of 7 Rule 86B provides that the registered person shall not utilise the amount available in electronic credit ledger to discharge his liability towards output tax in excess of 99% of such tax liability, in cases where the value of taxable supply other than exempt supply and zero- rated supply, in a month exceeds ` 50 lakh subject to specified exceptions. It has been discussed subsequently in this chapter. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.23 7.23 outward supplies till 30th September following the end of FY in which the ITC in respect of such invoice/ debit note has been availed; the said amount of ITC shall be reversed by the said recipient, while furnishing a return in GSTR-3B on or before 30th November following the end of such FY during which such ITC has been availed. However, where the said amount of ITC is not so reversed by recipient, such amount shall be payable by the said person along with interest thereon under section 50. (II) Re-availment of reversed ITC: Where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him. Thus, where the said supplier subsequently furnishes the return in GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in GSTR-3B for a tax period thereafter. (4) Jhamku, a registered supplier, supplies goods to Chamku valuing ` 10,000 on which he charged CGST and SGST of ` 900 each in the invoice raised in March, 2023. Jhamku uploaded the details of the said invoice in his GSTR-1 for the said month filed before the due date based on which Chamku availed the said ITC of ` 900 each towards CGST and SGST while filing his GSTR-3B for March, 2023 as the said ITC was also reflected in his GSTR-2B. However, Jhamku failed to furnish the corresponding GSTR-3B (for the month of March, 2023) upto 30th September, 2023. Accordingly, while filing GSTR-3B for the month of October, 2023 on 20th November, 2023, Chamku reversed an amount of ITC earlier availed by him. Subsequently, suppose if Jhamku files GSTR-3B on 20th December, 2023 and pays the said amount of ` 900 each towards CGST and SGST alongwith interest, Jhamku can now re-avail the said input tax credit of ` 900 towards CGST and SGST which he has reversed earlier. © The Institute of Chartered Accountants of India  1.24 7.24 GOODS AND SERVICES TAX (f) Filing of return [Section 16(2)(d)] The registered person taking the ITC must have filed his return in GSTR-3B under section 39. Thus, a taxpayer should file GSTR-3B to avail ITC on eligible inward supplies. (iii) Goods received in lots: ITC available only on receipt of last lot [First proviso to section 16(2)] In case the goods covered under an invoice are not received in a single consignment but are received in lots / instalments, ITC can be taken only upon receipt of the last lot / instalment. (5) XYZ enters into a contract with ABC for supply of 10 MT of a chemical for ` 1,18,000 (inclusive of GST of ` 18,000) in the month of August. The chemical is to be delivered in lots over a period of three months. ABC raises the invoice for the entire amount in August and XYZ also makes the payment in the same month but the supply is completed in November. Though XYZ paid the full tax as early as August, it can take the ITC of the same only on receipt of the last lot of the chemical in the month of November. (iv) Payment for the invoice to be made within 180 days [Second proviso to section 16(2) read with rule 37] The registered person must pay to the supplier, the value of the goods and/or services along with the tax within 180 days from the date of issue of invoice [Second proviso to section 16(2)]. However, where a registered person, who has availed of ITC on any inward supply fails to pay to the supplier thereof, the amount towards the value of such supply, whether wholly or partly, along with the tax payable thereon, within 180 days from the date of issue of invoice by supplier, shall pay or reverse an amount equal to the ITC availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50, while furnishing the return in Form GSTR-3B for the tax period immediately following the period of 180 days from the date of the issue of the invoice. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.25 7.25 Exceptions This condition of payment of value of supply plus tax within 180 days does not apply in the following situations: (a) Supplies on which tax is payable under reverse charge (b) Deemed supplies without consideration – Schedule I (c) Additions made to the value of supplies on account of supplier’s liability, in relation to such supplies, being incurred by the recipient of the supply as per section 15(2)(b). Under situations given in points (b) & (c), the value of supply is deemed to have been paid. (6) Due to a quality dispute, PZP Ltd withheld payment on a machine supplied by a vendor till it could be rectified. Over 180 days went by in this dispute. The credit taken by PZP on the invoice needs to be paid / reversed along with interest in GSTR-3B furnished for the month after completion of 180 days. Only after the vendor rectified the machine and PZP released the payment, could PZP take the credit again. (v) If depreciation claimed on tax component, ITC not allowed [Section 16(3)] If the person taking the ITC on capital goods and plant and machinery has claimed depreciation on the tax component of the cost of the said items under the Income-tax Act 1961, the ITC on the said tax component shall not be allowed. Thus, in respect of