Concept Of Input Tax Credit

Concept of Input Tax credit-PART I
Under the Indirect taxes mechanism, the taxes are levied at every stage of value addition. This is applicable in case of supply of goods as well as services. Thus it is important to understand that tax and the value addition will be always coupled together. Value addition continues till the time the goods or services reach the ultimate consumer. The ultimately generated value of goods or services is going to be a cost to the consumer. This cost will be a composition of (Value generated + Tax levied at each stage). Now if the tax at every stage is absorbed as a part of value of goods or services, there would be a case of “cascading effect of tax” (levy of tax on already levied tax). As a result of this the ultimate consumer would be the one who would suffer the most. As consumer would be liable to bear the entire load of taxes along with the value of goods. This has been a known issue under the Indirect tax structure in our country. Therefore, even in the Pre-GST regime, there were certain counter measures undertaken to deal with the problem of hefty pricing in the hands of consumers. Under the Central Excise and Service tax, there were “Modvat credit” / “Cenvat credit” provisions whereby the concept of “Input tax credit” was incorporated. Likewise under the VAT provisions, the concept of Input VAT credit was incorporated.

Determination of availability of Input tax credit:
We have considered two scenarios in the below mentioned tables. In the Case-1, we are assuming that there is “No Input tax credit available”. In this case, one can observe that the Input tax is becoming a part of “Total cost of purchase” which is fondly known as “cascading effect of taxes”. In the Case-2, the Input tax is not becoming part of cost of purchase. As a result of this there is no levy of tax on tax unlike under Case-1. In Case-2, even if the profits
are assumed to be on absolute terms like Case-1, still it can be observed that with the elimination of “cascading effect”, the “Consumers Purchase price” is less in Case-2 as compared to Case-1.
Case 1: Input tax credit is not available
Case 2: Input tax credit is available
Thus, it is pertinent to note that the availability of Input tax credit reduces the consumer purchase price. Even when the profit amount was kept same in absolute terms in Case-2, still the buyer will be benefitted. Thus under the Input tax credit there are also economic benefits such as “reduction in consumer price”. Reduction in overall prices also would contribute towards reducing “Inflation”.

Input tax credit under GST
Under the Pre-GST regime, although Input tax credit was available, there was an issue as far as cross utilization of taxes across the Excise/Service tax with VAT laws. The same was not available under the cross utilization basis. Under the GST regime, availability of “seamless credit” is one of the prime objectives. Basis this let us now analyze the provisions of Section 16, 17, 18 and 19 of the CGST Act 2017.

Case 1: Input tax credit is not available

Case 2: Input Tax Credit is available

Thus, it is pertinent to note that the availability of Input tax credit reduces the consumer purchase price. Even when the profit amount was kept same in absolute terms in Case-2, still the buyer will be benefitted. Thus under the Input tax credit there are also economic benefits such as “reduction in consumer price”. Reduction in overall prices also would contribute towards reducing “Inflation”.

Input tax credit under GST
Under the Pre-GST regime, although Input tax credit was available, there was an issue as far as cross utilization of taxes across the Excise/Service tax with VAT laws. The same was not available under the cross utilization basis. Under the GST regime, availability of “seamless credit” is one of the prime objectives. Basis this let us now analyze the provisions of Section 16, 17, 18 and 19 of the CGST Act 2017.

Eligibility to claim Input tax credit Section 16:
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be 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 and the said amount shall be credited to the electronic credit ledger of such person. The provisions of this section provide for a generic eligibility for availing input tax credit.
Based on the above, it can be noted that “Every registered person “, is entitled to claim Input tax credit in respect of goods and or services, which are used or intended to be used in the course or furtherance of business. Thus reading the provisions of this section, one would
conclude that the Input tax credit in respect of anything and everything ie (goods or services) which are procured can be made eligible for claiming credit if the same has been used in the course or furtherance of business. However, it is not so the case. Thus let us further take a look at the conditions.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, The under mentioned conditions are to be followed compulsorily. As per the sub section 2 of Section 16 of the CGST Act 2017 the under mentioned conditions are

