Input Tax Credit Under GST
“A new historical development in Tax regime; especially in Indirect Taxes evolves on 1st July 2017 in the shape of Goods and Service Tax (GST) after number of Constitutional & legislative changes and various Central and State Level Indirect Taxes are merged into a single regime, which is known globally as VAT (Value Added Tax). As the name suggests, GST or VAT means value added tax wherein the tax from taxpayer is expected on the value added portion while the credit is passed on for the taxes paid on purchases used for offering supplies. This is not a new phenomenon. The same was also present in the earlier regimes of Central Excise, Service Tax and even VAT when the same was known as MODVAT or CENVAT Credit. Read on…”
1 Introduction & Foundational Concepts
Since the Goods and Services Tax removes the notion of manufacturing, job work, works contract and services and converts all of them into supply; commonality of law at the national level (One Nation – One Tax) further aims to offer ease of doing. Inspite of all these efforts, understanding the various aspects around Input Tax Credit are still a tiresome job for taxpayers, professionals and even for the authorities.
Here, it is an attempt to offer a 360° view around Input Tax Credit (ITC) about the eligibility to claim and retain the credit, while dealing with specific issues like blocked credit, credit in case of taxpayer dealing in taxable and exempted supplies and others.
2 Eligibility of a Taxpayer to Avail Input Tax Credit (Section 16)
As per Section 16 of the CGST Act, there are certain eligibility conditions which a taxpayer has to fulfil before becoming eligible to avail credit. The fundamental conditions are:
Eight Core Statutory Conditions under Section 16
- Course or Furtherance of Business [Section 16(1)]: That supply of goods or services or both should be made 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.
- Possession of Tax Paying Document [Section 16(2)(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.
- Receipt of Goods or Services [Section 16(2)(b)]: He has received the goods or services or both.
- Furnishing of Invoice Details in GSTR-1 [Section 16(2)(aa)]: Details of the invoice has been furnished by the supplier in GSTR-1.
- Actual Payment of Tax to Government [Section 16(2)(c)]: 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.
- Filing of Return under Section 39 [Section 16(2)(d)]: He has furnished the return under section 39.
- Capital Goods Option [Section 16(3)]: In case of Capital Goods, either the depreciation or Input tax credit can be availed on the portion of GST paid on purchase of Capital Goods.
- Statutory Time Limit [Section 16(4)]: Credit on any invoice need to be claimed in a time frame as prescribed under Section 16(4).
Detailed Analytical Breakdown of Eligibility Conditions
Condition 1: Use in Business / Ineligible Personal Expenditure
As per the first condition, the taxpayer has to ensure that the goods or services purchased on which he wishes to claim credit should be used for business. In case the same is neither used nor intended to be used for his business from where further supplies are offered, then such credit should not be claimed by the taxpayer. An illustration of such ineligible credit can be the processing charges paid by a taxpayer on the bank loan related to the education of his son on which GST was paid.
Condition 2: Valid Tax Invoice vs. Tax Paying Document (Notification No. 39/2018-CT)
The second condition laid down through Section 16(2) is the availability of a valid tax invoice or tax paying document in the hands of the recipient. Here two concepts are highlighted deliberately: “Valid Invoice/Document” and “Tax Paying Document”.
As per legal jurisprudence, eligible tax paying documents comprise: (i) Tax Invoice/Debit Note issued by supplier; (ii) Self-invoice raised for supplies falling under reverse charge mechanism (RCM) subject to payment of tax; (iii) Bill of Entry on import of goods; (iv) Invoice issued by an Input Service Distributor (ISD); and (v) Invoice issued to transfer common input services to the Input Service Distributor.
Condition 3: Physical Receipt – Goods in Lots & ‘Bill to Ship to’ Model
As per the third condition, the goods/services mentioned on the invoice must be received by the recipient.
- Goods in Lots or Instalments: When goods are received in lots or instalments, Section 16 clarifies that the taxpayer will be eligible to claim credit only once the final instalment or lot is received. For example, if Mr. A ordered goods in September and received the tax invoice in September, but the final lot of goods arrived in October, Mr. A cannot avail the credit in September; he becomes eligible only in October upon updating his stock register.
