07. Input Tax credit
In the first chapter of the book, we have understood that one of the main reasons for implementation of GST in India is to have seamless flow of credit. In the earlier tax regime, state taxes were not getting set off against central taxes and vice versa. After GST, on a single transaction, both central tax and state tax is levied if it is intra state transaction (as discussed in chapter of levy and collection). Hence, the input tax credit utilisation has been increased in comparison to earlier tax regime. For example, assume that during earlier tax regime, a testing laboratory purchased some machinery on which it paid VAT. By using this machinery, it provided service of testing of equipments. On this service, it charged service tax. Here, input VAT cannot be set off against the output service tax. However, if the same transaction is done under GST then on purchase of machinery, laboratory would be paying either IGST or CGST/SGST (depending upon whether the transaction is Intra State or Inter State). This can be set off against the output GST charged on provision of services. Hence, we can say that the increased credit utilisation has been achieved to some extent. However, the input tax credit can be used subject to certain conditions and restrictions. In this chapter, we will discuss in details the GST provision regarding the input tax credit.
Definitions
Business - Section 2(18) of CGST Act
“business” includes––
any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit
any activity or transaction in connection with or incidental or ancillary to sub-clause(a)
any activity or transaction in the nature of sub-clause(a), whether or not there is volume, frequency, continuity or regularity of such transaction
supply or acquisition of goods including capital goods and services in connection with commencement or closure of business
provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members
admission, for a consideration, of persons to any premises
services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation
activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.
Capital Goods - Section 2(19) of CGST Act
“capital goods” means goods, the value of which is capitalised 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.
Electronic Credit Ledger Section 2(46) of CGST Act
“electronic credit ledger” means the electronic credit ledger referred to in sub-section (2) of section 49.
Exempt Supply Section 2(47) of CGST Act
“exempt supply”means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.
Goods Section 2(52) of CGST Act
“goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
Input Section 2(59) of CGST Act
“input”means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.
Input Service Section 2(60) of CGST Act
“input service”means any service used or intended to be used by a supplier in the course or furtherance of business.
“Input Service Distributor” Section 2(61) of CGST Act
“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.
Input Tax Section 2(62) of CGST Act
“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—
the integrated goods and services tax charged on import of goods
the tax payable under the provisions of sub-sections (3) and (4) of section 9
the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act
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
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.
Input Tax Credit Section 2(63) of CGST Act
“input tax credit” means the credit of input tax.
Invoice or Tax invoice Section 2(66) of CGST Act
“invoice” or “tax invoice”means the tax invoice referred to in section 31.
Inward Supply Section 2(67) of CGST Act
“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.
Services Section 2(102) of CGST Act
“services”means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Section 16 to section 20 of the CGST Act, 2017 provides for the provision of input tax credit. Let us understand these provisions
Section 16
Eligibility and conditions for taking Input Tax Credit.
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of 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––
(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37 (inserted by Finance Act, 2021)
(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.
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;
(ba) The details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted. (inserted by Finance Bill 2022 which is yet to be notified)
(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 utilisation 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 instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
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
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.
(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 (30th November - proposed Amendment by Finance Bill - 2022) 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.
Commentary on section 16 of CGST Act
As per section 16(1), the input tax credit can be taken for GST paid on supply of Goods or services or both. What is the meaning of “Goods” and “Services” that we had discussed at length in first chapter of this book. However, an important condition which is given in this section is that the input supply whether goods or service or both are used or intended to be used in the course or further of business. This means if the input supply is not used or intended to be used in the course or further of business then credit of the GST paid on the supply cannot be taken. What is called business is also discussed in earlier chapters. Readers can understand from our earlier discussion in chapter 2 that as per section 7, a transaction can be called supply only if it is done in the course or furtherance of business ( except few exceptions discussed in first chapter). Hence charge of GST can be attracted only if the supply is made in the course or furtherance of business. As the output tax can be imposed only if the transaction is done in the course or furtherance of business, input tax credit can be taken only if the input supply is made in the course or furtherance of business. If some goods are purchased which are not purchased in the course or furtherance of business then input tax credit of the same cannot be taken as per section 16(1). Remember, the condition of in the course or furtherance of business in section 7, is from supplier's point of view whereas here this condition is from the point of view of recipient under section 16(1).
It has also been mentioned in the section that such amount shall be credited to electronic credit ledger of the person. It needs to be understood the amount shall be credited to his credit ledger only upon filing of return.
It has been mentioned in section 16(2) of the Act that the input tax credit can be taken only if conditions given under this subsection are fulfilled. Even if the input supply is in the course or furtherance of business but conditions given under section 16(2) are not fulfilled then the input tax credit is not available.
These conditions are as under-
Person is in possession of a tax invoice or debit note issued by a supplier or such other taxpaying documents as may be prescribed.
Apart from the invoice, Rule 36 prescribes debit note, bill of entry (or similar document prescribed under the Customs Act, 1962), Input service distributor invoice or input service distributor credit note.
In case of forward charge person should have invoice available with him, whereas in case of reverse charge or import of goods self invoice and Bill of Entry should be available to claim input tax credit.
He has received the goods or services or both. [Not applicable to inputs and capital Goods sent for job work –section 19(2)]
Unless the goods or services are received by the recipient, he cannot get the input tax credit. Here condition is about receipt of Goods or services and not physical receipt of goods or services. Under GST there is a concept of deemed receipt of goods or services.
For example, If Mr. A sells 100 units of Goods X to Mr. B. and Mr. B instructs Mr. A to deliver the goods at a place of Mr. C. Then, as per Section 10(1)(b) of the IGST Act, this transaction will be treated as two different transactions. First, goods sold by Mr. A to Mr. B and Second, goods sold by Mr. B to Mr. C. Here, Mr. B has not physically received goods as they directly delivered to Mr. C. Still, it will be deemed that Mr. B has received the goods and is entitled to ITC.
By GST Amendment Act, 2018, this deeming fiction is added for receipt of services also, i.e., where services are provided by the supplier or any person on the direction of and on account of any other registered person, then it should be deemed that the registered person has received the service.
Tax must be paid to government either through cash ledger or through utilisation of credit ledger
This is the condition that has given rise to huge conflict in GST. As per this clause if the supplier has not paid tax to Government either through cash ledger or through utilisation of credit ledger then the recipient shall not be eligible for the input tax credit. It is not within the control of the recipient that whether the supplier shall pay tax to government or not. However as per section 16(2)C, in such situation where supplier makes default in payment of tax to government, recipient shall not be eligible for the credit.
A writ petition has been filed praying for striking down this clause in Delhi High Court in case of Bharti Telemedia Ltd. However, final outcome of the case has yet not come. (Readers are suggested to read some important issues and discussion at the end of the chapter)
Return has been filed.
It is important to understand that the tax paid on input supply can be taken as input tax credit only upon filing of returns. We will discuss this in detail in the chapter of Returns.
There are two provisos also to this sub-section
Proviso 1 :
In case 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 instalment. This condition is applicable when goods are received in multiple lots under single invoice.
For Example, Mr. A makes an advance payment in September and gives order for 15units of goods X to Mr. B. Mr. B raises bill for the full amount in September and collects full GST from Mr. A. The goods will be delivers over three months i.e. October, November and December. Here, Mr. A has paid full tax in September still; he will be eligible to claim ITC on receipt of last instalment of Goods only and not in September
Proviso 2 :
As per second proviso to section 16(2), 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 manner provided under Rule 37 of GST Rules.
Here, it has been provided that the recipient should pay the amount of consideration to the supplier within 180 days from the date of invoice. In case the recipient fails to make payment within 180 days then he will be liable reverse the input tax credit taken earlier with interest. Rule 37 provides for the process of reversal of the credit in case the payment is not made within 180 days. Interest needs to be paid under section 50(1) commencing from the date of availment of such credit till the date of reversal.
It has also been provided that after such reversal whenever the recipient makes payment to the supplier, he shall again take credit of the tax paid. The time limit given under section 16(4) shall not apply in such case. (Readers are suggested to read some important issues and discussion at the end of the chapter)
Example: Mr. A sold goods worth Rs. 1 Lakh + GST 18,000 to Mr. B in the month of August 2017. Goods are also delivered in the same month. Mr. B availed the credit in the same month. Invoice is issued on 16th August 2017. However, Mr. B has not made payment of this invoice to Mr. A till 5th March 2018.
In the above situation, Mr. B is required to reverse the ITC taken on this invoice on 12th February 2018 (on expiry of 180 days from the date of invoice)
As he has made the payment to Mr. A on 5th March 2018, he can again avail the ITC on 5th March 2018.
Suppose in the above case, Mr. B has filed annual return for the FY 2017-18 on 25th October 2018, and payment of the above invoice is made on 5th November 2018 (after filing annual return), then ITC that was reversed on 12th February 2018, can be re-availed on 5th November 2018. Because, the time limit under Section 16(4) is not applicable in this case.
Proposed Amendments to Section 16(2) by Finance Bill 2022
(a) A new clause (ba) inserted to section 16(2) by Finance Bill 2022 (which is yet to be notified) as under-
The details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted.
To further stringent the conditions for availing input tax credit, Finance Bill 2022 has proposed to add another clause to this section. By Finance Bill 2022, section 38 has also been amended and it has been provided that for some supplies ITC cannot be availed by the receipt even if return has been filed by the supplier. These supplies are called “ supplies for which ITC is restricted under section 38(2)(b).
Readers can note that section 38 has been proposed to be substituted by Finance Bill 2022
As per this new section, the details furnished by supplier under section 37 shall be communicated to the recipient in a manner to be prescribed and an auto generated statement shall be made available to the recipient.
As per new section 38(2), the auto generated statement shall contain two types of inward supplies. One in respect of which input tax credit shall be available and second inward supplies in respect of which input tax credit shall not be availed, either wholly or partly. The situations in which the ITC shall be wholly or partially restricted are given under section 38(2) (b). Readers also need to note that if the ITC is restricted under section 38 then as per new clause (ba) to section 16(2), recipient is not eligible for the input tax credit.
The situations in which whole or part of the input tax credit is not available has been prescribed as under-
a. by any registered person within such period of taking registration as may be prescribed; or
b. by any registered person, who has defaulted in payment of tax and where such default has continued for such period as may be prescribed; or
c. by any registered person, the output tax payable by whom in accordance with the statement of outward supplies furnished by him under the said sub- section during such period, as may be prescribed, exceeds the output tax paid by him during the said period by such limit as may be prescribed; or
d. by any registered person who, during such period as may be prescribed, has availed credit of input tax of an amount that exceeds the credit that can be availed by him in accordance with clause (a), by such limit as may be prescribed; or
e. by any registered person, who has defaulted in discharging his tax liability in accordance with the provisions of sub-section (12) of section 49 subject to such conditions and restrictions as may be prescribed; or
f. By such other class of persons as may be prescribed.
