GST Input tax credit: Blocked and Eligible credit
GST Input tax credit has been further classified into Eligible and Blocked Credits. Blocked Credits are dealt under Section 17(5) while its eligibility conditions are dealt under Section 16. Before we proceed onto Blocked and Eligible credit, let us first understand some important definitions provided under CGST act.
What is Input tax and Input tax credit?
The meaning of ‘Input Tax’ and ‘Input Tax Credit’ is defined under Section 2(62) and Section 2(63) of CGST act.
Section 2(62) of CGST Act
“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-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) 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
(e) 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.
Section 2(63) of CGST Act
“Input tax Credit” means the credit of input tax.
Suppose there are three companies namely ‘A’, ‘B’,’C’ dealing in any manufacturing activity.
A produced the goods and sold it to B for Rs 100 + Rs. 18 as GST.
B also added value to those goods and sold it to C for Rs 150+ Rs. 27 as GST.
Now C reworked upon those goods and sold final goods to the ultimate customer for Rs. 200 + Rs 36 as GST.
To understand what is Input Tax Credit? Lets break this word.
In the above example,
Goods were sold by A to B for Rs. 100+ Rs 18 as GST. For B those goods are an input to produce an output and the tax levied on the transaction is also input. B will liable to take credit of Rs. 18 as he used the goods for further production.
Similarly, B sold the goods to C for Rs 150 +Rs 27 as GST. For C those goods are an input to produce and output and the tax levied on that transaction is also input. C will take credit of Rs 27 as he used goods for rework.
Ultimately, goods were sold to the Customer by C for Rs 200 + Rs 36 as GST. This is final price of goods and tax was borne by the customer.
Frequently asked questions on Input Tax Credit
1)How and when will i take input credit?
A1)When the taxpayer will furnish the GST return, he will add the details of Purchases made during the month and all details of tax levied on the transaction.
2)Whether I can take all the input tax credit on purchases made of everything?
A2) All of the ineligible credit are listed in Section 17(5) Of CGST act. Except for the credit mentioned in Section 17(5), the purchases made should be used for the furtherance of business.
3) Are there any conditions to claim Input tax credit?
A3) Yes, the conditions are listed in Section 16 of CGST Act.
Why government launched GST and changed the entire tax regime?
In the previous tax regime, there was non availability of credit at various pints in the supply chain, leading to cascading effect of tax i.e. tax on tax and therefore increasing the cost of goods and services.
The flaw has been removed under GST as there is continues flow of credit from one person to another in the value chain. “Produce goods or services, pay output tax and adjust input tax”
Eligibility and Conditions for taking GST Input tax credit under Section 16
Every registered person, subject to the conditions specified in Section 49 of GST Act 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 use in the course of furtherance of business and the said amount shall be credited to the electronic credit ledger of such person.
No person shall be entitled to take the credit of any input tax in respect of any supply of goods or services or both to him unless:
The four conditions are satisfied.
- He is in possession of tax invoice/debit note issued by the supplier registered under this act or such other taxpaying documents as may be prescribed.
- He has received the goods and services or both.
Now, What if goods and services are received on behalf of him by someone else?
For this purpose, it shall be deemed that the registered person has received the goods where are delivered by the supplier to the 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.
- Subject to the provisions of Section 41, the tax charged in respect of such supply of goods and services is paid to the government either by cash or utilizing ITC
- Taxpayer has furnished the return under Section 39.
Frequently asked questions on Eligibility of ITC
Q1 What if goods are received in lots or installments?
A1) When goods and services are received in lots or installments, the registered person shall be entitled to take credit upon receipt of last lot and installment.
Mr A orders 300 tonnes of goods from Mr B which are to delivered in three lots of 100 tonnes each. The lots are sent under single invoice with the first lot and payment is made by the recipient for value of supply plus GST and supplier has also deposited tax with the government.
The three lots are supplied in May June and July 2018.
The ITC is available to Mr A only after receipt of third lot that is in July 2018.
Q2 What if taxpayer has claimed deprecation on Input tax credit?
A2) 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 Income tax act, 1961. The input tax credit on the said tax component will not be allowed.
Q3 What is the time period to claim Input tax credit?
