Understanding

Input Tax
Credit
What is Input Tax?

• Input tax refers to the below tax charged on the supply of goods or services or both
• Central tax (CGST)
• State tax (SGST)
• Integrated tax (IGST)
• Union territory tax (UTGST)
• It includes IGST charged on imports of goods

However, it does not include tax paid under the composition levy.
• IGST is levied on inter-State supply.
• CGST and SGST/UTGST are levied on intra-State supply.
Input Tax Definition as per ACT
Section 2 (62) of the CGST Act, 2017 defines input tax as follows

Input tax in relation to a registered person means Central tax, State tax, Integrated tax, or Union territory tax charged on
any supply of goods or services or both made to made to a registered person but does not include the tax paid under the
composition levy

It shall also include:—

(a) The integrated goods and services tax which is charged on import of goods

(b) The tax payable as per section 9(3) and (4) of the CGST Act

(c) The tax payable as per section 5(3) and (4) of the IGST Act

(d) The tax payable as per section 9(3) and (4) of the respective SGST Act

(e) The tax payable as per section 7(3) and (4) of the UTGST Act
 Rationale Behind ITC Under GST

• The credit mechanism under the indirect tax aims to mitigate the cascading effect of duty on
duties.
• It provides for credit of duties paid on goods or services which are used as inputs in the
production of output goods or provision of output services.
• This aim was not achieved to the fullest as various duties, taxes, and cess were levied at the
central and state levels and all were not adjusted against each other.
• With the introduction of GST, credit on goods and services is available across the entire supply
chain barring a few exceptions
 What is Input Tax Credit?
An input tax credit means credit of tax (CGST, SGST. IGST, UTGST) paid on input, input services, and capital
goods

1. Input
Input means any goods other than capital goods used or intended to be used by a supplier in the course or
furtherance of business.

2. Input Service
Input service means any service used or intended to be used by a supplier in the course or furtherance of
business.

3. Capital Goods
Capital goods mean goods the value of which is capitalized in the books of accounts of the person claiming
the input tax credit and which are used or intended to be used in the course or furtherance of business
Legal Framework of ITC
The various provisions related to INPUT TAX CREDIT (ITC) are given under Chapter V (Section 16-19 &
Section 41 - 42) of the CGST Act, and CGST Rules.
The aspects covered under various sections are:—

Section Aspects Covered

Section 16: Eligibility and Conditions for taking Input tax credit

Section 17: Apportionment of credit and blocked credits

Section 18: Availability of Credits in Special Circumstances

Section 19: Taking input tax credit in respect of inputs and capital goods sent for job work.

Section 41: Utilization of ITC

Section 42: Matching, Reversal and Reclaim of ITC.

CGST RULES, 2017 RELATING TO ITC

The Chapter V of CGST Rules, 2017 contains the following rules in relation to ITC:

Section Aspects Covered

Rule 36: Documentary requirements & conditions for claiming ITC

Rule 37: Reversal of ITC in the case of Non-Payment of consideration

Rule 38: Claim of credit by a Banking Company or a Financial Institution

Rule 39: Procedure for distribution of ITC by Input Service Distributer (ISD)

Rule 40: Manner of claiming credit in special circumstances

Rule 41: Transfer of credit on sale, merger, etc.

SectionS Aspects Covered

Rule 42: Manner of determination of ITC in respect of inputs or input services & reversal

Rule 43: Manner of determination of ITC in respect of Capital goods & reversal thereof

Rule 44: Manner of reversal of credit under special circumstances

Rule 44A: Manner of reversal of credit of Additional Duties of Customs

Rule 45: Conditions and restrictions in respect of inputs and Capital Goods to the
job worker
Eligibility and
Conditions for taking
Input tax credit -
Section 16
 Section 16: Eligibility and Conditions for taking Input tax credit
As per 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 business and the said amount shall be
credited to the electronic credit ledger of such person.”
Condition Analysis of Section 16 (1)
1. Registered Person As per Section 16(1), Input tax credit is available only to a registered
Person.
Exception: There is one exception wherein ITC is not available although
the person is registered. This exception applies to a person who pays tax under section 10
of the CGST Act, under the compounded levy scheme
(Composition Scheme)

2. In the course of or in In the course or furtherance' is not defined but is broad enough to include any activity or
furtherance of business: transaction which is incidental or ancillary to the business activities.