- ‘Bill to Ship to’ Supplies for Goods: Where goods are sold before delivery and instructions are given to deliver directly to an ultimate buyer (e.g., Mr. A purchases goods from Mr. B and advises Mr. B to deliver directly to Mr. C), the goods never enter Mr. A’s warehouse. As clarified in Explanation to Section 16(2)(b), the original recipient (Mr. A) is deemed to have received the goods and is fully eligible to claim credit.
- ‘Bill to Ship to’ for Services: The CGST (Amendment) Act, 2018 inserted corresponding deemed-receipt provisions for services where services are provided by the supplier to any person on the direction of and on account of the original recipient.
Conditions 4 & 5: Tax Payment by Supplier, GSTR-1 & Rule 36(4) Restrictions
The taxpayer needs to ensure that tax paid to the supplier has been deposited in the government exchequer and is reflected in the electronic credit ledger of the recipient after the supplier files Form GSTR-1. While matching provisions were initially kept suspended, Finance Act, 2021 enacted a statutory condition requiring invoice details to be furnished in GSTR-1.
Condition 6: Mandatory Filing of Return under Section 39
Certain taxpayers operate under the perception that having excess input tax credit eliminates the urgency of filing returns. However, Section 16 explicitly prescribes that filing the return under Section 39 (Form GSTR-3B) is an essential condition. Unlike pre-GST jurisprudence where entry in books of account was often held sufficient, under GST the return must be filed to establish valid credit entitlement.
Condition 7: Capital Goods – Depreciation vs. Input Tax Credit [Section 16(3)]
Under Section 16(3), where capital goods are capitalised in the financial statements under Accounting Standards / Ind AS, the taxpayer must elect one of two mutually exclusive options:
• Option 1: Capitalise the entire gross value of INR 1,18,000 and claim income-tax depreciation on INR 1,18,000 → Zero ITC allowed under Section 16(3).
• Option 2: Capitalise INR 1,00,000 as Capital Goods and claim depreciation on INR 1,00,000 → Full ITC of INR 18,000 allowed.
Condition 8: Time Limit for Availment vs. Utilization [Section 16(4)]
Section 16(4) stipulates that credit on any invoice or debit note must be availed on or before the due date of filing of return under Section 39 for the month of September following the end of financial year, or the actual date of filing of annual return, whichever is earlier.
3 Retention of Input Tax Credit & The 180-Day Payment Rule
Availing credit is only the initial step; the taxpayer must also fulfil statutory requirements to retain the credit. Failure to do so requires reversal along with interest.
Second Proviso to Section 16(2) – Payment within 180 Days
Every taxpayer who has availed credit on purchase of goods or services (other than supplies subject to reverse charge) must pay to the supplier the value of supply along with applicable GST within 180 days from the date of invoice. If not paid within 180 days, an amount equal to the input tax credit availed must be added to outward tax liability along with interest.
- (i) Mandatory Interest: Entire unpaid credit must be reversed along with interest @18% p.a.
- (ii) Part-Payment Flexibility: In case of part-payment, pro-rata credit can be retained and only the balance unpaid credit must be reversed with interest.
- (iii) Computation Benchmark: The 180 days are strictly counted from the date of invoice, not from the date credit was availed.
- (iv) Unrestricted Re-availment: The credit so reversed can be re-availed upon making payment to the supplier without any time limit, irrespective of the Section 16(4) time barrier.
Wrongful Availment: Pre-GST vs. GST Regime [Section 42(10) ‘OR’ Substitution]
In the pre-GST Service Tax and Central Excise regime, interest and penalty were attracted on “wrongful availment AND utilisation” of credit. In GST, under Section 42(10), the word “AND” was replaced with “OR”, meaning thereby that mere wrongful availment of credit, even if unutilised, can trigger interest and penal exposure under the strict reading of the statute.
Numerical Illustration: 180-Day Rule Computation
Facts: Mr. A purchased goods/services worth INR 1,18,000 (INR 1,00,000 value + INR 18,000 GST) from Mr. Y on 01.03.2019, received invoice on the same date, and availed credit in March 2019. Mr. A paid Mr. Y on 01.12.2019. What is Mr. A’s statutory liability?
• 180 days from invoice date (01.03.2019) expired on 28th August 2019.
• As payment was not made within 180 days, INR 18,000 should have been added to outward liability in Form GSTR-3B for September 2019.
• Period of interest: From date of ITC availment (01.03.2019) to date of payment (01.12.2019) = 275 Days (1st March 2019 to 30th November 2019).