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
In order to avail Input tax credit in respect of goods or services or both, it is mandatory to have the physical possession of Invoice or any other tax paying document. Where it is also important to note that the invoices or the tax paying documents should be as per the specifications mentioned down under the provisions of Section 31 of the CGST Act and the rules in respect of the same.
(b) he has received the goods or services or both. The physical possession of goods and the actual receipt of services are the key factors. This is to ensure that the input tax credit is not being availed merely on the basis of documents in the name of the registered persons, but also has the authenticity by virtue of actually procured goods or services or both.
Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods or services where the goods or services are delivered by the supplier to a 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;
The above explanation has been considered on a modified basis to the extent covered as per the CGST Amendment Act 2018. Earlier the above explanation was applicable only in case of goods whereas the same is applicable in case of goods as well as services post the amendments. The basis of the explanation is that where the law applies the deeming fiction to assume the compliance of condition for receipt of goods or services.
Eg: Mr Siddharth of Bharuch (GJ), orders certain quantity of goods from the seller Mr Sandeep of (Surat). However Mr Siddharth asks Mr Sandeep to deliver the goods to one Mr Suresh of Mumbai (MH). In this case, Mr Suresh is only the recipient of goods under a “Bill-to Ship-to contract”. However for the purpose of the law it would be deemed that Mr Siddharth has received the said goods and thus will be entitled to claim the Input tax credit on deemed receipt basis. However there would be an obvious question that if the goods are ultimately consumed in Maharashtra, by Mr Suresh, how will he be able to get the Input tax credit? Well as GST is a destination based consumption tax, in this case, Mr Siddharth (the buyer) will be required to raise an Invoice on Mr Suresh, as this would enable Mr Siddharth to collect GST and also enable Mr Suresh to claim Input tax credit. Similarly the provisions of “Bill-to and Ship-to contracts” exist in case of supply of services.
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
As per the above clause, one of the conditions for claiming input tax credit is that, the tax in respect of a supply of goods or services or both, has been actually paid to the credit of Governments account. Meaning thereby, if the tax is not duly received by the Government, the Input tax credit of such amount cannot be passed on towards the tax payer.
(d) he has furnished the return under section 39. Under the GST mechanism, it is absolutely clear that “matching concept” is the basis. Thus one of the conditions is that the returns shall be filed in order to avail Input tax credit. The returns filed under section 39 will provide an assurance that the person who has availed the Input tax credit has a legitimate claim, as the same will be matched with the outward supply
reported by the supplier in his return. Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment.
Eg: Mr Mit, has supplied a consignment of 500 chairs to Ms Vinita. The lot of 500 chairs was received by Ms Vinita in 3 installments. The installments were on 29/08/2019, 30/08/2019 and 3/09/2019. Thus the last lot was received on 3/9/2019. Therefore in the given case, Ms Vinita will be entitled to claim Input tax credit in respect of 500 chairs only on or after 03/09/2019 ie after receipt of last installment.
Provided further that where a recipient fails to pay to the supplier of goods or 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 tax payable thereon within a period of one hundred and eighty 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 interest thereon, in such manner as may be prescribed.
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
In the pre GST regime, there have been many instances where the honest tax payer has ended up suffering on account of a defaulting customer. That is to say that the tax payers have ended up paying taxes as per the provisions of law but their amounts were not duly realized from customers leading to a loss. In order to safeguard the interest of the supplier, the GST law has prescribed the above proviso. Also, in order to ensure that a transaction is genuine in terms of intent and not merely a paper transfer or a book entry. Thus in respect of purchase of goods or services, a registered person is required to pay to the supplier, the value of goods and or services, within 180 days. If Input tax credit is availed but the payment is not made within 180 days, then the amount of Input tax credit so claimed will have to be reversed along with interest payable thereon. However if the amount which was due, is subsequently paid, then the Input tax credit which was reversed, can be availed. Interest paid however will not be eligible for reclaiming and would be a permanent loss to the business.

(3) 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 the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
Eg: If an asset is purchased for Rs 10,00,000 + GST @ 18% ie Rs 1,80,000 then the Invoice value of purchased asset is Rs 11,80,000/-. In this case as per sub-section 3 of Section 16 of the CGST Act 2017, if the asset is capitalized at Rs 10,00,000, then Input tax credit will be eligible of Rs 1,80,000 and the depreciation can be claimed only on Rs 10,00,000. However if the asset is capitalized at Rs 11,80,000, then the input tax credit cannot be claimed, and the
depreciation in such case can be claimed on Rs 11,80,000.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both 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 such debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Eg:Due date for filing return for the month of September 2019: 20th October 2019. Due date of filing annual return for the financial year 2018-2019 is 31st December 2019.
Case 1: If Annual return for FY 2018-2019, is filed on 15th September 2019, ie before 20th October 2019 (due date of filing monthly return for September 2019), then the Input tax credit can be claimed maximum up to 15th September 2019 for any invoice or tax paying document pertaining to FY 2018-2019.
Case 2: If Annual return for FY 2018-2019, is filed on 15th November 2019, ie after 20th October 2019 (due date of filing monthly return for September 2019), then the Input tax credit can be claimed maximum up to 20th October 2019 for any invoice or tax paying document pertaining to FY 2018-2019.

