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Decoding of ITC Rules

May 16, 2017

The Draft GST ITC Rules made public by Council, which is a complete set of provisions pertaining to the Input Tax Credit combining with the provisions of CGST/SGST Acts.

The provisions of ITC Rules broadly contain broadly the following issues:

How much credit of Input tax shall be available to credit on Electronic Credit Ledger;
Under what conditions these credits are available;
What kinds of reporting and disclosure required for availing ITC;
Under what circumstances the ITC will revise and what are the consequences thereof;
What are the provision to deals with special taxpayers and special circumstances?
The draft Rules are bit complicated in the comparison with the present provision of CENVAT, particularly with respect to the ITC related with Capital Goods.

DECODING THE ITC RULES: GST

The provisions of ITC Rules are as follows:

Rule 1 Documentary requirements and conditions for claiming input tax credit

(1) The ITC shall be availed on the basis of any of the following documents invoice/debit note/bill of entry/document issued by an ISD

(2)The documents under Rule 1(1) shall contains particulars as prescribed in Invoice Rules and the relevant information, as contained in the said document, is furnished in FORM GSTR-2

(3) No ITC shall be availed tax paid in pursuance of any demand on the account of fraud/willful misstatement/suppression of facts.

Rule 2 Reversal of input tax credit in case of non-payment of consideration

(1) A registered person,

who has availed of ITC but
fails to pay to the supplier the consideration within 180 days from the date of issuance of Invoice, shall furnish the details of such supply and the amount of input tax credit availed of in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of issue of invoice.
(2) The amount of input tax credit referred to in sub-rule (1) shall be added to the output tax liability of the registered person for the month in which the details are furnished.

(3) The registered person shall be liable to pay interest when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.

Rule 3 Claim of credit by a banking company or a financial institution

A banking company/FI/NBFC engaged in supply of services by way of accepting deposits or extending loans or advances and not opt to segregate taxable and non taxable Services for the purpose of appropriation of ITC shall follow the procedure specified below –

(a) Fifty per cent. of the input tax shall be the input tax credit admissible to the company or the institution and shall be furnished in FORM GSTR-2;

The credit disallowed u/s17(5) will not be taken under consideration;
The input credit shall not be allowed 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.

Rule 4.Procedure for distribution of input tax credit by Input Service Distributor (ISD)

4(1) a • the ITC shall be distributed in the same month in which it is available;

• The details of ITC distributed in a month shall be furnished in FORM GSTR-6 on or before 13th day from the end of the month in which ITC has been distributed.

b The ISD shall segregate the eligible input and ineligible input u/s 17(5) on pro-rata basis.

c The ITC relating to CGST/SGST/UTGST and IGST segregated on pro-rata basis.

d The ITC to one of the recipients ‘R1’, whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, “C1”, to be calculated by applying the following formula:-

C1 = (t1÷T) × C

“C” is the amount of credit to be distributed,

“T1” is the turnover, as referred to in section 20, of person R1 during the relevant period, and

“T” is the aggregate of the turnover of all recipients during the relevant period;

e The ITC on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient;

f The input tax credit on account of CGST and SGST,

(i) in respect of a recipient located in the same State: CGST and SGST be distributed as ITC of CGST and SGST respectively;

(ii) in respect of a recipient located in a State: CGST and SGST be distributed as integrated tax.

g The ISD shall issue an ISD invoice, as per Rule 7(1) Invoice Rules, clearly indicating in such invoice that it is issued only for distribution of input tax credit.

h The ISD shall issue an ISD credit note, as per Rule 7(1) Invoice Rules for reduction of credit in case the ITC already distributed gets reduced for any reason.

i Any additional amount of ITC on account of issuance of a debit note to an ISD shall be distributed on pro-rata basis and such ITC shall be distributed in the month in which the debit note has been included in the return in FORMGSTR-6.

j Any ITC required to be reduced on account of issuance of a credit note to the ISD by the supplier shall be apportioned to each recipient in the same ratio in which input tax credit contained in the original invoice was distributed and the amount so apportioned shall be,-

(i) reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; and

(ii) added to the output tax liability of the recipient and where the amount so apportioned is in the negative by virtue of the amount of credit to be distributed is less than the amount to be adjusted.

(3) If the amount of input tax credit distributed by an Input Service Distributor is reduced later on for any other reason for any of the recipients, including that it was distributed to a wrong recipient by the Input Service Distributor, the process prescribed in clause (j) of sub-rule (1) shall, mutatis mutandis apply for reduction of credit.

GST Tax Rate

Rule 5 Manner of claiming credit in special circumstances: ITC Manner of Pro-Rata Distribution

Rule 5(1) ITC claimed in accordance with the provisions of Section 18(1) stock, or the credit claimed on capital goods shall be subject to the following conditions –

(a) The ITC on capital goods, in terms of Section 18(1) (c) and (d) , shall be claimed after reducing the tax paid on such capital goods by five percentage points per quarter of a year or part thereof from the date of invoice or such other documents on which the capital goods were received by the taxable person.

