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Input Tax Credit

GST
 Input Tax Credit:
 Tax credit means that tax which a supplier reduces form his output liability while paying his tax on output.
Input tax credit means that when a supplier pays the tax on his output, he can deduct the tax he previously
paid on the input he purchased. Here, while paying the tax on his output, he can deduct or take credit for
the tax he paid while purchasing inputs.

 Relevant Definition:
Section Term Definitions
2(59) Input  Any goods other than capital goods
 Used or intended to be used by a supplier
 In the course or furtherance of business:
2(19) Capital Goods  Goods the value of which is capitalized in the books of account
 Of the person claiming the input tax credit and
 Which are used or intended to be used
 In the course or furtherance of business:
2(60) Input Service  Any service used or intended to be used by a supplier
 In the course or furtherance of business:
2(61) Input service Input service distributor means
distributor  An office of the supplier of goods or services or both
 Which receives tax invoices issued under section 31
 Towards the receipt of input service and
 Issues a prescribed document for the purposes of distributing the credit of
central tax, State tax, integrated tax or Union territory tax paid on the said
services to a supplier of taxable goods or services or both
 Having the same Permanent Account Number as that of the said office:

In other words, it is basically an office to receive tax invoices towards receipt

of input services and further distribute the credit to supplier units (having the
same PAN) proportionately.
2(62) Input Tax Input tax means
 The Central tax (CGST), State tax (SGST), Integrated tax (IGST) or Union
territory tax (UTGST) charged on supply of goods or services or both
made to a registered person.
It also include
 Tax paid or reverse charge basis and
 Integrated tax goods and services tax charged on import of goods

It does not include

 Tax paid under composition levy.
2(92) Quarter Quarter shall mean a period comprising three consecutive calendar months,
ending on the last day of March, June, September and December of a calendar
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year

 Eligibility and conditions for taking input tax credit [Sec. 16]
 Subject to condition and restriction specified in Section 49 (Section 49 prescribes provisions relating to
payment of tax, interest, penalty & other amounts)
 Every Registered person shall be entitled to take credit of tax paid on inward supplies of goods and/or
services
 Used/ intended to be used in the course or furtherance of business
 if the all 4 conditions are fulfilled as below:
1. He has valid tax invoice/debit note/prescribed tax paying document
2. He has received goods and/or services
3. Tax on such supply has been paid either in cash or Utilization of ITC
4. He has furnished the return u/s 39 (i.e. GSTR-3)

Manner of use input tax credit as per section 49

Inward Outward Supply Remarks
Supply IGST CGST SGST
IGST Allowed Allowed Allowed 1st IGST next CGST and next SGST in that order
CGST Allowed Allowed Not Allowed 1st CGST next IGST in that order
SGST Allowed Not Allowed Allowed 1st SGST and next IGST in that order

Important Notes:
1. ITC can be availed if he is in possession of Invoice /debit note/prescribed taxpaying documents
issued by a supplier registered under this Act,
Under Rule 36(1) of CGST Rules following taxpaying documents has been prescribed)
(a) Invoice issued by a supplier of goods and/or services
(b) Invoice issued by recipient (receiving goods and/or services from unregistered supplier) along with
proof of payment of tax (in case of reverse charge)
(c) A debit note issued by supplier
(d) Bill of entry or similar document prescribed under Customs Act
(e) Revised invoice
(f) Document issued by Input Service Distributor

2. Input Tax Credit only if invoice complete in all respects

Input tax credit shall be availed by a registered person only if all the applicable particulars as prescribed in
Invoice Rules are contained in the said document, and the relevant information, as contained in the said
document, is furnished in form GSTR-2 by such person - rule 36(2) CGST Rules.

3. The person taking the ITC must have received the goods and / or services here “Bill to Ship to”
Model also included.
Goods delivered to third person on the direction of the registered person deemed to be received by the
registered person ⇒ ITC available to registered person

4. When goods are received in lots or installments:

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When goods are received in lots or installments, ITC can be availed only upon receipt of the last lot or
installment

5. On tax component of cost of capital goods, if depreciation has been claimed on the tax component
ITC cannot be availed on the tax component of cost of capital goods, if depreciation has been claimed on
the tax component in Income Tax return.