the tax paid on such items, dual benefit cannot be claimed under Income-tax Act, 1961 and GST law simultaneously. In other words, either depreciation on the tax component can be claimed under Income Tax Act or ITC of such tax paid can be availed under GST law. (7) A registered supplier purchases a machinery for business purposes. The value of the machinery is ` 10 lakh and GST paid thereon is ` 1.80 lakh. ITC of ` 1.80 lakh cannot be availed by the supplier if he has claimed depreciation on such amount under income-tax law. © The Institute of Chartered Accountants of India  1.26 7.26 GOODS AND SERVICES TAX (vi) Time limit for availing ITC: 30 th November of succeeding financial year or date of filing of relevant annual return, whichever is earlier [Section 16(4)] ITC on invoices pertaining to a financial year or debit notes issued in a financial year can be availed any time till 30th November of the succeeding financial year or the date of filing of the relevant annual return, whichever is earlier. Here, in case of debit notes, the date of issuance of debit note and not the date of underlying invoice is relevant to determine the relevant financial year 8. (8) A debit note dated 07.07.2022 is issued in respect of the original invoice dated 16.03.2022. As the invoice pertains to F.Y. 2021- 22, the relevant financial year for availment of ITC in respect of the said invoice in terms of section 16(4) shall be FY 2021-22. However, as the debit note has been issued in FY 2022-23, the relevant financial year for availment of ITC in respect of the said debit note shall be FY 2022-23 in terms of section 16(4). (9) Hercules Machinery delivered a machine to XYZ, a monthly return filer under GST, in the month of January under Invoice no. 49 dated 28th January 2023 for ` 4,15,000 plus GST and undertook trial runs and calibration of the machine as per the requirements of XYZ. The amount chargeable for the post-delivery activities was covered in a debit note raised in the month of April 2023 for ` 50,000 plus GST. XYZ did not file its annual return for FY 2022-23 till the end of November, 2023. The time-limit to avail ITC in respect of tax paid on supply for Invoice No. 49 would be 30th November, 2023. Since the debit note is received in the next financial year, the time limit for taking ITC available on ` 50,000 is 30th November 2024, [earlier of the date of filing the annual return for the preceding financial year or 30th of November of the succeeding year. 8 Circular No. 160/16/2021 GST dated 20.09.2021 © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.27 7.27 Exception The time limit u/s 16(4) does not apply to claim for re-availing of credit that had been reversed earlier. (vii) Restriction of ITC in proportion of (i) taxable supplies (ii) business purposes [Sub-sections (1) and (2) of section 17] ITC is restricted in proportion of the use of the goods and/or services (i) in the taxable and / or zero-rated supplies (ii) for business purposes. This is elaborated in heading (4) below. (viii)ITC not allowed on certain supplies [Section 17(5)] ITC has been blocked for specified goods and services. This is elaborated in heading (4) below. 4. APPORTIONMENT OF CREDIT & BLOCKED CREDITS [SECTION 17] STATUTORY PROVISIONS Section 17 Apportionment of credit and blocked credits Sub-section Clause Particulars (1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business. (2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. © The Institute of Chartered Accountants of India  1.28 7.28 GOODS AND SERVICES TAX (3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. Explanation — For the purposes of this sub-section, the expression ‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except: (i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and (ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule. (4) A banking company or a financial institution including a non- banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse: Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year: Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number. (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:— (a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.29 7.29 persons (including the driver), except when they are used for making the following taxable supplies, namely:— (A) further supply of such motor vehicles; or (B) transportation of passengers; or (C) imparting training on driving such motor vehicles; (aa) vessels and aircraft except when they are used–– (i) for making the following taxable supplies, namely:— (A) further supply of such vessels or aircraft; or (B) transportation of passengers; or (C) imparting training on navigating such vessels; or (D) imparting training on flying such aircraft; (ii) for transportation of goods; (ab) the following supply of goods or services or both:— services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa): Provided that the input tax credit in respect of such services shall be available— (i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein; © The Institute of Chartered Accountants of India  1.30 7.30 GOODS AND SERVICES TAX (ii) where received by a taxable person engaged— (I) in the manufacture of such motor vehicles, vessels or aircraft; or (II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him; (b) the following supply of goods or services or both— (i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance: Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply; (ii) membership