PES UNIVERSITY

GST Compliance and Customs

Unit 1: Mechanism of Input Tax Credit
Introduction
In earlier indirect tax regime, the credit mechanism for indirect taxes levied by the Union
Government, (central excise duty and service tax) was governed by the CENVAT Credit Rules,
2004; and the credit mechanism for state- level VAT on sale of goods was governed by the
States under their respective VAT laws. The VAT legislations allowed ITC of VAT on inputs
and capital goods in transactions within the State, but not on inputs and capital goods coming
in the State from outside the State, on which central sales tax was paid. CENVAT Credit Rules,
2004 allowed availing and utilizing credit of duty/tax paid on both goods (capital goods and
inputs) and services by the manufacturers and the service providers across the country.
Meaning and Definition
Input means any goods other than capital goods used or intended to be used by a supplier in
the course or furtherance of business [Section 2(59)].
Input service means any service used or intended to be used by a supplier in the course or
furtherance of business [Section 2(60)].
Input tax in relation to a registered person, means the central tax, State tax, integrated tax or
Union territory tax charged on any supply of goods or services or both made to him and
includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of
section 9;
(c) the tax payable under the provisions of sub-section (3) and (4) of
section 5 of the IGST Act;
(d) the tax payable under the provisions of sub-section (3) and sub-
section (4) of section 9 of the respective State Goods and Services
Tax Act; or
(e) the tax payable under the provisions of sub-section (3) and sub-
section (4) of section 7 of the Union Territory Goods and Services
Tax Act, but does not include the tax paid under the composition
levy [Section 2(62)].
Input tax credit means the credit of input tax [Section 2(63)].
Inward supply in relation to a person, shall mean receipt of goods or services or both whether
by purchase, acquisition or any other means with or without consideration [Section 2(67)].
Taxable supply means a supply of goods or services or both which is leviable to tax under
CGST Act [Section 2(108)].
Conditions for taxing input tax credit: Section 16

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 or intended to be
used in course of furtherance of business and the said amount shall be credited to the electronic
credit ledger of such person.
The analysis of above statutory provision reveals the following
1. Registered Person: As per Section 16(1), Input tax credit is available only to a registered
person. When a registered person is supplied with goods or services or both, on which tax has
been charged, he is allowed to take credit of the input tax paid. This is subject to the provisions
relating to use of ITC under section 49 and the conditions & restrictions in the rules. This
means, if a person is unregistered he will not be eligible to claim Input tax credit.
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. Such person cannot claim ITC in respect of inward
supplies made by him. In-fact, the tax paid under Composition levy does not fall within the
definition of Input tax.
2. In the course of or in furtherance of business: The goods/services must be used or intend-
ed to be used in the course of or in furtherance of his business. However, no such credit is
available in respect of inputs used for outward supply of exempted goods or services.
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. The
method of utilization of ITC on account of IGST, CGST, SGST/UTGST has been given in
different clause of section 49(5) of CGST Act. I,e.
- ITC of IGST – it shall be utilised towards payment of IGST on outward supply. Then
the remaining if any, may be utilised towards the payment of CGST and balance if any
to SGST/UTGST.
 - ITC of CGST – it shall be utilised towards payment of CGST on outward supply. Then
the remaining if any, may be utilised towards the payment of IGST
- ITC of SGST – it shall be utilised towards payment of SGST on outward supply. Then
the remaining if any, may be utilised towards the payment of IGST
- ITC of UGST – it shall be utilised towards payment of UGST on outward supply. Then
the remaining if any, may be utilised towards the payment of IGST
Rules under CGST R ules, 2017: the condition and restrictions have been specified in
chapter V of CGST Rules, 2017 (Rule 36 to Rule 45).
Conditions for Taking ITC [Section 16(2)]
The registered person will be entitled to ITC on a supply only if all the following four
conditions are fulfilled:
(a) Possession of Tax Invoice or Debit Note
(b) Receipt of Goods and Services
(c) Payment of tax to the Government
(d) Filing of Valid Return
Possession of taxpaying document [Section 16(2) (a) read with rule 36 of the CGST Rules]
ITC can be availed on the basis of any of the following documents:
(i) Invoice issued by a supplier of goods and/or services
(ii) Invoice issued by recipient (receiving goods and/or services from unregistered supplier)
along with proof of payment of tax (in case of reverse charge)
(iii) A debit note issued by supplier
(iv) Bill of entry or similar document prescribed under Customs Act
(v) Revised invoice
(vi) Document issued by Input Service Distributor

Receipt of the Goods and / or Services [Section 16(2)(b)]