6. Reversal of input tax credit if payment not made to supplier within 180 days [Second proviso to
section 16(2) read with rule 37 of CGST Rules]
 The registered person must pay the supplier, the value of the goods and/or services along with the tax
within 180 days from the date of issue of invoice. This condition of payment of value of supply plus
tax within 180 days does not apply in the Supplies on which tax is payable under reverse charge
 If value of the goods or/and Services along with the tax of goods and /or services is not paid within
180 days of the issuance of invoice, the details of such supplies and corresponding credits thereon
must be furnished in the GSTR 2 of the month immediately following such 180 days.
 Such credits availed by the registered person would be added to his output tax liability of the month in
which the details are furnished, with interest.
 Interest will be paid @ 18% from the date of availing credit till the date when the payment is made to
the supplier.
 However, once the payment is made, the recipient will be entitled to avail the credit again without any
time limit.
 In case part payment has been made, proportionate credit would be allowed. if (say) 90% amount of
supplier's invoice (including tax amount) is paid, only 10% tax amounts should be reversed.

7. Time limit for availing ITC

 A taxable person shall not be entitled to take input tax credit in respect of any supply of goods and/or
services to him after the expiry of one year from the date of issue of tax invoice relating to such supply
- section 18(2) of CGST Act.
 Further, ITC on invoices pertaining to a financial year or debit notes relating to invoices pertaining to a
financial year can be availed any time till the due date of filing of the return for the month of
September of the succeeding financial year or the date of filing of the relevant annual return,
whichever is earlier.
 The time limit u/s 16(4) does not apply to claim for re-availing of credit that had been reversed earlier

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Apportionment of credit and blocked credits [Sec. 17]

A. Blocked Credit [Section 17(5)]:- Input tax credit shall not be available in respect of the following, as per
section 17(5) of GST Act.
1. Motor vehicles Motor vehicles and other conveyances are not eligible for ITC except
and when they are
other conveyances used––
(i) for making the following taxable supplies, namely—
(A) further supply of such vehicles or conveyances
(B) transportation of passengers
(C) imparting training on driving, flying, navigating such vehicles or
conveyances
(ii) for transportation of goods

2. Goods and (i) Following supply of goods and services or both are not eligible for
services for food, input tax credit
beauty treatment, (a) Food and beverages,
health mainly for (b) outdoor catering,
personal (c) beauty treatment,
consumption (d) health services,
(e) cosmetic and plastic surgery
except where an inward supply of goods or services or both of a
particular category is used by a registered person
 for making an outward taxable supply of the same category
of goods or services or both or
 as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre,

(iii) rent-a-cab, life insurance and health insurance except where

(a) the Government notifies the services which are obligatory for an
employer to provide to its employees under any law for the time
being in force or
(b) such inward supply of goods or services or both of a particular
category is used by a registered person for making an outward
taxable supply of the same category of
goods or services or both or as part of a taxable composite or
mixed supply;

(iv) travel benefits extended to employees on vacation such as leave or

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home travel concession.

3. Works contract Works contract services for construction of an immovable property is not
services eligible,
EXCEPT WHEN
 It is input service for further supply of works contract service
 Immovable property is plant and machinery
4. Construction of an Inward supplies received by a taxable person for construction of an
Immovable immovable property on his own account is not eligible, even when such
property supplies are used in the course or furtherance of business
EXCEPT WHEN
 Construction of Plant & Machinery
 Construction of immovable property for Others

Meaning of construction and plant and machinery

“Construction”, both in this clause and the previous one, includes
reconstruction, renovation, additions or alterations or repairs, to the extent
of capitalization, to the said immovable property;

“Plant and machinery” means apparatus, equipment, and machinery

fixed to earth by foundation or structural supports but excludes land,
building or other civil structures, telecommunication towers, and pipelines
laid outside the factory premises.

5. GST paid under Goods or services or both on which tax has been paid under section 10
composition scheme (composition scheme) are not eligible.

