Input Tax Credit under GST and Tax Invoice An In-depth Analysis

Input Tax Credit under GST and Tax Invoice An In-depth Analysis
Presentation by: CA Dharmendra Srivastava

Overview of GST Model Law
Constitutional (One Hundred and Twenty- Second) Amendment Bill, 2014 has already been passed by the Lok Sabha and approved by the Rajya Sabha with amendments on 3rd August , 2016. The Model Law covers the following: 1. Goods and Services Tax Act, 2016 2. Integrated Goods and Services Tax Act, 2016 3. GST Valuation (Determination of the Value of supply of Goods and Services) Rules, 2016. This is a Model Law which shall be customized by the Centre and the States for enactment. This Model Law has 25 Chapters, 162 Sections and 4 Schedules The Law amalgamates concepts and practices from the Central legislations such as Central Excise and Service Tax and also of State VAT legislations. The Law also borrows several concepts from the International GST practices.

Input Tax Credit under GST
The concept of Input Tax Credit in the GST Regime is the core aspect of the Act, since it serves the basic purpose i.e Elimination of Cascading effect prevalent in the existing framework of tax structure. Input tax credit is the amount of tax paid by the dealer on purchases of goods or provision of service for which the dealer is entitled to claim a credit. The procedures and restrictions laid down in these provisions are important to make sure that there is seamless flow of credit in the whole scheme of transition without any misuse.

Input Credit Mechanism Present System of Credit
Types of Taxes Levy by Levied on (Nature) Can be set off Against Central Excise Duty (ED) Centre Manufacture ED & ST Service Tax (ST) Services Basic Custom Duty (BCD) Import No, it’s a cost Countervailing duty (CVD) Additional Import duty Special Additional Duty (SAD) Central Sales Tax (CST) Inter-state sales Valued Added Tax (VAT) State Intra-state sale VAT Octroi/ Entry Tax/ Local Body Tax

Availability of Credit under Model GST Law
Input Tax Credit (ITC) is available in respect of defined inputs, capital goods and input services. The term inputs and input services has been defined in a wide manner to cover goods/services used or intended to be used by a supplier for making an outward supply in the course or furtherance of business. The definition of Capital goods is similar to existing definition under Cenvat Credit Rules, 2004 (CCR,2004).

Relevant Definitions for Input tax credit under Model GST Law

Input tax [Section 2(57)] "Input tax" in relation to a taxable person, means The GST (IGST/ CGST/SGST) charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under Reverse charge.

Input [Section 2(54)] Goods other than capital goods, subject to exceptions, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business Comparative review with Cenvat Credit Rules under Present System: Input is presently defined under Rule 2(k) of CCR, 2004, has an exclusive and inclusive limb unlike in GST where it is an inclusive definition and exceptions are provided separately in Section 16(9) of Model GST Law.

Capital Goods [Section 2(20)]
(A) the following goods, namely:- (i) all goods falling within Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the Schedule to this Act; (ii) pollution control equipment; (iii) components, spares and accessories of the goods specified at (i) and (ii); (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof; (vii) storage tank; and (viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, and their chassis but including dumpers and tippers used- (1) at the place of business for supply of goods; or (2) outside the place of business for generation of electricity for captive use at the place of business; or (3) for supply of services,

Capital Goods [Section 2(20)] ..cont
(B) motor vehicle designed for transportation of goods including their chassis registered in the name of the supplier of service, when used for (i) supplying the service of renting of such motor vehicle; or (ii) transportation of inputs and capital goods used for supply of service; or (iii) supply of courier agency service; (C) motor vehicle designed to carry passengers including their chassis, registered in the name of the supplier of service, when used for supplying the service of- (i) transportation of passengers; or (ii) renting of such motor vehicle; or (iii) imparting motor driving skills; (D) Components, spares and accessories of motor vehicles which are capital goods for the taxable person.

Capital Goods: Comparative review with present system
Definition taken from Rule 2A of Cenvat Credit Rules, 2004 There is no specific provision allowing ITC of capital goods. Thus, entire ITC of GST paid on capital goods will be available in first year itself.

Input Service [Section 2(55)]
Any service subject to exceptions, used or Intended to be used by a supplier for making an outward supply in the course or furtherance of business Comparative review with present system: Input service is presently defined under Rule 2(l) of CCR, which has an exclusive and inclusive limb unlike in GST where it is an inclusive definition and exceptions are provided separately in Section 16(9) of Model GST Law.