(b) Finance Bill 2022 has proposed change to section 16(2)(c) as under-
In clause (c) of section 16(2), reference of section 43A has been omitted.
It is important to note that section 43A was inserted to CGST Act by GST Amendments Act, 2018 which provides for procedure for filing returns and availing Input Tax Credit which had overriding effect over section 16(2), section 37 and section 38. This section 43A never got notified by government and by budget 2022 it is proposed to omit this section. As this section has been proposed to be omitted, its references to other places of the Act has also been proposed to be omitted. One such reference is in section 16(2)(c) which is read as under-
Subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.
From this clause reference of section 43A has been omitted
(3).Section 16(3) provides that if depreciation under income tax has been claimed under income tax on GST component of the capital goods and plant and machinery then input tax credit of such GST cannot be taken. It is clear that both – benefit under income tax and GST cannot be taken. If depreciation is claimed on GST component in income tax then ITC of the same cannot be claimed under GST.
(4). Section 16(4) provides for the time limit for availment of input tax credit. As per this section, a registered person can take input tax credit only up to earlier of the following two dates.
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 (these words are removed by Finance Act 2020 applicable from the year 2021) debit note pertains or
(ii).furnishing of the relevant annual return.
Example:
A Ltd. purchased some goods from B Ltd. in the month of February 2021. Invoice is received and goods are also delivered in February 2021. However, A Ltd. forgot to take ITC of GST paid on this transaction. A Ltd. Filed annual return for the FY 2020-21 on;
30th June 2021
15th December 2021
In the above situation, if annual return is filed on 30th of June, A Ltd. cannot take ITC after 30th June (actual date of filing annual return i.e. 30th June or due date of filing return for the month of September of following FY, i.e. 20th October 2021.)
If annual return is filed on 15th December, then ITC cannot be taken after 20th October 2021 (actual date of filing annual return i.e. 15th December or due date of filing return for the month of September of following FY, i.e. 20th October 2021).
An important amendment is made to section 16(4) by Finance Act, 2020 which is applicable from 1st January, 2021. As per this amendment when a debit note is issued, the time limit for taking input tax credit shall be applicable from the date of issuance of the debit note and not from the date of issuance of the original invoice pertaining to the debit note.
For example,
if invoice is issued on 25th March, 2021 and a debit note relating to it issued on 20th July, 2021. If we compute the time limit under section 16(4) from the date of original invoice pertaining to debit note then the input tax credit of such debit note can be taken till the due date of filing return for the month of September, 2021 or the date of filing annual return for the year 2020-21 whichever is earlier. However, after the amendment done by Finance Act, 2020, the time limit under section 16(4) shall be computed from the date of issuance of debit note. I.e. 25th July 2021. Hence, the input tax credit for this debit note can be take till the due date of filing return for the month of September, 2022 or the date of filing annual return for the FY 2021-22 whichever is earlier.
Proposed Amendments to Section 16(4) by Finance Bill 2022
Finance Bill 2022 has proposed a change in section 16(4) also.
This section provides for time limit for availment of input tax credit. Presently as per this section.
“(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 such debit note pertains or furnishing of the relevant annual return, whichever is earlier.”
By Finance Bill, 2022 the time limit prescribed under this section has been amended. Instead of “ the due date of furnishing return under section 39 for the month of September following the end of financial year”, now “ 30th day of November following the end of the financial year” has been substituted. Hence, as per this proposed amendment, now input tax credit can be availed till 30th November following the end of the financial year or due date of filing annual return, whichever is earlier.
This amendment has been proposed to end litigations regarding whether GSTR-3B is return or not and many other related issues
Some important amendments in the year 2021
There had always been a debate about the eligibility of input tax credit to the recipient in case of default/error by the supplier. As discussed earlier, as per clause (c) of section 16(2), input tax credit cannot be availed by the recipient if the supplier has not paid tax to Government by cash or by utilisation of input tax credit. However, sometimes it may happen that the supplier has paid tax to government but the invoice is not reflected on the portal of the recipient. (In GSTR-2A/2B). It happens when say B2B supply has been shown by the supplier as B2C supply by mistake. In such a situation there has been a doubt about availability of input tax credit. A new clause (aa) inserted by Finance Act, 2021 which is as under-
aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37
Readers can note that the condition of matching of the invoice details between supplier and recipient has been now given as a condition for availment of input tax credit. It means that if the supplier has not filed GSTR-1 properly and the details are not reflected in GSTR-2A/2B of the recipient then the ITC shall not be available to the recipient. This will definitely create huge problems for many of the businesses as the recipient shall suffer due to mistake of the supplier.
As per Rule 36(4) which was inserted by notification 49/2019-CTR dated 9th October, 2019, there is a provision of taking provisional credit if some invoices are not reflected on the portal of the recipient. This rule has been amended thrice after its insertion in October, 2019. Provisions of this rule are further clarified by circular no 123 dated 11/11/2019. Following are relevant points for this provision
a). Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37. Hence maximum credit during a period for those invoices which are not shown in GSTR 2A shall be restricted to 20% of invoices uploaded by suppliers. (This limit of 20% reduced to 10% and then further reduced to 5% by notification no. 94/2020 dated 22nd December, 2020. Then after by notification no. 40/2021 dated 29th December, 2021 this limit of 5% also has been removed)
b). The above restriction is only for those invoices which are required to be uploaded by supplier under section 37 (1). Hence there is no restriction on availment of ITC for RCM or IGST paid on imports.
c). The restriction imposed is not supplier wise. The credit available under sub-rule (4) of rule 36 is linked to total eligible credit from all suppliers against all supplies whose details have been uploaded by the suppliers. Further, the calculation would be based on only those invoices which are otherwise eligible for ITC. Accordingly, those invoices on which ITC is not available under any of the provision (say under sub-section (5) of section 17) would not be considered for calculating 5 per cent. of the eligible credit available.
d). Registered person is required to check GSTR 2A on the due date of filing GSTR 3B for the purpose of computation of above limit. The computation is required to be made month wise
Consider following example for better understanding
Mr A has received supplies having input tax amounting to Rs. 10,00,000/- during the month of November 2021. Out of this amount he can see invoices having input tax Rs. 7,00,000/- till the due date of filing return for the month of November, 2021. Out of input tax credit of Rs. 3,00,000/- relating to invoice not uploaded by suppliers, Mr A can take credit of Rs. 35,000/- (Rs.7,00,000 * 5 %). Hence his total eligible credit to be taken for the month of November 2019 shall be Rs. 7,35,000/- (Rs. 7,00,000 + Rs. 35,000). Balance Rs. 2,65,000 credit can be taken when supplier uploads invoice related thereto.
Compliance with rule 36(4) along with section 16(2)(aa) has made the input tax credit availment extremely difficult. Taxpayer need to be careful not only about his own accounting but he also needs to be vigilant about tax payment and return filing by his suppliers. Recipient shall be punished by denial of Input tax credit for the fault of supplier. To what extent such compliance is possible for the taxpayer is a matter of debate. We need to wait for Judicial pronouncement addressing this issue of taxpayer.
Further Amendment to Rule 36(4) effective from 1st January, 2022
As discussed earlier, by insertion of Clause (aa) to section 16(2) of the CGST Act by Finance Act, 2021 effective from 1st January, 2022, there has been a major change in conditions for availment of ITC. This clause is as under-
aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37.
A much required condition for reflection of invoice or debit note/credit note in GSTR-2A/2B has been added to these four conditions. There was a huge debate on whether a person is eligible for ITC if the invoice is not reflected in GSTR-2A but conditions of section 16(2) are complied with. Many courts ruled that if all conditions of section 16(2) are fulfilled there can be no bar on taking ITC even if the invoice is not reflected in GSTR-2A. Now by insertion of additional condition of mentioning of the invoice as per section 37 (in GSTR-1) and communication thereof to the recipient, government has made compliance with the condition of reflection of invoice in GSTR-2A/2B a mandatory condition for taking ITC in the law itself.
Due to this amendment, it was necessary that corresponding change is also made to Rule 36(4) which provides for availment of ITC on provisional basis in cases where details of outward supplies are not furnished by the supplier. Consequently, by notification no 40/2021 dated 29th December, 2021 following amendment is made to Rule 36(4)
(4) No input tax credit shall be availed by a registered person in respect of invoices or debit notes the details of which are required to be furnished under sub- section (1) of section 37 unless,-
a). the details of such invoices or debit notes have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility; and
b). the details of such invoices or debit notes have been communicated to the registered person in FORM GSTR-2B under sub-rule (7) of rule 60
Conclusion
Combined effect of clause aa of section 16 (2) and rule 36(4) amended with effect from 1st January 2022 is that a person cannot take input tax credit if the details are not furnished by the supplier.
Section 17 Apportionment of credit and blocked credit
As per section 16(1), input tax credit can be taken only if the input goods or services are used in the course or furtherance of business. However sometimes the input is partially used for business purposes and partially for non-business purposes. In this situation as per section 17(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.
Sometimes, it also happens that the input goods or services are not exclusively used for effecting taxable supplies. In this situation also, part of the input tax paid on the goods or services used for effecting non taxable and exempt supplies need to be reversed. This provisions are given under section 17(2) and 17(3). Rule 42 and Rule 43 also plays a major role in determining the amount of input tax credit reversible under section 17(1) to 17(3).
Further section 17(4) provides for special provisions of ITC for Banking and financial institutions. Section 17(5) provides for blocked credit.
Let us discuss these provisions of section 17 in detail
Section 17(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.
Section 17(2) & 17(3)
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.
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.
Commentary
Section 17(2) provided that when an input supply is used for effecting both- Taxable(including Zero rated supplies) as well as exempt (or non taxable ) supplies then the input tax credit shall be restricted to that much part of the total credit which is attributable to taxable supply (including zero rated supply).
Here three phrases are very important. 1. Exempt supplies 2. Taxable supplies and 3. Zero rated supplies. To understand exempt supplies, we need to examine section 2(47) and section 17(3) to understand exempt supplies. The definition given under section 2(47) is as follows-
supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non- taxable supply.
The definition of exempt supplies given under section 2(47) has been extended by section 17(3). It is important to note that when we are computing ITC credit to be reversed as per Rule 42 or 43 under section 17(2), we need to take exempt supplies as defined under section 17(3).
Definition of exempt supplies as defined under section 17(3) is as under-
Following shall also be included in the value of exempt supplies for restriction of ITC:
Supplies on which recipient is liable to pay tax on reverse charge basis
(For example, Mr. A supplies services of Rs. 10 Lakh to Mr. B. Tax on which is required to be paid by Mr. B under RCM (section 9(3)), then this supply will be considered as exempt supply for Mr. A.)
Transactions in securities (as per explanation in ITC rules, value of security shall be taken as 1% of sale value of such security.)
