FAQ’s on Input Tax Credit

Q 1. What is input tax?

A: “Input tax” has been defined in section 2 (55) of the Model GST Law and section 2 (15) of the IGST Act. Input tax in relation to a taxable person, means the {IGST and CGST} in respect of CGST Act and {IGST and SGST} in respect of SGST Act, 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 sub-section (3) of section Z.

Under the IGST Act, input tax is defined as IGST, CGST or SGST charged on any supply of goods and / or services.

The flowchart showing how input credit can be utilized to set off output tax liability in preference:

Q 2. Does input tax includes tax (CGST/ IGST/SGST) paid on input goods, input services and/ or capital goods?

Ans. Yes, in terms of section 2(49), 2(53) & 2(19) of the Model GST Law respectively. It may be noted that credit of tax paid on capital goods also is permitted to be availed in one installment.

Q 3. What is the ITC entitlement of a person who has applied for registration under the Act within thirty days from the date on which he becomes liable to registration and has been granted such registration? (Section 16(2))

Ans. He 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. It may be noted that the credit on pre-registration stock would not be admissible if the registration has not been obtained within a period of 30 days from the date on which he becomes liable to registration.

Q 4. A person becomes liable to pay tax on 1st August, 2017 and has obtained registration on 15th August, 2017. Such person is eligible for input tax credit on inputs held in stock as on………….?

Ans. 31st July, 2017.

Q 5.  What is the mode of credit? Is it on receipts of goods/services, or on the basis of the documents or both? 

Ans. Section 16(2) states that the taxable person shall be entitled to the credit of input tax, if all the following four conditions are satisfied:

• The receiver is in possession of tax invoice or debit note or any other tax paying documents
• The receiver has received the goods and or services
• The supplier has paid output taxes to the appropriate government
• The receiver has furnished the monthly return.

 Therefore, the mode of credit will be based on the above conditions including receipt of goods/services and the possession of documents.

Q 6.  Whether Input tax credit on Capital Goods is allowed in one installment?

Ans. Yes, under the Revised Model GST Law the input tax credit on capital goods is allowed in one installment except in respect of pipelines and telecommunication towers fixed to earth by foundation or structural support including foundation and structural support thereto.

Q 7.  What is the time limit within which the recipient of service is liable to pay the value of supply with taxes to the supplier of service to avail input tax credit?

Ans. The time limit is three months from the date of issue of invoice by the supplier of service within which the recipient is liable to pay the value of supply along with taxes to the supplier of service to avail the input tax credit. 

Q 8.  One of the conditions to claim credit is that the receiver has received the goods and or services. Is there any provision for deemed credit in case of transfer of document of title before or during the movement of goods?

Ans. The Explanation to section 16(2) states that it is deemed that the taxable person has received the goods where the goods are delivered by a supplier to a recipient or any other person on the direction of taxable person whether acting as agent or otherwise, before or during movement of goods either by way of transfer of documents of title to goods or otherwise.

Q 9.  Whether the taxable person can avail the benefits of input tax credit and depreciation on the tax component of capital goods?

Ans. Section 16(3) states that input tax credit shall not be allowed on the tax component if depreciation on the tax component is claimed under the provisions of Income Tax Act, 1961 by the taxable person. 

Q 10.  What is the maximum time limit to claim the Input tax credit? 

Ans. A taxable person shall not be entitled to take input tax credit in respect of any supply of goods or services after the earlier of following two events:

• Filing of the return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains
• Furnishing of the relevant annual return.

Q 11.  Is proportionate credit for capital goods allowed for business and non-business purpose under the Revised Model GST Law?

Ans. In terms of section 17(1) of the Revised Model GST Law, where the goods used by the registered taxable 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. Thus, proportionate credit for capital goods is allowed for business purpose under the Revised Model GST Law.

Q 12. Is there any option to the Banking Company or a Financial Institution engaged in accepting deposits or extending loans or advances with respect to availment of input tax credit?