The relation of inputs and input services with business can be direct or indirect. ‘Intention
to use’ implies that ITC can be availed as soon as inputs or input services are received,
though the same may be utilized later.
Condition Analysis of Section 16 (1)
3. Credit Ledger: The amount of ITC shall be credited to the Electronic Credit Ledger of the person
entitled.

4. Manner of Utilisation The ITC shall be utilised in the manner specified in section 49.

5. Rules under CGST Rules, 2017 The conditions and restrictions have been specified in Chapter V of CGST Rules, 20
17 (Rule 36 to Rule 45).
Section 16(2): Conditions to be satisfied for Availing ITC
The registered person is entitled to the credit of any input tax credit on a supply only if all the following conditions are fulfilled:

1. Possession of a Tax Invoice or Debit Note

2. Furnishing and communication of details

3. The ITC is not restricted

4. Receipt of goods and/or services

5. Payment of tax to the Government

6. Furnishing the valid return under section 39

NOTE: The above conditions are given in section 16(2), which starts with “Notwithstanding anything contained in this section …..”. It
implies that it is an overriding section.

Moreover, these conditions are cumulative, therefore, they all must be satisfied in order to be eligible for availing tax credit.
1. Possession of a Tax Invoice or Debit Note (a) an invoice
(b) a debit note
(c) an invoice raised by the recipient in case of inward
supply from unregistered.
(d) a bill of entry or any similar document prescribed under
the Customs Act, 1962
(e) an Input Service Distributor invoice or Input Service
Distributor credit note, or any document issued by an
Input Service Distributor for distribution of credit. (Rule
54).

The document must mention the following

(a) the details of the amount of tax charged
(b) description of goods or services,
(c) total value of supply of goods or services or both
(d) GSTIN of the supplier and recipient
(e) place of supply
2. Furnishing and communication of details (a) the details of such invoices or debit notes have been furnished by the
supplier in the statement of outward supplies in FORM GSTR-1 or using
Section 16(2)(aa), the invoice furnishing facility; and
the ITC claims will be allowed only when the details of such invoice/debit (b) the details of ITC in respect of such invoices or debit notes have been
note have been furnished by the supplier in his GSTR-1 and subsequently it communicated to the registered person in FORM GSTR-2B under rule
appears in GSTR-2A. Thus, now the recipient can no longer claim provisional 60(7)
ITC. In other words, the ITC claimed should be reflected in GSTR-2A.

3. The ITC is not restricted (a) The input tax credit in respect of the supply communicated to the
registered person under FORM GSTR2B / GSTR2A has NOT been restricted.

4. Receipt of Goods or Services or both (section 16(2)(b)) (a) The registered person should have received the goods or services or
both. This means the ITC will not be available unless the goods are
received by the registered person.
(b) the goods delivered to a third party on the direction of the customer
will be deemed to have been received by the customer. (Bill to Ship to
Model)
5. Payment of Tax to the Government (a) the tax should have actually been paid to the government for which ITC
is being taken. This payment can be done by the supplier either by
(i) Making the payment through cash or (ii) through utilization of ITC.

6. Filing of valid Return (Section 16(2)(d)) (a) the registered person should have furnished the return under section
39
Reversal of ITC in case of Non-Payment of Consideration
Reversal of ITC in case of Non-Payment of Consideration (a) Where a recipient fails to pay to the supplier of goods or services or
[Second Proviso to Section 16(2)]: both, the amount towards the value of supply along with tax payable
thereon, within 180 days from the date of issue of invoice by the
supplier, an amount equal to ITC availed by the recipient shall be added
to his output tax liability, along with interest thereon, in the manner as
may be prescribed.
(b) Related provisions as prescribed under Rule 37 of CGST Rules, 2017

Related provisions as prescribed under Rule 37 of CGST Rules, 2017 As per Rule 37(1), A registered person, who has availed of input tax credit on
any inward supply of goods or services or both, other than the supplies on
which tax is payable on reverse charge basis, but fails to pay to the supplier
thereof, the amount towards the value of such supply, whether wholly or
partly, along with the tax payable thereon, within the time limit specified in
the second proviso to section 16(2), shall pay or reverse an amount equal to
the input tax credit availed in respect of such supply, proportionate to the
amount not paid to the supplier, along with interest payable thereon under
section 50, while furnishing the return in FORM GSTR-3B for the tax period
immediately following the period of 180 days from the date of the issue of
the invoice.
Re-Entitlement when payment is made subsequently (a) As per Rule 37(2), Where the said registered person subsequently
makes the payment of the amount towards the value of such supply
along with tax payable thereon to the supplier thereof, he shall be
entitled to re-avail the input tax credit referred to in rule 37(1).
(b) The time limit of availing credit as specified in section 16(4) shall not
apply to a claim for re-availing of any credit, in accordance with the
provisions of the Act or the provisions of this Chapter that had been
reversed earlier.
No ITC if Depreciation is claimed on Tax Component [Section 16(3)]