Sale of land
Sale of building (subject to clause (b) of para 5 of Schedule II i.e., if the whole consideration for sale of the building is received after issuance of completion certificate by the competent authority, the sale of building will be considered as exempt supply.)
By GST Amendment Act, 2018, following explanation has been inserted to section 17(3)
Explanation—For the purposes of this sub-section, the expression ''value of exempt supply'' shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule.
By this explanation, it has been clarified that the expression “Value of Exempt Supply” shall not include the value of activities or transactions specified in Schedule III (i.e., those activities which are neither supply of goods nor supply of services). However, para 5 of the said schedule shall be included in the computation of value of exempt supplies. This para 5 of the schedule is nothing but sale of land and sale of building after receipt of completion certificate.
Exempt Supplies vs. Zero Rated Supplies
We have understood exempt supplies. Zero rated supplies are defined under section 16 of the IGST Act, 2017. This we will discuss in detail in relevant chapter. However, for the sake of understanding ITC reversal under section 17(2) read with rule 42 and 43, it is important to have idea of zero rated supplies. Zero rated supplies are mainly exports and deemed exports. In case of exports, if certain conditions are fulfilled then GST is not levied. In case of exempt supplies also GST is not charged. However, unlike exempt supplies, zero rated supplies shall not trigger reversal of ITC under Rule 42 and Rule 43. It means even if output tax is not charged in case of zero rated supplies, input tax credit is not required to be reversed. Whereas in case of exempt supplies, ITC is required to be reversed.
Output tax
Not required to be paid
Not required to be paid
Input tax
Not required to be reversed
Need to be reversed.
Section 17 (1), 17(2) and 17(3) are applicable in cases where supplies made by a registered person is partially exempt or the inward supplies are used partially for non business purposes.
To determine eligibility of ITC in above cases we need to understand Rule 42 and Rule 43 of GST Rules. Rule 42 is applicable for determination of ITC in respect of inputs and input services whereas Rule 43 is applicable for determination of the ITC in respect of Capital Goods.
Rule 42 of GST Rules (Other than Real Estate)
Manner of determination of Input Tax Credit in respect of inputs or Input Services and reversal thereof
(E = aggregate value of exempt supplies during the tax period,
F = Total turnover in the state of the registered person during the tax period)
Notes
where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of 'E/F' shall be calculated by taking values of 'E' and 'F' of the last tax period for which the details of such turnover are available, previous to the month during which the said value of 'E/F' is to be calculated
As per explanation to rule 42, the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule
The amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non- business purposes shall be equal to five per cent of common credit shown in above chart and the remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting supplies other than exempted supplies but including zero rated supplies.
The amount of eligible credit shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax
The amount equal to ineligible credit under this rule shall be added to the output tax liability of the registered person
The input tax credit determined under this rule 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.
Where the aggregate of the amounts calculated finally in respect of ineligible credit exceeds the aggregate of the amounts determined under sub-rule (1) in respect of ineligible credit, such excess shall be added to the output tax liability of the registered person in the month not later than the month of September following the end of the financial year to which such credit relates and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment.
Where the aggregate of the amounts determined under sub-rule (1) in respect of ineligible credit exceeds the aggregate of the amounts calculated finally in respect of ineligible credit, such excess amount shall be claimed as credit by the registered person in his return for a month not later than the month of September following the end of the financial year to which such credit relates.
Explanation - For the purposes of rule 42 and rule 43, it is clarified that the aggregate value of exempt supplies shall exclude the value of supply of services specified in the notification of the Government of India in the Ministry of Finance, Department of Revenue No. 42/2017-Integrated Tax (Rate), dated the 27th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number GSR 1338(E) dated the 27th October, 2017. i.e. supply of services having place of supply in Nepal or Bhutan against payment in Indian Rupees
Example
(1) Input tax paid on inputs or input services for non-business purpose- Rs. 5,00,000/-
(2) Input tax paid on inputs or input services exclusively used for exempt supplies-Rs. 2,00,000/-
(3) Input tax paid on inputs or input services for which ITC blocked U/s 17(5) Rs. 3,00,000/-
(4) Input tax paid on inputs or input services exclusively used for taxable and zero-rates supplies- Rs. 8,00,000/-
(5) Input tax paid on inputs or input services used for both, exempt as well as taxable supplies- Rs. 6,00,000/-
(6) Total turnover in the state-Rs. 20,00,000/-
(7) Value of exempt supplies (Including supplies of services having place of supply in Nepal against payment in INR 2,00,000)-Rs. 10,00,000
Solution
In Case 1, 2 and 3 No ITC can be taken.
In Case 4, full ITC of Rs. 8 Lakh can be taken In Case 5, ITC will be calculated as under-
[Rs. 6 Lakh X Rs. 8 Lakh (excluding supplies to Nepal or Bhutan)] / Rs. 20 Lakh =Rs. 2,40,000/- will ineligible ITC
Hence, eligible ITC will be Rs. 3,60,000/- (Rs. 6,00,000/- – Rs. 2,40,000/-) Therefore, total eligible ITC will be Rs. 11,60,000/-
Rule 43 of GST Rules (Other than Real Estate) Manner of determination of Input Tax Credit in respect of Capital Goods and reversal thereof in certain cases
Explanation.- An item of capital goods declared under clause (a) on its receipt shall not attract the provisions of sub-section (4) of section 18, if it is subsequently covered under this clause.
The aggregate of the amounts credited to the electronic credit ledger under clause (a) above to be denoted as 'Tc', shall be the common credit in respect of capital goods for a tax period.
Provided that where any capital goods earlier covered under clause (b) is subsequently covered under clause (c), the value of credit arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof shall be added to the aggregate value 'Tc'.
The amount of input tax credit attributable to a tax period on common capital goods during their useful life, be denoted as 'Tm' and calculated as-
Tm= Tc ÷ 60
The amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, be denoted as 'Tr' and shall be the aggregate of 'Tm' for all such capital goods;
The amount of common credit attributable towards exempted supplies, be denoted as 'Te', and calculated as-
Te= (E÷ F) x Tr
Where,
'E' is the aggregate value of exempt supplies, made, during the tax period, and
'F' is the total turnover of the registered person during the tax period:
Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of 'E/F' shall be calculated by taking values of 'E' and 'F' of the last tax period for which the details of such turnover are available, previous to the month during which the said value of 'E/F' is to be calculated.
Explanation-For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of list II of the said schedule.
The amount Te along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.
The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax.
Explanation - For the purposes of rule 42 and rule 43, it is clarified that the aggregate value of exempt supplies shall exclude the value of supply of service specified in the notification 42/2017 - IGST (Rate) dated 27th October 2017 i.e. Supply of Services having place of supply in Nepal or Bhutan against payment in Indian Rupees.
Following data is provided by Mr. A for the month of April 2018.
1
Input Tax paid on capital goods used exclusively for taxable supply
Rs. 5,00,000
2
Input tax paid on capital used exclusively for exempt supplies
Rs. 3,00,000
3
Capital Goods acquired in the month of April 2018 to be used for both, exempt and taxable supplies
Rs. 6,00,000
4
Exempt supplies during April 2018 (including supplies to Bhutan Rs. 2,00,000)
Rs. 10,00,000
5
Total turnover for April 2018
Rs. 20,00,000
Solution :
In case 1, ITC is fully available.
In case 2, ITC is not available.
In case 3, first, Mr. A will take ITC of Rs. 6,00,000.
Then compute Tm= Tc /60. I.e. Rs. 6,00,000 /60 (i.e. 5 years x 12 months), which is Rs. 10,000 every month starting from April 2018.
Then, he will reverse the ITC as under for April 2018.
[Rs. 10,000 x Rs. 8,00,000 (total turnover excluding supplies to Nepal or Bhutan] / Rs. 20,00,000, which is Rs. 4,000 per month for 5 years
Reversal of Input tax credit as per Rule 42 and 43 for Real Estate Sector.
Provisions of Rule 42 and 43 for Real Estate is similar to normal provisions of these Rules as discussed above. However, certain changes are made to these Rules for Real Estate sector by Notification No. 16/2019-CT dated 29th March 2019, which are summarized below:
The provisions are applicable only for commercial projects, because in case or residential projects, reduced rate of 5% or 1% (for affordable housing) is applicable without ITC. Hence, there is no question of reversal of ITC for residential projects.
For real estate sector, value of E/F shall be computed for each tax period and for each project separately.
Value of E will be aggregate carpet area of the apartment construction of which is exempt from tax plus aggregate carpet area construction of which is not exempt from tax but are identified by the promoter to be sold after issue of completion certificate or first occupation, whichever is earlier and value of F is aggregate carpet area of apartment in the project. (For example, if total carpet area of the project is 5000 sq. Ft. and promoter expects that the carpet area of the apartments which will be sold after completion certificate shall be 2000 sq. ft., then E = 2000 and F = 5000)
On the completion of the project, the total amount of credit to be reversed as above shall be computer finally. Where, E will be aggregate carpet area of the apartments construction of which is exempt from tax plus aggregate carpet area of the apartments constriction of which is not exempt from but which have not been booked till the date of issue of completion certificate or first occupation of the project, whichever is earlier. F will be aggregate carpet area of the apartment of the project.
Where aggregate amount calculated finally as per Point 4 above, exceeds the total amount of reversals made during each tax period as per Point 3, then such excess amount shall be reversed in Form GSTR-3B or through Form GST-DRC-03 in the month not later than the month of September following the end of the financial year in which completion certificate is issued or the first occupation takes place. The person is liable to pay interest on the excess amount at the rate specified under Section 50(1) for the period starting from the first day of April of the succeeding financial year till the date of payment.
If the amount calculated as per Point 4 is less than total amount of reversals made during each tax period as per Point 3, then the differential amount shall be claimed as credit by the registered person in the return for the month not later than the month of September following the end of the financial year, in which the certificate of completion is issued or first occupation takes place.
Special Provisions for Banking companies and financial institutions Section 17(4)
Banks and financial institutions supply many services which are exempt from GST. For example, interest collected by banks are exempt from payment of GST. However, many other services are subject to GST. For example, Locker Rent, Bank charges etc. In this situation, as banks are providing taxable as well as exempt supplies, they need to comply with the provisions of section 17(2) and 17(3) as mentioned above. In case, banks and financial institutions do not want to comply with these provisions, they have been provided a special option under section 17(4).
As per section 17(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 fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:
The option once exercised shall not be withdrawn during the remaining part of the financial year.
The restriction of fifty per cent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number (PAN).
Refer table below to understand ITC for banking company or a financial institution as per Rule 38 of GST Rules
Particulars
ITC
Tax paid on inputs and input services used for non- business purposes
NO ITC
Credit attributable to supplies specified in section 17(5)
NO ITC
Tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number
FULL ITC
Remaining Amount of Input Tax
50% of Input tax credit
Blocked Credit under section 17(5)
There are certain input supplies in case of which even if all conditions of Section 16 are fulfilled credit is not available. Input Tax credit in respect of such supplies are blocked under Section 17(5). Hence, if we have paid input tax in respect of such supplies, we cannot get input tax credit of such tax as it is blocked under section 17(5).