Ans. Yes, there is an option either to avail eligible input tax credit to the extent of taxable supplies including zero rated supplies or avail every month an amount equal to fifty percent of eligible input tax credit on inputs, capital goods and input services in that month. 

The option once exercised by the Banking Company or a Financial Institution cannot be withdrawn during the remaining part of the financial year.

Q 13.  Whether input tax credit available on taxable goods, which are given free as gift etc. for sales promotion?

Ans. Section 17(4) (g) states that input tax credit shall not be available in case of goods lost, stolen, destroyed, written off or disposed of, by way of gift or free samples.

Q 14.  Whether input tax credit is allowed on inputs, which become waste and is sold as scrap?

Ans. Section 17(4) (g) states that input tax credit shall not be available in case of goods lost, stolen, destroyed, written off or disposed of, by way of gift or free samples. Therefore, input tax paid on taxable goods which becomes waste and is sold as scrap is not eligible.

Q 15.  Whether Input destroyed/pilfered/stolen resultant  are also covered?

Ans. Section 17(4) (g) states that input tax credit shall not be available in case of goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. Therefore, input tax paid on taxable goods, which are destroyed/ pilfered/stolen is not eligible.

Q 16.  Whether input tax paid on Motor vehicles and other conveyances which are used for courier agency, outdoor catering, pandal and shamiana and tour operator is eligible for credit?

Ans. The input tax credit shall not be available in respect of Motor Vehicles and other conveyances except when they are used for further supply of such vehicles or conveyances or transportation of passengers or imparting training or for transportation of goods. Therefore, input tax credit shall be available when it is used by courier agency, outdoor catering, pandal and shamiana and tour operator as it can be considered as transportation of goods/ transportation of passengers.

Q 17.  If any goods and services are to be procured by a company as per mandatory legal requirement for the benefit of employees will input tax credit be available for health insurance for all employees as per Factories Act?

Ans. Section 17(4) (b)(iii) states that input tax credit of rent a cab, life insurance, health insurance will be eligible where the Government notifies such services are obligatory for an employer to provide to its employees under any law for the time being in force.

Q 18. Is there any negative list on which ITC is not permitted?

Ans. Section 17 (4), provides for the negative list with respect to the admissibility of ITC. It has been provided that the ITC on following items cannot be availed:

• (a) motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services
  • (i) transportation of passengers, or
  • (ii) transportation of goods, or
  • (iii) imparting training on motor driving skills;
• (b) goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness center, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/ or services are used primarily for personal use or consumption of any employee;
• (c) goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;
• (d) goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
• (e) goods and/or services on which tax has been paid under section 8; and
• (f) goods and/or services used for private or personal consumption, to the extent they are so consumed.

Q 19.  Whether taxes paid on change of interiors of service apartment is eligible for input tax credit?

Ans. The input tax credit is not available on goods or services received by a taxable person for construction of an immovable property on his own account other than plant and machinery even when used in course or furtherance of business. The word “construction” includes reconstruction, renovation, additions or alterations or repairs to the extent of capitalization to the said immovable property. If the cost of interiors is capitalized towards the cost of immovable property, then it forms part of the cost of immovable property (Service apartment) and accordingly taxes paid on change of interiors of service apartment is not eligible for input tax credit.

Q 20.  Whether input tax credit can be availed on input services and capital goods when there is application for new registration or voluntary registration under section 18?

Ans. No. Input tax credit cannot be availed on the input services and capital goods as  section 18(1) and section 18(2) state that input tax credit shall be available only on the stock held (inputs, inputs contained in semi-finished goods or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax or preceding the date of grant of registration.

Q 21. What is the eligibility of input tax credit on inputs in stock for a person who obtains voluntary registration?

Ans.  As per section 18(2), the person who obtains voluntary registration is entitled to take the input tax credit of input tax on inputs in stock, inputs in semi­finished goods and finished goods in stock, held on the day immediately preceding the date of registration.

Q 22. What would be input tax eligibility in cases where there is a change in the constitution of a registered taxable person?