(b) The registered person shall within thirty days from the date of his becoming eligible to avail of ITC under sub-section (1) of section 18 shall make a declaration, electronically, on the Common Portal in FORM GST ITC-01 to the effect that he is eligible to avail of ITC as aforesaid;

(c) The declaration under clause (b) shall clearly specify the details relating to the inputs lying in stock or inputs contained in semi-finished or finished goods lying in stock, or as the case may be, capital goods–

(i) on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act, in the case of a claim under clause (a) of sub-section (1) of Section 18,

(ii) on the day immediately preceding the date of grant of registration, in the case of a claim under clause (b) of sub-section (1) of Section 18,

(iii) on the day immediately preceding the date from which he becomes liable to pay tax under Section 9, in the case of a claim under clause (c) of sub-section (1) of Section 18,

(iv) on the day immediately preceding the date from which supplies made by the registered person becomes taxable, in the case of a claim under clause (d) of sub-section (1) of Section 18.

(d) The details furnished in the declaration under clause (c) shall be duly certified by a practicing chartered account or cost accountant if the aggregate value of claim on account of central tax, State tax and integrated tax exceeds two lakh rupees.

(e) The ITC claimed in accordance with clauses (c) and (d) of sub-section (1) of section 18 shall be verified with the corresponding details furnished by the corresponding supplier in FORM GSTR-1 or as the case may be, in FORM GSTR- 4, on the Common Portal.

Rule 6.Transfer of credit on sale, merger, amalgamation, lease or transfer of a business

Rule 6 casts obligations on the transferee and transferor in the case of transfer of business either by way of sale, merger, de-merger, amalgamation, lease or transfer or change in ownership of business.

Rule 6(1): Disclosure

Filing Form GST ITC-02: the transferor is under obligation to furnish the detail of transfer of business in Form GST ITC-02 along with a request to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee.

In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

Rule 6(2): Certification

The Form GST ITC-02 shall also contains submit a copy of a certificate issued by a practicing chartered account or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for transfer of liabilities.

Rule 6(3): Acceptance of contents by Transferee

The transferee shall, on the Common Portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.

Rule 6(4): The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Rule 7 Manner of determination of ITC in certain cases and reversal thereof.

Rule 7 deals with a situation where the taxpayer employed inputs for business/non-business/ exempted supply. In such cases Section 17(1) and (2) applies which provides that under such circumstances, the amount of ITC shall be restricted to so much of the input tax as is attributable to the purposes of his business or said taxable supply.

In such situation, the taxpayer will require to segregate input tax, attributable to inputs intended to be used exclusively for business/non-business purposes, exempted supply or taxable supply or used for taxable/non-taxable/exempted purposes.

7(1) The ITC for input being partly used for the business purposes/non-business purposes/ taxable (including zero rated)/exempted supplies, shall computed as the manner given below:

Rule 7(1)(e) the amount of ITC credited to the electronic credit ledger of registered person C1 calculated as:C1 = T- (T1+T2+T3);

a. ‘T’ = Total input tax involved on inputs and input services in a ‘tax period’

b. T1= The amount of input tax attributable to inputs and input services intended to be used exclusively for non business purposes.

c. T2= The amount of input tax attributable to inputs and input services intended to be used exclusively for effecting exempt supplies.;

d. T3 = Blocked Credit, i.e., The amount of input tax, in respect of inputs on which credit is not available under sub-section section 17(5);

f. T4 = the amount of ITC attributable to inputs and input services used exclusively in or in relation to taxable supplies including zero rated supplies;

g. ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2;

h. ITC left after attribution of ITC under clause (g) shall be called common credit, be denoted as ‘C2’ and calculated as:

C2 = C1- T4;

C2 = T – T1- T2- T3- T4

i. The amount of ITC attributable towards exempt supplies, be denoted as ‘D1’ and calculated as:D1= (E÷F) × C2

‘E’ is the aggregate value of exempt supplies

And ‘F’ is the total turnover of the registered person during the tax period:

Where the registered person does not have/not available any turnover during the said tax period, the value of ‘E/F’ shall calculated by taking values of ‘E’ and ‘F’ of the last tax period for which details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to calculated.

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 ITC attributed to the purposes of business and for effecting taxable supplies including zero rated supplies and shall be denoted as ‘C3’, where,- C3 = C2 – (D1+D2);

l. The amount ‘C3’ shall be computed separately for ITC of central tax, State tax, Union territory tax and integrated tax;

m. The amount equal to ‘D1’ and ‘D2’ shall be added to the output tax liability of the registered person:

Provided that if the amount of input tax relating to inputs or input services which have been used partly for purposes other than business and partly for effecting exempt supplies has been identified and segregated at invoice level by the registered person, the same shall be included in ‘T1’ and ‘T2’ respectively, and the remaining amount of credit on such input or input services shall be included in ‘T4’.

Rule 7(2) Adjustment to be made for Current/Actual Turnover and Historical Turnover and the additional/reduced ITC will be paid or claimed.