[Section 16(3)] (a) 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.
It is clear that in respect of tax paid on such items, double
benefit cannot be claimed under GST laws and Income-tax Act,
1961 simultaneously. Therefore, the assessee has the option to
either claim depreciation on tax component of capital goods by
capitalizing the capital goods inclusive of tax in the books of
account or to claim ITC. A person is not allowed to take the dual
benefit under two different laws simultaneously.
Time Limit for availing the Input Tax Credit [Section 16(4)]

[Section 16(4)] (a) The Finance Act, 2022 has amended section 16(4), w.e.f. 1-1-2022, to extend the period to take
ITC. Pursuant to this amendment, a taxable person shall not be entitled to take ITC in respect of any
invoice or debit note or supply of goods or services or both, after the 30th November following the
end of the financial year to which such invoice or debit note pertains or furnishing of the relevant
annual return, whichever is earlier.

(b) In view of this, it can be concluded that the ITC on invoices which pertains to a particular financial
year must be availed as per the following:

Earlier of
 30th November of the next financial year
 Date of filing Annual Return in FORM GSTR-9 under section 44
Additional points as regards the (a) Relevant Date for Debit Note: After the amendment made by Finance Act, 2020 w.e.f. 1-1-2021, the
time limits for claiming ITC date of issue of invoice relating to debit note is of no relevance for determining time limit to take
ITC on Debit Note.

(b) No time limit for reclaiming ITC reversed due to non-payment within 180 days

(c) One Year from the date of Invoice in special cases:

 The Section 18(2) provides that in special circumstances, like new registration or voluntary
registration, the 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
Apportionment of
credit and blocked
credits - Section 17
Apportionment of Input Tax Credit
As regards the apportionment of ITC, the provisions are contained in section 17 of CGST Act, 2017, which are as
follows:
Section Aspects Covered
Section 17(1) Where goods or services are used partly for business purposes and partly for other purposes

Section 17(2) Where goods or services are used partly for effecting taxable supply including zero rated
supply and partly for exempted supply

Section 17(3) Items included in exempted supplies

Section 17(4) Optional method for Banks for taking ITC

Section 17(5) Blocked Credits

Section 17(1) – ITC for Business & personal use & Section 17(2) – ITC on Taxable supplies and exempted supply
1. Where goods or services are used partly for business purposes (a) Where the goods and/or services are used by the registered
and partly for other purposes [Section 17(1)] person partly for the purposes of any business and partly for
other purposes, the amount of credit shall be restricted to so
For Example: Suman owns a Business entity and deals in textiles. She much of the input tax as is attributable to the purposes of his
has purchased goods for the business, in respect of which ITC business.”
admissible is ` 42,500. If 15% of such goods have been used by her for
personal purposes, then ITC will not be available in relation to such
goods which are used for non-business purposes. Therefore, as per
section 17(1), Suman shall be entitled to take credit of ` 36,125
(calculated as 85% of ` 42,500).

2. Where goods or services are used partly for effecting taxable (a) When the goods are used for business purposes, they may either
supply including zero rated supply and partly for exempted supply be used in effecting the following supplies:
[Section 17(2)]
 Taxable supplies, which includes zero-rated supplies or
 Exempted supplies or
 Partly taxable and partly exempted supplies.

(b) 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.”

(c) In other words, the ITC shall be available only for that portion of
Input tax which is attributable to the purposes of business of
providing taxable supplies including zero-rated supplies.
Section 17(3) - Items included in exempted supplies
Section 17(3) provides that for the purpose of ITC reversal, the value of exempt supply would include the following
transactions:

(a) Supplies subject to GST under reverse charge (say sponsorship services by an event company)

(b) Transactions in security (say sale of shares)

(c) Sale of Land

(d) Sale of Building (except under-construction building)

Section 17(3) is not providing that the above transactions would be treated as exempt supply. Instead, it merely provides
that for ITC reversal, the value of exempt supply would include the value of the above transactions.

