GST AND CUSTOMS

UNIT 1
INPUT TAX CREDIT (ITC)
INPUT TAX CREDIT
Taxes paid on inward supply of inputs, capital goods and services are called input taxes. These
may be Integrated GST, Central GST, State GST or Union Territory GST. Taxes paid under
reverse charge mechanism are also input taxes.
The credit of the above taxes is called input tax credit, that is, the taxes paid on inputs are
available as a set off against the taxes payable on outward taxable supplies.
CGST Act, 2017 contains the provisions relating to ITC, its availment, utilization and conditions
and restrictions attached therewith.
Definitions of input tax and input tax credit:
Section 2(62) “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-sections (3) and (4) of section 5 of the Integrated
Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective
State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (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(63) “input tax credit” means the credit of input tax;
Input Tax Credit (ITC) is considered as a cornerstone of GST. In the previous tax regime, there
was non- availability of credit at various points in supply chain, leading to a cascading effect of
tax i.e., tax on tax and therefore increasing the cost of goods and services. This flaw has been
removed under GST and a seamless flow of credit throughout the value chain is therefore
available consequently doing away with the cascading effect of taxes.
To avail the benefit of ITC, it is required that the person availing such benefit is registered under
GST. An unregistered person is not eligible to take the benefit of ITC. Section 155, of the CGST
Act, 2017 states that where any person claims that he is eligible for input tax credit under this
Act, the burden of proving such claim shall lie on such person.
Section 49(5) of the CGST Act, 2017 provides for utilization of ITC in Electronic credit ledger
for payment of GST.

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 ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT [Section 16]
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed
and, in the manner, as 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 his business and the said amount shall be credited to the electronic credit
ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to
the credit of any input tax in respect of any supply of goods or services or both to him unless,
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this
Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

To be eligible for ITC he must be in possession of a tax invoice or debit note issued by a supplier
registered under this Act, or such other tax paying documents and received the goods or services
or both.
The registered person need not receive the goods himself. It is sufficient even if the goods are
delivered to some other person on his direction.
Explanation. – For the purposes of this clause, it shall be deemed that the registered person has
received the goods where the goods are delivered by the supplier to a recipient or any other
person on the direction of such registered person, whether acting as an agent or otherwise, before
or during movement of goods, either by way of transfer of documents of title to goods or
otherwise;
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been
actually paid to the Government, either in cash or through utilization of input tax credit
admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or installments, the
registered person shall be entitled to take credit upon receipt of the last lot or installment.
Provided further that where a recipient fails to pay to the supplier of goods or services or
both, other than the supplies on which tax is payable on reverse charge basis, the amount
towards the value of supply along with tax payable thereon within a period of one hundred
and eighty days from the date of issue of invoice by the supplier, an amount equal to the
input tax credit availed by the recipient shall be added to his output tax liability, along with
interest thereon, in such manner as may be prescribed. This is known as INPUTTAX
CREDIT REVERSAL.
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment
made by him of the amount towards the value of supply of goods or services or both along with
tax payable thereon.
(3) 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.

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(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or
debit note for supply of goods or services or both after
• the due date of furnishing of the return under section 39 for the month of September following
the end of financial year to which such invoice or invoice relating to such debit note pertains or
• furnishing of the relevant annual return
whichever is earlier.
Section 16 of the CGST Act, 2017, states the conditions and eligibility to obtain ITC. Following
four conditions are required to be fulfilled by a registered taxable person:
• he should be in possession of tax invoice or debit note or such other taxpaying documents as
may be prescribed;
• he should have received the goods or services or both;
• the supplier should have actually paid the tax charged in respect of the supply to the
government; and
• he should have furnished the return under section 39.
Where the goods against an invoice are received in lots or installments, the registered person
shall be entitled to take credit upon receipt of the last lot or installment.

Availability of ITC to recipient has been made dependent on payment of tax by supplier. Thus,
even if the receiver has paid the amount of tax to the supplier and the goods and/or services so
procured are eligible for ITC, no credit would be available, till the time, tax so collected by the
supplier, is deposited to the Government.
Every registered person is eligible to take credit of GST charged to him for his inward supply of
goods/ services if he uses such supplies in the course or furtherance of his business.
Such credit is called input tax credit and the same is to be credited to his electronic ledger.
Payment of tax and filing of return is also necessary to claim ITC. However, Section 41 allows
ITC on provisional basis.
Depreciation under Section 32 of the Income Tax Act shall not be claimed on the tax portion on
which ITC has been claimed. It is a violation under Income Tax Act also.
Note: In a financial year, the return for September is to be filed by 20th of October under Section
39 of CGST Act, 2017.

APPORTIONMENT OF CREDIT AND BLOCKED CREDITS [Section 17]

Goods and Services Tax aims at providing seamless flow of credit throughout the supply chain.

However, below is a list of few situations as mentioned in section 17 of Central GST Act, 2017
where input tax credit will not be available:
(1) Where the goods or services or both are used by the registered person partly for the purpose
of any business and partly for other purposes, the amount of credit shall be restricted to so much
of the input tax as is attributable to the purposes of his business.