Further section 17(5) has been amended by GST (Amendments) Act, 2018. Amended provisions are given below
Blocked credit in respect of motor vehicle and other conveyances
GST Amendment Act, 2018 has replaced clause (a) & (b) of Section 17(5). Clause (a) has been removed and new clauses a, aa and ab are inserted. Relevant provisions are as under:
(i) Motor Vehicles:
Motor vehicle for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making following taxable supplies namely:-
Further supply of such M.V. or
Transportation of passengers or
Imparting training for driving such motor vehicles.
(ii) Vessels and aircrafts:
Vessels and aircrafts except when they are used for:-
For making the following taxable supplies:
Further supply of such vessels or aircrafts or
Transportation of passengers or
Imparting training on navigating such vessels or
Imparting training on flying such aircrafts
For transportation of Goods
(iii) Service of General Insurance, servicing, repairs and maintenance for M.V., vessels or aircrafts specified in (i) & (ii).
However, Input Tax Credit of General Insurance, servicing, repairs and maintenance for M.V., vessels or aircrafts shall be available if:
The M.V., vessels or aircrafts is used for purposes specified in (i) & (ii) above.
Where received by a taxable person engaged:
in manufacture of such M.V., vessels or aircrafts or
in supply of General Insurance services in respect of such M.V., vessels or aircrafts insured by him
Commentary on clause (a) and (aa) of Section 17(5)
Gst Amendment Act, 2018 has made important amendments to clause a and b of section 17(5). ITC on purchase of motor vehicle, vessel and aircrafts are not available as per these clauses. In case of motor vehicles is approved seating capacity (including driver) is not exceeding 13 persons then this restriction shall not be applicable. However, for specified purposes like further supply of motor vehicle, vessel and aircraft, transportation of passengers, providing training for driving motor vehicle, navigating vessels and imparting training on flying aircrafts, GST ITC shall not be blocked under section 17(5).
Motor vehicle is defined under section 2(76) as having the same meaning as assigned to it in clause (28) of section 2 of Motor Vehicle Act, 1988.
Readers can observe that the ITC in respect of General insurance, servicing, repairs and maintenance for motor vehicles, vessels and aircrafts covered under this sub-section shall also be blocked. This restriction is not applicable if service of general insurance, servicing, repairs and maintenance is not applicable if the service is received by manufacturer of such motor vehicle, vessels or aircrafts or by a person who is engaged in supply of general insurance services in respect of such motor vehicle, vessels or aircrafts insured by him (reinsurance service).
This can be explained as under-
If ITC of motor vehicle, vessel or aircraft is blocked then ITC for supply of service of general insurance, servicing and repairs-maintenance shall also be blocked provided it is not received by manufacturer of such motor vehicle, vessels or aircrafts or by a person who is engaged in supply of general insurance services in respect of such motor vehicle, vessels or aircrafts insured by him.
Let's understand this with following examples
Example:
A Ltd. imports an aircraft for use in its training activity, then, under section 17(5)(a)(i)(c) of the CGST Act, ITC is allowed on aircraft if they are used to make the taxable supply of imparting training on flying an aircraft.
Example:
A car dealer is allowed ITC on cars purchased for resale; a cab service is allowed ITC on cars purchased for use as cabs; a driving school is allowed ITC on cars purchased for use in teaching driving.
Example:
A Chartered Accountant buys a motor vehicle for use in his business. He cannot avail ITC of tax paid on purchase of vehicle as per section 17(5)(a).
Example:
A Ltd. a manufacturing company of television sets purchased car for its director then ITC of such car is not available.
A Ltd. a manufacturing company of television sets purchased a bus having seating capacity of 20 persons. Thus, ITC of GST paid on purchase of bus is available as the seating capacity of the M.V. is more than 13 persons.
A Ltd. a manufacturing company of television sets incurs repair expense of car purchased for director then ITC of such repair service is not available.
A Ltd. a manufacturing company of television sets incurs repair expense of bus purchased earlier then ITC of such repair service is available.
Blocked credit in respect of some specific goods or services
There are some specified supplies for which Input tax credit is blocked.
Clause b (I)of section 17(5)
Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery renting or hiring of motor vehicles , Vessels or aircrafts referred in (a) & (aa) of 17(5) except when used for purposes specified therein, life insurance, health insurance 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.
Commentary
Here there is no blanket blockage of credit but law allows credit only for same category of business. Which means one to one correlation is required to take credit. This restriction is applicable for input tax paid on any of following inward supplies
Food and beverages
Outdoor Catering
Beauty Treatment
Health care
Cosmetic and plastic surgery.
Renting or hiring of motor vehicle, vessels or aircrafts referred in (a) & (aa) of 17(5), except when used for purposes specified therein
Life insurance
Health insurance
For example a CA firm receives supply of food pack during the month of September then CA firm is not allowed to take ITC of input tax paid on such supply. Further if such input supply is used for making outward taxable supply as an element of a taxable composite or mixed supply then ITC is allowed. For example, an outdoor caterer can take ITC of input tax paid on purchase of food and beverages because it will become element of composite supply of outdoor catering.
Clause b(ii) and (iii) of section 17(5)
Membership of a club, health and fitness centre; and
Travel benefits extended to employees on vacation such as leave or home travel concession
Here, ITC for these two services I.e. membership of a club, health/fitness centre and travel benefits for employees are blocked.
There is also one proviso to clause b of section 17(5) which is as under-
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
Commentary
Sometimes because of government laws and regulations it is obligatory for a person to provide such services to its employees. In this situation ITC of such services is allowed. For example, as per government norms it is mandatory for employer to provide transportation facility to employees working in call centre at night shift. In this situation if employer avails service of rent a cab then he is allowed to take credit of input tax paid on receipt of rent a cab service. Another example can be employee state insurance taken by employer for employee to fulfil his statutory obligation.
It is important for the readers to understand that in case of sub clause (I) of clause b of section 17(5), ITC is allowed if there is one to one correlation of business. (same line of business), however, in case of sub clause ii and iii (membership of club/fitness centre and employee travel benefits for vacation), ITC is not allowed to be taken even in same line of business. Further, the proviso about allowance of ITC in case the supply is obligatory for the employer to be provided to employees is applicable to whole clause b.
Author's note on ITC of Food and beverages
As discussed, ITC on food and beverages are not allowed if it is not used for same line of business. Question arises as to whether ITC of restaurants services is allowed or not? As per my opinion, food and beverages are different from restaurants services. Food and beverages are goods whereas restaurant service is a service as specified under para 6(b) of schedule II. What is blocked here is food and beverages and not restaurant services. Hence, there is no legal bar on taking ITC for restaurant services. Though conservatively, we can avoid taking ITC on restaurant services. Because there is another clause (g), which provides that Input tax credit for goods or services or both used for personal consumption shall not be allowed.
Blocked credit in respect of works contract service and other goods and services used for construction of immovable property.
We need to see clause (c) and (d) of section 17(5) together to understand this denial of ITC under section 17(5).
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;
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 capitalisation, to the said immovable property.
Commentary
For clause (c) let us understand the meaning of “works contract”.
As per section 2(119) of CGST Act “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
It is important to note that a contract can be a works contract only when it is in relation to an immovable property. Tax paid on input service of work contract is allowed only when it is used as input service for further outward supply of works contract. So here the input and output service should be in same category (i.e. both should be works contract service) to be eligible to get input tax credit.
Instead of taking service of works contract, it is also possible that a person himself purchases goods and services separately and constructs immovable property on his own. Here also clause (d) blocks input tax credit. For example, a person purchases goods for construction of his factory building, in this situation ITC of the goods purchased or services received shall not be available.
There are certain common points that we need to discuss-
Meaning of Immovable property
The credit which is blocked here is for construction of immovable property. Here a question arises as to what is called immovable property? The phrase “immovable property” has not been defined under GST Act.
Section 3(26) of the General Clause Act, 1847 defines immovable property as “Immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.
Hence the test for any property to be classified in to immovable property is its permanent fastening or attachment to earth. What is the meaning of permanently attached to earth? Supreme Court has held that if a property cannot be removed from its place without causing substantial damage to it then it is considered as immovable property.
Let's take an example of lift being installed in a building. Whether it will be plant and machinery or immovable property? A lift permanently installed to building becomes integral part of the building (immovable property).
Meaning of construction
Explanation to these clauses mentions that expression “construction” includes re-construction, renovation, additions or alterations or repairs to the extent of capitalisation, to the said immovable property. Here the treatment of the expense in books of accounts becomes important. If expense is capitalised to the immovable property then the credit is blocked, but if the expense is charged off to profit and loss accounts then the credit is not blocked. For example Mr. A carries out repair of his factory building and this expense is not capitalised by him in his books of accounts but has been charged off to profit and loss account. In this situation he can take ITC of tax paid by him on goods or services used for such repair.
Meaning of plant and machinery
As per explanation to section 17(5), 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—Land, building or any other civil structures;Telecommunication towers; andPipelines laid outside the factory premises.
From the explanation, readers can observe that the plant and machinery when fixed to earth does not lose input tax credit. The foundation or structural support for fixing the machinery to earth will also be included in plant and machinery and shall be eligible for input tax credit. Further, telecommunication towers and pipelines laid outside the factory premises are also excluded from the definition of plant and machinery and ITC on them shall be blocked.
Author's note
In case of M/s. Safari Retreats Pvt. Ltd., and another V/s Chief Commissioner of Central Goods & Service Tax & others, honourable Orissa High Court held that the input tax paid for construction of commercial mall is eligible as ITC when the shops and offices of the mall are let out and on the rent GST is payable. In this case, high court did not hold section 17(5)(d) ultra vires and refused to strike it down but allowed ITC on construction of mall. Department has filed an appeal against the judgement of Orissa High Court to Supreme Court. The case is presently pending with Supreme Court.
Blocked credit for goods or services or both on which tax has been paid under section 10( Tax paid under composition scheme)
We have already discussed in the chapter of composition scheme that a person opting for composition scheme can neither take input tax credit nor he can pass on input tax credit to his customers.
Blocked credit for non resident taxable person
It has been provided that a non resident taxable person cannot take ITC of tax paid on any goods or services or both except on goods imported by him.
As per section 2(77) of the GST Act,“non-resident taxable person” means any person who occasionally undertakes transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India.
Blocked credit for goods or services or both used for personal consumption.
The goods or services or both used for personal consumption are not eligible for ITC. This clause may become a cause of disputes and litigations. The term “ personal consumption” has not been defined in GST law. Hence question arises as to what is called personal consumption. There needs to be a proper clarification as to what is called personal consumption. Under service tax era food, goods used in guesthouse used by employee etc were not eligible for ITC as they were primarily meant for personal consumption. However, such clarification is missing under GST law. Goods or facilities such as mobile phones, guesthouse etc provided to employees may be covered under personal consumption and till we get any ruling from high court or Supreme Court the confusion about what is called “personal consumption”shall continue.
Goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample.
If goods are lost, stolen, destroyed, written off or disposed of by way of gift or free samples, then ITC taken on such goods earlier is required to be reversed.
For example,
A Ltd. purchased 100 units at Rs. 10 per unit from B Ltd. GST
Rate being 18%. Out of these 100 units it gave 30 units as free sample to its customer C Ltd.
A Ltd. is required to reverse ITC of following amount:- Units = 30
* Price = 10
300 * GST Rate 18%=54
ITC of Rs. 54 needs to be reversed.
Above mentioned provisions are applicable to free samples and gifts. However, there might be a sales promotion scheme like buy one get one free. For example, buy one toothpaste and get a toothbrush free. In this situation, it is wrong to apply provisions of blocked credit and to conclude that the toothbrush is supplied free. In fact, the toothbrush is not supplied free but its price is included in the price of toothpaste. Hence, it can be considered as a mixed or composite supply and there is no need to reverse ITC on such transaction. Same view is expressed in Circular No. 92/11/2019-GST dated 7th March, 2019.
Blocked credit for any tax paid in accordance with the provisions of section 74, 129 and 130
Section 74 is about determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed by reason of fraud or any wilful misstatement or suppression of facts
Section 129 is about detention, seizure and release of goods and conveyances in transit.
Section 130 is about confiscation of goods or conveyances and levy of penalty.
ITC of any tax paid under section 74 or 129 or 130 cannot be taken. Further Rule 36(3) of GST rules provide that No input tax credit shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, wilful misstatement or suppression of facts.
Further as per Rule 53(3) any invoice or debit note issued in pursuance of any tax payable in accordance with the provisions of section 74 or section
129 or section 130 shall prominently contain the words “INPUT TAX CREDIT NOT ADMISSIBLE”.
Section 18 Input Tax Credit in special cases
Section 18 provides for input tax credit in case of special circumstances. Let us examine these circumstances in detail
Section 18(1)
This subsection provides for
Availment of ITC in case of new registration- 18(1)(a) & (b)
When a person cease to pay tax under section 10- 18(1)(c)
When exempt supply becomes taxable. – 18(1)(d)
Availment of ITC in case of new registration- 18(1)(a) & (b)
A person who has applied for registration under GST 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. Section 18 (1)(a)
Commentary
Lets understand with help of an example.
Aggregate turnover of Mr. A exceeds Rs. 20 lakh on 15-08-2017. He applied for registration on 31-08-2017 (within 30 days from the day on which he became liable for application). Registration is granted on 02-09-2017. He is entitled to take ITC of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on 14-08-2017.
A person who takes registration under sub-section (3) of section 25 (Voluntary 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 of grant of registration. Section 18 (1)(b)
Suppose in above example, Mr. A voluntary applies for registration on 31- 08-2017 and registration is granted on 02-09-2017. He is entitled to take ITC of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on 01-09-2017
Question remains what will happen to a person who though liable for applying registration does not apply for registration within a period of 30 days?
As there is no provision for granting ITC to such person, he will not be entitled to ITC on input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock. He can take ITC on input tax paid on inward supplies received after the effective date of registration.
Example:
Mr. A becomes liable to pay tax on 1st September 2017 and applies for registration on 15th September 2017. Mr. A is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 31st August. Mr. A cannot take ITC on capital goods. Suppose in the above example, Mr. A applies for registration on 5th October 2017, i.e. after expiry of 30 days, then he will not be eligible to take ITC even for inputs lying in stock on 5th October 2017.
Example:
Mr. A applies for voluntary registration on 15th June and obtains registration on 25th June. Mr. A is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 24th June. Mr. A cannot take ITC on capital goods.
When a person cease to pay tax under section 10 – 18(1)(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. Section 18 (1)(c)
Example:
Mr. A, a registered taxable person, was paying tax at composition rate up to 30th July. However w.e.f. 31st July, Mr. B becomes liable to pay tax under regular scheme. Mr. B will be eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as on 30th July. ITC on capital goods will be reduced by 5% per quarter from the date of the invoice.
When exempt supply becomes taxable – 18(1)(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 prescribed under Rule 40. Section 18 (1)(d).
As per Section 18(2), ITC under section 18(1) above cannot be taken in respect of any supply of goods or services or both after expiry of one year from the date of issue of tax invoice relating to such supply.
Commentary on section 18(1) and 18(2)
In case of section 18(1)(a), suppose a person applies for registration after expiry of 30 days from the date on which he becomes liable for registration whether he can take ITC in respect of input tax paid in respect of inputs held in stock or semi-finished or finished goods?? Apparently, section 18(1)(a) only provides for ITC for a person applying for registration within a period of 30 days from the date on which he becomes liable for registration. Hence once the deadline of 30 days expires there is no provision for taking ITC in respect of inputs held in stock or semi-finished or finished goods.
There is no provision for taking ITC of Capital Goods under section 18(1)(a) and 18(1)(b), which apparently means if capital goods are acquired before taking registration ITC of such capital Goods is not available.
Section 18(1) allows credit of input tax paid in respect of inputs held in stock, inputs contained in semi-finished goods or finished goods. It is important to observe that there can be input tax paid on services in respect of inputs.
example
GST paid on freight for purchase of input is also eligible as ITC under section 18 (1) if other conditions are satisfied.
It is important to note that Rule 40 is applicable for situations covered under section 18(1). Following are the procedures laid down in Rule 40
The input tax credit on capital goods, in terms of clauses (c) and (d) of sub- section (1) of section 18, shall be claimed after reducing the tax paid on such capital goods by five percentage points per quarter of a year or part thereof from the date of the invoice or such other documents on which the capital goods were received by the taxable person.
The registered person shall within a period of thirty days from the date of becoming eligible to avail the input tax credit under sub-section (1) of section 18, or within such further period as may be extended by the Commissioner by a notification in this behalf, shall make a declaration, electronically, on the common portal in FORM GST ITC-01 to the effect that he is eligible to avail the input tax credit as aforesaid:
The declaration mentioned above shall clearly specify the details relating to the inputs held in stock or inputs contained in semi-finished or finished goods held in stock, or as the case may be, capital goods–
on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of the Act, in the case of a claim under clause (a) of sub-section (1) of section 18;
on the day immediately preceding the date of the grant of registration, in the case of a claim under clause (b) of sub-section (1) of section 18;
on the day immediately preceding the date from which he becomes liable to pay tax under section 9, in the case of a claim under clause (c) of sub- section (1) of section 18;
on the day immediately preceding the date from which the supplies made by the registered person becomes taxable, in the case of a claim under clause (d) of sub-section (1) of section 18;
NOTES
The details furnished in the declaration under clause (b) shall be duly certified by a practicing chartered accountant or a cost accountant if the aggregate value of the claim on account of central tax, State tax, Union territory tax and integrated tax exceeds two lakh rupees;
The input tax credit claimed in accordance with the provisions of clauses (c) and (d) of sub-section (1) of section 18 shall be verified with the corresponding details furnished by the corresponding supplier in FORM GSTR-1 or as the case may be, in FORM GSTR- 4, on the common portal.
Further as per section 18(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.
Readers can note that section 18(1) provides for availment of input tax credit on stock in special circumstances. As the availment is about stock, it is required to fulfil condition given under section 18(2) also. As per this sub section, the invoice should not be earlier than one year for taking ITC on the stock item.
Section 18(3)
ITC in case of change in constitution of registered person
As per section 18(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 unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in manner provided under Rule 41 as under:
A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:
In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de- merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC- 02 shall be credited to his electronic credit ledger.
The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.
Transfer of ITC in case of death of a sole proprietor.
There can also be cases where there is ITC lying in an Electronic Credit Ledger and the proprietor of the business dies. In this situation, there is a provision for transfer of ITC to successor of the business. The issue has been clarified by circular number 96/12/2019-GST dated 29th March, 2019. Clarifications given by the circular is summarized below :
Transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor.
In case after death of the sole proprietor business is continued by his successor or transferee, The ITC remaining unutilized is allowed to be transferred to the transferee.
Transferee shall take a fresh registration by filing of GST REG-01 and he is required to mention “ Death Of the Proprietor” in reason to obtain registration.
Legal heir of the deceased proprietor shall apply cancellation of registration in Form GST REG-16. He will mention “ Death of proprietor” as reason for cancellation.
ITC lying in Electronic Credit ledger of the deceased proprietor shall be allowed to be transferred to the successor as per section 18(3) as prescribed under rule 41.
As per Rule 41(1), Transferee shall file form GST ITC -02 Upon acceptance of form GST ITC -02, Input tax credit shall be credited to electronic credit ledger of the transferee.
It is important to mention provisions of section 85(1) and section 93(1).
According to these provisions, transferee /successor shall be liable to pay tax, interest or any penalty due from the transferor in cases of transfer of business due to death of proprietor.
ITC in case of a person opting to pay tax under composition or goods or services become wholly exempt – Section 18(4) and section 18(5)
Provisions of section 18(4) and section 18(5) covers situation exactly opposite to situations covered under section 18(1)( c) and 18(1)(d).
The provisions of Section 18(4) and (5) shall be applied in following cases
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, 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 per Rule 44, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption.
Further, after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
Let us understand provisions of reversal of ITC
Rule 44
Example:
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
NOTES
The amount, as specified/ calculated above shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.
Where the tax invoices related to the inputs held in stock are not available, the registered person shall estimate the above amount based on the prevailing market price of the goods on the effective date of the occurrence of any of the events specified.
The amount determined above shall form part of the output tax liability of the registered person and the details of the amount shall be furnished in FORM GSTITC-03, where such amount relates to any event specified and in FORM GSTR-10, where such amount relates to the cancellation of registration.
The details furnished based on estimated amounts shall be duly certified by a practicing chartered accountant or cost accountant.
The amount of input tax credit for the specified purposes relating to capital goods shall be determined in the same manner as specified and the amount shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.
Rule 44A
.Manner of reversal of credit of Additional duty of Customs in respect of Gold ore bar- The credit of Central tax in the electronic credit ledger taken in terms of the provisions of section 140 relating to the CENVAT Credit carried forward which had accrued on account of payment of the additional duty of customs levied under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975), paid at the time of importation of gold ore bar, on the stock of gold ore bar held on the 1st day of July, 2017 or contained in gold or gold jewellery held in stock on the 1stday of July, 2017 made out of such imported gold ore bar, shall be restricted to one-sixth of such credit and five-sixth of such credit shall be debited from the electronic credit ledger at the time of supply of such gold ore bar or the gold or the gold jewellery made there-from and where such supply has already been made, such debit shall be within one week from the date of commencement of these Rules.