Explanation to Section 17(3) provides that the value of exempt supply shall not include the value of activities/transactions
specified in Schedule III except those specified in paragraph 5 of the said Schedule.
Paragraph 5 of Schedule III covers the transaction of sale of land and sale of the building (except under construction).

Therefore, as per the explanation, except for the sale of land and constructed building, value of other
transactions/activities of Schedule III is not included in the value of exempt supply.
Section 17(4) read with Rule 38 : Optional method for Banks for taking ITC
The provision of Section 17(4) read with Rule 38 are as follow

(a) Registered person shall be a banking company or a financial institution including a NBFC engaged in supplying of
Services by way of accepting deposit , extending loans and advances

(b) The said company shall have the option to avail ITC as
1. proportionately in accordance with the provision of Section 17(2)
2. avail every month an amount equal to 50% of the eligible ITC in that month in FORM GSTR3B and and the balance
ITC to be reversed every month

(c) The option once exercised shall not be withdrawn during the remaining part of the Financial Year

(d) The restricition of 50% ITC would not be applicable on tax paid on supplies made by one registered person to another
registered person having same PAN ( E.g. - Branches of bank in different states)
Blocked Credits i.e. Ineligible Inputs/Capital Goods/Services for ITC [Section 17(5)]

The section 17(5) of CGST Act, 2017 has listed down specific goods and services, in respect of which ITC is
not available, irrespective of their use in business. These are termed as Blocked Credits.
1. Motor vehicles (a) ITC is not allowed on Motor vehicles for transportation of persons with seating capacity < 13 (including
the driver), used for any purpose [other than ones mentioned in (A), (B) and (C)],.

(A) further supply of such motor vehicles (Car Dealer, Car renting company)

(B) transportation of passengers (Taxi – OLA , UBER)

(C) imparting training on driving such motor vehicles

(Motor Driving School)

(b) ITC on motor vehicles for transportation of persons with seating capacity > 13 persons (including the
driver) is allowed.

(c) In the case of a motor vehicle (which is not for transportation of persons) like Truck, dozer, dumper,
digger, crane, fork-lift truck, etc., input tax credit is not blocked provided such vehicle is used for business
purposes for making taxable supplies.
Blocked Credits i.e. Ineligible Inputs/Capital Goods/Services for ITC [Section 17(5)]
1. Motor vehicles Examples: Where ITC is not allowed [ITC is blocked]
1. X purchased one motor car, having seating capacity of 5 passengers, to be used by him for going to
factory.

2. A registered person, purchases a motor vehicle (Seating capacity: 10 passengers) for commutation of
employees from their residence to factory and back.

3. Car purchased by a marketing company for official use of its employees.

Examples: Where ITC is allowed [Exception to Section 17(5)(a)]

1. Mr X purchased motor car for running as taxi.

2. Cars purchased by the company engaged in renting out cars for transportation of passengers.

3. A car dealer has purchased cars for resale.

4. A driving school has purchased cars for use in imparting driving skills.

5. Trucks purchased by a company for transportation of its finished goods.

6. Buses purchased by a company for transportation of employees from their residence to office and back.
Blocked Credits i.e. Ineligible Inputs/Capital Goods/Services for ITC [Section 17(5)]
2. Vessels and (a) ITC is not allowed on Vessels and Aircraft used for any purpose [other than ones mentioned in (A), (B)
Aircraft and (C)],.

(A) further supply of such such vessels or aircraft

(B) transportation of passengers or goods
(C) imparting training on navigating such vessels or aircraft

Examples: Where ITC is not allowed [ITC is blocked]

1. If a manufacturing company purchases an aircraft for official use of its executive officer.

Examples: Where ITC is allowed

1. If aircraft is purchased by an Aviation school providing training on flying aircrafts.

2. Liberty Limited purchases an aircraft for the purpose of transportation of goods manufactured by it.
3. Indian Airline, an operates a fleet of Airbus A 320. It has added 5 aircraft in its fleet. These will be used
for transportation of goods/passengers
Blocked Credits i.e. Ineligible Inputs/Capital Goods/Services for ITC [Section 17(5)]
3. Specific Services (a) ITC is not allowed Services of general insurance, servicing, repair and maintenance in so far as they
relating to Motor relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):
vehicles, Vessels and
Aircraft (b) 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

 in the manufacture of such motor vehicles, vessels or aircraft; or

 in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft
insured by him;

Examples: Where ITC is not allowed [ITC is blocked]

1. If a car is used by the employees of a manufacturing company for official purposes, then ITC on car
is blocked. Now, the ITC on general insurance taken on this car is also not allowed.