Input Service: Comparative review with present system
Prior to , the definition of “input service” allowed credit in respect of “activities relating to business”. Such provision has been subject matter of interpretation by our courts in the context of CENVAT credit. In the landmark case of Coca Cola India Private Limited 2009-TIOL-449-HC- MUM-ST this phrase (Activities relating to business) was analyzed by the Hon’ble High Court in detail. High Court observed : “ that all and any activity relating to business falls within the definition of input service provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase “activities relating to business” are words of wide import.” In the GST Regime, the expression “in the course or furtherance of business” would cover all activities related to the functioning of a business. For example in relation to a manufacturer, business cannot be restricted only to the activity of manufacturing the final products; rather it would comprise of all the integrated activities comprising of whole of the business operations of the taxable person.

Manner of taking Input tax Credit: Section 16
Input Tax Credit to Registered Taxable Person clause 16(1) of GST Model Law Every registered taxable person shall subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 35 be entitled to take credit of input tax admissible to him. Such amount shall be credited to the electronic credit ledger of such person. Electronic credit ledger: The input tax credit ledger in electronic form maintained at the common portal for each registered taxable person in the manner as may be prescribed in this behalf. [Section 2(41)].

Input Tax Credit to Registered Taxable Person
Availability of credit is linked with registration i.e. only registered taxable persons are allowed credit. However, as per CCR, 2004, registration is not required for availing Cenvat credit and this position has also been affirmed by various courts. In the case of any new business with a high initial investment and long gestation period to earn any revenue from such, it would be difficult to claim input tax credit in respect of the expenses made during investment stage. In such cases, business would be liable to be registered at a later stage when it generates

Eligibility Of Input Tax Credit
Any person who has taken Registration within 30 days from the date when he becomes liable for registration and has been granted same is eligible to avail the Input Tax Credit of Input lying in stock, WIP & Inputs contained in finished goods on the day when he becomes liable to pay tax. Credit of Input Tax shall be recorded in his Electronic Ledger maintained at GSTIN site. Sec 16(2) The above provisions of Input Tax Credit are admissible to Persons who get themselves voluntarily registered under GST Act. (Persons falling under Sec 19(3)] Persons switching over from Composite Levy (Section 8) to Normal Tax are also eligible to avail Input Tax Credit under GST.- Sec 16(3)

Proportionate ITC when partly used for business or taxable supplies
The goods and / or services are used by a registered taxable person partly for business and partly for non-business; he is eligible to input tax credit of goods and / or services attributable to the purposes of business. Calculation formulae would be specified once the GST Rules is notified by the GST Council. (Sec 16(5)] The goods and / or services are used partly for effecting taxable supplies (plus zero- rated supplies{exports}) and partly for effecting non-taxable supplies (plus exempt supplies); he is eligible for credit attributable to the taxable supplies including zero- rated supplies. Calculation formulae would be specified once the GST Rules is notified by the GST Council. (Sec 16(6)] In case of change in the constitution of registered Taxable Person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with transfer of liabilities, the Input Tax Credit is allowed to be transferred by the said registered taxable person.(Sec 16(8)]

Time limit for availing ITC
Input tax credit cannot be taken after one year from date of invoice or filing of annual return – A taxable person shall not be entitled to take input tax credit in respect of any supply of goods and/or services to him after the expiry of one year from the date of issue of tax invoice relating to such supply – clause 16(3A) Further a taxable person shall not be entitled to take input tax credit in respect of any invoice for supply of goods and/or services, after the filing of the return under section 27 for the month of September following the end of financial year to which such invoice pertains or filing of the relevant annual return, whichever is earlier – clause 16(15)

Ineligible credit: Section 16(9)
Motor vehicles, except when they are supplied in the usual course of business or are used for providing taxable services of – Transportation of passengers  Transportation of goods  Imparting training or motor driving skills Comparative review with present system: As like CCR-2004, ITC may not be claimed on motor vehicle when are not supplied in usual course of business. Hence ITC on motor vehicle cannot be claimed by a company using motor vehicle for own purpose. The same was excluded vide the definition of input and input service. In the definition of input service as per Rule 2(l) of CCR Rent-a-cab service, Insurance of Motor Vehicles, Repair of Motor Vehicles was not eligible, except where Motor Vehicle is eligible as ‘capital goods’ and

Ineligible credit: Section 16(9)
Goods and services for personal consumption of employees  food and beverages, outdoor catering, cosmetic and plastic surgery  life insurance, health insurance  travel benefits to employees on vacation such as leave or home travel concession  membership of a club, beauty treatment,  health services,  health and fitness centre such goods and / or services as are used primarily for personal use or consumption of employee Comparative review with present system: Similar to existing CCR- 2004, ITC may not be claimed for those supplies where these are used primarily for personal use or consumption of employee