The person taking the ITC must have received the goods and / or services.
"Bill to Ship to" Model also included: Under this model, the goods are delivered to a third party
on the direction of the registered person who purchases the goods from the supplier. Receipt of
goods u/s 16(2)(b) includes delivery to another person on the direction of the registered person
by way of transfer of documents of title to goods or otherwise either before or during the
movement of goods. It would be deemed that the registered person has received the goods in
such scenario. So, ITC will be available to the registered person on whose order the goods are
delivered to third person.
Tax Leviable on Supply Actually Paid to Government [Section 16(2) (c)]
Tax should actually have been paid, by cash or through utilization of ITC, on the goods and/or
services for which ITC is being taken. However, provisional ITC can be taken initially, prior
to matching in the common portal, and used for payment of self-assessed tax on outward
supply.
As per section 16(2)(c), the third essential condition is that the tax should have actually
been paid to the government on the goods or services for which ITC is being taken. This
payment can be done by the supplier either by: -
(a) Making the payment through cash or
(b) through utilization of ITC.
However, when the recipient claims ITC, it is provisionally allowed to be utilized for making
the payment of self-assessed tax on outward supply, before matching in the common portal. It
is later on verified after filing of GSTR 3.
(d) Filing of valid Return:

As per Section 16(2)(a), the fourth essential condition is that the registered person should have
furnished the return under section 39.

The return has to be filed before 15th of the month succeeding the month in which the supplies
were received. This return must be furnished in Form GSTR-3 and must contain all the details
of inward supplies.
Goods received in lots: ITC available only on receipt of last lot [First proviso to section
16(2)]
In case the goods covered under an invoice are not received in a single consignment but are
received in lots / instalments, the ITC can be taken only upon receipt of the last lot / instalment.
Depreciation Claimed on Tax Component, ITC Not Allowed [Section 16(3)]
If the person taking the ITC on capital goods and plant and machinery has claimed depreciation
on the tax component of the cost of the said items under the Income-tax Act 1961, the ITC on
the said tax component shall not be allowed. Thus, in respect of the tax paid on such items,
dual benefit cannot be claimed under Income-tax Act, 1961 and GST laws simultaneously. In
other words, either depreciation on the tax component can be claimed under Income Tax Act
or ITC of such tax paid can be availed under GST laws.
Time Limit for Availing ITC: Due Date of Filing of Return for the Month of September
of Succeeding Financial Year or Date of Filing of Annual Return, Whichever is Earlier
[Section 16(4)]
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.
Time Limit for Availing ITC: Due Date of Filing of Return for the Month of September
of Succeeding Financial Year or Date of Filing of Annual Return, Whichever is Earlier
[Section 16(4)]
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.
Payment for the Invoice to be Made 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. In the event of failure to do so, 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.
capital goods
Capital goods are assets such as buildings, machinery, equipment, vehicles and tools that an
organization uses to produce goods or services. For example, a blast furnace used in the iron
and steel industry is a capital asset for the steel manufacturer.

credit on capital goods

When you purchase anything, you are required to pay GST on it. Later, you can claim input tax
credit on the GST paid on your purchases. Similarly, when you are purchasing any machinery
for your factory, you will pay the applicable GST rate. This GST paid can be claimed as credit
in the same way as inputs. However, if you claim depreciation on the GST paid while
purchasing the capital asset, you cannot claim input tax credit.

Types of ITC for capital goods

Capital goods used only for personal use or for exempted sales
No ITC is available for personal purchases or for capital goods used in exempted sales. This
will be indicated in GSTR-3B and shall not be credited to the electronic credit ledger.

Example 1: Personal purchases

Ms. Anita has purchased a fridge. Since this is not required for her business, i.e., a purely
personal purchase, she will not be able to claim any ITC on the GST paid for the fridge.

Example 2: Capital goods used for exempted sales

Mr. Avinash has purchased a small flour mill in his grocery shop to grind wheat grains to flour.
Since he is producing unbranded flour it is exempted from GST. As it is an exempted sales, he
cannot claim any ITC on the GST paid for the mill.

Capital goods used for normal sales

XYZ has purchased machinery to manufacture shoes. Since, shoes are normal taxable supplies,
the GST included paid while purchasing machinery will be completely available as ITC. This
shall be indicated in GSTR-3B and shall be credited to the electronic credit ledger.

Common credit for partly personal/ exempted and partly normal sales
The ITC paid for the capital goods will be credited to electronic credit ledger
Useful life of such capital asset will be taken as 5 years from the date of purchase
Now the total amount of input tax credited to electronic credit ledger for the whole useful life
will be distributed over the useful life
The useful life will be taken as 5 years. If you pay GST on a monthly basis then you will use
the following formula:
GST Section 17
ITC (Input Tax Credit) Apportionment and Blocking of Ineligible GST Credits are covered in
Section 17 of the CGST Act, 2017. GST was implemented to prevent cascading taxes and to
ensure a consistent flow of input tax credits with the complete supply chain. The primary and
foremost strength of the GST law is the input tax credits mechanism. The value of the GST as
a value-added tax is greatly increased owing to the ITC.