Examples: Where ITC is allowed

1. If a truck is purchased by a manufacturing company for transportation of its finished goods, the ITC
on truck is allowed. Simultaneously, ITC on maintenance and repair services availed for this truck
Blocked Credits i.e. Ineligible Inputs/Capital Goods/Services for ITC [Section 17(5)]
4. Specific Supply of Goods or (a) Input tax credit would not be allowed of taxes paid on supplies of goods or services or both for the
services or both mentioned Goods or services or both

 Food and beverages

 Outdoor Catering (b) There are two exception to the above restriction
 Beauty Treatment
 Health Services 1. where an inward supply of such goods or services or both is used by a registered person for
 Cosmetic and plastic surgery making an outward taxable supply of the same category of goods or services or both or as an
 Renting or hiring of motor element of a taxable composite or mixed supply.
vehicles, vessels or aircraft 2. Input tax credit in respect of Goods or services or both shall be available, if it is obligatory for an
referred to in clause (a) or clause employer to provideto its employees under any law for the time being in force
(aa) except when used for the
purposes specified therein Examples: Where ITC is allowed
 Life Insurance and health
Insurance 1. A company has set up a canteen in its factory as a statutory obligation under Factories Act, 1948.
 Membership of a club, health and The company has availed outdoor catering services to run the canteen. The ITC on such outdoor
fitness center catering is allowed.
 Travel benefits extended to
employees on vacation such as 2. Arun, a caterer of Mumbai, has been awarded catering contract in a grand birthday party to be held
leave or home travel concession: at Pune. Arun has given the contract for supply of food articles, to be served in the party, to a local
caterer of Pune (Mr. Bhanu). ITC on such outdoor catering services availed by Arun is allowed.
Blocked Credits i.e. Ineligible Inputs/Capital Goods/Services for ITC [Section 17(5)]
5. Works Contract Services (a) This category includes works contract services when supplied for construction of an
immovable property (other than plant and machinery)

(b) Construction of an immovable property includes following activities

 Re-Construction
 Renovation
 Addition / Alteration
 Repairs
Composition Scheme (a) No ITC is available to the person who has made the payment of tax under composition
scheme

Non – Resident (a) ITC cannot be availed on goods/services received by a non-resident taxable person.
(b) ITC is only available on any goods imported by him.

Free samples and destroyed goods (a) No ITC is available for goods lost, stolen, destroyed, written off or given off as gift or
free samples.
 Reversal of ITC
Rule 42 & Rule 43
Rule 42 & 43 – Reversal of ITC

Why is there a need for Reversal of 1. Where the goods or services or both are used by the registered person
ITC under Rules 42/43  partly for effecting taxable supplies including zero-rated supplies and
 partly for effecting exempt supplies

2. the amount of ITC shall be restricted to the amount of ITC that can be attributable directly or indirectly
to the taxable supplies including zero rated supplies i.e. exports.
Therefore, the ITC directly attributable to exempt and Non-taxable supply shall be reversed if wrongly
taken.

3. Also, ITC directly attributable to non-business or personal purposes shall be reversed if wrongly availed.

4. In case of common credits which are used for both taxable as well as non-taxable/exempt supplies
proportionate ITC amount to the extent of supplies that are non-taxable/used for personal consumption
shall be identified and reversed as per Rules 42 and 43.

Rule 42 Determining common credit of ITC on Inputs and services

Rule 43 Determining common credit of ITC on Capital Goods

Rule 42 – Reversal of ITC on Inputs and services

Formula for determining T = TOTAL ELIGIBLE CREDIT

reversal of proportionate ITC
used both taxable as well as The total ITC on inputs and input services
non-taxable purposes (-)
Amt of ITC on used for Personal Use
(-)
Amt of ITC used for exclusively for effecting exempt supplies
(-)
Amt of ITC which is not available (Block Credit)

S = SPECIFIC CREDIT
(ITC intended to be used exclusively for effecting taxable supplies including zero rated
supplies)

C (COMMON CREDIT ) = T (TOTAL ELIGIBLE CREDIT) – S (SPECIFIC CREDIT)

Rule 42 – Reversal of ITC on Inputs and services

COMMON (ITC)

EXEMPT SUPPLIES TAXABLE SUPPLIES

REVERSAL OF ITC (R1) is the ITC attributable towards exempt supplies from COMMON ITC