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(2) Where the goods or services or both are used by the registered person partly for effecting
taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and
Services Tax Act and partly for effecting exempt supplies under the said Acts, 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
(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and
shall include supplies on which the recipient is liable to pay tax on reverse charge basis,
transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II,
sale of building.
(4) A banking company or a financial institution including a non-banking financial company,
engaged in supplying services by way of accepting deposits, extending loans or advances shall
have the option to either comply with the provisions of sub-section (2), or 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 rest shall lapse:
Provided that the option once exercised shall not be withdrawn during the remaining part of the
financial year:
Provided further that the restriction of 50% shall not apply to the tax paid on supplies made by
one registered person to another registered person having the same Permanent Account Number.
Input Tax Credit is available only on those goods and services used for business. Exports and
supplies to SEZ fall under the category of zero-rated supplies. ITC is available on zero rated
supplies and taxable supplies but not on exempt supplies.

Note :
The value of exempt supply shall be such as may be prescribed, and shall include supplies on
which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of
land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
In Point (3), the option once exercised shall not be withdrawn during the remaining part of the
financial year.
In Point (3), the restriction of 50% shall not apply to the tax paid on supplies made by one
registered person to another registered person having the same Permanent Account Number.

NEGATIVE LIST FOR INPUT TAX CREDIT (Blocked Credits) [Section 17(5)]
Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section
18, input tax credit shall not be available in respect of the following, namely:
(a) motor vehicles and other conveyances except when they are used –
(i) for making the following taxable supplies, namely: –
(A) further supply of such vehicles or conveyances; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) for transportation of goods;

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Example: A car dealer in the business of buying and selling cars is allowed ITC. Cab services
engaged in the business of transportation of goods can avail ITC. Training Institutes for Cars /
Aircrafts etc. can also avail ITC.
(b) the following supply of goods or services or both –
(i) food and beverages, outdoor catering, beauty treatment, health services, 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;
Example : A company avails catering services for its annual day function, it can‟t claim ITC as
the inward supplies are not consumed to prepare outward taxable supplies of the same category.
(ii) membership of a club, health and fitness center;
(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; and
Example: In Assam, if the Government notification requires all employers to provide home drop
in the evening for safety reasons, and the employer consequently avails Rent-a-Cab services, it
can claim ITC on such inward supplies.

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;
(c) works contract services when supplied for construction of an immovable property (other than
plant and machinery) except where it is an input service for further supply of works contract
service;
(d) goods or services or both received by a taxable person for construction of an immovable
property (other than plant or machinery) on his own account including when such goods or
services or both are used in the course or furtherance of business.
Explanation. – For the purposes of clauses (c) and (d), the expression “construction” includes re-
construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the
said immovable property;
(e) goods or services or both on which tax has been paid under section 10; (Composition Supply
Scheme)
(f) goods or services or both received by a non-resident taxable person except on goods imported
by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130. (Recovery
Sections)

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Section 17(6) The Government may prescribe the manner in which the credit referred to in sub-
sections (1) and (2) may be attributed.
Explanation. – For the purposes of this Chapter and Chapter VI, the expression “plant and
machinery” means apparatus, equipment, and machinery fixed to earth by foundation or
structural support that are used for making outward supply of goods or services or both and
includes such foundation and structural supports but excludes
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises
AVAILABILITY OF INPUT TAX CREDIT IN SPECIAL CASES [Section 18]
This section deals with eligibility of credit in special cases.

Subject to such conditions and restrictions as may be prescribed –

(a) a person who has applied for registration under this Act within thirty days from the date on
which he becomes liable to registration and has been granted such registration shall be entitled to
take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the day immediately preceding the date from which he becomes
liable to pay tax under the provisions of this Act;
(b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take
credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the day immediately preceding the date of grant of registration;
(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take
credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished
goods held in stock and on capital goods on the day immediately preceding the date from which
he becomes liable to pay tax under section 9:
Provided that the credit on capital goods shall be reduced by such percentage points as may be
prescribed;
(d) where an exempt supply of goods or services or both by a registered person becomes a
taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in
stock and inputs contained in semi-finished or finished goods held in stock relatable to such
exempt supply and on capital goods exclusively used for such exempt supply on the day
immediately preceding the date from which such supply becomes taxable:
Provided that the credit on capital goods shall be reduced by such percentage points as may be
prescribed.
(2) A 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.
Note: Here, the maximum time limit for availing ITC is one year. Invoices more than one year
old are not eligible for taking credit.