GST Section 17- ITC Credit Apportionment and Blocking of Ineligible Tax Credits
1. If the registered person uses both the goods or services partly for any business’s purpose
or any other intent, the credit amount shall be controlled to the extent of the income tax
that it is referable to for the purposes of his business.
2. If the registered person uses the goods or services in conjunction with both making
taxable (including zero-rated) supplies under this Act or the Integrated Goods and
Services Tax Act and making exempt supplies under the same Acts, the amount of the
credit is controlled to the extent of the input tax that is referable to the taxable (including
zero-rated) supplies.
3. The value of an exempt supply under subsection (2) shall be accordingly. And shall also
include supplies where the person is accountable for the tax on the basis of reverse
charges, transactions in securities, the sale of land, and, subject to clause (b) of
paragraph 5 of schedule II, the sale of a building. [Explanation: For this subsection, the
term “value of exempt supply” shall not include the value of any activities or
transactions as mentioned in Schedule III, except those listed in said Schedule’s
paragraph 5].
4. A banking company or financial institution, including a non-banking financial
company, that provides services by accepting deposits, extending loans, or making
advances may choose to comply with subsection (2) or avail of a monthly credit equal
to 50% of the eligible input tax credit on inputs, capital goods, and input services, with
the remaining credit expiring: As long as the option is kept in effect for the remainder
of the fiscal year after it has been exercised: Additionally, the tax paid on supplies made by
one registered person to another registered person who has the same Permanent Account
Number is exempted by 50%.
5. Despite anything stated in Section 16 Subsection 1 and Section 18 Subsection 1, the
following are exempt from the availability of input tax credits:
(a) Motor vehicle for transportation of persons with the approved seating capacity of
not more than thirteen persons, including the driver, unless they are used to make one
of the following taxable supplies, namely:
(A) Further supply of such motor vehicles
(B) Passenger transportation
(C) Imparting driving instruction in such motor vehicles
(aa) Vessels and aircraft except when they are used:
(i) For making any of the following taxable supplies, namely:
(A) Further supply of such vessels or aircraft
(B) Transportation of passengers
(C) Imparting training on operating such vessels
(D) Imparting training on using such aircraft
(ii) For transportation of goods; (ab) general insurance, servicing, repair, and
maintenance services insofar as they relate to motor vehicles, vessels, or aircraft
mentioned in clause (a) or clause (aa) are used with the intention specified therein; (ii)
when received by a taxable person who is (I) engaged in producing such motor vehicles,
boats, or aircraft; or (II) engaged in providing general insurance services for such motor
vehicles, vessels, or aircraft insured by him; 38.
(b) [The supply of the aforementioned commodities, services, or both]
(i) Food and beverages, outdoor catering, cosmetic and plastic surgery, health services,
beauty treatments, leasing, renting, or hiring of motor vehicles, vessels, or aircraft
referred to in clauses (a) or (aa), unless used for the purposes specified therein, life
insurance, and health insurance: Provided that the input tax credit in respect of such
goods or services, or both, is used by a registered person for making an outward taxable
supply of the same category.
(ii) Participation in a club or fitness facility
(iii) Travel perks provided to workers while they are on vacation, such as leave or home
travel discounts [providing the input tax credit in respect of such goods or services or
both shall be available, where it is required that an employer offer the same to its
workers under any currently in effect law].
(c) Services under a works agreement provided for the building of an immovable
property (other than machinery and plant), unless they are input services for the
provision of further works agreement services;
(d) Goods, services, or both that a taxable person receives for the purpose of
constructing an immovable property on his own dime (other than plant or apparatus),
including when such goods, services, or both are employed in the conduct or
advancement of business. For the purposes of clauses (c).
(d) The term “constructive” comprises reconstruction, renovation, additions,
alterations, or repairs to the aforementioned immovable property to the extent that they
are capitalised;
(e) Goods or services, or both, for which Section 10 tax has been paid;
(f) Commodities or services, or both, that a non-resident taxable person receives,
excluding commodities that he imports;
(g) Products or services used for personal consumption, or both;
(h) Products that were given away as gifts or free samples, lost, stolen, destroyed, or
otherwise disposed of; and
(i) Any tax that has been paid in accordance with sections 74, 129, and 130.
 6. The government may offer guidance regarding the appropriate approach for attributing
the credit mentioned in subsections (1) and (2).
Explanation: For the purposes of this chapter and Chapter VI, “plant and machinery”
refers to apparatus, equipment, and machinery that is fixed to the ground by a
foundation or other structural supports but does not include any of the following: (i)
land, buildings, or other civil structures; (ii) telecommunication towers; and (iii)
pipelines installed outside the factory grounds.