6. Goods or services Goods or services or both received by a non-resident taxable person are
or both received by not eligible for input tax credit, except on goods imported by him
a non-resident
taxable person
7. Goods and services Goods or services or both used for personal consumption are not eligible
used for personal for input tax credit
consumption
8. Lost, stolen or Goods lost, stolen, destroyed, written off or disposed of by way of gift or
destroyed goods free samples are not eligible for input tax credit
and free samples
9. GST paid after Any tax paid under sections 74, 129 and 130 of CGST Act are not eligible
detection of fraud for input tax credit. This covers GST paid after detection of fraud or
or suppression or suppression or goods removed in contravention of GST Act
goods removed in
contravention of
GST Act

B. Apportionment of ITC

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Partly Business purpose Where the goods or services or both are used by the registered taxable
& Partly other purpose person partly for business purpose and partly for non business purposes,
[Sec. 17(1)] ITC attributable only to business purposes can be taken by the registered
person [Sec. 17(1) of CGST Act]
Partly Taxable Supply & Where the goods and/or services are used by the registered person partly
Partly Exempt Supply for making taxable supplies including zero rated supplies under CGST or
[Sec. 17(2)] IGST Act and partly for exempt supplies, ITC attributable to taxable
supplies and zero rated supplies can be taken by the registered person –
[Sec. 17(2) of CGST Act]
Meaning of exempt The value of Exempt supplies shall include
supply for the purpose supplies charged to tax under reverse charge,
Sec. 17(2) [Sec. 17(3)]  transactions in securities,
 sale of land and sale of building when entire consideration is received
after completion certificate issued by the competent authority.

Manner of determination In many situations, the amount of input tax involved in exempt /non
of input tax credit in business use is not easily discernible, as common goods and/or services
respect of inputs or input are used for (i) making taxable supplies including zero rated supplies and
services or capital goods exempt supplies and (ii) business and non-business purposes. To
and reversal thereof. Overcome these situation Rule 42 & Rule 43 has been provided

 Manner of determination of input tax credit in respect of inputs or input services and reversal thereof
[Rule 42 of the CGST Rules, 2017]:

STEP 1: PARTICULARS Value in Rs. CGST Rules, 2017

Total ITC on inputs and input services “T” XXXX As per rule 42(1)(a)
Less: ITC on supplies exclusively used for XXXX As per rule 42(1)(b)
the purpose other than business (“T1”)
Less: ITC on supplies exclusively used for XXXX As per rule 42(1)(c)
providing exempted supplies (“T2”)
Less: ITC not available u/s 17(5) of the XXXX As per rule 42(1)(d)
CGST Act, 2017 (“T3”)
Input tax credit which are used to supply XXXX As per rule 42(1)(e)
taxable as well as exempted output supplies
“C1”
Less: ITC on supplies used exclusively for XXXX As per rule 42(1)(f)
taxable supply including Zero rated supply
(i.e. ITC on normal supplies) (“T4”)
Common ITC, which are used to supply XXXX As per rule 42(1)(h)
taxable as well as exempted output supplies
(denoted as “C2”)
STEP 2: Amount of reversal of input tax credit attributable to inputs partly used for Exempt supplies
D1 =E/F x C2
E = Value of ES during tax period
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F = Total turnover during tax period

If no turnover during the tax period/values not available, values for last period may be used.

STEP 3: Credit attributable to non business purpose if common Input Supplies used partly for
business + non -business purposes
D2 = 5% x C2
STEP 4: Both these ITC amounts as Calculated in Step-2 & Step 3 have to be reversed in the GSTR 2
filed by the dealer and ITC to be reversed has to be added to output liability.
Remaining common credit ,“C3” = C2 – (D1 + D2) will be attributable to business & taxable
supplies including ZRS

Note:-
 A per Rule 42(1)(m) of the CGST Rules, 2017, (D1 + D2) to be added to the output tax liability on
monthly basis and the registered person should pay the amount. Same will be reported in table number 11
of GSTR-2
 C3 will be computed separately for ITC of CGST, SGST/ UTGST and IGST.

 Adjustment at the yearend [Rule 42(2)]:

 The input tax credit determined under sub-rule (1) shall be calculated finally for the financial year before
the due date for furnishing of the return for the month of September following the end of the financial year
to which such credit relates, in the manner specified in the said sub-rule and Compute Σ (D1 + D2) for the
whole financial year, by taking exempted turnover and aggregate turnover for the whole financial year,
before the due date for filing the return for September in the following financial year.