Concept of Input Tax credit-PART II

In the part I we discussed in detail regarding the “Concept of Input tax credit” and the “Eligibility to avail Input tax credit as envisaged under Section 16 of the CGST Act 2017. In this part we will be discussing the concept of “Blocked Credits” as laid down under section 17 of the CGST Act 2017. Blocked credit refers to certain situation and cases under the GST laws where the availability of “Input tax credit” (ITC) is restricted. Although under GST, we aim at seamless flow of “ITC”, still due to the provisions of law, there are certain restrictions in force. Let us examine the same.

As per the provisions of section 17(1) of the CGST Act 2017 Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is
attributable to the purposes of his business.
Eg: Mr “Siddharth” a proprietor of a “toy shop”, has purchased a stock of toys containing 100 cars. Out of this stock, he has taken 2 cars for his son “Nishant”. The purchase value of the stock of 100 cars is Rs 1,00,000 and IGST paid was @ 12% ie Rs 12,000. In such case the entry passed in the books at the time of purchase of stock and entry which would be passed subsequently would be as follows.

1. Purchases A/c Dr…………… 1,00,000
   Input IGST A/c Dr………….. 12,000
   To Suppliers A/c 1,12,000
   (Purchase of stock of 100 cars recorded in books)
2. Purchases A/c Dr…………….240
   To IGST A/c 240
   (Being IGST credit reversed on goods which were used for the purpose other than business)
   Thus, it can be observed that where the goods were used for the purpose other than business, the Input tax credit was restricted to only those goods which were used for the purpose of business.
   (2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
   (3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. (a) in sub-section (3), the following Explanation shall be inserted, namely:–– ‘Explanation.—For the purposes of this sub-section, the expression ‘‘value of
   exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule.’;
   Eg: Saaj Ltd is engaged in manufacture of 5 different types of goods. The goods are manufactured at a common manufacturing facility. The annual rent of the manufacturing facility is Rs 24,00,000. The CGST + SGST levied on the same is @ 18%. Ie Rs 4,32,000. The total turnover of Saaj Ltd for the year was Rs 15,00,00,000. Out of the total turnover, the turnover of exempt supplies is Rs 1,00,00,000. As per rule 42 of the CGST Rules 2017, the ITC
   in respect of the rent expenses will be liable for reversal to the extent the common services are consumed in making exempt supplies.
   ITC liable to be reversed = Common ITC x Turnover of exempt supplies the year/Total Turnover during the year
   Therefore, ITC liable to reversed = 4,32,000 x 1,00,00,000 /15,00,00,000
   Therefore, ITC to be reversed, on the basis of Rule 42 will be = Rs 28,800
   (4) 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 sub-section (2), 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: Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year: Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.
   The Banking company, Financial Institutions and the Non-Banking Finance Companies are engaged primarily in the activities of “Accepting deposits and lending loans”. Besides this, they are also engaged in providing other services such as “Standing Instruction functions”, “Check book/debit card/ credit card issuances”, “Other assistive services”. Thus, in respect of banks, financial institutions and the NBFC’s, the major activities (accepting deposits and lending loans) are under the category of exempted supplies, whereas remaining supplies are taxable. Thus in their case, they have an option to either avail the ITC in full and reverse to the extent of turnover of exempt supplies as mentioned in illustration above under Section 17(2/3), or to avail only 50% of the eligible ITC and forego the remaining ITC.
   As per the provisions of Section 17 (5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:
    “(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely
   (A) further supply of such motor vehicles; or
   (B) transportation of passengers; or
   (C) imparting training on driving such motor vehicles;
   Post the amendments as per the CGST Amendment Act 2018, the following is the interpretation in respect of the above clause. Input tax credit is not eligible to be claimed in respect of “Motor vehicles” which are meant for transportation of passengers, except when they are used for making the specified supplies as mentioned in (A,B,C) above. However, the meaning of the word “motor vehicle” has been given a specific understanding. Based on the
   above let us understand the above provisions in terms of under mentioned points.

