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Input tax Credit entitlement and mechanism

For a business person (registered under GST laws) Credit mechanism is heart of GST.

A Registered Taxable Person ("RTP") can avail credit of GST (CGST or SGST or IGST) paid on acquisition of goods and services and use it to pay GST on supply of goods and services.

[To illustrate, a trader purchases goods of Rs 100; pays GST of, say, Rs 18; sells them for Rs 150; collects GST Rs 27 (payable to Government); can avail credit of Rs 18 and pay balance of Rs 9.]

CREDIT ELIGIBILITY

Every RTP is entitled to take credit of input tax (explained later) paid on supply of goods / services and as admissible to him,
subject to prescribed conditions and restrictions, and
should avail it within time and manner specified in Law, like, credit to Electronics Credit Ledger; priority of set-off of CGST/SGST/IGST, documents necessary, payment by supplier etc).

Meaning of input tax etc

Input and Input service as defined [section 2 (54) and section 2 (55) of the Model law] and explained: goods and services, respectively, used or intended to be used by supplier for making an outward supply in course or furtherance of business. It would not include: capital assets and goods/services excluded by Law or Rules.

Input tax is defined and explained [section 2 (57) of the Model law]: GST [IGST and CGST or IGST and SGST] charged on supply of goods/services used or intended to be used in course or furtherance of business including tax payable under reverse charge mechanism.

Input tax credit is defined [section 2 (58) of the Model law] to mean credit of input tax.

Outward supply is defined [section 2 (73) of the Model law] to mean: supply of goods/services, whether by sale, transfer, barter, exchange and other modes of transfer (referred in definition) made or agreed to be made in course or furtherance of business.

[Observation: Supply is defined by section 3; hence, reference to only some transfers (referred in section 3) in definition of outward supply can create some ambiguity. To illustrate, "self-supply" is not referred in definition of outward supply but is implied in definition of supply.]

Credit in respect of inputs sent for job work [section 16 A of model law]

A principal (having permission under section 43 A to remove goods for job work) is, subject to fulfilment of conditions, entitled to take credit in respect of:

Inputs sent to job worker
inputs directly received by job worker
capital goods sent to job worker.

Conditions:

Must receive the inputs after completion of job work within 182 days;
must receive capital goods back after completion of job work within two years;
fulfill other prescribed conditions and restrictions, if any;
if inputs or capital goods are not received back within time, principal shall pay Credit availed along with interest (it can be reinstated, if subsequently inputs/capital goods are received).

Credit in respect of stocks on date of registration in certain cases [section 16 (2) (2A) and (3)]

A person, when obliged to obtain registration applies within prescribed time upon becoming liable for registration; or person obtaining voluntary registration; or if a registered taxable person ceases to pay tax under composition scheme:

such person is entitled to take Credit in respect of inputs held in stock (including in form of semi-finished or finished goods) on day preceding date from which he becomes liable to pay tax or date of obtaining voluntary registration, as the case may be.

CREDIT INELIGIBILITY

Credit not available in respect of following [section 16 (9) of Model law]:

(a) motor vehicles, except when they are:

supplied in usual course of business or
used for providing following taxable services—
- transportation of passengers, or
- transportation of goods, or
- imparting training on motor driving skills;

(b) goods / services provided to and used primarily for personal use or consumption of any employee, namely:

food and beverages,
outdoor catering,
beauty treatment,
health services,
cosmetic and plastic surgery,
membership of a club,
health and fitness center,
life insurance,
health insurance, and
travel benefits extended to employees on vacation such as leave or home travel concession.

(c) goods and/or services acquired by principal in execution of works contract resulting in construction of immovable property, other than plant and machinery;

(d) goods acquired by a principal, property in which is not transferred (whether as goods or in some other form) to any other person, which are used in construction of immovable property, other than plant and machinery;

[Observation: Under GST law, taxable event is supply and not transfer of property in goods (in same or other form); hence, manner in which it can be applied is not very clear.]

(e) goods / services on which composition payment is made on its supply; and

(f) goods and/or services used for private or personal consumption.

If RTP claims depreciation on tax component of cost of capital goods under the Income Tax Act, 1961, Credit not allowable on the tax component. [section 16 (10) of Model law]

Period limitation: No Credit in respect of any supply (of goods/services) after expiry of one year from date of issue of tax invoice (of such supply). [section 16 (3A) of Model law]

Invoice issued after a particular date not eligible for credit [section 16 (15) of Model law]

RTP is not entitled to Credit based on any invoice in respect of a financial year after it has filed Return of September of the succeeding financial year or filing of annual return of the financial year, whichever is earlier.

[To illustrate, RTP receives invoice in respect of supply effected in January 2018 (financial year 2017-18) on 23rd October 2018. It has filed Return of September 2018 (of the succeeding financial year 2018-19) on 15 October 2018 and it filed annual return (for the financial year 2017-18) on 30 September 2018. RTP will not be entitled to claim Credit in respect of invoice received on 23 October 2018.

Observation: section 16 (3 A) also provides for limitation of one year; possibly, this provision is not consistent with it.]

If credit is taken wrongly, it shall be recovered from RTP in prescribed manner. [Section 16 (16) of Model law]

We will examine compliance and related requirements for Credit in a subsequent communication.

Business effects and aspects

Generally, it can be said that, Credit would affect cost, price (including price plus tax), profits, cash flows and other related matters. Thus, Business will have to undertake a thorough and detailed analysis of the same.

Apparently, Credit would be available in respect of tax paid on all inputs and input services. It is hoped that Rules do not provide for any restriction or condition in nature of denial of Credit.
Thus, a business person may not have any GST cost as a part of cost of goods or service. He should be entitled to pass it on to the customers, subject of course to market conditions.
Certain businesses (including provision of services), as compared to position prior to GST, may be entitled to certain additional credits (earlier not available and therefore formed part of cost of goods or service); it may affect cost, price and returns.
Certain businesses, as compared to position prior to GST, may have a higher rate of tax. That, as such, may not affect cost but may affect price (in the hands of customer including GST) and profits.
Credit in respect of self-supplies would depend on its taxability and conditions or restrictions for allowance of Credit. Presently, they are not clear.
A business person may have more than one registration, in respect of different places of business. Possibly, cross Credit may not be permissible between different registrations [to illustrate, Credit in respect of place A cannot be used for payment of GST of place B]. It will affect cash flows.
In case of IGST or CGST also, there is no clarity whether Credit in respect of different businesses (registered separately under State law) can be availed. It may affect cash flows.
Limitation period specified in law appears to be inadequate and, at least, it should be tied up with limitation period for audit or assessment or the outcome of such audit or assessment. Otherwise, there may be denial of Credit on account of delays not attributable to RTP.

These are some of the aspects for consideration.

Some other relevant aspects may be identified and considered for appropriate action.