If Σ (D1 + D2) > the amount already added to The differential amount has to be added to the
output tax liability every month output tax liability of any month till September in
the following financial year and interest @ rate
18% should be paid on such differential amount
from 1st April of succeeding year till the date of
payment as per rule 42(2)(a)

If the amount added to output tax liability The additional amount paid has to be claimed
every month > Σ (D1 + D2) back as credit in the return of the month not later
than September in the next financial year as per
rule rule 42(2)(b)

Point To Be Noted:-
 Exempt supplies include reverse charge supplies, transactions in securities, sale of land and sale of
building when entire consideration is received after CC.
 Aggregate value of exempt supplies and total turnover exclude the CED, SED & VAT
 T1, T2, T3 and T4 will be determined and declared by the registered person at the invoice level in GSTR2.

Practical Question:

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Q.1 Nakoda Limited is a registered taxpayer engaged who supplies both taxable and exempted suppliers. It has the
following data on records:
Taxable Turnover is Rs. 8.0 Crore
Exempted Turnover is Rs. 2.0 Crore
Total available Credit is Rs. 10 Lacs
Input credit attributable to exclusively Non Business Purpose = Rs. 50,000/-
Input Credit attributable to exclusively exempted business purpose = Rs. 1,00,000/-
Input Credit attributable to exclusively for blocked credit = Rs. 5,00,000/-
Input Credit attributable to exclusively for Business Purpose = Rs. 5,00,000/-
Compute the quantum of ITC available to Nakoda Limited and amount to be credited on Electronic Cash
Ledger.

 Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain
case [Rule 43 of the CGST Rules, 2017]:
Rule 43 of the CGST Rules provides the methodology for apportionment of ITC on capital goods and reversal
of ineligible credit as follows:
ITC on capital goods used for the supply of exempt supplies and non-business purposes will also be reversed.
(a) Capital Goods used only for Personal Use or for Exempted Sales Not Eligible
Identify input tax on capital goods used/ intended to be used exclusively for non-
business purposes or making exempt supplies and declare the same in GSTR 2. Such
amount will not be credited to Electronic Credit Ledger.

(b) Capital Goods used only for taxable sales including ZRS. Fully Eligible
Identify input tax on capital goods used/ intended to be used exclusively for making
taxable supplies including zero rated supplies and declare the same in GSTR 2. Such
amount will be credited to Electronic Credit Leger.

(c) Common use for partly personal/ exempted and partly Taxable sales
Identify input tax on capital goods not covered under (i) and (ii) above (i.e., the capital
goods which are used/intended to be used commonly for making taxable as well as
exempt supplies & business & non business purposes] and denote the same as ‘A’. Such
amount will be credited to Electronic Credit Ledger
The useful life of such capital goods will be taken as 5 years from the date of invoice.
Adjustment due to Inter change
 Change from exclusive use for non-business purpose/exempt supplies to common
use: Where capital goods which were initially covered under (i) above get
subsequently covered under clause (iii), compute ‘A’ by reducing ITC @ 5% per
quarter or part thereof. Such reduced amount will be credited to Electronic Credit
Leger Add together the amounts of ‘A’ credited to Electronic Credit Ledger to arrive
at common credit ‘Tc’.

 Change from exclusive use for taxable including zero rated supplies to common use:
Where capital goods which were initially covered under (ii) above get subsequently

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covered under clause (iii), compute ‘A’ by reducing ITC @ 5% per quarter or part
thereof and add such value to Tc.
(d) Determine common credit during the useful life of capital goods for a tax period as Tm= Tc/60
under and denote the same as ‘Tm’:

(e) Determine common credit at the beginning of a tax period for all capital goods Tr=Tm
whose useful life remains during the tax period as under: for such capital
goods

(f) Apportion common credit attributable to exempt supplies as under: Te =

Where (E ÷ F) x
E = Aggregate value of exempt supplies made during the tax period Tr
F = Total turnover during the tax period
(g) Restrict ineligible credit
Add Te to the output tax liability along with applicable interest during every tax period
of the useful life of the capital goods concerned.
Point to be noted
 If the registered person does not have any turnover during the said tax period, or the above information is
not available, the values for the last tax period may be used.
 Aggregate value of exempt supplies and total turnover excludes the central excise duty, State excise duty
and VAT.
 Exempt supplies include supplies charged to tax under reverse charge, transactions in securities, sale of
land and sale of building when entire consideration is received after completion certificate issued by the
competent authority.
 Amount of Te has to be computed separately for CGST, SGST/UTGST and IGST.
 The value of exempt supply in respect of land and building is the value adopted for paying stamp duty and
for security is 1% of the sale value of such security

