The Goods and Services Tax (GST) Law came into effect on 1 July 2017. At the same time, all other laws associated with similar taxation were repealed and replaced by the GST law. This basically allowed for the multiple taxes charged by the Central and State Governments to be replaced by a single tax in the country.
A vital aspect of GST is the provision for ‘Input Tax Credit,’ which was introduced to help avoid the cascading effect of taxes.
Overview of Input Tax Credit under GST
Input Tax Credit (ITC) is a process through which taxpayers may claim credit for the taxes paid by them when purchasing any goods or availing any services that shall be used for their business. It helps individuals adjust the tax they have already paid for goods/services when paying their output tax liability, which results in significantly decreasing the tax burden on them.
Taxes levied on tax invoices by registered individuals on their outward supply of goods or services or both is referred to as ‘input tax’ for the individual buying/availing such goods or services or both. Taking credit for this input tax by the buyer is known as ‘Input Tax Credit.’
Benefits of Input Tax Credit
The provision of Input Tax Credit offers several benefits to businesses in India:
Taxpayers can evade the cascading effect of taxes by claiming credit for the taxes they paid on inputs. This significantly reduces the tax burden on taxpayers by ensuring that taxes are only charged on the value added at each stage of supply chains.
- Increased Competitiveness
As ITC reduces input costs, business can choose to give tougher competition to their competitors. Considering it does not cost a lot to buy resources, thanks to ITC, businesses can compete with others by freely lowering prices, increasing their profits margins or plan investments for different growth projects.
ITC enables a smooth flow of credits through entire supply chains, as every registered individual is allowed to claim credit for the taxes they have paid when buying the goods or services or both.
- Compliance and Documentation
With the option to avail ITC, businesses are encouraged to maintain adequate and accurate records while incentivizing them to comply with various GST rules as well. It encourages them to ensure the invoices are valid and there is complete transparency with respect to business-related transactions.
Eligibility of ITC
Any individual not registered for GST cannot enjoy the benefits offered by ITC. In addition, anyone who is registered but has opted for the composition scheme shall not be eligible for ITC benefits as well.
Section 16 of the Central Goods and Services (CGST) Act, 2017 lays down some conditions that must be fulfilled before an individual can avail ITC.
Valid Tax Invoice
Individuals must hold a valid tax invoice or any other specified papers, such as a debit note or bill of entry, for claiming ITC.
Business Use
The inputs on which an individual wants to claim ITC must be used or planned to be used for some business-related reasons. If it is for personal purposes, you shall be ineligible to claim ITC.
Payment of the Tax
The supplier should have paid the tax charged on input to the Government in cash or through usage of ITC admissible with respect to such inputs. Recipients shall not be eligible to avail ITC until the supplier pays the tax to the Government.
Filing of Returns
The supplier must file GST returns along with tax invoice details as per appropriate timelines to be eligible to ITC.
Payment to Supplier
- When a recipient fails to pay the supplier of goods/services or both the amount that includes the supply’s value as well as the tax payable on it within a 180-day period from the date when the supplier had issued the invoice, an amount equal to the ITC availed by the recipient would be credited to their output tax liability along with interest thereon.
- If the amount which is the cost of the goods/services supplied plus the tax that must be paid on it is paid by the recipient, they shall be eligible to avail input tax credit for the same.
Receipt of Goods/Services
Individuals shall be considered to have received goods/services or both:
- When such goods are delivered to registered individuals or any other individual on the request of registered individuals either through transfer of documents that carry the title to goods or otherwise.
- When the supplier provides any individual their services on the request and account of a registered individuals.
Restricted List
If the goods/services are not mentioned in the restricted list under Section 17(5), individuals may avail ITC on them.
Goods/Services restricted under Section 17(5)
Following goods and/or services shall not be eligible for ITC as they are restricted under Section 17(5) of CGST Act:
1. Proportion of goods and services used for:
- exempted supply,
- something other than business purposes.