Ineligible credit: Section 16(9) Goods and services in works contract
Goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property are not eligible for ITC, other than plant and machinery. The purpose of this provision is that the manufacturer/service provider/trader will not be entitled to avail Input Tax Credit of cement, steel and other material used in construction of office building or factory building and tax paid on input services. The manufacturer can avail input tax Credit of plant and machinery received by him during execution of works contract. The contractor who is undertaking works contract will be eligible to avail input tax credit of building material and input services as he is not ‘Principal’ “Principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods and/or services – clause 2(77) of GST Model Law, 2016.

Ineligible credit: Cont.
Goods acquired by principal, the property in which is not transferred  whether as goods or in some other form  to any other person,  which are used in construction of immovable property,  other than plant and machinery. Goods and/or services on which composition tax has been paid (u/s 8) Goods and/or services used for private or personal consumption to the extent they are so consumed.

No Input Tax Credit if Depreciation availed on Tax component [Sec 16(10)]
Input Tax Credit provisions in respect of Capital Goods shall stand on same footing as prevails in the present Tax Regime i.e. Input Tax Credit shall not be admissible on Capital Goods if the Depreciation has been availed in respect of the Tax component under Income Tax Act, 1961.

Conditions for availing input tax credit: Section 16(11)
Registered taxable person is not entitled to input tax credit on supply of goods and/or services unless he: (i) is in possession of a  tax invoice, debit note, supplementary invoice or  such other taxpaying document as may be prescribed. (ii) has received the goods and/or services. The goods are deemed to be received by the taxable person when goods are delivered by supplier to recipient or other person on direction of the taxable person whether an agent or otherwise before or during movement of goods by way of transfer of documents of title of goods or otherwise.

Conditions for availing input tax credit: Section 16(11)..cont
(iii) Tax charged for such supply  is actually paid to the credit of the appropriate Government,  either through cash or through utilisation of input tax credit admissible in respect of such supply (This is the most challenging provisions as the onus has been cast on the recipient to ensure that supplier has paid GST, It shall lead to a practical difficulty at the end of the recipient. (iv) He has furnished return as per section 27 (Annual Return) (v) In case of the goods which are received in lots or installments, against an invoice the credit could be availed upon receipt of last lot or installment by registered taxable person.

ITC Matching Concept ITC is available only on provisional basis until the supplier makes the tax payment and files a valid return. The claim of input tax credit in respect of invoices and/or debit notes relating to inward supply shall be matched with the details of corresponding outward supply. In case of mismatch and where the supplier has not made the tax payment, the ITC shall be reversed with interest. Interest is from the date of wrong availment or utilization. There is specific provision for reclaim of ITC and interest in case of subsequent matching

Procedure to file Return for a taxpayer other than compounding taxpayer and ISD
First of all a taxable person need to file details of his outward supplies (i.e. sale) made during a tax period In from GSTR-1 within 10 days from the end of that tax period. Then taxable person need to furnish details of his inward supplies (i.e. purchase) made during a tax period in form GSTR-2 within 15 days from the end of that tax period. After that he has to file monthly return in from GSTR-3 within 20 days from the end of that tax period. At the last Annual return has to be filed in from GSTR-8 within 31st December of next Financial Year.

Claim of ITC on provisional basis
Step 1 for taking ITC As per Section 28, every taxable person shall be entitled to take credit of input tax, as self assessed, in his return and such amount shall be credited, on a provisional basis,to his electronic credit ledger to be maintained in the manner as may be prescribed Provided that a taxable person who has not furnished a valid return under section 27 of the Act shall not be allowed to utilize such credit till he discharges his self-assessed tax liability

Finalization of Claim of ITC
Step 2 for taking ITC (Section 29) Matching of claim of ITC The details of inward supply furnished by taxable person (“recipient”) for a tax period (GSTR-2) be matched- With the corresponding details of outward supply furnished by the corresponding taxable person (“Supplier”) in his valid return (GSTR-1) for the same tax period or any preceding tax period With the additional duty of customs paid under Section 3 of the Customs Tariff Act, 1975 The claim of input tax credit be finally accepted and shall be communicated to the recipient where- Invoices and/ or debit notes relating to inward supply matches with the details of corresponding outward supply or with the additional duty of customs paid

