Updated on 01-05-2018

GST Guidance Note -6

Input Tax Credit

What this Guidance Note contains?

6.01 Meaning of input tax credit (ITC)
6.02 Utilization of tax credits of various taxes
6.03 Key principles for eligibility of tax credits
6.04 Scope of ‘use in the course or furtherance of business
6.05 Meaning of word ‘business’ under GST law
6.06 Meaning of negative list of input credits
6.07 Input credits falling in the negative list
6.08 Meaning of plant and machinery
6.09 Exclusion of credits relating to towers, pipeline and land /
building / civil structures
6.10 Credit on diaries and calendars distributed at New Year for
business promotion
6.11 Will tax credits be available if ……..
6.12 Time for availing input tax credit
6.13 Inputs, input services and capital goods defined separately for
availment of credits
6.14 Credits for capital goods are available in full upfront
6.15 Difference in treatment of capital goods credit from credit of
inputs and input services?
6.16 Inputs or input services used partly for making taxable
supplies and partly for non-taxable supplies or partly for
non-business purpose
6.17 Meaning of exempt supplies for pro rata reversals.
6.18 Exclusion of non GST taxes for pro rata reversals
6.19 Illustration to explain computation of pro-rata reversal
6.20 Credit on capital goods are also subject to pro rata reversal
6.21 Treatment of credit already availed where capital goods used
for making taxable supplies are subsequently used for making
exempt supplies as well
6.22 Input tax credit in respect of services procured centrally
6.23 Manner of distribution of credit by an ISD
6.24 Conditions for distribution of credit by an ISD

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6.25 Rule for credit distribution by an ISD

6.26 Exclusion of non GST taxes from value of ISD
6.27 Meaning of relevant period
6.28 Examples of distribution of credits by an ISD
6.29 Distribution of credits for goods procured centrally
6.30 Period for availing tax credits
6.31 Penalties of wrongly availing tax credits
6.32 Penalty applicable to availment or actual utilization?
6.33 Key differences between ITC provisions under the scheme of
Central Excise, Service Tax and VAT laws and those under
GST
6.34 Possible reasons for mismatch in invoice details reported by
the supplier and those reported by the recipient
6.35 Manner of dealing with any mismatch of invoices uploaded by
supplier and those recorded by the recipient
6.36 Consequences of invoices remaining mismatched
6.37 Necessity of quickly rectifying the invoices shown as
mismatched
6.38 Importance of paying for receipt of goods and services
in time
6.39 Payment condition in credit availment in cases of
reverse charge

6.01 Meaning of input tax credit (ITC)

Input tax credit (ITC) means credit of Central Tax, State Tax, Union
Territory Tax, Integrated Tax and Compensation Cess paid on supply of
goods or services by a supplier that can be used by a recipient for payment of
its output tax liability. Integrated Tax paid on import of goods or services and
tax paid by the recipient on reverse charge basis is also available as input tax
credit. For example steel scrap supplier ‘A’ charges Rs. 18000 as Integrated
Tax from recipient ‘B’. Subsequently recipient ‘B’ utilizes scrap in making
steel ingots and supplies the same at Rs. 120000, on which Integrated Tax of
Rs. 21600 is payable. ‘B’ can discharge the tax liability of Rs. 21600, by
using available ITC of Rs. 18000 and payment of balance of Rs. 3600 in cash.

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6.02 Utilization of tax credits of various taxes

The order for utilization of tax credit has been provided under section 49(5) of the
CGST Act. Integrated Tax credits can be used for payment of Integrated, Central
and State Taxes, or as the case may be, Union Territory tax in the said order. Central
Tax credits can be used for payment of Central Tax and Integrated Tax in this order.
Similarly State Taxes credits or Union Territory Taxes credits can be used for
payment of State Taxes or Union Territory Taxes and Integrated Tax in this order.
However Central Tax cannot be used for payment of State Taxes/UT tax and vice-
versa. It can be better understood by following chart:

Type of credit ———> IT CT ST/UTT

To be used first for payment of IT CT ST/UTT
Remaining amount can be CT IT IT
used for payment of
Remaining amount can be ST/UT Cannot be used for Cannot be used
used for payment of T payment of for payment of CT
ST/UTT