1. Motor vehicles for transportation of person having seating capacity of not more than 13 persons including the driver, has been considered as ineligible for claiming ITC. Thus one can say that a motor vehicle designed for transportation of persons, with approved seating capacity of more than 13 persons including the driver, will be eligible for claiming ITC even if such motor vehicle is not used for the purposes specified in (A/B/C) above.
2. Motor vehicles for transportation of persons, having seating capacity of up to 13 persons including the driver, if is used for the purpose other than those specified in (A/B/C) above, then in such case the ITC in respect of the same will not be eligible.
   Eg: A Chartered Accountant purchases a car with seating capacity less than 13 seats including the driver, he would not be entitled for claiming ITC.
   Eg: A person engaged in providing services of “rent-a-cab”, purchases 5 cars. Out of these 4 cars are to be used in his business of “Rent-a-cab” and 1 will be used for his personal purpose. In such case, he shall be entitled to claim ITC in respect of those 4 cars which are to be used for the purpose of supplying specified service of “Transportation of passengers”.
   Eg: Mr Keyur owns a car showroom. In such case if he purchases a motor vehicle (with seating capacity of less than 13 persons including the driver) for further supply of such motor vehicle, then he shall be entitled for claiming ITC.

(ii) for transportation of goods;
Motor vehicles, which are meant for transportation of goods, is entitled for claiming ITC. In respect of this, it does not matter in which type of an outward supply, a registered person is engaged in. Thus, if a registered person is eligible to claim ITC as per the provisions of Section 16, then he shall be entitled to claim the ITC of “Motor vehicles used for transportation of goods”.
Eg: Sinewave Computers is engaged in business of supply of computer hardware parts such as monitors, keyboards, CPU etc. In such case, if the company has purchased a “Cargo VAN”, then it shall be eligible for claiming ITC on such Motor vehicle used for transportation of goods.

(aa) vessels and aircraft except when they are used–– (i) for making the following taxable supplies, namely
(A) further supply of such vessels or aircraft; or
(B) transportation of passengers; or
(C) imparting training on navigating such vessels; or
(D) imparting training on flying such aircraft;
Eg: Indido Airlines purchases, Aircraft, for using it for the purpose of transportation of passengers, in such case the company will be eligible for claiming ITC.
Eg: Mr Manan, MD of a company has purchased a private jet for his own travel purpose. He would be using it for business as well as personal usage. In this case, since Mr Manan will not be using the jet for any of the purpose mentioned in the points (A/B/C/D) to clause (aa),
he shall not be entitled to claim ITC in respect of the private jet.
(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).
Any person, who is eligible to claim ITC in respect of “Motor vehicle for transportation of persons or goods” as discussed above, is also eligible to claim ITC in respect of services of “general insurance and repairs and maintenance in respect of such Motor vehicle”. Thus it
would also mean that, if in cases as discussed above, a registered person is not able to claim the ITC of motor vehicles, then he shall not be entitled to claim the ITC in respect of “general insurance and repairs and maintenance” of such motor vehicles.
On the same basis even in case of Aircraft, where the registered person is eligible to claim ITC of aircraft, he shall be entitled to claim ITC of services of “general insurance and repair and maintenance in respect of such aircraft”.
Provided that the input tax credit in respect of such services shall be available— (i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;
(ii) where received by a taxable person engaged
(I) in the manufacture of such motor vehicles, vessels or aircraft; or
Eg: Maruti Suzuki Limited, is engaged in the manufacture or motor vehicles, so if such company has undertaken services of “General Insurance and repairs and maintenance” of motor vehicles manufactured by it, then it shall be eligible for claiming ITC in respect of the such services.
Eg: Boeing Ltd, is engaged in manufacture of “Aircrafts”, thus if such company has availed
services of “General Insurance and repairs and maintenance” of such aircrafts. In such case Boeing Ltd will be eligible to claim ITC in respect of such services.
(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;
Eg: MGM Insurance Ltd has insured a vehicle. There is a repairs maintenance service received in respect of such vehicle, when the damage claim was filed by the owner of the insured vehicle. In such case when the repairs bill is received by “MGM Insurance Ltd”, it will be eligible to claim the ITC in respect of such motor vehicle.
(b) the following supply of goods or services or both— (i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except