A3) A registered person shall not be entitled to take Input Tax credit in respect of any invoice or debit note for the supply of goods or services or both after
- Furnishing of the relevant annual return( GSTR-9)
- 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 such debit pertains
Whichever is earlier.
Q4 What if I failed to pay tax to the supplier?
When the recipient fails to pay to the supplier of goods and 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 the tax payable thereon within a period of 180 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 added to his output tax liability along with the interest thereon.
Apportionment of credit and blocked credits (Section 17)
Goods and Service tax Input credit is available to taxpayers. However, there are some situations mentioned in Section 17 of Central GST Act 2017 where input credit will not be available.
1)When goods and services are used by registered person partly for the purpose of business and partly for other purpose. Then, a taxpayer can claim Input credit on those goods and services which are used for the purpose of business.
2)Where the goods and services are used by the registered person for effecting taxable supplies including zero rated supplies and partly producing exempt supplies. Then, Input tax Credit shall be a available for taxable supplies including zero rated but not exempt supplies.
|Type of Supplies||ITC available?|
|Taxable supply( 5%, 12%,18%,28%)||Yes|
|Zero Rated Supply||Yes|
Zero rate is also a rate in GST.
3) The value of exempt supplies refer above in sub-section (2) shall as may be prescribed and will include supplies on which the service receiver is liable to pay tax on Reverse Charge mechanism, transaction in securities, sale of land and sale of building.
4) A banking company/financial institution/NBFC engaged in supplying services by way of
b)Extending loans and advances
shall have the option of to either comply with the provisions of sub section(2), or avail of, every month an amount equal to 50% of eligible input tax credit on inputs, capital goods and input services in that month rest shall lapse.
Once the option is exercised shall not be withdrawn during the remaining part of the year.
The restriction of 50% shall not apply to the tax paid on supplies made by the one registered person to another registered person having same PAN number.
Blocked credits u/s Section 17(5)
Notwithstanding anything contained in sub-section (1) of Section 16 and sub- section(1) of Section 18, Input tax credit shall not be eligible in respect of the following-
|a)Motor Vehicles and other conveyance having approved seating capacity of not more than thirteen persons(including driver)||When used for |
a)Further supply of such motor vehicles
b)transportation of passengers
c)imparting training on such motor vehicles
ii)transportation of goods
|aa) Vessels and aircrafts||When used for |
a)Further supply of such vessels or aircraft
b)transportation of passengers
c)imparting training on navigating such vessels
d)imparting training on flying such aircraft
|Ab) 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)||When Motor vehicles, vessels or aircrafts received by a taxable person are used for |
a)Manufacture of such motor vehicles, vessels or aircrafts
b)in supply of general insurance services in respect of such motor vehicles, vessels or aircrafts insured by him
|b)i) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing or renting or hiring of motor vehicles, vessels or aircraft referred in clause(a) or (aa), life insurance and health insurance||Where a inward supply of goods and services or both of a particular category is used by a registered person for making an outward taxable supply of same category of goods and services or both or as an element of taxable composite or mixed supply.|
|ii)Membership of club, health and fitness centre.|
|iii)travel benefits extended to employees on vacation such as leave or home travel concession.|
|iv) rent a cab||a)The government notifies the services which are obligatory for an employer to provide to employee under any law |
b) Where a inward supply of goods and services or both of a particular category is used by a registered person for making an outward taxable supply of same category of goods and services or both or as an element of taxable composite or mixed supply.
|c)Works contract services when supplied for construction of immovable property(other than plant & machinery)||Where it is an input service for further supply of such services.|
|d)Construction of an immovable property(other than plant & machinery) when used for furtherance of business|
|For Clause c and d, Construction includes re-construction, renovation, alteration, additions, or repairs to the extent of capitalization to the said immovable property|
| Here “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 and services or both includes structural foundation but exclude |
i)Land, building or any other civil structure
ii) telecommunication towers
iii) pipelines laid outside factory premises
|e)goods or services on which tax has been paid under Section 10(Composite supply)|
|f)goods or services received by non-resident taxable person||Except on goods imported by him|
|g)goods or services used for personal consumption|
|h)goods or services or both lost,stolen,destroyed,written off or disposed by way of gift or free sample|
|i)any tax paid in accordance of sections 74,129,130|