In case of Kundan Care Products Ltd. Vs. UOI, Delhi High Court has granted interim relief to Gold Ore Bar importers in application of Rule 44A, by order dated 25th August 2017.
Section 18(6) Reversal of Input tax credit in case of supply of capital goods
As per section 18(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 prescribed under Rule 40 (2) of GST Rules (i.e. by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods) 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.
Example:
A Ltd. acquired Capital Goods for Rs. 10 Lakh on 15th December 2017 and took ITC of tax paid on these goods of Rs. 1.8 Lakh (@ 18% GST). The goods are removed on 16th August 2018 for a consideration of Rs. 6 Lakh.
In the above situation, A Ltd. will have to pay higher of;
ITC taken Rs. 1.8 Lakh (less) 20% (i.e. 4 quarters x 5 years) of Rs. 1.8 Lakh, which is Rs. 1.44 Lakh
GST on the transaction value Rs. 1.08 Lakh (18% on Rs. 6 Lakh) A Ltd. will have to Rs. 1.44 Lakh.
NOTE: Where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in FORM GSTR-1.
Section 19 ITC in case of inputs and capital goods sent for job work
As per Section 2 (68) of CGST Act, 2017, “Job Work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “Job Work” shall be construed accordingly.
As discussed earlier, as per Section 16(2), a registered person can take credit of goods only if he has received goods. In case of a Job Work, sometimes goods are directly sent to job worker without being directly received at the place of principal. In this situation —
As per section 19, the principal shall, subject to such conditions and restrictions as may be prescribed, be allowed input tax credit on inputs sent to a job worker for job work.
Inputs
Notwithstanding anything contained in clause (b) of sub-section (2) of section 16 the principal shall be entitled to take credit of input tax on inputs even if the inputs are directly sent to a job worker for job work without being first brought to his place of business.
Where the inputs sent for job work are not received back by the principal after completion of job work or otherwise or are not supplied from the place of business of the job worker in accordance with clause (a) or clause (b) of sub- section (1) of section 143 within one year of being sent out, it shall be deemed that such inputs had been supplied by the principal to the job worker on the day when the said inputs were sent out. (not applicable for to moulds and dies, jigs and fixtures, or tools sent out to a job worker for job work.)
Provided that where the inputs are sent directly to a jobworker, the period of one year shall be counted from the date of receipt of inputs by the jobworker.
Example:
Mr. A supplies some inputs to job worker on 1st April 2018. The inputs are not received back at the premises of Mr. A nor are they sold from the premises of job worker till 1st April 2019. Then, it will be deemed that Mr. A has supplied these inputs on 1st April 2018 and is required to pay GST along with interest of one year
Capital Goods
The principal shall, subject to such conditions and restrictions as may be prescribed, be allowed input tax credit on capital goods sent to a jobworker for jobwork.
Notwithstanding anything contained in clause (b) of sub-section (2) of section 16 the principal shall be entitled to take credit of input tax on capital goods even if the capital goods are directly sent to a jobworker for jobwork without being first brought to his place of business.
Where the capital goods sent for job work are not received back by the principal within a period of three years of being sent out, it shall be deemed that such capital goods had been supplied by the principal to the job worker on the day when the said capital goods were sent out (not applicable for to moulds and dies, jigs and fixtures, or tools sent out to a jobworker for jobwork.)
Provided that where the capital goods are sent directly to a job worker, the period of three years shall be counted from the date of receipt of capital goods by the jobworker.
Example:
Mr. A supplies some capital goods to job worker on 1st April 2018. The goods are not received back at the premises of Mr. A nor are they sold from the premises of job worker till 1st April 2021. Then, it will be deemed that Mr. A has supplied these capital goods on 1st April 2018 and is required to pay GST along with interest of three years.
Explanation.––For the purpose of this section, “principal” means the person referred to in section 143
Rule 45 Conditions and restrictions in respect of inputs and capital goods sent to job worker
The inputs, semi-finished goods or capital goods shall be sent to the job worker under the cover of a challan issued by the principal, including where such goods are sent directly to a job-worker, and where the goods are sent from one job worker to another job worker, the challan may be issued either by the principal or the job worker sending the goods to another job worker:
Provided that the challan issued by the principal may be endorsed by the job worker, indicating therein the quantity and description of goods where the goods are sent by one job worker to another or are returned to the principal:Provided further that the challan endorsed by the job worker may be further endorsed by another job worker, indicating therein the quantity and description of goods where the goods are sent by one job worker to another or are returned to the principal.
The challan issued by the principal to the job worker shall contain the details specified under Rule 55
The details of challans in respect of goods dispatched to a job worker or received from a job worker or sent from one job worker to another during a quarter shall be included in FORM GST ITC-04 furnished for that period on or before the twenty- fifth day of the month succeeding the said quarter or within such further period as may be extended by the Commissioner by a notification in this behalf.
As provided by notification 35/2021 dated 29th August, 2021,Rule 45 has been amended to provide that the form ITC 04 is NOT required to be filed quarterly now. For persons having aggregate turnover up to five Crore annually this form shall be filed and for persons having aggregate turnover exceeding five Crore semi annually this form shall be filed.
Where the inputs or capital goods are not returned to the principal within the time stipulated in section 143, it shall be deemed that such inputs or capital goods had been supplied by the principal to the job worker on the day when the said inputs or capital goods were sent out and the said supply shall be declared in FORM GSTR- 1 and the principal shall be liable to pay the tax along with applicable interest.
Rule 45 has been amended by Notification 14/2018-CT dated 23-03-2018, to clarify procedures where goods are sent from one job-worker to another job- worker. As per this amended Rule 45, where goods are sent from one job-worker to another job-worker, the challan may be issued by either the principal or the job-worker sending the goods to another job-worker. Where the challan is issued by the principal, job-worker is required to endorse the challan indicating therein the quantity and description of goods. Further the challan endorsed by the job- worker maybe further endorsed by another job-worker indicating quantity and description.
Section 20 Distribution of Credit by Input Service Distributor
Under Section 2(61), input service distributor is defined as under
“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.
As per section 20, the Input Service Distributor may distribute the credit subject to the following conditions, namely:––
The credit can be distributed to the recipients of credit against a document containing such details as prescribed under Rule 36
The amount of the credit distributed shall not exceed the amount of credit available for distribution
The credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient
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
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.
Explanation––For the purposes of this section––
The “relevant period” shall be-
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; orif 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;
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;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 entry 51 and 54 of List II of the said Schedule.As per Rule 39 of GST rules following procedures are prescribed for distribution of credit by ISD
NOTE 1:
The input tax credit that is required to be distributed in accordance with the provisions of clause (d) and (e) of sub-section (2) of section 20 to one of the recipients 'R1', whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, “C1”, to be calculated by applying the following formula -
C1 = (t1÷T) × C
Where,
“C” is the amount of credit to be distributed,
“t1” is the turnover, as referred to in section 20, of person R1 during the relevant period, and
“T” is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable in accordance with the provisions of section 20;
NOTE 2:
in respect of a recipient located in the same State or Union territory in which the Input Service Distributor is located, be distributed as input tax credit of central tax and State tax or Union territory tax respectively;
in respect of a recipient located in a State or Union territory other than that of the Input Service Distributor, be distributed as integrated tax and the amount to be so distributed shall be equal to the aggregate of the amount of input tax credit of central tax and State tax or Union territory tax that qualifies for distribution to such recipient in accordance with Note 1;
NOTE 3:
The amount so apportioned on the basis of credit note (computation) shall be
Reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; or
Added to the output tax liability of the recipient where the amount so apportioned is in the negative by virtue of the amount of credit under distribution being less than the amount to be adjusted.
If the amount of input tax credit distributed by an Input Service Distributor is reduced later on for any other reason for any of the recipients, including that it was distributed to a wrong recipient by the Input Service Distributor, the process specified in NOTE 3 shall apply, mutatis mutandis, for reduction of credit.
Subject to the above mentioned statement, the Input Service Distributor shall, on the basis of the Input Service Distributor credit note as specified, issue an Input Service Distributor invoice to the recipient entitled to such credit and include the Input Service Distributor credit note and the Input Service Distributor invoice in the return in FORM GSTR-6 for the month in which such credit note and invoice was issued.
Example:
A Ltd. having its head Office at Delhi is registered as ISD. It has branches in 'Mumbai', 'Ahmadabad' and 'Kolkata'. All three branches were operational during the year.
A Ltd furnishes the following information for the month of August 2018:
GST paid on services used only for Ahmadabad: Rs. 5,00,000.
GST paid on services used for all the branches: Rs. 6,00,000 Turnover details of previous Financial Years: -
Unit
Turnover (Rs.)
Turnover of Mumbai Branch
10,00,00,000
Turnover of Ahmadabad Branch
6,00,00,000
Turnover of Kolkata unit
4,00,00,000
Determine the credit to be distributed by A Ltd. to each of its three units.
Answer
Particulars
Credits distributed to all units (Rs.)
Total Credit Available
Ahmedabad
Mumbai
Kolkata
GST paid on Services used only For Ahmedabad Unit
5,00,000
5,00,000
0
0
GST paid on services used for all units Distribution on pro rata basis to all the branches which are operational in the current year
6,00,000
3,00,000
1,80,000
1,20,000
Total
11,00,000
8,00,000
1,80,000
1,20,000
Note: Pro rata distribution in the ratio of turnover of respective Branches. i.e. 10:6:4
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.
Some Important Issues and its Discussion
Section 16: Can tax be recovered from buyer if supplier fails to pay tax?
Since implementation of GST, this issue has been a matter of debate. If there is a fault of supplier, how can an innocent recipient be punished? The argument on the part of the recipient is that he has received goods/services, has paid consideration for the same with tax to supplier, has filed all the returns and supplier fails to pay tax to government then what is the fault of the recipient? Argument from the Government, on the other hand is that if government exchequer has not received the amount of tax, how can it be given as input tax credit? if something is not received then how can it be given?
Let us discuss, legal provisions and judicial view on the matter. Conditions for getting Input tax credit is governed by section 16(2). This section is reproduced below-
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––
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;
he has received the goods or services or both.
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;
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 utilisation of input tax credit admissible in respect of the said supply; and
4. he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
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:
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.
Readers can observe that section 16(2)(C) provides a very stringent condition that the tax charged in respect of the supply has been actually paid to the government. Hence, this section is clear that if tax has not been paid to government, recipient is not eligible for ITC.
There can also be cases where tax has actually been paid to government but the supplier has wrongly entered details of supplies as B2C instead of B2B or GST number of the recipient is wrongly entered and hence the same is not reflected in GSTR-2A/2B of the recipient. Can recipient take ITC in such situation saying that the tax has already been paid to Government and condition of section 16(2)(C) is fulfilled? As per opinion of author, ITC cannot be denied in this situation as all the conditions of section 16(2) are fulfilled. The restriction given under Rule 36(4) cannot override provisions of section 16(2).