Input tax credit cannot be used for payment of interest, penalty or fees.
Further, the credits of compensation cess can be used only for payment of
compensation cess.1

6.03 Key principles for eligibility of tax credits

Followings are key principles for eligibility of tax credits:-

Supplier should… Recipient should… Goods & Services should…

be registered under GST be registered under GST be for use or intended for
use in course or
furtherance of business

not be under composite not be under not be in the negative

levy composite levy list

1
See proviso to section 11 of the GST (Compensation to States) Act, 2017

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have deposited the tax to have paid tax to the

the credit of the govt. Government if on
reverse charge

file valid tax return have made payment to

supplier within 180
days from the date of
invoice

have actually received the

goods or services

6.04 Scope of ‘use in the course or furtherance of ‘business’

Tax paid on inputs, input services or capital goods that are used in the course or
furtherance of its business by the recipient is available as credit. This phrase
intends to widen scope of eligibility of credit. Restrictions in erstwhile regime
such as ‘use in factory’, ‘in or in relation to the manufacture’, for use in
‘manufacturing or processing of goods’, ‘for sale’ etc. are no more relevant.
Word ‘furtherance’ intends to allow credit of tax even for new or future lines of
businesses.

6.05 Meaning of word ‘business’ under GST law

GST law has defined ‘business’ in very wide terms to include any trade,
commerce, manufacture, profession, vocation, adventure, wager or any other
similar activity, whether or not it is for a pecuniary benefit. (for detailed
discussion refer to Guidance note-2 on ‘Chargeability’)

6.06 Meaning of negative list of input credits

These are inputs or input services, tax paid on which is not available as
credit even though they have been used in the course or furtherance of
business. These restrictions have been placed under section 17(5) of the
CGST Act.

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6.07 Input credits falling in the negative list

Input tax credits are not allowed under GST in respect of following-
NEGATIVE LIST
GOODS SERVICES
1) Meant for personal consumption 1) Meant for personal consumption
2) Motor Vehicles** 2) Outdoor catering*
3) Goods lost, stolen, destroyed, 3) Beauty Treatment*
written off
4) Goods disposed off by way 4) Health Services*
of gift or free samples
5) Goods received for construction 5) Cosmetic and plastic surgery*
of immovable property on own
account (other than plant
and machinery)
6) Membership of club, health &
fitness center
7) Travel benefits to employees
8) Rent a cab, life insurance, Health
insurance****
9) Works contracts for construction of
immovable property other than Plant
and Machinery.***
10) Services received for construction
of immovable property on own
account.

*These credits are allowed if the service is used for providing same category of
service e.g. services of a beautician taken by a beauty parlor or as an element
of a taxable composite or mixed supply.

**Allowed in following cases -i. Further supply of such vehicle or conveyance

(e.g. credit of tax paid on cars by the manufacturer will be available to a car
dealer);
ii. Taxable supply of transportation of passengers
iii. Taxable supply of imparting training on driving, flying, navigating such

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vehicles or conveyances; (e.g. tax paid by dealer on sale of cars will be available
as credit to a car driving school).

***Allowed if used for providing work contracts service e.g. tax paid by sub-
contractor for construction of a factory administration building is available as
credit to the main contractor for payment of its liability, however the tax paid by
the main contractor will not be available to the factory owner / manufacturer.

****Can be allowed by way of notification if mandatory on part of employer to

provide these facilities. If these services are used as an input for supply of same
category of service or as an element of a taxable composite or mixed supply,
tax credit will be available.

Note – Telecommunication towers and pipelines outside the factory premises

have been specifically excluded from the definition of plant and machinery.

6.08 Meaning of plant and machinery

Credit of tax paid on goods and services used for construction of immovable
property including work contract service has been allowed only if such
immovable property is in the nature of plant and machinery. The expression
‘plant and machinery’ has been defined through explanation in Chapter V of the
CGST Act to mean 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 –
i. Land, building or any other civil structures;
ii. Telecommunication towers; and
iii. Pipelines laid outside the factory premises.