Where ITC claimed by recipient in respect of inward supply is in excess of tax declared by the supplier for the same supply or the outward supply is not declared by supplier in his valid return then: The discrepancy shall be communicated to both i.e. the recipient and the supplier If such discrepancy is not rectified by the supplier in his valid return for the month in which discrepancy is communicated then the amount of discrepancy shall be added to the output tax liability of the recipient for the month succeeding the month in which discrepancy is communicated The recipient is also required to pay interest on said addition of output liability at the rate specified under Section 36(1)

Excess of ITC on account of duplication of claim The duplication of claim of ITC shall be communicated to the recipient The amount of claim of ITC that is found to be in excess on account of duplication of claim shall be added to the output tax liability of the recipient - for the month in which duplication is communicated In such case recipient is also required to pay interest at the rate specified in Section 36(1)

CHAPTER-IXA TRANSFER OF INPUT TAX CREDIT Section 37A
IGST credit to be utilized for First for IGST Then for CGST Then for SGST CGST credit to be utilized for First for CGST Then for IGST CGST never for SGST SGST credit to be utilized for First for SGST SGST never for CGST

CHAPTER – VII TAX INVOICE, CREDIT AND DEBIT NOTES
23. Tax invoice 23 A. Amount of tax to be indicated in tax invoice and other documents 24. Credit and debit notes

CHAPTER – VII Tax invoice
A registered taxable person supplying taxable goods/ service shall issue, at the time of supply, a tax invoice showing the description, quantity and value of goods (in case of taxable goods) the tax charged thereon and such other particulars as may be prescribed; That a registered taxable person supplying non-taxable goods and/or services or paying tax under the provisions of section 8 shall issue, instead of a tax invoice, a bill of supply containing such particulars as may be prescribed. Provisions for issuance of credit/debit notes have been introduced subject to fulfilment of certain conditions.

Supply of goods Every registered person is required to issue a tax invoice at the time of supply of taxable goods and the invoice shall contain following particulars:- Description of goods; Quantity of goods; Value of goods; Tax charged on Value of goods; and Such other particulars as may be prescribed.

Supply of services Every registered taxable person is required to issue a tax invoice at the time of supply of taxable service and the said invoice shall contain all the following essential details as – Description of Services; Value of Services; Tax charged on Value of Services; and Such other particulars as may be prescribed.

Tax Invoice..cont Revised Invoice
If a Registered Taxable Person issued any invoice before issue of registration certificate then such registered person may issue a revised notice for the period starting from the effective date of registration and date of issuance of certificate of registration. Composition levy A registered taxable person who opts for composition levy shall at the time of supply of goods or services not issue a tax invoice. Instead it had to issue a bill of supply containing the particulars as required. Non-taxable supply A registered taxable person who supplies non-taxable goods or services shall instead of issuing a tax invoice had to issue a bill of supply containing the particulars as required. Tax Indication in the Tax Invoice Where A Registered Dealer providing supply for a consideration and which is liable to tax, then tax on such supply shall necessarily be indicates in all documents relating to assessment, tax invoice and other documents.

Credit Notes When a Credit note should be issued
Where a tax invoice has been issued and the taxable value and/or tax charged in that tax invoice is found to exceed the taxable value and/or tax payable in respect of such supply, the taxable person, may issue to the recipient a credit note containing prescribed particulars. Time limit for issuing Credit Note Thirtieth day of September following the end of the financial year in which such supply was made or date of filling of the relevant annual return; whichever is earlier: No credit note shall be issued by the said person if the incidence of tax and interest on such supply has been passed by him to any other person

Debit Note When a Debit Note should be issued
Where a tax invoice has been issued and the taxable value and/or tax charged in that tax invoice is found to be less, the taxable person shall issue to the recipient a debit note containing prescribed particulars. Time limit for issuing Credit Note Thirtieth day of September following the end of the financial year in which such supply was made or date of filling of the relevant annual return; whichever is earlier:

Furnishing details of debit and credit note in return
If any registered taxable person issues and receives a credit or debit note in relation to a supply of goods or services, he shall declare the details of credit and debit note in the return for the month during which the credit or debit note has been issued or received. However, such debit note or credit note cannot be declared in return later than September following the end of financial year in which such supply was made, or the date of filing of the relevant annual return, whichever is earlier. After filing details in return, the tax liability shall be adjusted in the manner specified – clause 24(3) of GST Model law, 2016.

THANK YOU DHARMENDRA SRIVASTAVA CHARTERED ACCOUNTANT

Input Tax Credit under GST and Tax Invoice An In-depth Analysis

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Input Tax Credit under GST and Tax Invoice An In-depth Analysis

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