Ans. As per section 18(6), the transferor shall be allowed to transfer the input tax credit that remains unutilized in its books of accounts to the transferee provided that there is a specific provision for transfer of liabilities.

Q 23. What would be input tax eligibility in case where the goods and/or services supplied by a registered taxable person become absolutely exempt?

Ans. As per section 18(9), the registered taxable person who supplies goods and / or services which become absolutely exempt, has to pay an amount equivalent to the input tax credit 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 such exemption. It has also been provided that after payment of the amount on such goods, the balance, if any available in electronic credit ledger would lapse.

Q 24. What would be input tax eligibility in cases where taxable person paying tax opts to pay tax under Compounding Scheme under Section 8?

Ans. As per section 18(9), the registered taxable person, who was paying tax opts to pay tax under Compounding Scheme under Section 8, has to pay an amount equivalent to the input tax credit 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 such switch over. It has also been provided that after payment of the amount on such goods, the balance, if any available in electronic credit ledger would lapse.

Q 25. Whether the principal is eligible to avail input tax credit of inputs sent to job worker for job work?

Ans. Yes, the principal is eligible to avail the input tax credit on inputs sent to job worker for job work in terms of Section 20(1).

Q 26. What is the time period within which the inputs sent for job work has to be received back by the principal?

Ans.  One year.

Q 27. Whether principal has to reverse the input tax credit on inputs which have not been received back from the job worker within one year?

Ans. Yes, the principal has to reverse the credit along with interest on inputs which have not been received back from job worker within one year but he can reclaim the credit on receipt of inputs.

Q 28. Which of the following is included for computation of taxable supplies for the purpose of availing credit:

• (a) Zero-rated supplies;
• (b) Exempt supplies; (c) Both?

Ans. Zero rated supplies.

Q 29. What is the time period within which the capital goods sent for job work has to be received back by the principal?

Ans. Three years.

Q 30. What is the liability of the principal if the capital goods sent to job worker have not been received within 3 years from the date of being sent?

Ans. Principal has to pay an amount equal to credit taken on such capital goods along with interest But he can reclaim the credit on receipt of inputs.

Q 31. Whether the Input service distributor and the recipient situated in different States should have same PAN or different PANs.?

Ans. Explanation 2 to Section 21(3) states that ‘recipient of credit’ means supplier of goods and or services having the same PAN as that of Input Service Distributor. Therefore, the distributor and the recipient situated in different States should have same PAN.

Q 32.  What is the manner in which Input Service Distributor should distribute the credit where distributor and recipient are located in different States?

Ans. The distribution of credit is to be done in following manner:

CGST, as CGST and IGST

SGST, as SGST

 and IGST IGST, as IGST or CGST

Q 33.  What is the manner in which Input Service Distributor should distribute the credit where distributor and recipient are business verticals located in the same State?

Ans. The distribution of credit is to be done in following manner:

CGST and IGST as CGST

SGST and IGST as SGST

Q 34. Whether CGST can be distributed as SGST and whether SGST can be distributed as CGST within the State and between the states?

Ans. No, based on section 21 of the CGST Law, CGST cannot be utilized against SGST and SGST cannot be utilized against CGST within the State and between the States.

Q 35. What are the conditions applicable to Input service distributor to distribute the credit?

Ans. The conditions are as under:

• The credit should be distributed against a prescribed document.
• The amount of credit distributed shall not exceed the amount of credit available for distribution.
• The credit of tax paid on input service attributable to a recipient of credit shall be distributed only to that recipient.
• If credit is applicable to more than one recipient, then it shall be attributable to such distribution on pro rata basis to the aggregate turnover of such recipients.
• If credit is applicable to all recipients, then it shall be attributable to such distribution on pro rata basis to the aggregate turnover of all such recipients.

Q 36. Whether recovery provisions can be initiated in case of wrong distribution of credit?

Ans. Based on section 22 of the CGST Act if the credit has been distributed wrongly the same shall be recovered from the registered taxable person along with interest in accordance with the provisions of the CGST Law.