6.09 Exclusion of credits relating to towers, pipeline and land /

building / civil structures
From the definition of plant and machinery telecommunication towers and pipelines
laid outside the factory premises cannot be treated as plant and machinery.
Similarly land, building and other civil structure (excluding foundation and
structural support) cannot be treated as plant and machinery. Therefore, any inputs
or capital goods used for construction of telecommunication towers, pipeline laid
outside the factory, buildings and other civil structures (excluding foundation and
structural support) will not be available on input tax credit.

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6.10 Credit on diaries and calendars distributed at New Year for

business promotion
Goods disposed of by way of gifts are in the negative list. Credit of tax paid on
purchase of diaries, calendars or other goods which are disposed of as free gifts
would not be available.

6.11 Will tax credits be available if ……..

IF… THEN…
Cement is used for construction of No. Building is not plant and machinery
administration building
Cement is used for foundation Yes as such structural support for plant
of pillars supporting a boiler and machinery is included in definition
of plant and machinery.
Works contract services is provided Yes. Works contracts service is
by sub-contractor to a contractor excluded except when used for
providing work contract service.
Health insurance for factory No. Apart from being statutorily
workers if it is statutorily mandated mandated, credit is not allowed
to take such insurance unless permitted by Government
by notification.
Goods are used for running Yes as guest house is used for
a guest house in a factory furtherance of business.
(dispute cannot be ruled out)
However credit in respect of
provision of food and
beverages & catering
services will not be available
Car used by a factory for as itCar
No. is put in negative
or any list
conveyance
personal use is in negative list, except
when it is intended for use
in further supply or for
making taxable supply of
transportation of passenger
service.

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Steel and other structural No. Telecommunication

are used for setting up a towers have been
telecommunication tower specifically excluded from
definition of plant and
machinery.

6.12 Time for availing input tax credit

Subject to fulfilment of other conditions explained in para 6.03 above, credit
can be availed when the recipient has received (i) tax invoice or debit note or
other prescribed tax paying document and (ii) underlying goods and/or
services. If the goods under an invoice are received in lots, credit can be
availed only after receipt of the last lot. For better understanding let us have
following examples:
‘A’ Limited received services of repair of machinery in plant on April 16, 2016
and released payment on the basis of pro-forma invoice on same day. Tax
invoice was issued by the supplier on April 30, 2016. Credit can be availed on
or after April 30, 2016.
‘B’ Limited released payment for services of repair of machinery in plant on
April 16, 2016 on the basis of pro-forma invoice. Engineers of the service
provider visited plant on between May 01 to May 05, 2016 and carried repair.
They brought the tax invoice dated April 30, 2016 issued by the supplier. Credit
can be availed on or after May 05, 2016.

‘C’ limited placed order for supply of 1000 bags of cement. Supplier was asked
to dispatch 200 bags every alternate day. Supplier issued Tax invoice for 1000
bags on May 01, 2016 and dispatched first lot of 200 bags. Payment was
released on May 02, 2016. Last lot of 200 bags was received on May 09, 2016.
Credit can be availed on or after May 09, 2016. If separate invoice is issued for
each of the lots then credit can be taken on receipt of each lot.

6.13 Inputs, input services and capital goods defined separately

for availment of credits
Inputs, input services and capital goods have been defined separately. While
inputs and input services have been defined to mean goods and services used or
intended to be used in the course or furtherance of business, capital goods have
been defined to mean goods whose value is capitalized in the books of accounts

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of the person claiming the credit and which are used or intended to be used in
the course of furtherance of business.

6.14 Credits for capital goods are available in full upfront

Credits for capital goods are available in full. There is no provision stipulating
availment of capital goods credit in instalment or tranches. Further, if the tax
payer claims depreciation of the tax component in the value of capital goods
under the provisions of Income Tax Act, then credit is not allowed on such tax
component of capital goods.

6.15 Difference in treatment of capital goods credit from credit

of inputs and input services?
There is no major difference as credit in case of capital goods is also available
upfront. There would only be difference in treatment of capital goods when
supplied after use or in manner of reversal of credits when inputs / capital goods
are used for taxable and non-taxable supplies or partly for the purposes of
business and partly for other purposes.