Hence, as per opinion of the author, the requirement of invoice details being reflected in GSTR 2A/2B and conditions imposed through Rule 36(4) are ultra vires to the main section 16 and cannot stand in a judicial test. However, an amendment is made to section 16(2) by section 100 of Finance Act, 2021 by which a new clause (aa) has been added to section 16(2).
Though this clause is not yet notified, it is relevant to discuss effect of the new clause. This clause is reproduced below-
“aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”.
Now by insertion of additional condition of mentioning of the invoice as per section 37 (in GSTR-1) and communication thereof to the recipient, government has made compliance with the condition of reflection of invoice in GSTR-2A/2B a mandatory condition for taking ITC in the law itself.
The whole debate of delegated legislation cannot override the parent legislation has been put to rest by this amendment. Further, by this amendment, Government has made its stand clear that it does not want to give benefit of ITC to any person if the matching is failed even if he is innocent and has paid tax to his supplier and have received goods and/or services.
Discussion on Judicial view on the matter
Here the main question to answer by the court is whether it can be permitted to deny ITC to recipient for the fault of supplier? The only way in which we can get answer “No” to this question is by way of challenging constitutional validity of section 16(2)(c). Challenging constitutional validity of a taxation statute is a difficult task but not an impossible one. As I have mentioned earlier, to challenge constitutional validity of a law, two things shall be looked into by the court.
Whether parliament is competent to pass the law?
Is the law violates any of the fundamental rights guaranteed by part III of the constitution?
This has been done in number of writs filed at various high courts. However, final ruling on the same is still awaited. In case of 2021 (5) TMI 420 - DELHI HIGH COURT, FEDERATION OF INDIAN SMALL SCALE BATTERY ASSOCIATIONS (REGD.) AND ANR. VERSUS UNION OF INDIA,
Constitutional vires of Section 16(2)(c) of CGST Act as also Rule 36(4) and 86A(1)(b) of the CGST Rules, 2017 are challenged. Here Delhi High Court has observed that“Petitioner informed that there are other petitions pending adjudication before this Court, which raise issues, that are similar to the ones, that subsist in the instant writ petition. Issue Notice.”
As far as the vires of Rule 36(4) is concerned, I am of the view that the same is surely ultra vires to main law. Though the answer to main question is still awaited, there are many observations of court which are relevant for our discussion.
In case of M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. (2021 (3) TMI 1020 - MADRAS HIGH COURT), Court has held as under-
“The assessee must have received the goods and the tax charged in respect of its supply, must have been actually paid to the Government either in cash or through utilization of input tax credit, admissible in respect of the said supply - if the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the case on hand, the respondent does not appear to have taken any recovery action against the seller, on the present transactions.
When it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him.
That apart in the enquiry in question, the Person who supplied / sold the goods, ought to have been examined. They should have been confronted. - This is all the more necessary, because the respondent has taken a stand that the petitioners have not even received the goods and had availed input tax credits on the strength of generated invoices.
The matters are remitted back to the file of the respondent - petition allowed by way of remand.”
In the above case, order of denial of ITC to buyer was quashed for two reasons as observed by Madras High Court-
Non- examination of supplier in the enquiry.
Non-initiation of recovery from the supplier.
Hence an important ratio we can draw from this judgement is that once GST authority questions the genuineness of a transaction and wants to deny ITC to the recipient, first it has to examine the supplier and recovery proceedings against the supplier must have been initiated. It is wrong to come directly to recipient for recovery of tax by way of denial of ITC by invoking provisions of section 16(2)( c ).
In another case of M/S. BHARAT ALUMINIUM COMPANY LIMITED VERSUS UNION OF INDIA AND OTHERS (2021 (6) TMI 1052 - CHHATTISGARH HIGH COURT), court has given interim relief to taxpayer and has noted as under-
“Learned counsel for the petitioner would submit that the notice was served on petitioner vide Annexure P-1 dated 01.07.202020 wherein an Input Tax Credit as claimed by the petitioner was 95464.59 lakhs and 2A GST, ITC Form was of 86606.67 in lakhs, which if the seller declares. He would submit that the difference of tax 8857.91 lakhs has been claimed along- with interest. He would submit that as per the Press Release of GST Council dated 04th May 2018, there shall not be any automatic reversal of Input Tax Credit of buyer on nonpayment of tax by the seller. It is submitted that in case the seller has not paid the tax, a recovery has to be made from the seller and here in this case, the petitioner has come out with the purchases made, but it did not tally/match with 2A ITC shown by the seller meaning thereby the seller may not have filed return to remove the same. When the physical verification was offered to be made by petitioner it was not accepted. It is stated that for the recovery of like nature from the buyer, the action can only be available in the exceptional circumstances. He relies on a proposition laid down by Madras High Court in M/s. D.Y. Beathel Enterprises Vs. State Tax Officer [W.P. (MD) No.2127 of 2021] and would submit that in case, it has been held if the default is made by non-payment of tax by the seller, the recovery shall be made from the seller and only in exceptional circumstances, it can be from the recipient, therefore, the Input Tax Credit which was claimed by the petitioner cannot be denied for the reason that the seller has not uploaded their invoices on time.”
Though this is only an interim relief and not a final decision of court, it gives us idea of thought process of the judiciary.
In addition to these recent judgements on GST, it is also relevant to discuss Delhi High Court Judgement in case of Arise India Limited vs Commissioner of Trade & Taxes, Delhi and Ors for the same issue in case of Delhi VAT ACT. Section 9 (2) (g) of the Delhi VAT Act was also denying ITC to purchaser if the seller has not deposited tax to Government. In this case, there was a challenge to constitutional validity of section 9 (2)(g) of Delhi VAT Act. It was prayed that Court should either strike down the provision treating it as violative of Article 14 of the Constitution or give it an interpretation that saves an innocent buyer from denial of ITC. It was argued in this case that such provisions do not make difference between honest tax payer and a tax evader. Hence, it is irrational and arbitrary and liable to be struck down.
Though the Delhi High Court did not strike down the provision but it used “Doctrine of Reading Down” to save an innocent buyer. Doctrine of reading down is a principle of interpretation of law used by courts when there are two interpretations possible and giving it one selected interpretation can save the provision from being struck down. Delhi High court held that the expression “ Dealer or class of Dealers” occurring in section 9 (2) (g) of the Delhi VAT Act should be interpreted as not including a purchasing dealer who has bona file entered into purchase transactions with validly registered selling dealer.
This decision of delhi high court was challenged before Supreme Court of India and honourable Supreme Court had dismissed this petition filed by Commissioner of Trade & Taxes, Delhi.
It may be useful for readers to understand what is Doctrine of Reading Down and where it is used. In Delhi Transport Corporation v. DTC Mazdoor Congress AIR 1991 SC 101, a Constitution Bench of the Supreme Court explained in which cases the doctrine of reading down of statutes be used to save their constitutionality. It Held as under-
“The doctrine of reading down or of recasting the statute can be applied in limited situations. It is essentially used, firstly, for saving a statute from being struck down on account of its unconstitutionality. It is an extension of the principle that when two interpretations are possible--one rendering it constitutional and the other making it unconstitutional, the former should be preferred. The unconstitutionality may spring from either the incompetence of the legislature to enact the statute or from its violation of any of the provisions of the Constitution. The second situation which summons its aid is where the provisions of the statute are vague and ambiguous and it is possible to gather the intention of the legislature from the object of the statute, the context in which the provision occurs and the purpose for which it is made. However, when the provision is cast in a definite and unambiguous language and its intention is clear, it is not permissible either to mend or bend it even if such recasting is in accord with good reason and conscience. In such circumstances, it is not possible for the Court to remake the statute. Its only duty is to strike it down and leave it to the legislature if it so desires, to amend it. If the remaking of the statute by the courts is to lead to its distortion that course is to be scrupulously avoided.
The doctrine can never be called into play where the statute requires extensive additions and deletions. The Courts, though, have no power to amend the law by process of interpretation, but do have power to mend it so as to be in conformity with the intendment of the legislature. Doctrine of reading down is one of the principles of interpretation of statute in that process. But when the offending language used by the legislature is clear, precise and unambiguous, violating the relevant provisions in the constitution, resort cannot be had to the doctrine of reading down to blow life into the void law to save it from unconstitutionality or to confer jurisdiction on the legislature.”
Readers can understand from above noting of constitutional bench of honourable Supreme Court that the doctrine of Reading Down is used by courts to save a provision from being struck down where there is a serious challenge to its constitutionality. Court will prefer giving it such an interpretation that it cannot be interpreted as being violative of constitution. However, where the language of a provision is absolutely clear and there is no room of different interpretation, then court will have no option to give it a different interpretation. In this situation if the clear interpretation of the provision is against the vires of the constitution then court will have only one option left, which is to strike it down.
Hence, a question may also arise as to whether same doctrine can be used by courts to exclude “bonafide purchaser” from the phrase “ registered person” occurring in section 16(2) of the CGST Act by using doctrine of reading down? As per opinion of the author, this possibility cannot be entirely ruled out.
Conclusion and author's opinion
As per opinion of the author, the provision of section 16(2) ( c ), imposes a condition which is unreasonable if not arbitrary. It is excessive to expect from a recipient that he can exercise any control on action of supplier. The doctrine of “impossibility of performance” can also be applied in this case. It can be argued in court of law that the condition imposed by section 16(2)( C ) is impossible to perform as recipient cannot control the action of the Supplier. It can also be argued that the provision does not differentiate between an honest taxpayer and tax evaders, making the provision violative of Article 14 and 19(1)(g) of the constitution.
Till the Judiciary comments anything on constitutional validity of section 16(2)(c), it is compulsory for taxpayers to follow the same. However, Madras High Court judgement in case of M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. (2021 (3) TMI 1020) is
useful for taxpayers which says that the GST authority should go after the supplier first and only then after it can come to the recipient for recovery of the tax amount.
Some issues on blocked credit under section 17(5)
It is interesting to discuss the issues of blocked credit under section 17(5). The rationale of section 17(5) is that even if all the provisions of section 16 are fulfilled, credit of supplies mentioned under section 17(5) shall not be available to taxpayer. This is based on the concept of “ Parliamentary wisdom”, which means that parliament has wisdom to draft law in a manner in which it is drafted. Questions are raised as to the constitutional validity of section 17(5). It is believed by some that it violates Article 14 of the constitution which gives “equality before law” as fundamental right.
However, as held by Supreme Court, before court can hold that a provision is in violation of Article 14 of the constitution, it needs to satisfy itself whether the provision discriminates taxpayers or it only creates a classification. In case, it is only a classification of taxpayers and due to some understandable reason, credit for some supplies are blocked under section 17(5), then we cannot say that the provision violates Articles 14 of the constitution. It should be left to the wisdom of parliament whether or not to allow Input tax credit in some cases.
