Input, Input Tax and Input Tax Credit

Section 2 of the Central Goods & Services Act defines various terminologies. Relevant definitions are reproduced herein as follows:—

(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

(62) “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—

the integrated goods and services tax charged on import of goods;
the tax payable under the provisions of sub-sections (3) and (4) of section 9;
the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

(63) “input tax credit” means the credit of input tax;

(67) “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;

(19) “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;

(94) “registered person” means a person who is registered u/s. 25 but does not include a person having a Unique Identity Number;

(105) “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;

(106) “tax period” means the period for which the return is required to be furnished;

(107) “taxable person” means a person who is registered or liable to be registered u/s. 22 or section 24;

(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;

(47) “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 u/s. 11, or u/s. 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

(78) “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act;

ELIGIBILITY TO CLAIM INPUT TAX CREDIT

Section 16(1) of the CGST Act provides that: Every registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

Thus, to claim Input Tax Credit (ITC) it is necessary that the claimant is a ‘registered person’. All such persons who are registered under the Act (other than persons holding UIN) are eligible to claim ITC in respect of taxes paid (i.e., CGST, SGST or UTGST and IGST) on all inward supplies of goods and services received, which are used or intended to be used in the course of his business or for furtherance of business.

Such inward supplies may be of inputs, input services or capital goods. All such supplies are eligible for claim of ITC. Thus, whether it is raw material, packing material, trading goods, consumables, capital goods or items of expenditure (debited to Profit & Loss a/c under various heads) all such items are eligible provided the same are used or intended to be used in the course or furtherance of business (subject to such conditions and restrictions as may be prescribed).

CONDITIONS & RESTRICTIONS

Apart from the basic condition i.e., used or intended to be used in the course or furtherance of business, section 16(2) provides for certain conditions, which may be summarised as follows:

Goods and/or services (as the case may be) must have been received.
The recipient must be in the possession of a tax invoice (issued by the supplier) in respect of such supply
Tax charged on such inward supply must have been paid to the Government (whether in cash or by way of utilisation of ITC)
A return (in accordance with section 39) has been furnished
In respect of capital goods, if the registered person has claimed depreciation (under the Income-tax Act) on tax component of such assets (capital goods), ITC shall not be admissible. That would mean that if tax component has been added to the cost of such capital goods, ITC to that extent is not eligible.

It has further been provided that if the recipient fails to make payment to the supplier in respect of supplies so received (on which ITC has been claimed) within a period of 180 days from the date of issuance of Tax Invoice, the ITC so claimed has to be reversed along with interest. And such amount can be reclaimed on making payment to the supplier.

REDUCTION IN ITC

Section 17 provides for certain conditions in which the claim of ITC may get reduced to certain extent or proportionate reduction may have to be worked out in following circumstances:—

If the taxable supplies received are used partly for the purposes of business and partly for any other purposes (may be for personal use). ITC will be admissible to the extent of business uses only. If the exact amount is not ascertainable then proportionate reduction method will be applicable.
If the taxable supplies received are used partly for the purposes of outward supply of taxable goods and/or services (including zero rated supplies) and partly for exempt supplies, ITC will be admissible to the extent of use in taxable supplies including zero rated supplies). If the exact amount is not ascertainable then proportionate reduction method will be applicable.
Note: ‘Zero Rated supplies’ are defined u/s. 16 of IGST Act as follows:—
“16. (1) “zero rated supply” means any of the following supplies of goods or services or both, namely:–
1. export of goods or services or both; or
2. supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.”
Thus, although there is no tax payable on outward supplies, which are zero rated, input tax credit is available in full (without any reduction).
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 section 17(2) (i.e. bifurcation of taxable and exempt supplies), 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.

NO ITC

Section 17(5) of the CGST Act provides that; 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:—

motor vehicles and other conveyances except when they are used––
1. for making the following taxable supplies, namely:—
  1. further supply of such vehicles or conveyances; or
  2. transportation of passengers; or
  3. imparting training on driving, flying, navigating such vehicles or conveyances;
2. for transportation of goods;
The following supply of goods or services or both—
1. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the category of goods or services or both or as an element of a taxable composite or mixed supply;
2. Membership of a club, health and fitness centre;
3. Rent-a-cab, life insurance and health insurance except where––
  1. the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
  2. such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
4. Travel benefits extended to employees on vacation such as leave or home travel concession;
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;
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;
Goods or services or both on which tax has been paid u/s. 10 (composition schemes);
Goods or services or both received by a non-resident taxable person except on goods imported by him;
Goods or services or both used for personal consumption;
Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
Any tax paid in accordance with the provisions of sections 74, 129 and 130 (specific cases).
Explanation.– For the purposes of Chapter V (Input Tax credit) and Chapter VI (registration), 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—
1. Land, building or any other civil structures;
2. Tele-communication towers; and
3. Pipelines laid outside the factory premises.

It may further be noted that following persons are not entitled to claim input tax credit in respect of any of the items of inward supply of goods or services:

An unregistered person
Registered persons who have opted for Composition
Scheme
Persons holding Unique Identification Number (UIN)
A registered person whose registration is cancelled (in respect of inward supplies on or after the date of cancellation).

DOCUMENTATION REQUIREMENTS AND CONDITIONS FOR CLAIMING ITC

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:—

Tax invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31;
An invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to payment of tax (i.e., in respect of purchases from unregistered dealers, where tax is payable under reverse charge scheme);
A debit note issued by a supplier in accordance with the provisions of section 34 (in respect of goods return, rate difference, etc.);
A bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for assessment of integrated tax on imports;
An ISD invoice or ISD credit note or any document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule invoice 7.

TIME LIMIT FOR CLAIM OF ITC

The procedure to claim ITC by a registered person is that the same can be claimed immediately in respective month (Tax Period) to which the tax invoice relates (subject to actual receipt of such goods/services). Each such claim of ITC is credited to the Electronic Credit Register of such registered person. He may utilise the credit as and when he would like to adjust the same against his output tax liability.

However, if a person has not claimed ITC in the respective month, for any reason, he may claim the same any time (i.e., in any tax period) up to the due date of filing the return for the month of September following the end of financial year to which the invoice pertains or furnishing of the relevant Annual Return for the said financial year, whichever is earlier.

It may be noted that credit of CGST, SGST or UTGST and IGST has to be maintained separately and the same can be utilsed in a prescribed manner only. The credit of CGST can be utilised for discharge of output tax liability of CGST and if balance remains it can be utilised for IGST also. But credit of CGST cannot be utilsed for payment (discharge of output tax liability) of SGST. Similarly credit of SGST cannot be utilsed for output tax liability of CGST. In short, cross utilisation of CGST and SGST is not permitted. However, the credit of IGST can be utilised first for discharge of output tax liability of IGST, then against CGST, and if still balance remains, against SGST.