6.16 Inputs or input services used partly for making taxable

supplies and partly for non-taxable supplies or partly for
non-business purpose
When common taxable inputs and/or services are used for making both taxable
and non-taxable/ exempt supplies or inputs and/or services are diverted to non-
business/personal use then the quantum of credit on such inputs/input services
is restricted to the credit attributable to taxable supplies or to the extent such
inputs/input services are used in course or furtherance of business. In other
words the total credit will be subject to pro-rata reversals i.e. reversal in
proportion to value of non-taxable/exempt supplies or value of inputs/input
services diverted for non-business use or personal use.
Rule 42 of the CGST Rules, 2017 prescribes principles/formula for
computation of ineligible credit or for pro rata reversals. The scheme
prescribed through rules is summarized below:-

An input tax credit claimant, engaged in supply of taxable as well as exempt

supplies (including non-taxable supply) should segregate total input tax as under:-

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T1 Credit attributable to inputs and input

services intended to be used exclusively
for purposes other than business
T2 Credit attributable to inputs and input
services intended to be used exclusively
for effecting exempted supply
(including non-taxable supply)
T3 Inputs and input services on which
credit is not available under section
17(5), i.e. negative list
T4 Credit attributable to inputs and input Amounts gets credited
services used exclusively for effecting to electronic credit
taxable supply including zero-rated ledger
C2 Credit attributable to inputs and input
services which do not fall in any of
above category (common use credit)

Out of C2 portion ineligible due to (i) use for the purpose of effecting exempt supply
(D1) and (ii) use for purposes other than business (D 2) will be calculated by
following formula.

D1 = C2 X (E / F)
Where E is the aggregate value of exempt supplies. (For meaning of ‘exempt
supplies’ please see point no. 6.17)

D2 = 5% of C2

As common credit, i.e. C2 was credited to electronic credit ledger, D1 and D2 will be
added to output tax liability.

If for the credits which are common for taxable and exempt supplies and/or used for
non-business purposes, the taxpayer has identified T1 and T2 at invoice level, the
amount will not form part of common credit (C2). Credit for eligible portion will be
available in full.

Above computation for reversal of input tax credit will be made by tax payer for
every tax period and again at the end of financial year.

If D1 and D2 computed earlier is less than D1 and D2 calculated at the end of

financial year, the shortfall will be added to the output tax liability of the current
year. The taxpayer will be liable to interest from April 1st of the year succeeding the
relevant financial year till the month in which ineligible credit has been added. The
taxpayer will have to offer shortfall as part of output tax liability in the return for
any tax period succeeding the relevant financial year but not later than the month of
September.

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If D1D1 and D2 computed earlier is more than D1 and D2 calculated at the end of
financial year, the taxpayer will be allowed to claim credit of such excess in the
return for any tax period succeeding the relevant financial year but not later than the
month of September. However, the taxpayer will not be eligible for interest on
excess output tax liability admitted earlier.

6.17 Meaning of exempt supplies for pro rata reversals.

As per the definition of ‘exempt supplies’ under GST law, exempt supplies include
supplies which attracts NIL rate of tax; supplies which may be exempt and includes
non-taxable supplies as well. The ambit of the term ‘exempt supplies’ has been
expanded for purpose of determining pro rata distribution of input tax credits to
include the following

i. Transaction in securities (which is neither treated as goods nor services)

ii. Sale of land
iii. Sale of building provided the entire consideration has been received after
issuance of completion certificate where required by the competent
authority or before its first occupation whichever is earlier.
Explanation in Chapter V of the CGST Rules, 2017 provides that value of land and
building shall be taken as the same as adopted for the purpose of paying stamp duty
and the value of security shall be taken as one percent of the value of such security.

6.18 Exclusion of non GST taxes for pro rata reversals

As per definition of ‘aggregate turnover’ under GST law it includes the total value
of supply of goods or services or both minus the GST taxes paid by the registered
person on such value. Therefore, while calculating the credits attributable to non-
taxable turnover for the purpose of pro rata reversals the value of non-GST taxes
like Excise duty, VAT etc are not getting excluded leading to disproportionately
high reversals.