The ITC determined under sub-rule (1) shall be calculated finally for the financial year before the due date for filing the return for the month of September following the end of the financial year to which such credit relates, in the manner prescribed in the said sub-rule

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 added to the output tax liability of the registered person for a 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 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.

Note : Total Amount shall be credited to Electronic Credit Ledger is = C1 = T-(T1-T2-T3)

Total ITC available to the taxpayer = T4 + C3

Total ITC available to the taxpayer = T4 + C2-C2*5%-C1*E/F

Total ITC available to the taxpayer = T4 + C2(1-1/20-E/F)

Thus Total ITC available to the taxpayer = T4 + C2(19/20 – E/F)

GST Rule

Rule 8 Manner of determination of ITC in respect of capital goods and reversal thereof in certain cases

Rule 8 deals with a situation where the taxpayer employed capital goods for business/non-business/exempted supply. In such cases Section 17(1) and (2) applies which provides that under such circumstances, the amount of ITC shall be restricted to so much of the input tax as is attributable to the purposes of his business or said taxable supply.

In such situation, the taxpayer will require to segregate input tax, attributable to inputs intended to be used exclusively for business/non-business purposes, exempted supply or taxable supply or used for taxable/non-taxable/exempted purposes.

Rule 8 the manner of computation and segregation of Input Taxes.

8(1) The ITC for Capital Goods being partly used for the business purposes/non-business purposes/taxable (including zero rated)/exempted supplies, shall computed as the manner given below:

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-2 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 taxable supplies including zero-rated supplies shall be indicated in FORM GSTR-2 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:

Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger;

d. the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c), to be denoted as ‘Tc’, shall be the common credit in respect of capital goods for a tax period:

Provided that where any capital goods earlier covered under clause (b) is subsequently covered under this clause, the value of ‘A’ arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof shall be added to the aggregate value ‘Tc’;

e. the amount of ITC attributable to a tax period on common capital goods during their residual life, be denoted as ‘Tm’ and calculated as:- Tm= Tc÷60

f. the amount of ITC, at the beginning of a tax period, on all common capital goods whose residual 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

where,

‘E’ is the aggregate value of exempt supplies, that is, all supplies other than taxable and zero rated supplies, during the tax period, and

‘F’ is the total turnover of the registered person during the tax period:

Provided 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’ calculated by taking values of ‘E’ and ‘F’ of the last tax period for which details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to calculated;

Explanation: For the purposes of this clause, the aggregate value of exempt supplies and total turnover shall exclude the amount of any duty or tax levied under entry 84 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 applicable interest shall, during every tax period of the residual life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.

Rule 8(2) The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax.

GST Integrated Tax

Rule 9. Manner of reversal of credit under special circumstances

Rule 9 deals with the situations where the taxpayer’s registration either cancelled or the taxpayer opted to be assessed under the Composition Scheme under Section 10. The result of the change of the functionalities of the taxpayer made the it ineligible to take ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date of change of such functionalities of the taxpayer.

Rule 9 provides the manner in which the ITC, relating to such inputs lying in stock, inputs contained in semi-finished and finished goods lying in stock, and capital goods lying in stock. The Rule 9 also provides an example with the numerical values.

ITC on inputs shall be calculated proportionately on the basis of corresponding invoices: Rule 9(1)(a)

For inputs lying in stock, and inputs contained in semi-finished and finished goods lying in stock, the ITC shall be calculated proportionately on the basis of corresponding invoices on which credit had been availed by the registered taxable person on such input. The amount of ITC shall be determined separately for ITC of IGST and CGST.

ITC on capital shall be calculated on basis of remaining life of Capital Goods: Rule 9(1)(b)

For capital goods lying in stock the ITC involved in the remaining residual life in months shall be computed on pro-rata basis, taking the residual life as five years;

Illustration

Capital goods have been in use for 4 years, 6 month and 15 days.

The residual remaining life in months= 5 months ignoring a part of the month ITC taken on such capital goods=C

ITC attributable to remaining residual life = C multiplied by 5/60

Where the tax invoices related to the inputs lying in stock are not available

The registered person shall estimate the amount of ITC based on the prevailing market price of goods on the effective date of occurrence of any of the events.

Reporting

The amount determined as under shall form part of the output tax liability of the registered person and the details of the amount shall be furnished in FORM GST ITC-03, where such amount relates opting composition scheme by the taxpayer and in FORM GSTR-10, where such amount relates to cancellation of registration.

Rule10: Conditions and restriction in respect of inputs and capital goods sent to the job worker.

The inputs or capital goods shall be sent to the job worker under the cover of a challan, containing the information of an Invoice u/r 8, issued by the principal, including where the inputs or capital goods are sent directly to job-worker.

Disclosure

The details of challans in respect of goods dispatched to a job worker or received from a job worker during a tax period shall be included in FORM GSTR-1 furnished for that period.

Where the inputs or capital goods are not returned to the principal within the stipulated time.

If the inputs or capital goods are not returned to the principal within the time stipulated in section 143, the challan issued under sub-rule (1) shall be deemed to be an invoice for the purposes of this Act.

This article was first published on LinkedIn by Vineet Sahay

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