of a club, health and fitness centre; and (iii) travel benefits extended to employees on vacation such as leave or home travel concession: Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.31 7.31 the same to its employees under any law for the time being in force 9. (c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; (d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property (e) goods or services or both on which tax has been paid under section 10; (f) goods or services or both received by a non-resident taxable person except on goods imported by him; (fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013; (g) goods or services or both used for personal consumption; (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and 9 Circular No. 172/04/2022 GST dated 06.07.2022 clarifies that this proviso is applicable to the whole of section 17(5)(b). © The Institute of Chartered Accountants of India  1.32 7.32 GOODS AND SERVICES TAX (i) any tax paid in accordance with the provisions of sections 74, 129 and 130. (6) The Government may prescribe the manner in which the credit referred to in sub-sections (1) and (2) may be attributed. Explanation.–– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises. Chapter V: Input Tax Credit of the CGST Rules Rule 38 Claim of credit by a banking company or a financial institution A banking company or a financial institution, including a non-banking financial company, engaged in the supply of services by way of accepting deposits or extending loans or advances that chooses not to comply with the provisions of sub-section (2) of section 17, in accordance with the option permitted under sub-section (4) of that section, shall follow the following procedure, namely,- (a) the said company or institution shall not avail the credit of,- (i) the tax paid on inputs and input services that are used for non-business purposes; and (ii) the credit attributable to the supplies specified in sub-section (5) of section 17; © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.33 7.33 (b) the said company or institution shall avail the credit of tax paid on inputs and input services referred to in the second proviso to sub-section (4) of section 17 and not covered under clause (a); (c) fifty per cent. of the remaining amount of input tax shall be the input tax credit admissible to the company or the institution and the balance amount of input tax credit shall be reversed in Form GSTR-3B; Rule 42 Manner of determination of input tax credit in respect of inputs or input services and reversal thereof Sub-rule Clause Particulars (1) The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,- (a) the total input tax involved on inputs and input services in a tax period, be denoted as ‘T’; (b) the amount of input tax, out of ‘T’, attributable to inputs and input services intended to be used exclusively for the purposes other than business, be denoted as ‘T1’; (c) the amount of input tax, out of ‘T’, attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as ‘T2’; (d) the amount of input tax, out of ‘T’, in respect of inputs and input services on which credit is not available under sub-section (5) of section 17, be denoted as ‘T3’; © The Institute of Chartered Accountants of India  1.34 7.34 GOODS AND SERVICES TAX (e) the amount of input tax credit credited to the electronic credit ledger of registered person, be denoted as ‘C1’ and calculated as- C1 = T- (T1+T2+T3); (f) the amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero rated supplies, be denoted as ‘T4’; (g) ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at summary level in FORM GSTR-3B; (h) input tax credit left after attribution of input tax credit under clause (f) shall be called common credit, be denoted as ‘C2’ and calculated as- C2 = C1- T4; (i) the amount of input tax credit attributable towards exempt supplies, be denoted as ‘D 1’ and calculated as- D1= (E ÷ F) × C2 where, ‘E’ is the aggregate value of exempt supplies during the tax period, and ‘F’ is the total turnover in the State of the registered person during the tax period: Provided further that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated; © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.35 7.35 Explanation: For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 and entry 92A of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule; (j) the amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as ‘D2’, and shall be equal to five per cent. of C2; and (k) the remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting supplies other than exempted supplies but including zero rated supplies and shall be denoted as ‘C3’, where,- C3 = C2 - (D1+D2); (l) the amount ‘C3’, ‘D1’ and ‘D2’ shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax and declared in FORM GSTR-3B or through FORM GST DRC-03; (m) the amount equal to aggregate of ‘D 1’ and ‘D2’ shall be reversed by the registered person in FORM GSTR-3B or through FORM GST DRC-03: Provided that where the amount of input tax relating to inputs or input services used partly for the purposes other than business and partly for effecting exempt supplies has been identified and segregated at the invoice level by the registered person, the same shall be included in ‘T1’ and ‘T2’ respectively, and the remaining amount of credit on such inputs or input services shall be included