Explanation in rule 42 of the CGST Rules provides that for the purpose of
computation of quantum of pro rata reversals, the aggregate value of exempt
supplies and total turnover shall exclude Central and State Excise Duty and Sales
VAT. However, the Central Sales Tax is not excluded. 1 This appears to be an
inadvertent mistake, but is the position in law.

1
Central Sales Tax (CST) is levied under entry 92A of List I of Seventh Schedule to
the Constitution

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6.19 Illustration to explain computation of pro-rata reversal

Let us take example of a large format retail store selling cosmetics,
refrigerators, milk, fruits & vegetables, soaps, shampoos, alcohol for human
consumption etc. Assuming cosmetics and refrigerator are liable to GST; Milk,
fruits and vegetables are exempt from GST. Alcohol for human consumption is
a non-GST product.
Cosmetics are delivered in bright print plastic boxes. Refrigerators are
repacked in wooden caskets. Milk is delivered in non-returnable glass bottles.
Fruits & vegetables, soaps, shampoo, alcohol are delivered in a polythene bags
which are common for all the goods.
The retail store has cleaning staff, internet connectivity, security, a diesel
generating set for back up electricity supply, arrangement with a bank for daily
pickup of cash etc. These services are common for all goods and services
supplied from the store.
So far as tax credit of goods sold is concerned, there is no ambiguity and
respective credits can be availed. For example, full credit of tax paid on
refrigerator would be available to the retail store as the refrigerators are being
sold further on payment of GST. Credit relating to bright print plastic boxes for
cosmetics, wooden caskets for refrigerator would also be admissible in full
as these items are identifiable as used in taxable supplies. Let us assume
credit identifiable with taxable supplies works out to Rs. ‘a’.
Non-returnable glass bottles for milk are identifiable with exempt supplies and
hence tax credit cannot be claimed. Let us assume credit identifiable with
exempt supplies works out to Rs. ‘b’.
Tax credit relating to polythene bags which are used for delivery of fruits &
vegetables, alcohol, soaps and shampoos are credits in in respect of inputs that
are used for making exempt, non-GST as well as taxable supplies. Let us say
common credits on inputs work out to Rs.‘c1’. Similarly input services are
common for exempt, non-GST and taxable supplies. Let us say common credits
on input services works out to Rs. ‘c2’.
Let us further assume that store achieved a turnover of Rs 50 lakh (F) during
the calendar month. This consisted of supply of taxable goods and service
worth Rs. 30 lakh and supply of non-taxable and exempt goods/services worth
Rs. 20 lakh (E).
Total credit available (T) = a+b+ c1+c2.
Credit identifiable with taxable supplies (X) = a
Credit identifiable with non-taxable/exempt supplies (Y) = b

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Common credit (C) = c1+c2

Ineligible credit (D) = (E/F) x C
= (20/50) x C
Credits available for utilization = T – [‘b’ + D]
Common credit was disallowed in the proportion of non-eligible turnover vis-à-
vis total turnover.
Exact mechanism for pro-rate reversal is provided by draft input tax credit rules.

6.20 Credit on capital goods are also subject to pro rata reversal
If capital goods are used for making both taxable and exempt/non-taxable
supplies, the credits in respect of such capital goods will also be restricted to
the extent it is attributable to non-taxable supplies/non business activity. Exact
mechanism for working out the credits so attributable is provided in rule 43 of
the CGST Rules. The scheme prescribed through rules is summarized below:-

An input tax credit claimant, engaged in supply of taxable as well as exempt

supplies (including non-taxable supply) should segregate total input tax in respect of
capital goods as under:-

