A key feature of the Indian Goods and Services Tax (GST) Bill is the continuous chain of input tax credit (ITC). For e.g.: In the current system of indirect taxation, ITC is not available on Entry Tax, CST and Luxury which significantly increase the cascading effects of taxes. Similarly, there is no provision for manufacturers and service providers to claim ITC of value added tax (VAT) and goods dealers cannot claim ITC on service tax, central excise duty and countervailing duty (CVD).
Under GST law, the ITC will abide by the supply chain not only in intra-state trade transactions but also in inter-state trade transactions. Section 2 (55) of the Model GST Law (MGL) defines “input tax” in relation to a taxable person, which would mean that the IGST, including that on import of goods, CGST and SGST charged on any supply of goods or services to him and includes the tax payable under sub-section (3) of section 8, but does not include the tax paid under section 9. According to sub-section 56 of section 2 “input tax credit” means credit of ‘input tax’ as defined in sub-section (55).
The various requirements for availing ITC under the current tax structure have been compiled below:
|Type of Input Tax Credit||Conditions for availing Input Tax Credit (ITC)|
|Value Added Tax||VAT dealers can avail ITC of VAT paid on goods purchased for business. This may be the VAT on resale or manufacture of goods. However, the purchase should be from a registered state dealer.|
|CENVAT/Service Tax||Manufactures can avail the credit on CENVAT for all inputs that have been utilized directly or indirectly for the manufacture of the final finished product. The credit on service tax paid for any input service can also be availed.
Service providers offering taxable service can avail the credit on service tax for paid input services used for the delivery of the taxable services.
Under the tax structure of the GST, ITC can be availed by any individual who is a registered taxable person. The credit can be availed on all inputs utilized or intended to be utilized in the course of or for the furtherance of the individual’s business. Section 16(1) of the MGL states that every registered taxable person is entitled to take credit of input tax admissible to him and such amount will be credited to his electronic credit ledger.
However, the claim to ITC is subject to certain conditions that have been mentioned below:
1. The Tax Invoice/Debit or Credit Note has to be issued by a registered person.
2. The goods/services should have been received.
3. GSTR-3 for the related month has to be filed.
4. The government has received the tax from the supplier, either in cash or through the availing of ITC.
Input Tax Credit can be availed under the following circumstances
i. When GST registration has been applied for
There are two scenarios under which registration for GST is applied for:
1) Liability for registration
2) Voluntary application for registration
• GST application on registration liability
# When GST application is due to registration liability, individuals can avail ITC on inputs and inputs in semi-finished products or finished in-stock products, on the day prior to the date on which they become liable to pay the tax, only if they have:
# Registration application has been made within 30 days from the date on which they become liable to register and Have been granted registration
• GST application is voluntary
Even if an individual has not exceeded the threshold limit for registration, provisions of the MGL state that they can apply for voluntary registration. In such cases, ITC can be availed on inputs and inputs in semi-finished products or finished in-stock products, on the day before being granted registration.
ii. When one becomes a regular dealer by quitting the composition dealer
If an individual is registered under the composition scheme and their aggregate turnover is more than Rs. 50 lakhs, they can no longer be considered under the composite scheme and become regular dealers. Regular dealers can avail ITC on inputs, inputs in semi-finished products or finished in-stock products, and capital goods on the day prior to the date on which they become liable to pay the tax. The ITC on capital goods will be lowered by percentage points and will be notified to the individual.
iii. When exempted goods and services become taxable
ITC can be availed when GST exempted goods and services are made taxable. In such cases, ITC has to be availed on the day after the date the supply is taxable. The ITC can be availed on inputs and inputs in semi-finished products or finished in-stock products, which are related to the exempt supply. ITC can also be availed on capital goods that used exclusively for exempt supply. The ITC on capital goods will be lowered by percentage points and will be notified to the individual.
iv. When there is a sale, lease, transfer, merger, demerger or amalgamation of the business
In any of the above mentioned cases, if the transfer agreement also has provisions for transfer of liabilities, the unutilized ITC can be transferred to the succeeding party.
v. When goods and/or services are used partly for business and partly for other purposes
If goods, services or both of them are partly used for business purposes and partly for activities other than those that serve business purposes, ITC can be claimed only on the portion that has been utilized for business purposes.
vi. When goods and/or services are used partly for taxable supplies and partly for exempt supplies
If goods, services or both of them are being partly used for taxable supplies and partly for exempt supplies, ITC can be claimed only on the portion used for creating taxable supplies and zero rated supplies. ITC on exempt supplies is not allowed.
Cases of Exception
In the below mentioned exceptional scenarios, ITC can be availed, subject to certain terms and conditions.
i. Receiving of goods in lots or installments
If the goods have been received in lots or in installments, ITC on such goods can only be availed upon the receipt of the last installment or lot.
ii. Credit on telecommunication towers and pipelines
For telecommunication towers and pipelines, the terms for availing ITC have been summarized below:
|The financial year in which the telecommunication tower and/ or pipeline is received||ITC to be availed- 1/3rd of total input tax paid|
|The succeeding financial year||ITC to be availed- 2/3rd of total input tax, including credit availed in the previous year|
|Any subsequent financial year||Balance input credit|