Goods and Services Tax (GST) is an indirect tax that has replaced several previous of indirect taxes in India, including excise duty, VAT, and service tax. The GST Act was passed by the Parliament on March 29, 2017, and come into effect on July 1, 2017. In the earlier indirect tax system, the credit mechanism for Union Government levied taxes (like central excise duty and service tax) was governed by the CENVAT Credit Rules, 2004. For state-level VAT on the sale of goods, the credit mechanism was managed by individual states under their respective VAT laws. The system was designed to prevent the cascading effect of taxes, transitioning into GST, which is a destination-based tax.
Input Tax Credit (ITC) refers to the GST paid by a registered person on the purchase of goods and services used for business growth and development. In simple terms, ITC means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount. ITC helps businesses lower their tax liability by claiming credit for the GST paid on purchases and by ensuring a smooth flow of credit throughout the entire supply chain.
Every registered person is entitled to claim input tax credit (ITC) on the GST charged for any goods or services received, provided they are used or intended to be used for business purposes. This credit is subject to certain conditions and restrictions and must be claimed according to the rules in section 49. The ITC amount will then be added to the person’s electronic credit ledger.
The recipient must have a valid tax invoice, debit note, invoice issued by the recipient for reverse charge, or a bill of entry for home consumption issued by a supplier registered under the GST Act.
The recipient must have actually received the goods or services, including the bill-to-ship-to model, where goods are delivered to a third party on the direction of the customer.
The supplier must have paid the tax to the government, either in cash or by utilizing their ITC, for the goods or services on which the ITC has been claimed.
The registered person claiming the ITC must have filed their return under Section 39.
Proviso to section 16(2)
If goods are received in multiple lots or installments, the ITC can only be claimed upon receipt of the final lot or installment.
The recipient must make payment to the supplier within 180 days from the invoice date. If not, the recipient must reverse the ITC along with interest. However, there are exceptions where this condition does not apply:
For situations (ii) and (iii), the value of the supply is considered to have been paid.
ITC must be availed by the earlier of:
Exception: This time limit does not apply to re-availing ITC that was previously reversed.
(a) ITC is not allowed on motor vehicles for transportation of persons with an approved seating capacity of not more than 13 persons (including the driver), exceptions when used for further supply of motor vehicles, transporting passengers and imparting training on driving.
(aa) ITC is blocked on vessels and aircraft except when used for further supply, transporting passengers, imparting training in driving or flying and transporting goods.
(ab) ITC on services related to general insurance, servicing, repair, and maintenance is blocked if related to the motor vehicles, vessels, or aircraft mentioned in clauses (a) and (aa). However, if ITC is allowed on the vehicle, vessel, or aircraft, ITC on related ancillary services is also allowed.
(b) Specific Services (Food, Beverages, and Others)
ITC is not allowed on the following services, except when used for making outward taxable supplies of the same category or as part of a composite/mixed supply:
(c) ITC is not allowed on works contract services when supplied for the construction of immovable property (other than plant and machinery), except when the works contract services are used for further supply of works contract services.
(d) ITC is not allowed on goods or services received by a taxable person for the construction of immovable property (other than plant and machinery) on their own account, even if used in the course or furtherance of business.
In cases of business changes (sale, merger, demerger, etc.) with specified liability transfer, the registered person can transfer unutilized input tax credit from their electronic credit ledger to the new entity, as prescribed.
ITC must be reversed proportionately when a registered person switches from the normal scheme to a composition levy or when supplies become fully exempt.
If capital goods or machinery, on which ITC has been claimed, are supplied, the registered person must pay the higher of:
The same applies for ITC concerning the remaining useful life of the capital goods.
|
Credit of |
To be utilized first for payment of |
May be utilized further for payment of |
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CGST |
CGST |
IGST |
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SGST/UTGST |
SGST/UTGST |
IGST |
|
IGST |
IGST |
CGST,SGST/UTGST |
NOTE: Credit of CGST cannot be used for payment of SGST/UTGST and credit of SGST/UTGST cannot be utilized for payment of CGST.
*CGST- Central Goods and Services Tax
*SGST- State Goods and Services Tax
*UTGST- Union Territory Goods and Services Tax
*IGST- Integrated Goods and Services Tax
Clarification on availability of input tax credit (ITC) in respect of warranty replacement of parts and repair services during warranty period.
(a) When a distributor replaces parts under warranty, using either their stock or purchased from a third party, they charge the manufacturer via a tax invoice. In this case, GST is payable by the distributor on this supply, and the manufacturer can claim input tax credit (ITC), provided other conditions of the CGST Act, 2017, are met. No ITC reversal is required by the distributor.
(b) If the distributor requests parts from the manufacturer for warranty replacements and receives them without a separate charge, no GST is due on this supply. The manufacturer does not need to reverse ITC for these parts.
(c) If the distributor replaces parts using inventory already received from the manufacturer and the manufacturer issues a credit note for these replaced parts, the manufacturer can adjust the tax liability, provided the distributor has reversed the ITC claimed on those parts, in accordance with section 34(2) of the CGST Act, 2017.
(d) If a distributor replaces parts from their stock and then requisitions replacements from the manufacturer, who provides them via a delivery challan without charging separately, no GST is payable on this replenishment. The manufacturer also does not need to reverse ITC for these replenished parts.
Clarification on time limit under Section 16(4) of the CGST Act, 2017 in respect of RCM supplies received from unregistered persons.
It is clarified that for supplies received from unregistered suppliers where the recipient must pay tax under the reverse charge mechanism (RCM), and where the recipient issues an invoice as per section 31(3)(f) of the CGST Act, 2017, the relevant financial year for calculating the time limit to avail input tax credit (ITC) under section 16(4) will be the financial year in which the recipient issues the invoice, provided the tax is paid on that supply and other conditions of sections 16 and 17 are met. If the recipient issues the invoice after the time of supply and pays tax late, they will be liable to pay interest on the delayed tax payment. Additionally, they may face penalties under section 122 of the CGST Act, 2017 for late invoice issuance.
Clarification on availability of input tax credit on ducts and manholes used in network of optical fiber cables (OFCs) in terms of section 17(5) of the CGST Act, 2017
Ducts and manholes used in optical fiber cable (OFC) networks are not specifically excluded from the definition of “plant and machinery” in the Explanation to section 17 of the CGST Act, 2017, as they do not fall under nature of land, buildings, civil structures, or telecommunication towers or pipelines outside factory premises. Therefore, it is clarified that input tax credit (ITC) on these ducts and manholes is not restricted under clauses (c) or (d) of section 17(5) of the CGST Act, 2017.
To determine the relevant financial year, in case of debit notes, the date of issuance of debit note and not the date of underlying invoice is relevant.
The GST regime has effectively addressed the challenges of indirect taxation in India, notably the cascading effect of taxes, through the introduction of input tax credit. The judiciary has played a vital role in interpreting the Act's provisions. Additionally, the establishment of the GST Council allows both the Centre and states to collaboratively address GST-related issues.