 Claim of Credit by a Banking Company or a Financial Institution [Section 17(4) read with rule 38]
1. A banking company or a financial institution including a nonbanking financial company, engaged in
supplying services by way of accepting deposits, extending loans or advances shall have the option to
either
A) comply with the provisions of section 17(2) of CGST Act, (i.e. Avail Proportionate ITC) or
B) avail of, every month, an amount equal to 50% of the eligible input tax credit on inputs, capital goods
and input services in that month and the remaining ITC shall lapse:

2. The methodology is summarised below,

Identify,
The total tax on purchase of goods & services xxx
Reduce the total tax credit by following
Ineligible credit as per Section 17 (5) (xxx)
ITC on Non Business Purpose (xxx)
Balance xxx
50% of balance credit will eligible to Banking & Financial Institute

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3. The option once exercised cannot be changed during the remaining part of the financial year. (1 st Provisio)

4. The restriction of availing 50% ITC shall not apply to the tax paid on supplies procured from another
registration within the same entity i.e., 100% credit of such tax can be availed. (2nd Provisio)

 Credit in Special Circumstances [Sec. 18]:

Entitlement of ITC at the time of registration/voluntary registration or switching to regular tax paying status or
coming into tax-paying status [Sub-sections (1) and (2) of section 18 read with rule 40 of CGST Rules]

When a Person apply for registration Persons eligible to take credit:- Person who has applied for
under GST, on becoming liable to registration within 30 days from the date on which he becomes
register [Sec. 18(1)(a)] liable to registration and has been granted such registration

Goods eligible for ITC:- Inputs held in stock and inputs

contained in semi-finished or finished goods held in stock other
than capital goods as on the day immedicately preceding the date
from which he becomes liable to pay GST.

Restriction/conditions:- ITC to be availed within 1 year from

the date of the issue of the tax invoice by the supplier.

When a person voluntarily apply for Persons eligible to take credit:- Person who is not required to
registration [Sec. 18(1)(b)] register, but obtains voluntary registration

Goods eligible for ITC:- Inputs held in stock and inputs

contained in semi-finished or finished goods held in stock other
than capital goods as on the day immediately preceding the date
of grant of registration

Restriction/conditions:- ITC to be availed within 1 year from

the date of the issue of the tax invoice by the supplier.

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When A person leave the composition Persons eligible to take credit:- Registered person who ceases
scheme and become a regular dealer to pay composition tax and switches to regular scheme
[Sec. 18(1)(c)]
Goods eligible for ITC:- Inputs held in stock and inputs
contained in semi finished or finished goods held in stock and
capital goods as on the day immediately preceding the date from
which he becomes liable to pay tax under regular scheme

Restriction/conditions:-
 ITC on capital goods will be reduced by 5% per quarter of a
year or part of the year from the date of invoice.
 ITC claimed shall be verified with the corresponding details
furnished by the corresponding supplier.
 ITC to be availed within 1 year from the date of the issue of
the tax invoice by the supplier

When exempted goods or services Persons eligible to take credit:- Registered person whose
become taxable [Sec. 18(1)(d)] exempt supplies become taxable supplies

Goods eligible for ITC:- Inputs held in stock and inputs

contained in semi-finished or finished goods held in stock
relatable to such exempt supply and capital goods exclusively
used for such exempt supply as on the day immediately
preceding the date from which such supply becomes taxable

Restriction/conditions:-
 ITC on capital goods will be reduced by 5% per quarter of a
year or part of the year from the date of invoice.
 ITC claimed shall be verified with the corresponding details
furnished by the corresponding supplier.
 ITC to be availed within 1 year from the date of the issue of
the tax invoice by the supplier.