Credit attributable to capital goods

intended to be used exclusively for
purposes other than business Rule 43 does not talk about
Credit attributable to capital goods credits attributable to capital
intended to be used exclusively for goods barred by section
effecting exempted supply (including 17(5). However since
non-taxable supply) provisions in Act will
Credit attributable to capital goods supersede rules, credit
which is barred by section 17(5), i.e. attributable to ineligible
negative list capital goods should also be
identified at this stage
Credit attributable to capital goods Amounts gets credited to
intended to be used exclusively for electronic credit ledger
effecting taxable supply including zero-
rated
Tc Credit attributable to capital goods
which do not fall in any of above
category (common use credit)

For capital goods comprised in Tc, the taxpayer will maintain record of each capital
asset separately. Useful life of each capital asset will be considered as 5 years. For
each tax period i.e. calendar month, the taxpayer will calculate common credit
attributable to such capital asset (T m) based on age profile of asset. Sum of all T m

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will be denoted as Tr.

Ineligible portion (Te) will be calculated every tax period by following formula.

Te = Tr X (E / F)

Where E is the aggregate value of exempt supplies, i.e. all supplies other than
taxable supplies and zero rated supplies and F is total turnover during the tax period.

As common credit, i.e. Tc was credited to electronic credit ledger, Te will be added
to output tax liability.

The taxpayer will also be liable to interest on Te for the period starting from the
month in which entire credit was claimed till the month in which ineligible credit is
added to output tax liability.

6.21 Treatment of credit already availed where capital goods

used for making taxable supplies are subsequently used for
making exempt supplies as well
Credit proportionate to the residual life of the capital goods will be subject to
reversals based on turnover of exempt supplies. Proviso below rule 43(d)
provides that original input tax credit eligible for availment will get reduced by
five percentage points for every quarter or part thereof and balance will be
subject to reversal computation. . Exact mechanism for working out the
reversal is provided in the CGST Rules.

6.22 Input tax credit in respect of services procured centrally

The provisions of input service distributor has been provided to allow business
to go for centralized procurement of services and distribute the tax credits
where such services have been used.
Input service distributor is a special concept to enable the entrepreneur to
distribute the tax credit of common services to different registrations of the
same entity (same PAN). An entrepreneur avails several services which cannot
be identified to a particular registration. Services of statutory auditors are best
example of such common services. An enterprise may be operating in all 29
States and 7 Union Territories with its registered and corporate office, say in
Hyderabad. Statutory audit is done for corporate entity. Auditors will carry
major part of their procedures in Hyderabad, discuss with management in
Hyderabad, and sign the accounts and reports in Hyderabad etc. Though most
of the activities are performed in Hyderabad, it cannot be said that auditors
were providing services only to the enterprise’s establishment in the State of

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Telangana. In fact auditors were working for establishments of the enterprise

located in all 29 States and 07 Union Territories and credit of tax charged by the
auditors needs to be distributed to all States and UTs.

6.23 Manner of distribution of credit by an ISD

An ISD is allowed to distribute the credit as follows-

Credit of ISD and the recipient Credit to be distributed as…

of credit…
Integrated tax are in different States/ Integrated tax
Union Territory
Central Tax
Integrated Tax (sum of Central Tax &
State Tax/Union State/UT Tax)
Territory Tax
Integrated tax are in same State/ Union Integrated Tax
Territory
Central Tax (different business Central Tax

vertical or otherwise)
State Tax/Union State Tax/ Union Territory Tax
Territory Tax

Compensation Whether same State or Compensation Cess@

Cess different State

@ Input tax credit rules have not dealt with distribution of cess.

6.24 Conditions for distribution of credit by an ISD

• ISD has to be registered separately.
• The input service invoice should be in favour of ISD indicating ISD’s
GSTIN.
• The credit availed on the basis of each invoice is to be distributed to
other registrations following prescribed rule
• Input Service Distributor will issue an ISD invoice in favour of the
registrations to which credit belong. The amount to be distributed has to
be calculated separately for credit of four different taxes
• All credits have to be distributed in the same month of availment.
 Amount in-eligible and the amount eligible will be distributed separately.

