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Input tax Credit procedural compliance and mechanism

In earlier Mail, we dealt with entitlement to Credit. The conditions and/or restrictions are discussed here.

Generally, the mechanism remains more or less the same (as was prevalent under earlier indirect tax laws), save for credit thereof in Credit ledger and similar other aspects having regard to GST provisions and manner of its implementation.

LIMITATIONS, CONDITIONS AND PROCESS IN RESPECT OF CREDIT

Calculation: Credit shall be calculated in accordance with generally accepted accounting principles and in prescribed manner [section 16 (4) of Model law].

[Observation: prima facie it appears that generally accepted accounting principles would govern Credit. However, "prescribed manner" would clarify actual position.]

Partial credit: if goods / services are used partly for business and partly for other purposes, Credit shall be restricted to proportionate amount i.e., input tax attributable to business purpose. Manner of calculating proportionate Credit (attribution) may be prescribed by Central or State government. [section 16 (5)/(7) of Model law]

If goods / services are used partly for effecting taxable supplies and partly for non-taxable supplies (including exempt but excluding zero rated supplies), Credit shall be restricted to proportionate amount i.e., input tax attributable to taxable supplies (including zero rated supplies). Manner of calculating proportionate Credit (attribution) may be prescribed by Central or State government. [section 16 (6)/(7) of Model law]

Procedure GSTN [Section 16(1) of Model law]

Input tax credit (Credit) shall be credited to Electronic Credit Ledger ("Credit ledger") of such person.

Compliance for claiming Credit:

RTP shall be entitled to Credit in respect of any supply of goods / services, if and only if:

(a) he possesses tax invoice, debit note, supplementary invoice or prescribed taxpaying document, issued by supplier (RTP);

(b) he has received goods and/or services. [If goods against an invoice are received in lots or instalments, Credit upon receipt of last lot or instalment. If, to RTP, goods are delivered by supplier, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise, it shall be deemed that goods are received.] [section 16 (11) of Model law];

(d) supplier has furnished Return.

Some other stipulations [section 35 of Model law]

Self-assessed Credit should be credited to Credit ledger (to be maintained in prescribed manner);
Credit (amount) available in Credit ledger may be used for making payment of tax in prescribed manner, conditions and time;

Credit available in Credit ledger should be utilised as follows:

Nature of Credit available in Credit Ledger	Can be used for Payment of	Cannot be Used for
IGST	IGST then CGST and then for SGST	NA
CGST	CGST and balance for IGST	SGST
SGST	SGST and balance for IGST	CGST

Transfer of credit: change in constitution of RTP

If on account of sale, merger, demerger, amalgamation, lease or transfer of business with specific provision for transfer of liabilities, RTP can transfer unutilized Credit (as per books of account) to successor (pursuant to such transfer of business) in prescribed manner. [section 16 (8) of Model law]

Payment or lapse of Credit upon exemption etc [section 16 (12) of Model law]

If RTP avails and utilises Credit and thereafter:

he opts for composition payment, or
goods or services supplied by him become exempt,

Credit so taken and used and attributable to inputs held in stock (including inputs contained in semi-finished or finished goods held in stock) on immediately preceding day of the date of opting out or exemption, shall be paid by him. Credit availed but not used and attributable to above inputs would lapse. To calculate amount payable or amount which may lapse, generally accepted accounting principles may be followed in prescribed manner.

[To illustrate, RTP is engaged in supply of certain goods which are declared exempt on June 10, 2018. RTP had availed and used credit to the extent of Rs 1000 and there was a balance lying to his credit in Credit Ledger of Rs 500 and inputs are held in stock on June 9, 2018. In such a case, RTP will have to pay Rs 1000 and balance of Rs 500 would lapse.]

Similar provision is made in respect of capital goods where amount needs to be paid after reducing prescribed percentage; however, circumstances for such payment are not clear.

Manner of distribution of credit by Input Service Distributor [section 17 of Model law]

It basically provides for distribution of Credit (in respect of input service only) and, in that:

stipulates distribution through prescribed document,

nature of input tax to be distributed (as detailed below), and
terms and conditions thereof.

Input service distributor (ISD) is defined [section 2 (56) of Model law] to mean (to paraphrase):

an office of supplier of goods and/or services,
it receives tax invoices towards receipt of input services,
it issues tax invoice or prescribed document for distributing credit of CGST or IGST or SGST,
to supplier of goods or services having same PAN (implying another office of the supplier having the office referred above being ISD) ("recipient").

[Observation: apparently, there is no clarity about Credit availment of tax paid on inputs or input services received by and consumed by ISD (not engaged in supplying goods or services).]

Nature of credit and distribution as [section 17(1) /(2) of Model law]

Input tax on service to be distributed	Location of ISD and recipient	To be distributed as
CGST	Different states	IGST
IGST	Different states	IGST
SGST	Different states	IGST
CGST	Same state	CGST
IGST	Same state	CGST
SGST	Same state	SGST
IGST	Same state	SGST

Conditions:

Credit to be distributed against prescribed document, containing prescribed details, to each of the recipients;
credit distributed should not exceed credit available for distribution;
credit of input tax attributable to a recipient shall be distributed only to that recipient; and
credit of tax paid on input services attributable to more than one recipients, distribution shall be pro rata on the basis of turnover in a state of the recipient, during the relevant period, to the aggregate of the turnover of all recipients.
Excess credit distributed can be recovered along with interest as per applicable provisions of law [section 18 of Model law].

Business effects and aspects

Generally, compliance would be inevitable for Credit. Any lapse would affect claim for and use of Credit.

To claim Credit, two difficult or impossible conditions are imposed: payment of tax and filing of return by supplier of goods and services, not within the control of business person. It may affect costs or cash flows.
There may or may not be any difficulties about Credit, provisional or otherwise, to Credit ledger; however, it will have to be monitored.
Utmost care will have to be taken about Documentation as well as status of supplier (as regards compliance). Appropriate stipulations may become necessary for recovery of Credit (not allowed) on account of some lapse on part of Suppliers.