Having discussed the constitutional aspect of the provision of section 17(5), I need to accept that there are many areas in section 17(5), which can invite litigations. We will discuss some of the areas of this section where court rulings are available.
Blocked credit in respect of works contract service and other goods and services used for construction of immovable property.
We need to discuss clause (c) and (d) of section 17(5) together to understand this denial of ITC under section 17(5). They are reproduced below-
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 capitalisation, to the said immovable property.
For clause c let us understand the meaning of “works contract”.
As per section 2 (119) of CGST Act “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
It is important to note that a contract can be a works contract only when it is in relation to an immovable property. Tax paid on input service of work contract is allowed only when it is used as input service for further outward supply of works contract. So here the input and output service should be of the same category (i.e both should be works contract service) to be eligible to get input tax credit.
Instead of taking service of works contract, it is also possible that a person himself purchases goods and services separately and constructs immovable property on his own. Here also clause (d) blocks input tax credit. For example, a person purchases goods for construction of his factory building, in this situation ITC of the goods purchased or services received for construction of the factory building shall not be available.
There are certain common points that we need to discuss-
Meaning of Immovable property
The credit which is blocked here is for construction of immovable property. Here the question arises as to what is called immovable property? The phrase “immovable property” has not been defined under GST Act.
Section 3(26) of the General Clause Act, 1847 defines immovable property as “Immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.
Hence the test for any property to be classified in to immovable property is its permanent fastening or attachment to earth. What is the meaning of permanently attached to earth? Supreme Court has held that if a property cannot be removed from its place without causing substantial damage to it then it is considered as immovable property.
Let's take an example of lift being installed in a building. Whether it will be plant and machinery or immovable property? A lift permanently installed to building becomes integral part of the building (immovable property).
Meaning of construction
Explanation to these clauses mentions that expression “construction” includes re-construction, renovation, additions or alterations or repairs to the extent of capitalisation, to the said immovable property. Here the treatment of the expense in the books of accounts becomes important. If expense is capitalised to the immovable property than the credit is blocked, but if the expense is charged off to profit and loss accounts then the credit is not blocked. For example Mr. A carries out repair of his factory building and this expense is not capitalised by him in his books of accounts but has been charged off to profit and loss account. In this situation he can take ITC of tax paid by him on goods or services used for such repair.
It shall not be out of place to mention that as per Accounting standards any repairs or improvement expenditure incurred after the asset is ready to use can be capitalised on the asset only if such expenditure results into increase in the capacity of the asset. If this condition is not fulfilled then the expense should be charged off to profit and loss account.
Meaning of plant and machinery
As per explanation to section 17(5), 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—
Land, building or any other civil structures;
Telecommunication towers; and
Pipelines laid outside the factory premises.
From the explanation, readers can observe that the plant and machinery when fixed to earth does not lose input tax credit. The foundation or structural support for fixing the machinery to earth will also be included in plant and machinery and shall be eligible for input tax credit. Further, telecommunication towers and pipelines laid outside the factory premises are also excluded from the definition of plant and machinery and ITC on them shall be blocked.
Though the issue is pending before honourable Supreme Court, it is relevant here to discuss Orissa High Court Judgement in case of Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax. In this case, the petitioner Safari Retreats Pvt Ltd was in the business of construction of Malls. As argued by the petitioner, after completion of the construction of Malls, shops and showrooms of the mall were given on rent. Petitioner needs to pay GST on the Rents collected but due to provisions of section 17(5)(d), it cannot get ITC of the goods and/or services used for construction of the mall. The argument of the petitioner was had he constructed the mall for selling the same then he would have been eligible for ITC, but as the mall is used for being let out, section 17(5)(d), does not allow the petitioner to take ITC. Hence, such provision is discriminatory as being arbitrary, unreasonable and violative article 14 of the constitution.
Orissa high court accepted contention of the petitioner that he is at huge loss due to non availment of ITC on construction of Mall. To allow him the ITC, honourable high court used “ Doctrine of Reading Down”. In my previous article, I explained the concept of “ reading down” used by courts.
In Delhi Transport Corporation v. DTC Mazdoor Congress AIR 1991 SC 101, a Constitution Bench of the Supreme Court explained in which cases the doctrine of reading down of statutes be used to save their constitutionality. It Held as under-
“The doctrine of reading down or of recasting the statute can be applied in limited situations. It is essentially used, firstly, for saving a statute from being struck down on account of its unconstitutionality. It is an extension of the principle that when two interpretations are possible--one rendering it constitutional and the other making it unconstitutional, the former should be preferred. The unconstitutionality may spring from either the incompetence of the legislature to enact the statute or from its violation of any of the provisions of the Constitution. The second situation which summons its aid is where the provisions of the statute are vague and ambiguous and it is possible to gather the intention of the legislature from the object of the statute, the context in which the provision occurs and the purpose for which it is made. However, when the provision is cast in a definite and unambiguous language and its intention is clear, it is not permissible either to mend or bend it even if such recasting is in accord with good reason and conscience. In such circumstances, it is not possible for the Court to remake the statute. Its only duty is to strike it down and leave it to the legislature if it so desires, to amend it. If the remaking of the statute by the courts is to lead to its distortion that course is to be scrupulously avoided.
The doctrine can never be called into play where the statute requires extensive additions and deletions. The Courts, though, have no power to amend the law by process of interpretation, but do have power to mend it so as to be in conformity with the intendment of the legislature. Doctrine of reading down is one of the principles of interpretation of statute in that process. But when the offending language used by the legislature is clear, precise and unambiguous, violating the relevant provisions in the constitution, resort cannot be had to the doctrine of reading down to blow life into the void law to save it from unconstitutionality or to confer jurisdiction on the legislature.”
Readers can understand from above noting of constitutional bench of honourable Supreme Court that the doctrine of Reading Down is used by courts to save a provision from being struck down where there is a serious challenge to its constitutionality. Court will prefer giving it such an interpretation that it cannot be interpreted as being violative of constitution. However, where the language of a provision is absolutely clear and there is no room of different interpretation, then court will have no option to give it a different interpretation. In this situation if the clear interpretation of the provision is against the vires of the constitution then court will have only one option left, which is to strike it down.
In case of Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax, Orissa High Court rejected the narrow interpretation that the ITC cannot be allowed on supplies received for construction when the mall is let out. It allowed the petitioner to avail such ITC. However, Orissa High Court refused to strike down the provision.
Here, a question still remains whether “Doctrine of Reading Down” be used in case of section 17(5)(d) considering the ratio laid down by constitutional bench of Supreme Court in case of Delhi Transport Corporation v. DTC Mazdoor Congress AIR 1991 SC 101? Isn't the language of section 17(5)(d) absolutely clear leaving no room for reading down? This question shall be answered by honourable Supreme Court in the times to come.
Blocked credit for Goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample.
Section 17(5)(h), blocks credit in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample. Similar concept was also existing in erstwhile Cenvat Credit Rules, 2004.
For example, A Ltd. purchased 100 units at Rs. 10 per unit from B Ltd. GST Rate being 18%. Out of these 100 units it gave 30 units as free sample to its customer C Ltd.
A Ltd. is required to reverse ITC of following amount:- Units = 30
* Price = 10
300 * GST Rate 18%= 54
ITC of Rs. 54 needs to be reversed.
Above mentioned provisions are applicable to free samples and gifts. However, there might be a sales promotion scheme like buy one get one free. For example, buy one toothpaste and get a toothbrush free. In this situation, it is wrong to apply provisions of blocked credit and to conclude that the toothbrush is supplied free. In fact, the toothbrush is not supplied free but its price is included in the price of toothpaste. Hence, it can be considered as a mixed or composite supply and there is no need to reverse ITC on such transaction. Same view is expressed in Circular No. 92/11/2019-GST dated 7th March, 2019.
Recently an interesting judgement has been given by Madras High Court in case of M/S. ARS STEELS & ALLOY INTERNATIONAL PVT. LTD. VERSUS THE STATE TAX OFFICER, GROUP – I, INSPECTION,
INTELLIGENCE – I, CHENNAI (2021 (6) TMI 957 ). In this case a question was asked whether loss arising due to manufacturing process shall be covered under section 17(5)(h)?. Court held that the loss that is occasioned by the process of manufacture cannot be equated to any of the instances covered by section 17(5)(h)
Madras high Court relied on the Judgement In the case of M/S. RUPA & CO. LIMITED, TIRUPUR VERSUS THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, THE COMMISSIONER OF CENTRAL EXCISE
[2015 (9) TMI 293 - MADRAS HIGH COURT], In that case, a certain amount of input had been utilised by the assessee, whereas the input in the finished product was marginally less. The department proceeded to reverse the cenvat credit on the difference between the original quantity of input and the input in the finished product.
In the words of Madras High Court “The reversal of ITC involving Section 17(5)(h) by the Revenue, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by the situations adumbrated under Section 17(5)(h).”
Do we need to reverse Input tax credit in all cases where payment to supplier is not made within 180 days from the date of issuance of invoice ?
As we have discussed earlier, as per 2nd proviso to section 16(2), 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.
There may be cases where the payment terms between supplier and recipient allow the recipient to male payment beyond a period of 180 days. Can law compel a person to make payment within 180 days? As per opinion of the author intention of law here is not to cover transactions where payment terms are more than 180 days. The phrase used in the proviso is “fails to pay” . If mutually supplier and recipient agrees for a payment terms beyond 180 days then we cannot say that the recipient has “ failed to pay” to supplier within 180 days. Where there is pre existing agreement to pay within 180 days and the recipient does not pay within that period only then we can say that he has failed to pay. Without agreement to pay within certain period there cannot be a failure.
Second argument in favour of the above opinion can be as under-
As per 2nd proviso to section 16(2), when recipient fails to pay to the supplier within 180 days from the date of issuance of invoice then 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.
Here the words “ as may be prescribed “ are significant. The amount shall be added to the output liability as prescribed under Rule 37 which is reproduced below-
A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice:
Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:
[Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.]
The amount of input tax credit referred to in sub-rule (1) shall be added to the output tax liability of the registered person for the month in which the details are furnished.
The registered person shall be liable to pay interest at the rate notified under sub-section (1) of section 50 for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.
The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.
Readers can note that Rule 37 requires the output liability to be added in GSTR-2. This statement (GSTR-2) is not operational and further as per proposed amendment to section 38 by Finance Bill, 2022 requirement of filing this Statement is removed.
Hence, the operational mechanism to implement proviso to Section 16(2) has never worked so there does not arise a question of reversal of input tax credit in case of non payment to supplier within 180 days from the date of issuance of invoice. As said by honourable Supreme Court of India many a times,
“when law requires a particular thing to be done in a particular manner it has to be done in that manner only and in no other manner.”
On the basis of above two arguments, author's opinion is that it is not compulsory to reverse input tax credit when payment to supplier is not made within 180 days from the date of issuance of invoice in each and every case.