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6.25 Rule for credit distribution by an ISD

• If input credit is identifiable to any one particular registration it will be

distributed to only that registration.
• If the input tax credit is attributable to more than one registration of a
person then the credit will be distributed amongst such registrations to
which the credit is attributable. The credit in such case will be
distributed pro rata to the turnover (excluding Central & State Excise
duties and VAT, if any) of a registration during the relevant period to
the aggregate of turnover (excluding Central & State Excise duties
and VAT, if any) of all registrations to whom such credit is
attributable.
• If the input tax credit is attributable to all registrations of a person then
the credit will be distributed amongst such registrations to which the
credit is attributable. The credit in such case will be distributed pro rata
to the turnover of a registration during the relevant period to the
aggregate of turnover of all registrations of the person.

6.26 Exclusion of non GST taxes from value of ISD

For distribution of credits to a registered person engaged in supply of taxable
as well as non-taxable goods and services or both, the aggregate value of
turnover of such person shall be reduced by amount of any duty or tax levied
under following Entries of VII Schedule of the Constitution.
 Entry 84 of List I (taxes on manufacture like Excise Duty on petroleum
etc.)
 Entry 51 of List II (duties of Excise on alcoholic liquor for human
consumption etc.)
 Entry 54 of List II (taxes on sale and purchase of goods)
Otherwise as per the definition of ‘aggregate turnover’ only GST taxes were
excluded from the value which was leading to disproportionate distribution
of credit to units manufacturing excluding products since the turnover of
such units included the value of non GST taxes.

6.27 Meaning of relevant period

Relevant period is normally the financial year preceding the year during which
credit is to be distributed. If all the registrations do not have turnover in
preceding financial year, then it is the last quarter for which details of such

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turnover are available previous to the month during which credit is to be

distributed.

6.28 Examples of distribution of credits by an ISD

Rule 29 of the CGST Rules, 2017 prescribe following formula for arriving at credit
distributed to each recipient:-
C1 = (t1/T) x C

Where.
‘C’ is the amount of credit to be distributed,
‘t1 is the turnover for the registration to which credit is distributed
‘T’ is the aggregate of the turnover at PAN level

Let us take example of an enterprise with establishments in 10 states engages

the services of a statutory auditor to provide audit services in respect of its
entire operations. Annual audit fees were say Rs. 10 lakh and input tax thereon
works out say Rs 1.80 lakh. Let us further assume that the enterprise achieved
a turnover of Rs.
1000 crore in preceding financial year with following spread in ten States.
Credit Distribution will look as under:

State Turnover Distributed credit (Turnover of State/ Total

(Rs. In cr.) Turnover) x Total common credit (Rs.)
1 50 (rs.) 9000
2 100 18000
3 125 22500
4 80 14400

State Turnover Distributed credit (Turnover of State/

Total Turnover) x Total common credit
5 90 16200
6 130 23400
7 175 31500
8 150 27000
9 75 13500
10 25 4500
Total 1000 180000

Here C = 180000 and T = 1000.

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6.29 Distribution of credits for goods procured centrally

Concept of input service distributer is applicable only for services. It is not
required for goods that are procured centrally and distributed for use in various
registrations as credit would automatically get distributed when goods are stock
transferred to other registrations for actual use on payment of GST.

6.30 Period for availing tax credits

As per section 16(4) of CGST Act, credit should be availed on or before
furnishing of the return for the month of September following the end of the
financial year to which invoice relates or furnishing of the relevant annual
return whichever is earlier. Return for a month is to be filed on or before the
twentieth day of the succeeding month. Thus return for the month of September
is to be filed by 20th October.
Input Service Distributor is required to file return within thirteen days of the
succeeding month. Thus for an Input Service Distributor, return for the month
of September is to be filed by 13th October. Annual return is to be filed by thirty
first day of December following the end of relevant financial year. This can be
further understood with following example of a Non-ISD taxpayer:

Where Annual return for Financial Year 2017-18 is filed on August 16, 2018

Invoice Date Last date up to which tax credit should be availed

April 01, 2017 August 16, 2018
March 31, 2018 August 16, 2018

Where Annual return for Financial Year 2017-18 is filed on December 31, 2018

Invoice Date Last date up to which tax credit should be availed

April 01, 2017 October 20, 2018
March 31, 2018 October 20, 2018

6.31 Penalties of wrongly availing tax credits

Tax credit wrongly availed will be added to the output tax liability of the month
in which discrepancy in tax credit claim is communicated to claimant recipient.
Recipient will also be liable to interest for the period from the date of availing
credit till the date of corresponding addition.