Conditions for availing 1. Filing of electronic declaration in form ITC-01 giving

above credit (Rule-40) invoice wise details of inputs held in stock/contained in semi-
finished goods and finished goods held in stock and capital
goods on the days immediately preceding the day on which
credit becomes eligible.
2. Declaration has to be filed within 30 days from becoming
eligible to avail credit.
3. Details in (i) above to be certified by a CA/ Cost Accountant
if aggregate claim of CGST, SGST/ IGST credit is more than
Rs. 2,00,000.
4. Such credits are subject to verification of details furnished by

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the supplier in GSTR– 1 or GSTR – 4 on the common portal.

 Reversal of ITC on switching to composition levy or exit from tax-paying status [Sec. 18(4) read with
rule 44 of CGST Rules

When a regular dealer who has  When a regular dealer (who has availed ITC) switches to the
availed ITC switches to the composition scheme,
composition scheme  the person must pay back the ITC availed on inputs in stock,
inputs in semi finished state, finished goods in stock and
capital goods (5% per quarter or part thereof from the
date of invoice)
 by way of debit in the electronic credit ledger or electronic
cash ledger
 on the day before the date of switching to the composition
scheme.

When taxable goods and/or services  When taxable goods and/or services supplied by a person are
become exempt notified as exempt,
 the person must pay back the ITC availed on inputs in stock,
inputs in semi finished or finished goods in stock and capital
goods (reduced by the prescribed percentage points)
 by way of debit in the electronic credit ledger or electronic
cash ledger
 on the day before the date of exemption

Cancellation of Registration Every registered person whose registration is cancelled shall

pay an amount equivalent to the ITC
 in respect of inputs held in stock on the day immediately
preceding the date of such cancellation or the output tax
payable on such goods, whichever is higher.
 taken on capital goods or plant and machinery, reduced by
5% or part thereof or the tax on the transaction value of such
capital goods or plant and machinery under section 15,
whichever is higher.

Manner of reversal of credit on (i) Inputs ⇒ ITC on inputs will be reversed proportionately on
inputs and capital goods & other the basis of corresponding invoices on which credit had been
conditions [Rule 44] availed on such inputs. If invoices are not available, the ITC to
be reversed will be based on the prevailing market price of such
goods on the date of switch over/exemption. The details
furnished on the basis of prevailing market value will be duly
certified by a practicing Chartered Accountant/ Cost Accountant.

(ii) Capital goods ⇒ ITC involved in the remaining useful life

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(in months) of the capital goods will be reversed on pro-rata

basis, taking the useful life as 5 years.
E.g. Capital goods have been in use for 4 years, 6 month and 15
days.
The useful remaining life in months = 5 months ignoring a part
of the month.
ITC taken on such capital goods = C
ITC attributable to remaining useful life = C x 5/60

(iii) ITC to be reversed will be calculated separately for ITC of

CGST, SGST/UTGST and IGST.

(iv) Reversal amount will be added to output tax liability of the

registered person.

(v) Electronic credit/cash ledger will be debited with such

amount. Balance ITC if any will lapse.

 Removal of Capital Goods after use on which ITC has been taken [Section 18(6) read with rule 40(2) &
rule 44(6) of CGST Rules]
 If capital goods or plant and machinery on which ITC has been taken are supplied outward by the
registered person, he must pay an amount that is the higher of the following:
ITC taken on such goods reduced by 5% per quarter of a year or part thereof from the date of issue
of invoice for such goods (i.e., ITC pertaining to remaining useful life of the capital goods),
or
tax on transaction value
 ITC pertaining to remaining useful life of the capital goods will be computed separately for ITC of CGST,
SGST/UTGST and IGST.
 Where the amount so determined exceeds the tax payable on the transaction value of the capital goods,
such amount will have to be paid and thus, will be added to the output tax liability.
 If refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay
tax on the transaction value.

 Transfer of ITC on account of change in constitution of registered person [Section 18(3) read with rule
41 of CGST Rules]
 In case of sale, merger, amalgamation, lease or transfer of business, unutilised ITC can be transferred to
the new entity if there is a specific provision for transfer of liabilities to the new entity. The inputs and
capital goods so transferred shall be duly accounted for by the transferee in his books of accounts.
 In case of demerger, ITC will be apportioned in the ratio of value of assets of new unit as per the demerger
scheme.

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 Details of change in constitution will have to be furnished on common portal along with request to transfer
unutilised ITC. CA/Cost Accountant certificate will have to be submitted certifying that change in
constitution has been done with specific provision for transfer of liabilities.

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