Blocked Credit Under GST

Section 17(5) of CGST Act, also referred to as blocked credits, is a very important provision
for every regular taxpayer under GST. It defines a list of purchases on which GST is paid but
businesses cannot claim these as the Input Tax Credit (ITC).

Clauses (e) & (f) – Composition & Non-resident

Section 10 puts a condition that a composition taxpayer cannot claim ITC on GST paid on
purchases as they pay tax on their quarterly turnover. Accordingly, Section 17(5) of CGST Act
states that ITC is not available for composition taxable persons, whether or not supplying goods
or services.

Non-resident taxable person deposits tax in advance. They can claim ITC on IGST paid on
import of goods, but cannot claim ITC on any other domestic purchases.

Clause (g) – Personal use

ITC is not available on purchases that are not used in business but used for personal purposes.
If part of goods or services purchased is consumed for both business and personal use, then
ITC will be allowed only to the extent of business use as per the formula of common credits.

Section -17 (5) (g): Goods or services or both used for personal consumption;
1. Input tax paid on goods and or services used for personal consumption is not eligible for
ITC.
2. If the goods or services on which input tax credit has been availed are used for personal
consumption, it actually means that the credit on the input or input services to the extent of its
use for personal consumption shall be disallowed. It means reverse the credit by debiting to
profit and loss account or pays an amount to the department by using electronic cash ledger
account.
Note:
1. if input goods or service or both used for further business purpose, ITC allowed
2. if input goods or service or both used for personal purpose of consumption, no ITC allowed

Section-17(5)(h): Goods lost, stolen, destroyed, written off or disposed of by way of gift or
free samples; and
Credit of GST paid on input or capital goods is permitted when input or capital goods are used
in the course or furtherance of business.
ITC not allowed in the following cases:
• Goods lost
• Goods stolen
• Goods destroyed Goods written off or
 • Disposed of by way of gift
• Disposed of by way of free samples
Note: As per Section 17(5) (h) of the CGST Act, 2017 input tax credit shall be reversed when
the goods have been disposed of by way of gift or free sample. In this case, there is no
consideration for sale of goods and GST is not payable on output supply. However, the input
tax credit availed on such goods shall be reversed or pay GST to the department as the case
may be.
Manner of distribution of credit by input service distributor (ISD) section 20
The Input Service Distributor (ISD) shall distribute the credit of central tax as central tax or
integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document
containing the amount of input tax credit being distributed in such manner as may be
prescribed.
2. The Input Service Distributor may distribute the credit subject to the following conditions,
namely:
(a) The credit can be distributed to the recipients of credit against a document containing such
details as may be prescribed;
(b) the amount of the credit distributed shall not exceed the amount of credit available for
distribution;
(c) The credit of tax paid on input services attributable to a recipient of credit shall be
distributed only to that recipient;
(d) the credit of tax paid on input services attributable to more than one recipient of credit shall
be distributed amongst such recipients to whom the input service is attributable and such
distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union
territory of such recipient, during the relevant period, to the aggregate of the turnover of all
such recipients to whom such input service is attributable and which are operational in the
current year, during the said relevant period:
(e) the credit of tax paid on input services attributable to all recipients of credit shall be
distributed amongst such recipients and such distribution shall be pro rata on the basis of the
turnover in a State or turnover in a Union territory of such recipient, during the relevant period,
to the aggregate of the turnover of all recipients and which are operational in the current year,
during the said relevant period.
Manner of distribution of IST
1. ISD and the recipient of credit are located in the same state
2. ISD and recipient and credit are located in different states
ISD and the recipient of credit are located in the same state
When the ISD and recipient of credit are located in the same state/union territory input tax
credit of IGST, CGST, SGST, and UTGST should be distributed from the following order

ISD and recipient and credit are located in different states

When ISD and recipient and credit are located in different states/union territory the input tax
credit of IGST, CGST, SGST, and UTGST should be distributed from the following order.
Section 21 - Manner of recovery of credit distributed in excess.
Where the Input Service Distributor distributes the credit in contravention of the provisions
contained in section 20 resulting in excess distribution of credit to one or more recipients of
credit, the excess credit so distributed shall be recovered from such recipients along with
interest, and the provisions of section 73 or section 74, as the case may be, shall, mutatis
mutandis, apply for determination of amount to be recovered.