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If the credit has been availed without actual receipt of goods and/or services
either fully or partly, the claimant will be liable to further consequence of a
penalty of rupees ten thousand or an amount equivalent to the input tax credit
so availed, whichever is higher.

6.32 Penalty applicable to availment or actual utilization?

Interest and penalty both are applicable on availment. Actual utilization thereof
is not material.

6.33 Key differences between ITC provisions under the

scheme of Central Excise, Service Tax and VAT laws and
those proposed under GST
Pre-GST Law Post GST

Eligibility based on use in factory; Eligibility based on use in course or

provision of output service in furtherance of business
central taxes
Capital goods defined with reference Broad based definition to include all
to headings, description etc. goods capitalized in account and used
in course or furtherance of business.

Pre-GST Law Post GST

Availment of capital goods credit No such condition
in instalments
Wider negative list Trimmer negative list
Restriction / retention of credits in case Free flow of credits. No such
of stock transfers or even CST Sales restrictions / retentions
No credit of CST spend on Credit of IGST paid on
inter-State sale interstate supplies
Full credit on capital goods if used Pro-rata reversals even in case
for taxable and non-taxable activities of capital goods
No concept of online and Credits based on matching of invoices.
meticulous matching of invoices

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6.34 Possible reasons for mismatch in invoice details reported

by the supplier and those reported by the recipient
Following reasons might lead to mismatch in details furnished by two parties.
• Clerical error at either party end
• Mismatch in transaction value as per understanding of recipient while
placing order for supply
• Mismatch in classification (where rates of tax are different in two
classifications entries) as per understanding of recipient while placing
order for supply
• Receipt of lesser quantity than reported dispatched by supplier (this may
be due to human error at the end of recipient or some natural/man made
losses occurring in transit)

6.35 Manner of dealing with any mismatch of invoices uploaded

by supplier and those recorded by the recipient
Supplier and recipient should come to a common understanding. For
transaction value mismatch, supplier can agree to issue a credit/debit note.
Recipient will accept previously uploaded invoice and also the credit/debit
note. For classification dispute, both the parties will have to reach an
agreement. Here, if the classification claimed by the recipient was of lower rate
of tax, mismatch would have already been accepted by the GSTN. Loss of
input tax credit in the hands of recipient remains a commercial dispute only.
For loss of goods in transit, supplier is not entitled to reduce tax liability. To
save tax credit, recipient will have to accept the invoice details uploaded by
supplier. Mismatch remains a commercial dispute only.

6.36 Consequences of invoices remaining mismatched

Tax credit pertaining to invoices remaining mismatched will be added to the
output tax liability of recipient. The recipient will be liable to pay interest on
such disallowed credit from the date of availing of credit till the date of
addition.

6.37 Necessity of quickly rectifying the invoices shown as

mismatched
Provisionally allowed tax credit will be disallowed and will remain
disallowed till the time it is not rectified. If mismatch is not settled by the
time of filing of annual return credit will be lost forever.

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6.38 Importance of paying for receipt of goods and

services in time

Under GST it is very important that supply of goods and services on which input tax
credit is taken are paid for in time. As per CGST Act if recipient of goods or
services fails to pay to the supplier the amount towards value of supply along with
tax payable thereon within a period of 180 days from the date of issue of invoice, an
amount equal to the input tax credit availed on such supply shall be added to output
tax liability of recipient along with interest. The Input tax credit rules provide that
such addition will be proportionate to the amount not so paid. The recipient shall be
entitled to avail the credit again once he makes payment to the supplier and the time
limit of credit availment (as mentioned in para 1 of 6.3) will not be applicable. (See
rule 37 (4) of CGST rules). However the interest paid will not be refunded.

6.39 Payment condition in credit availment in cases of

reverse charge

The condition for payment to the supplier within 180 days for availment of credit
does not apply to supplies on which tax is payable under reverse charge.

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