• Interest Liability: INR 18,000 × 18% × 275 / 365 = INR 2,441.
• Total Liability payable on reversal: INR 18,000 (tax) + INR 2,441 (interest) = INR 20,430.
4 Blocked Credit under GST – Section 17(5)
Carried forward from pre-GST concepts, Section 17(5) of the CGST Act blocks credit on specific goods and services even if incurred in the course or furtherance of business:
Motor vehicles for transportation of persons with seating capacity ≤ 13 persons (including driver). Exceptions: Used for further supply of vehicles, transportation of passengers, or imparting training.
Blocked except where taxpayer is eligible for ITC on vehicles under clause (a), or is engaged in manufacturing vehicles or supplying insurance services (e.g., Maruti can claim ITC on repair/insurance of vehicles manufactured).
Food and beverages, outdoor catering, beauty treatment, health services, cosmetic/plastic surgery, leasing/renting of vehicles/vessels/aircraft, life and health insurance. Exceptions: Same category outward supply, or statutory obligation under any law.
Membership of a club, health and fitness centre. Exception: Where obligatory for an employer to provide to employees under any law.
Leave travel concession (LTC/LTA) extended to employees. Exception: Where obligatory for an employer under any statutory law.
Works contract when supplied for construction of immovable property (other than plant and machinery). Exception: When input service for further supply of works contract.
Goods/services received for construction of immovable property on own account (other than plant and machinery), even if used in business, to the extent capitalised.
Goods or services on which tax has been paid under Section 10 (composition levy suppliers).
Goods or services 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 (read with Schedule I of Section 7).
Any tax paid in accordance with the provisions of Sections 74 (fraud/suppression), 129 (detention), and 130 (confiscation).
Practical Carve-Outs and Statutory Exceptions
- Motor Vehicles Carve-out: A management consultant buying a car for office use cannot claim ITC; but an automobile dealer running a car showroom can claim full ITC as the vehicles are used for outward taxable supply in the same line of business.
- Rent-a-Cab Carve-out: Rent-a-cab is blocked generally, but if Mr. A provides rent-a-cab services to clients and hires cabs from vendor Mr. B, Mr. A can claim ITC of GST paid to Mr. B because it is used for outward taxable supply of the same category.
5 Apportionment of Input Tax Credit – Rule 42 & Rule 43
Where goods or services are used partly for business and partly for other purposes, or partly for taxable (including zero-rated) supplies and partly for exempt supplies, Section 17 read with Rules 42 (Inputs & Input Services) and 43 (Capital Goods) governs pro-rata apportionment.
Fundamental Variables under Rule 42
- T1: Credit specifically attributable to non-business or personal consumption (ineligible).
- T2: Credit specifically attributable to exempt supplies (including NIL rated, non-taxable petroleum, and Schedule III items) (ineligible).
- T3: Credit on goods/services on which credit is blocked under Section 17(5) (ineligible).
- C1: Net eligible credit after removing direct exclusions:
C1 = T - (T1 + T2 + T3). - T4: Credit specifically attributable to exclusively taxable and zero-rated supplies (fully admissible).
- C2: Common credit available for pro-rata apportionment:
C2 = C1 - T4. - D1: Credit attributable to exempt supplies:
D1 = (E / F) × C2, where E is exempt turnover and F is total turnover. - D2: Deemed credit attributable to non-business purposes:
D2 = 5% of C2. - C3: Net common credit available for taxable activity:
C3 = C2 - (D1 + D2). - Total Eligible ITC:
C3 + T4.
Comprehensive Practical Case Study on Rule 42
• INR 5 Lakh credit for personal consumption services.
• INR 5 Lakh credit on godown rental for exempt goods.
• INR 20 Lakh credit for building materials/services constructed on own account.
• INR 10 Lakh credit for works contract services used for taxable/exempt construction and non-business.
• INR 12 Lakh credit on servicing motor vehicle used for passenger transport (taxable/exempt/non-business).
• INR 1 Lakh credit for staff food & beverages.
• INR 1 Lakh credit for director car servicing.
• INR 6 Lakh credit on goods stolen from factory.