when used for the purposes specified therein, life insurance and health insurance:
Under usual circumstances, Input tax credit in respect of the above inward supplies is not eligible to be claimed. However, let us consider the following proviso
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
Eg: An outdoor caterer Mr Shailesh, has a dinner order where he has to serve “Indian food” as well as “Continental food”. He does not have the “Continental food cook available for the day”. Thus, he has procured services of a cook and his team who is a specialist in making “Continental dishes”. In such case, services of “outdoor catering” procured by Mr Shailesh, would be eligible for claiming ITC, because Mr Shailesh has procured these services to
provide the “outdoor catering services as an outward supply”.
Eg: ABC Ltd has procured, “food and beverages” for its employees and the supplier has charged GST @ 5%. In such case, ABC Ltd will not be eligible to claim ITC.
ABC LTD is an outdoor catering and has procured “food and beverages” to be used in its order of outdoor catering, in such case, ABC Ltd will be eligible for claiming ITC in respect of food and beverages which are used for providing “outdoor catering services”.
Thus, in respect of specified categories of supplies as mentioned in clause(b) above, are used for providing specified categories of outward supply or as a part of composite or mixed supply, only then the ITC on the same is eligible.
(ii) membership of a club, health and fitness centre. In no situation the membership of club or fitness centre is eligible for claiming ITC.
(iii) travel benefits extended to employees on vacation such as leave or home travel concession.
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”.
Eg: If an employer has taken health insurance policy of his employees, where he does not have any legal obligation to do so, in such case the employer would not be eligible to claim ITC. However, as envisaged under the “ESIC Act”, an employer is under an obligation to provide health insurance cover to its employees, in such case, the premiums paid by employer is to meet the statutory obligations, thus he shall be entitled for claiming ITC.

Concept of Input Tax credit-PART III
In the previous part, we have discussed in depth the provisions of restricted and blocked credits under GST Law. In this part, we will continue the discussion, and further discuss the concept of “Availability of Input tax credit under special circumstances.
Section 17(5)(c) 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
Eg: BH constructions, is a firm which undertakes civil contracts of construction of immovable properties. Under the following two scenarios, let us examine the availability of Input tax credit.

Scenario I:- “BH” construction provides works contract services of construction of “warehouse (immovable property), to “FZ” Ltd. “FZ” Ltd is engaged in business of manufacturing motors and pipes. “BH” constructions has levied GST on the “Works contract services” provided. In such case as per the provisions of Section 17(5)(c), “FZ” Ltd will not be able to avail ITC in respect of the works contract services as it did not use the “Input works contract services”, for providing “output works contract services”.
Scenario II:- “BH” construction provides works contract services of construction of “warehouse (immovable property), to “CZ” Ltd. “CZ” Ltd is engaged in business of civil constructions of immovable property as well. Currently a part of civil work (construction of warehouse), undertaken by CZ Ltd has been sub-contracted to “BH” constructions. “BH” constructions has levied GST on the “Works contract services” provided. In such case as per the provisions of Section 17(5)(c), “CZ” Ltd will be able to avail ITC in respect of the works contract services as it would be using the “works contract services” received, for providing
“output works contract services”.

(d) 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. Where any registered person has received any goods or services which are to be used in construction of immovable property, then the ITC in respect of the same is not eligible.
However, where a person is engaged in the outward supply of construction services, he shall be eligible to claim ITC.

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;

By virtue of this explanation, an interpretation can be drawn that any expense incurred on construction, which is not capitalized in the books, can be considered not getting envisaged under the category of “blocked credits”. However it is not so the case, the allowability of ITC on inward supplies which can be under either segment of “construction”, will depend not only on the accounting methodology but also on the fact that with respect to certain sector
of industry, if some expenditure is of a repetitive nature and is not capitalized.
Eg: In case of aviation maintenance company, it performs its repairs and maintenance works in a place called as “hanger”. The surface of this hanger is to be kept completely smooth which facilitates the smooth movement of the aircrafts and choppers on during rendering of
such services. In such cases the floor of the hanger needs a refurbishment at least once in two years. In such cases the inward supply of works contract services or construction services would be consumed. It can be argued however such refurbishment does not amount of “construction” as per the explanation provided above.

(e) goods or services or both on which tax has been paid under section 10 Input tax credit cannot be claimed in respect of supplies received from a supplier who has opted to pay tax under the provisions of “Composition levy”. Inward supplies from a service provider who has opted to pay tax @ 6% as mentioned under the notification 2/2019, would not be eligible for claiming ITC.