R1 = _TOTAL EXEMPT SUPPLIES_ X COMMON ITC

TOTAL TURNOVER

REVERSAL OF ITC (R2) is the ITC attributable towards Non- business purpose shall be equal to 5% of COMMON ITC

R2 = 5% X COMMON ITC
Rule 42 – Reversal of ITC on Inputs and services

CASE STUDY Consider the following situation for the month of January 2023 relating to supplies
made in Maharashtra :

Total ITC available 15,00,000/-

ITC on inputs attributable to supply used for personal – 7500
ITC on inputs to be used exclusively for making exempt supply – 15,000
Blocked credits under Section 17(5) - 77,500
ITC on inputs used exclusively for making taxable supplies – 2,50,000
The aggregate value of exempt supplies made in January’2023 (E) – 3,00,000
Total turnover in Maharashtra - 30,00,000
Rule 42 – Reversal of ITC on Inputs and services
SOLUTION The total ITC on inputs and input services 15,00,000
(-)
Amt of ITC on used for Personal Use 7,500
(-)
Amt of ITC used for exclusively for effecting exempt supplies 15,000
(-)
Amt of ITC which is not available (Block Credit) 77,500

TOTAL ELIGIBLE CREDIT (T) 14,00,000

SPECIFIC CREDIT (S) 2,50,000

COMMON CREDIT (T-S) 11,50,000

TOTAL EXEMPT SUPPLIES 3,00,000

TOTAL SUPPLIES 30,00,000

REVERSAL OF CREDIT (R1)

1,15,000
(TOTAL EXEMPT SUPPLIES / TOTAL TURNOVER X COMMON ITC)
(3,00,000 / 30,00,000 X 11,50,000)

REVERSAL OF CREDIT (R2)

57,500
(5% X COMMON ITC)
(5% X 11,50,000)

BALANCE ITC AVAILABLE (T - R1 -R2) 12,27,500

Rule 43 – Reversal of ITC on Capital Goods

Formula for determining 1. Not Eligible Capital Goods – Identify Capital Goods which are to be used exclusively for
reversal of proportionate ITC exempted supplies. ITC of Capital Goods used exclusively for exempted Goods is not to be
used both taxable as well as taken
non-taxable purposes
2. Specific Capital Goods - Identify Capital Goods which are to be used exclusively for
Taxable supplies. 100% ITC of Capital Goods used exclusively for Taxable supplies is to be
taken.

3. Common Capital Goods - Thereafter the remaining Capital Goods are those which are used
for exempted supplies and Taxable supplies.

4. Steps for credit of ITC on common capital goods

 The ITC in relation to the common capital goods is to be taken and credit to electronic credit
ledger
 Considering useful life of capital goods as 5 years / 60 months
 Reversal of ITC is to be made each month by dividing it by a ratio between exempted
supplies and total supplies

5. The calculation are to be made separately for IGST / CGST / SGST / UTGST
Rule 43 – Reversal of ITC on Capital Goods

Formula for determining 6. For Real Estate (building construction) services, the ratio between exempt supplies and
reversal of proportionate ITC taxable supplies will be calculated on a project basis
used both taxable as well as
non-taxable purposes where:
-Exempt supplies will be the aggregate carpet area of exempt construction project or
apartments sold after construction is over
-Total supplies stands for aggregate carpet area of the apartments in the project
Rule 43 – Reversal of ITC on Capital Goods

Example:

ABC company operating in Maharashtra had availed the following ITC on various capital goods purchased in the month of
June 2023:

Particulars Amount (in Rs)

ITC on Machine A (used exclusively in the supply of exempt goods) 1,50,000
ITC on Machine B (used exclusively in the supply of taxable goods) 9,00,000
ITC on Machine C (used exclusively for non-business purposes) 20,000
ITC on Machine D (used partly in the supply of taxable and exempt goods) 4,50,000

The company had also made the following type of output supplies in Maharashtra in the month of June:

Turnover in relation to exempt supplies: Rs. 20,00,000

Turnover in relation to taxable supplies: Rs. 80,00,000

Calculate the ITC available for the month of June.2023

Rule 43 – Reversal of ITC on Capital Goods

Solution:

1. ITC on machine A and C will not be credited to the electronic credit ledger (1,50,000+20,000 = 1,70,000).

2. ITC on machine B will be credited to the electronic ledger: Rs. 9,00,000

3. ITC on machine D will also be credited to the electronic credit ledger: Rs 450,000

Total common credit (Tc) = 4,50,000

Total monthly common credit (Tm) = Tc ÷ 60

= 7,500

The amount of ITC to be reversed for the month of June, 2023 would be:
= (Exempt supplies ÷ Total Supplies) × Tm
= (20,00,000 ÷ 80,00,000) × 7,500
= 1,875

Thus, the total ITC credited to the electronic ledger for the month of June 2023
= Rs. (900,000 + 450,000 - 1875)
= Rs 13,48,125/-
Availability of Credits in Special
Circumstances - Section 18
Section 18 - Input Tax Credit ( ITC) availability to a taxable person who becomes liable
to pay GST at a later stage (Availability of Credits in Special Circumstances)

The liability to pay GST at a later stage may 1. Turnover exceeds the limit from the prescribed limit for registration (40 L / 20 L
arise due to the following reasons: /10L) / Voluntaary Registration

2. Opts out of Composition scheme

3. Exemption to the Supply of Goods or Service is withdrawn & goods or services

becomes taxable

4. Merger, Amalgamation, Sale of business

5. Sale of Capital Goods

Section 18 - Availability of ITC in Special Circumstances
Section 18(1)(a) A taxable person who has applied for registration within thirty days from the date on which he becomes liable to
registration is entitled to take Credit of input tax on the day immediately preceding the date from which he becomes
liable to pay tax under the provisions of the CGST Act. Example: Mr. R become liable to register ( turnover exceeds
40 Lakhs ) on 02 April 2020 and applied for registration on 20 April 2020 ( within 30 days from 02 April 2020 ) He
is entitled to take Credit of input tax held in stock on 01 April 2020.

Section 18(1)(b) Voluntary Registration: A person who has applied for voluntary registration be entitled to take Credit of input tax, on
the day immediately preceding the date of grant of registration.

Example: Mr. V applied for Voluntary registration on 20 April and granted registration on 18 May 2020. He is
entitled to take Credit of input tax held in stock on 17 May 2020.

Example: Subhash enterprises obtained voluntary registration on 31-8-2018. He had purchased inputs for furtherance
of business invoice dated 14-8-2017. The input tax on the same was ` 30,000. Although Section 16(4) allows to claim
ITC by 20th October 2018 (assuming annual return for the financial year 2017-18 is not yet filed), but if it is read
together with section 18(2), the ITC cannot be claimed beyond 14-8-2018 i.e. one year from the date of invoice.
Section 18 - Availability of ITC in Special Circumstances

Section 18(1)(c) Composition Scheme: Where any registered taxable person ceases to pay tax for composition scheme under section
Rule 40(2) of CGST 10 of the CGST Act, he shall be entitled to take Credit of input tax on the day immediately preceding the date from
Rules which he becomes liable to pay tax as a normal taxpayer. He shall be eligible to take Credit of tax on Capital goods
also. However, Credit on capital goods shall be reduced by 5% for every quarter or part thereof, from the date of
issue of invoice for the capital goods. Example: Mr. C, a Composition dealer, purchased capital goods on 01 April
2019 for Rs 1,00,000 and paid 18000/ as GST. On 02 April 2020, he ceases to pay tax under the composition scheme
and become a normal taxpayer. Credit on Capital goods shall be reduced @ 5% for four quarters (April 2019 to Mar
2020 ), and Credit available on capital goods will be 18000- ( 18000*5%*4)= 14400)
Section 18(1)(d) Exempt Supply becomes Taxable:
Where an exempt supply by a registered taxable person becomes a taxable supply, such person shall be entitled to
take Credit of input tax relatable to such exempt Supply on the day immediately preceding the date from which such
Supply becomes taxable.
He shall also be eligible to take Credit on capital goods exclusively used for such exempt Supply.
Credit on capital goods shall be reduced by 5% for every quarter or part thereof, from the date of issue of invoice for
the capital goods- proviso to section 18(1)(d) of CGST Act.

he Credit of ITC on capital goods can be availed only when a taxable person under composition scheme shifts to a
normal scheme under sec 18(1)(c), and when exempt Supply of goods becomes a taxable supply u/s 18(1)(d). It
cannot be availed when a taxable person applies for fresh registration.
Section 18 - Availability of ITC in Special Circumstances