• INR 20 Lakh credit exclusively for taxable activities.
| Sl. | Details of Credit (CGST + SGST) | Classification | Amount (INR) |
|---|---|---|---|
| 1. | Credit specifically related to Personal Consumption (Not Available) | T1 | 5,00,000 |
| 2. | Credit on Rental for Exempted Activity (goods) – Not Available | T2 | 5,00,000 |
| 3. | Building Material & Service for Office – Blocked Credit u/s 17(5) | T3 | 20,00,000 |
| 4. | Works Contract – Used for taxable & exempt works contract – Common | C2 | 10,00,000 |
| 5. | Servicing motor vehicle for passenger transport (taxable & exempt) – Common | C2 | 12,00,000 |
| 6. | Food & beverages for office use – Blocked credit u/s 17(5) | T3 | 1,00,000 |
| 7. | Service of Motor vehicle used for office – Blocked credit u/s 17(5) | T3 | 1,00,000 |
| 8. | Goods stolen from factory – Credit needs to be reversed u/s 17(5) | T3 | 6,00,000 |
| 9. | Credit exclusively for Taxable activity | T4 | 20,00,000 |
| 10. | Total Credit | T | 80,00,000 |
| 11. | Rule 42 – Calculation of C1 = T - (T1 + T2 + T3) [80L - (5L+5L+28L)] | C1 | 42,00,000 |
| 12. | Calculation of Common credit C2 = C1 - T4 [42,00,000 - 20,00,000] | C2 | 22,00,000 |
| 13. | Credit related to Exempt Activity = D1 = (C2 × E / F) = (22,00,000 × 3 / 10) | D1 | 6,60,000 |
| 14. | Credit related to Non-Business purposes = D2 = 5% of C2 (Rule 42(1)(j)) | D2 | 1,10,000 |
| 15. | Common Credit available for Taxable Activity = C3 = C2 - (D1 + D2) | C3 | 14,30,000 |
| 16. | Total Credit available to utilize for XYZ Ltd = C3 + T4 (14.30L + 20.00L) | C3 + T4 | 34,30,000 |
6 Input Tax Credit in Special Cases (Section 18)
Sections 18(1) to 18(3) provide relief and mechanisms for credit entitlement in distinct transitional circumstances:
Person applying within 30 days of becoming liable is entitled to ITC on inputs held in stock, semi-finished, or finished goods on the day immediately preceding the date liability arose.
Person taking registration under Section 25(3) is entitled to ITC on inputs in stock, semi-finished, or finished goods on the day immediately preceding the date of grant of registration.
Entitled to ITC on inputs in stock and capital goods on the day immediately preceding liability under section 9. Credit on capital goods is reduced by 5% per quarter of asset usage.
Entitled to ITC on inputs in stock relatable to such supply and on capital goods exclusively used, reduced by 5% per quarter from the date the supply becomes taxable.
Input Tax Credit under Merger, Demerger & Transfer of Business [Section 18(3) & Form ITC-02]
Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business with specific provision for transfer of liabilities, unutilised ITC in the electronic credit ledger can be transferred to the transferee entity by filing Form GST ITC-02. The application must be accompanied by a certificate from a practicing Chartered Accountant or Cost Accountant certifying compliance with statutory transfer provisions.
Reversal of GST Credit on Sale / Disposal of Capital Goods [Section 18(6)]
As per Section 18(6), in case of supply of capital goods or plant and machinery on which ITC was taken, the registered person must pay an amount equal to:
(a) The ITC taken on said capital goods reduced by 5% per quarter of use; OR
(b) The tax on the transaction value of such capital goods determined under Section 15,
whichever is higher.
Practical Illustration on Section 18(6)
Mr. A purchased Capital Goods for INR 5,00,000 on 01.01.2018 (GST @18% = INR 90,000). Mr. A disposes of the asset in open market on 31.12.2020 for INR 70,000 (GST rate 18%).
- Calculation (a) – Tax on Transaction Value: INR 70,000 × 18% = INR 12,600.
- Calculation (b) – Credit Reversal for Unexpired Period: Asset was used for 12 quarters (3 years). At 5% retention per quarter, Mr. A retains 60% (12 × 5%). The remaining 40% (8 quarters unexpired out of 20 quarters / 5 years) must be reversed: INR 90,000 × 40% = INR 36,000.
- Statutory Liability: Higher of (a) and (b) = INR 36,000. Mr. A collects INR 12,600 as GST from the buyer and reverses the balance INR 23,400 from his electronic credit ledger.