(f) goods or services or both received by a non-resident taxable person except on goods imported by him.

A person who has opted registration as a “Non-resident taxable person”, is eligible to claim ITC only in respect of those goods which have been imported and on which IGST (levied under Section 3(7) of the Customs Tariff Act read with provisions of Section 5 of the IGST Act.

(g) goods or services or both used for personal consumption

It is really a matter of fact check as to what can be called as personal consumption. Let us assume a scenario where a proprietor is engaged manufacture of “cosmetics”. If he consumes 5 bottles per month for his domestic usage, in such case it can be said that the goods are used for personal consumption. In such case the ITC already availed, to the extent attributable towards the 5 bottles will be liable for reversal.

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and (i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

Eg: Often pharmaceutical companies follow the practice of giving “free samples” to the physicians. In such case the ITC availed, which is attributable towards such “free samples” would be liable for reversal. Likewise any other goods on which ITC has been availed, if are disposed from the business, then the ITC in respect of the same is liable for reversal.

(6) The Government may prescribe the manner in which the credit referred to in subsections (1) and (2) may be attributed. Explanation.––For the purposes of this Chapter and Chapter VI, 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—
 land, building or any other civil structures;
 telecommunication towers; and
 pipelines laid outside the factory premises.

Section 18: “Availability of Input tax credit under special circumstances”

As per provisions of Section 18(1) Subject to such conditions and restrictions as may be prescribed

(a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.

Eg: Mandar Private Limited was incorporated on 1/4/2018. The registered office of the company is in Mumbai. The company had not sought a GST registration till the time the turnover had not crossed Rs 20 Lakhs. On 4/9/2018, the company crossed the turnover of Rs 20 lakhs. In such case, the registration under GST will have to be sought within 30 days from 4/9/2018. In such case, as per the provisions of Section 18(1), Mandar Private Limited would be entitled in respect of “inputs held in RM, WIP of FG” as on 3/9/2018 (ie the day immediately before it became liable to seek a registration.

(b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semifinished or finished goods held in stock on the day immediately preceding the date of grant of registration;

(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed

Eg: Mr Vijay, had opted to pay tax under the composition levy. As on 25/11/2018, he opted out of the composition levy and was to pay GST under regular category of taxpayer. In such case, Mr Vijay would be entitled to claim ITC in respect of inputs held in RM, WIP and FG as on 24/11/2018. In addition to this he will also be entitled to claim ITC in respect of “Capital Goods”. However, in case of Capital Goods, the ITC will be allowed after considering the percentage reduction on proportionate basis. The manner of calculation has been prescribed in the CGST Rules 2017.

(d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.

Eg: Mr Tanay was engaged in the manufacture of exempt product till 28/7/2018. Thus was not availing any Input tax credit. However, with effect from 29/7/2018, the goods manufactured by him became taxable. As a result of this, he would be entitled to claim ITC in respect of Inputs lying in “RM,WIP and FG”. In case of capital goods, the ITC will be allowed, but not the entire amount of ITC, it would be calculated, based on percentage reduction as prescribed under the CGST Rules 2017.

(2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply. The provisions of this subsection are often misinterpreted. The provisions of this subsection are applicable only in cases envisaged under the ambit of Section 18(1). That means, where the ITC is available on account of registration being sought or opting out of composition levy or supplies becoming taxable, in such case the ITC can be availed in respect of Inward supplies, the invoice of which pertains to a period “within 1 year before the date of change.

(3) Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.
The provisions of this subsection are applicable in case of any arrangement of change in constitution of business. The method of transfer of the ITC has been prescribed under the CGST Rules. The transfer of ITC is effectively noted where the “Electronic credit ledger” of the recipient is given an effect of the transferred ITC.

(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption: Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic
credit ledger shall lapse.
In case where a person has been availing ITC, opts to pay tax under the composition levy, or where the goods manufactured by him became wholly exempt, in such case the right over the Input tax credit balance is to be foregone. Thus the ITC already availed in respect of Inputs lying in “RM, WIP and FG” will have to be reversed. Similarly, in respect of Capital Goods, the ITC will be liable to be reversed and the amount to be reversed in respect of Capital Goods will be determined on the basis of percentage reduction basis.

(5) The amount of credit under sub-section (1) and the amount payable under sub-section (4) shall be calculated in such manner as may be prescribed.

(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher: Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.

Disclaimer: The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above.