Section 18(3) Rule Where there is a change in the constitution of a registered person on account of the sale, merger, demerger,
41(1) Rule 41(2) amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities, the said
Rule 41(3) Rule registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit
41(4) ledger to such sold, merged, demerged, amalgamated, leased or transferred business. Procedure: A registered person
shall furnish the details in form GST ITC-02 electronically on the Common Portal along with a request to transfer the
unutilized input tax credit lying in his electronic credit ledger to the transferee. In the case of demerger, the input tax
credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme –
proviso to rule 41(1) of CGST Rules. Value of assets” means the value of the entire assets of the business, whether or
not input tax credit has been availed thereon – Explanation to rule 41(1) of CGST Rules inserted, w.e.f. 29-3-2019.
The transferor shall also submit a copy of a certificate issued by a practicing chartered account or cost accountant
certifying that the sale, merger, demerger, amalgamation, lease or transfer of business has been done with a specific
provision for transfer of liabilities. The transferee shall, on the Common Portal, accept the details so furnished by the
transferor and, upon such acceptance, the unutilized Credit specified in form GST ITC-02 shall be credited to his
electronic credit ledger. The Inputs and Capital goods so transferred shall be duly accounted for by the transferee in
his books of account.
Section 18 - Availability of ITC in Special Circumstances

Section 18(6) Rule ITC on Sale of Capital goods after use In case of sale of capital goods on which input tax credit has been taken, the
40(2) registered person shall pay an amount equal to the input tax credit taken on the said capital goods reduced by @ 5%
per quarter or the tax on the transaction value of such capital goods determined under section 15 of CGST Act,
whichever is higher. Example: Mr. CG purchased a machine on 1-7-2018 for Rs. 10,00,000 on which GST was paid
@ 18%. On 2-10-2019, he sold the machinery for Rs 7,50,000. (a) Asset is utilized for 6 quarters ( July 2018- Sep
2019) (b) GST Paid = 10,00,000@18% = 1,80,000 (c ) ITC on Capital Goods utilized = 1,80,000@5% *6= 54000/-
(d) Amount to be paid towards ITC taken = 1,80,000- 54000 = 1,26,000 Or the tax on the transaction value of such
capital goods= 7,50,000@18% = 1,35,000/= whichever is higher . Thus Rs 1,35,000 shall be added as output tax
liability in form GSTR-1. . If such amount exceeds the tax determined on the transaction value of the capital goods,
the amount shall be added as output tax liability in form GSTR-1 – proviso to rule 44(6) of CGST Rules. However, in
case of 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 of CGST Act – proviso to section 18(6) of CGST Act
Taking input tax credit in
respect of inputs and
capital goods sent
for job work- Section 19
Section 19 Taking ITC in respect of inputs sent for job work

Section 19(1) The principal can take credit on input tax on inputs sent to job worker for job work only if he fulfils the
conditions prescribed in Rule 45.

Section 19(2) Notwithstanding anything contained in Sec 16(2)(b)

Condition for availment of credit –Actual receipt of goods does not require to be fulfilled
The principal can avail credit of the input tax on Inputs even if the inputs are directly sent to a job worker
for job-work without being first brought to his place of business.

Where the inputs sent for job-work • In case of non-receipt of the inputs within the time prescribed, the principal shall issue an invoice for
are not received back by the the same and declare such supplies in his return for that particular month in which the time period of
“principal” after completion of job- one year has expired.
work or otherwise
within 1 YEAR • In case of direct supply, the period of 1 year shall be reckoned from the date the job worker receives
such inputs .
of being sent out
Section 19 Taking ITC in respect of Capital Goods sent for job work

Section 19(1) The principal can take credit of input tax on Capital Goods sent to job worker for job work only if he
fulfils the conditions prescribed in Rule 45.

Section 19(2) Notwithstanding anything contained in Sec 16(2)(b)

Condition for availment of credit –Actual receipt of goods does not require to be fulfilled
The principal can avail credit of the input tax on Capital Goods even if the capital goods are directly sent to
a job worker for job-work without being first brought to his place of business.

Where the inputs sent for job-work • In case of non-receipt of the inputs within the time prescribed, the principal shall issue an invoice for
are not received back by the the same and declare such supplies in his return for that particular month in which the time period of 3
“principal” after completion of job- year has expired.
work or otherwise
within 3 YEAR • In case of direct supply, the period of 3 year shall be reckoned from the date the job worker receives
such inputs .
of being sent out
THANK YOU
For Queries / question
Please free free to contact

Devang Doshi
• Whats app – 9967923276
• Email – devang.doshi@ca-sda.com
The giant leap in taxation history: One umbrella for all

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