2. Vehicles that have a maximum seating capacity of 13 people, including the driver.
| Note: If the vehicle is used for further supply, to transport passengers or train how to navigate/fly such vehicles, it shall be eligible for ITC. |
3. Vessels and aircrafts.
| Note: If a vessel or aircraft is used for further supply, to transport passengers, train how to navigate/fly such vessel/aircraft, or transport goods, it shall be eligible for ITC. |
4. General insurance, servicing, maintenance, and repairs related to the vehicles, vessels and aircrafts mentioned above.
Note:
- If the services are used for uses mentioned in points 2 and 3, it shall be eligible for ITC.
- If the individual receiving the services is involved in the manufacturing or providing general insurance for such vehicles, vessels or aircraft, it shall be eligible for ITC.
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5. Food and beverages.
6. Outdoor caterings.
7. Beauty treatments.
8. Health services.
9. Cosmetic and plastic surgery.
10. Leasing, renting or hiring vehicles, vessel or aircrafts mentioned in points 2 and 3 except when used for purposes stated therein.
11. Insurance & health insurance.
| Note: If such goods/services are used to make outward taxable supply of similar category of goods/services or both or an as element of taxable composite or mixed supply, it shall be eligible for ITC. |
12. Travel benefits offered to employees on leave or home travel concession.
| Note: If the employer is legally obligated to provide such benefits to employees, it shall be eligible for ITC. |
13. Work contract services supplied to construct an immovable property.
| Note: If the service is used for some plant and machinery, it shall be eligible for ITC. In addition, if it is for further supply of work contract services, it shall be eligible for ITC. |
14. Goods/services or both on which tax has been paid under the composition scheme.
15. Goods/services or both that are received by a non-resident taxable individual, except for the goods they import.
16. Goods/services or both used for personal consumption.
17. Goods that have been lost, stolen, destroyed, written off or disposed of in the form of gifts or free samples.
Inherent loss of Inputs during Manufacture
Under Section 17(5)(h), ITC for goods lost, stolen, destroyed, written off or disposed of in the form of gifts or free samples must be reversed. This is because as a result of the inherent nature of the manufacturing process, there is some loss of raw materials during the manufacturing process, which also known as ‘normal loss.’
The GST department was issued several orders to reverse a part of the ITC that has been claimed by petitioners, proportionate to the loss of input, referring to the regulations stated under Section 17(5)(h) of the GST Act.
In the matter of ARS Steel & Alloy International Pvt. Ltd. vs. the State Tax Officer, there was a loss of a part of the inputs inherent to their manufacturing process. The issue in this case was determining whether an ITC’s reversal is contemplated with respect to the loss resulting from the manufacturing process.
The Madras High Court held, when interpreting Section 17(5)(h) of the CGST Act, that an equivalent provision was contained in the older GST regime, under Section 19 of the Tamil Nadu Value Added Tax Act, 2006 (“the TNVAT Act”) that deals with the different circumstances arising from the grant and reversal of ITC by the registered dealer.
It noted that the statutes of Section 19 of the TNVAT Act were recaptured in the regulations of Section 17 of the CGST Act. It also observed that Section 17(5)(h) of the CGST Act shows loss of inputs that can be quantified and involve external aspects. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself.
While relying on the Madras High Court’s ruling in the case of Rupa & Co. Ltd. vs. CESTAT, Chennai, the Court stated that a certain amount of consumption of the inputs was inevitable in the manufacturing process and held that CENVAT credit should be granted on the original amount of inputs used notwithstanding that the entire amount of inputs would not figure in the finished product.
While setting aside the GST officer’s order in question, the Court held that the reversal of ITC involving Section 17(5)(h) of the CGST Act by the Revenue Department, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such losses are not considered or covered by the circumstances outlined under Section 17(5)(h) of the CGST Act.
Conclusion
As businesses would have to bear double taxation on the same transactions, ITC is an excellent option to ensure they avoid this issue. While they shall pay the usual taxes for the input of goods/services or both, they may save certain amounts from their output tax liability, thanks to the credit earned under for the input tax liability.
We can address your Eligibility of Input Tax Credit vis-à-vis Inherent Loss of Inputs during Manufacture concerns. You can get in touch with us by submitting a query below.
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