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(3) Where there is a change in the constitution of a registered person on account of sale, merger,
demerger, amalgamation, lease or transfer of the business with the specific provisions for
transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit
which remains unutilised in his electronic credit ledger to such sold, merged, demerged,
amalgamated, leased or transferred business in such manner as may be prescribed.
(4) Where any registered person who has availed of input tax credit opts to pay tax under section
10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay
an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to
the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock and on capital goods, reduced by such percentage points as may be
prescribed, on the day immediately preceding the date of exercising of such option or, as the case
may be, the date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying in his
electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable under sub-section (4)
shall be calculated in such manner as may be prescribed.
(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been
taken, the registered person shall pay an amount

• equal to the input tax credit taken on the said capital goods or plant and machinery reduced by
such percentage points as may be prescribed OR
• the tax on the transaction value of such capital goods or plant and machinery determined under
section 15,
whichever is higher:
Provided that where refractory 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.
The table below summarizes the entitlement of Input Tax Credit (ITC):

Case Persons eligible Goods entitled as on Conditions

1 Person who has applied for He can claim the ITC on inputs ITC must be availed
registration within 30 days held in the form of Raw within 1 year from
from the date on which he Materials / WIP / Finished the date of issue of
becomes liable to Goods as on the day immediately tax invoice by the
registration, and has been preceding the date from which supplier
granted such registration he becomes liable to pay tax

2 Person who isn’t liable to He can claim the ITC on inputs ITC must be availed
register per se, but obtains held in the form of Raw within 1 year from

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 voluntary registration Materials/WIP/ Finished Goods the date of issue of
as on the day immediately tax invoice by the
preceding the date of supplier
registration

3 Registered person who He can claim the ITC on inputs ITC on Capital
ceases to be under held in the form of Raw Goods will be
composition levy and Materials/ WIP / Finished Goods reduced by 5% per
switches to the regular & Capital Goods as on the day quarter of year / part
scheme immediately preceding the date thereof of usage from
from which he becomes liable to the date of invoice.
pay tax under the regular
scheme

4 Registered person whose He can claim the ITC on inputs ITC on Capital
exempt supplies become held in the form of Raw Goods will be
taxable Materials/WIP/ Finished Goods reduced by 5% per
& Capital Goods relatable to quarter of year / part
such exempt supply as on the thereof of usage from
day immediately preceding the the date of invoice.
date from which the supply
becomes taxable

Utilization of ITC
Input Tax Credit (ITC) is credited to a person‟s electronic credit ledger. The person may use this
to pay his output tax liability.
In terms of Sec. 49(5) , the manner of utilization of ITC is as under:

Input tax credit Output liability on Output liability on Output liability on

on account of account of Integrated account of Central account of State tax/
tax tax Union Territory tax

Integrated tax (I) (II) & (III)– In any order and in any proportion

(III) Input tax credit on account of Integrated tax to be completed exhausted mandatorily

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Central tax (V) (IV) Not permitted

State tax/ Union (VII) Not permitted (VI)

Territory tax

Therefore, it is clear that there is no offset available between the CGST and the SGST.

Illustration:
Mr. Z, a supplier of goods, pays GST under regular scheme. Mr. Z is an inter-state supplier and
hence is not eligible to any threshold exemptions. He has made the following taxable supplies:
Outward Taxable Supplies
Intra State 12,00,000
Inter State 4,50,000
He has also furnished the following details about his purchases:
Inward Taxable Supplies
Intra State 4,50,000
Inter State 75,000
He has opening balances of ITC as under :
CGST INR 45,000
SGST INR 45,000
IGST INR 1, 05,000
If the supplies are exclusive of taxes (18% GST), compute his tax liability.
Solution:

The following represents his tax liability with respect to Outward Taxable Supplies:

Tax Liability
CGST SGST IGST
1,08,000 1,08,000 81,000
The following statement explains his ITC situation:
Tax Liability
CGST SGST IGST
For Current 40,500 40,500 13,500
Purchases
Opening 30,000 30,000 70,000
Total 70,500 70,500 83,500

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The following table represents his discharge of liabilities:
Discharge
CGST SGST IGST
Liability 81,000 1,08,000 1,08,000
ITC (CGST/SGST) 85,500 85,500
ITC (IGST) 81,000 22,500 15,000
Paid NIL NIL 7,500

INPUT SERVICE DISTRIBUTOR

A company may have a number of units and the GST paid by it on input services received can be
distributed to the beneficiary units on the basis of their previous year turnover. The office of the
company which distributes the credit is called input service distributor.
Section 2(61): “Input Service Distributor” means an office of the supplier of goods or services or
both which receives tax invoices issued under Section 31 towards the receipt of input services
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
Manner of distribution of credit by Input Service Distributor [Section 20]
(1) The Input Service Distributor 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,

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to the aggregate of the turnover of all recipients and which are operational in the current year,
during the said relevant period.
Explanation. – For the purposes of this section, – (a) the “relevant period” shall be –
(i) if the recipients of credit have turnover in their States or Union territories in the financial year
preceding the year during which credit is to be distributed, the said financial year; or
(ii) if some or all recipients of the credit do not have any turnover in their States or Union
territories in the financial year preceding the year during which the credit is to be distributed, the
last quarter for which details of such turnover of all the recipients are available, previous to the
month during which credit is to be distributed;
(b) the expression “recipient of credit” means the supplier of goods or services or both having the
same Permanent Account Number as that of the Input Service Distributor;
(c) the term „„turnover‟‟, in relation to any registered person engaged in the supply of taxable
goods as well as goods not taxable under this Act, means the value of turnover, reduced by the
amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the
Constitution and entries 51 and 54 of List II of the said Schedule.
Manner of distribution of credit by Input Service Distributor [Section 21]
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.

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