in ‘T4’. © The Institute of Chartered Accountants of India  1.36 7.36 GOODS AND SERVICES TAX (2) The input tax credit determined under sub-rule (1) shall be calculated finally for the financial year before the due date for furnishing of the return for the month of September following the end of the financial year to which such credit relates, in the manner specified in the said sub-rule and,- (a) where the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts determined under sub-rule (1) in respect of ‘D1’ and ‘D2’, such excess shall be reversed by the registered person in FORM GSTR-3B or through FORM GST DRC- 03 in the month not later than the month of September following the end of the financial year to which such credit relates and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment; or (b) where the aggregate of the amounts determined under sub-rule (1) in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’, such excess amount shall be claimed as credit by the registered person in his return for a month not later than the month of September following the end of the financial year to which such credit relates. Rule 43 Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases Sub-rule Clause Particulars (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.37 7.37 partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,- (a) the amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-3B and shall not be credited to his electronic credit ledger; (b) the amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated in FORM GSTR-3B and shall be credited to the electronic credit ledger; (c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as five years from the date of the invoice for such goods: Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, input tax in respect of such capital goods denoted as ‘A’ shall be credited to the electronic credit ledger subject to the condition that the ineligible credit attributable to the period during which such capital goods were covered by clause (a), denoted as ‘Tie’, shall be calculated at the rate of five percentage points for every quarter or part thereof and added to the output tax liability of the tax period in which such credit is claimed; Provided further that the amount ‘Tie’ shall be computed separately for input tax credit of central tax, State tax, © The Institute of Chartered Accountants of India  1.38 7.38 GOODS AND SERVICES TAX Union territory tax and integrated tax and declared in FORM GSTR-3B. (d) the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c) in respect of common capital goods whose useful life remains during the tax period, to be denoted as ‘Tc’, shall be the common credit in respect of such capital goods: Provided that where any capital goods earlier covered under clause (b) are subsequently covered under clause (c), the input tax credit claimed in respect of such capital good(s) shall be added to arrive at the aggregate value ‘Tc’; (e) the amount of input tax credit attributable to a tax period on common capital goods during their useful life, be denoted as ‘Tm’ and calculated as:- Tm= Tc÷60 Explanation.- For the removal of doubt, it is clarified that useful life of any capital goods shall be considered as five years from the date of invoice and the said formula shall be applicable during the useful life of the said capital goods. (f) the amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, be denoted as ‘Tr’ and shall be the aggregate of ‘Tm’ for all such capital goods. (g) the amount of common credit attributable towards exempted supplies, be denoted as ‘Te’, and calculated as: Te= (E÷ F) x Tr 10 10 Clause (f) of the rule which contained the provisions for computation of ‘Tr’ has been omitted vide Notification No. 16/2020 CT dated 23.03.2020. This has rendered the formula given in clause (g) otiose as the term ‘Tr’ is now nowhere defined in the amended rule. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.39 7.39 where, ‘E’ is the aggregate value of exempt supplies, made, during the tax period, and ‘F’ is the total turnover in the State of the registered person during the tax period: Provided further that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated; Explanation: For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 and entry 92A of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule; (h) the amount Te along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit. (i) The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax and declared in FORM GSTR-3B. Explanation:-For the purposes of rule 42 and this rule, it is hereby clarified that the aggregate value of exempt supplies shall exclude:- (b) the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, © The Institute of Chartered Accountants of India  1.40 7.40 GOODS AND SERVICES TAX engaged in supplying services by way of accepting deposits, extending loans or advances; and (c) the value of supply of services by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. (d) the value of supply of Duty Credit Scrips specified in Notification No. 35/2017CT (R) dated 13.10.2017 Explanation.- For the purposes of this Chapter,- (1) the expressions “capital goods” shall include “plant and machinery” as defined in the Explanation to section 17; (2) for determining the value of an exempt supply as referred to in sub-section (3) of section 17- (a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and (b) the value of security shall be taken as one per cent. of the sale value of such security. ANALYSIS Section 17 requires apportionment and concomitant restriction of ITC in two situations as also blocking of ITC on specified inward supplies. A. Apportionment of ITC [Sub-sections (1) and (2) of section 17 read with rule 42 and rule 43 of the CGST Rules] The fundamental principle of credit scheme under value added tax is that tax paid on inputs, input services and capital goods can be availed as credit only when the output is taxable. Thus, when tax is not payable on output, credit cannot be availed. Accordingly, ITC under GST can be availed and utilised for payment of tax on output supply. Consequently, ITC cannot be availed when tax is not payable on output supply, i.e. on exempt supply. The only exception to the above © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.41 7.41 principle is ‘zero rated supply, where ITC is available even if no tax is payable on output supply as zero rated supply is not an exempted supply. If a taxable person is making both taxable and exempt supply, he is entitled to full credit of ITC in respect of inputs, input services and capital goods exclusively used for taxable supply and no credit at all for inputs, input services and capital goods exclusively used for exempt supply. If common inputs, input services and capital goods are used for taxable as well as exempt supply, only proportionate ITC attributable to the taxable supply is available. The common ITC is apportioned in the ratio of value of taxable supply and exempt supply. Also, in case goods and/or services are used by the taxable person partly for the business purposes and partly for non-business purposes, he is entitled to full credit of ITC in respect of inputs, input services and capital goods exclusively used for business purposes and no credit at all can be availed for goods and/or services exclusively used for non-business purposes. If common inputs, input services and capital goods are used partly for business and partly for non-business purposes, only proportionate ITC attributable to the business purpose is available. Elaborate provisions have been made in sub-sections (1) and (2) of section 17 and rules 42 and 43 for calculation of such proportionate ITC. Such provisions are discussed in detail in the ensuing pages. The situations requiring apportionment are as follows: (a) when the goods and / or services are used by the registered person partly for the purpose of business [See the definition of business] and partly for other purposes [Section 17(1)]; and (b) when the goods and / or services are used by the registered person partly for making taxable supplies including zero-rated supplies and partly for making exempt supplies [See the definition of exempt supplies] [Section 17(2)]. In both the above situations, full ITC on inward supplies cannot be taken; only proportionate ITC is allowed in such scenarios. Where goods and/or services are used partly for non-business purposes and partly for business purposes, © The Institute of Chartered Accountants of India  1.42 7.42 GOODS AND SERVICES TAX ITC attributable only to business purposes can be taken by the registered person. Similarly, where goods and/or services are partly used for making exempt supplies including zero rated supplies and partly for taxable supplies, ITC attributable to taxable supplies and zero rated supplies can be taken by the registered person. Section 16(2) of the IGST Act specifies that ITC may be availed on inward supplies for making zero-rated supply, notwithstanding the exempt nature of the zero-rated supply. Zero- rated supply is an expression that covers two kinds of supplies: (i) exports, and (ii) supplies for authorised operations to a SEZ unit or SEZ developer. Therefore, ITC is available on goods and / or services used for supplies made in the course of export or to an SEZ unit or SEZ developer for authorised operations. (10) A registered person is in the business of manufacturing shoes. He gave 50 pairs of shoes to his friends free of cost. ITC on inputs and input services attributable to such 50 pair of shoes being used for non-business purposes will not be available. (11) A registered person manufactures a product ‘X’ chargeable to 18% GST, a product ‘Y’ chargeable to NIL rate of tax and a product ‘Z’ which is exported without payment of tax under bond. All the three products are manufactured from common inputs and input services. ITC on inputs and input services attributable to product ‘Y’ being an exempt supply, will not be available. (i) Methodology of apportionment of credit on inputs and input services and reversal thereof [Rule 42] In many situations, the amount of input tax involved in exempt /non- business use is not easily discernible, as common goods and/or services are used for (i) making taxable supplies including zero rated supplies and exempt supplies and (ii) business and non-business purposes. © The Institute of Chartered Accountants of India  INPUT TAX CREDIT 1.43 7.43 Rule 42 of the CGST Rules provides the methodology for apportionment of ITC on inputs and input services and reversal of ineligible credit as follows: Step 1 – Compute common credit Total input tax involved on inputs & input services in a T tax period Less: Input tax on inputs & input services that are (T1) intended to be used exclusively for non-business purposes Less: Input tax on inputs & input service