Input Tax Credit (ITC) under GST

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1. Introduction to Input Tax Credit (ITC) Definition: ITC refers to the credit of input tax charged on any supply of goods or services or both made to a registered person, which are used or intended to be used in the course or furtherance of business. Purpose: To avoid the cascading effect of taxes, making GST a value-added tax. Legal Framework: Chapter V of the CGST Act [Sections 16 to 21] & Chapter V of the CGST Rules [Rules 36-45]. 2. Relevant Definitions (Section 2) Agent: A person who carries on the business of supply or receipt of goods or services or both on behalf of another. Business: Includes any trade, commerce, manufacture, profession, vocation, adventure, wager, or any similar activity, whether or not for pecuniary benefit, and incidental/ancillary activities. Capital Goods: Goods whose value is capitalized in the books of account and used/intended for business. Exempt Supply: Supply of goods/services attracting nil rate of tax or wholly exempt under Sections 11 (CGST Act) or 6 (IGST Act), and includes non-taxable supply. Input: Any goods other than capital goods used/intended for business. Input Service: Any service used/intended for business. Input Tax: Central tax, State tax, integrated tax or Union territory tax charged on supply of goods/services, including IGST on imports and tax under reverse charge. Excludes tax paid under composition levy. Input Tax Credit: Credit of input tax. Inward Supply: Receipt of goods/services by purchase, acquisition, or any other means. Registered Person: A person registered under Section 25 of CGST Act, excluding those with a Unique Identity Number. Recipient: The person liable to pay consideration for supply, or to whom goods/services are delivered/rendered if no consideration. Supplier: The person supplying goods/services, including an agent. Taxable Supply: Supply of goods/services leviable to tax under CGST Act. Works Contract: Contract for building, construction, fabrication, etc., of immovable property where transfer of property in goods is involved. Zero-rated Supply: Export of goods/services or supply to SEZ developer/unit for authorized operations. 3. Eligibility and Conditions for Taking ITC (Section 16) Every registered person is entitled to ITC on inward supplies used/intended for business, subject to conditions. 3.1 General Conditions [Section 16(2)] Possession of Tax Paying Document: Must hold a tax invoice, debit note, or other prescribed document. Documents must contain: amount of tax, description of goods/services, total value, GSTIN of supplier & recipient, place of inter-State supply. Details Uploaded by Supplier: Details of invoice/debit note furnished by supplier in GSTR-1 (or IFF) and communicated to recipient in GSTR-2B. If not reflected in GSTR-2B, ITC cannot be availed. Can be claimed in succeeding months when furnished by supplier. Full ITC can be availed for IGST on imports, reverse charge documents, credit from ISD, which are outside Section 37(1) ambit. Receipt of Goods/Services: The registered person must have received the goods/services. "Bill to Ship to" Model: Goods delivered to a third party on the direction of the customer are deemed to be received by the customer. Tax Paid to Government: The tax charged on the supply must have been actually paid to the Government by the supplier. Furnishing of Return: The registered person must have furnished a return under Section 39 (GSTR-3B). 3.2 Specific Conditions & Restrictions Goods Received in Lots: ITC available only upon receipt of the last lot/instalment. Payment within 180 Days: Recipient must pay supplier (value + tax) within 180 days from invoice date. Failure to pay requires reversal of availed ITC with interest. Re-availment is possible upon subsequent payment. Exceptions: Reverse charge supplies, deemed supplies without consideration (Schedule I), additions to value of supplies due to supplier's liability incurred by recipient. Depreciation Claimed on Tax Component: If depreciation is claimed on the tax component of capital goods/P&M under Income-tax Act, ITC on that component is not allowed. (No dual benefit). Time Limit for Availing ITC [Section 16(4)]: Earlier of 30th November of succeeding financial year or date of filing relevant annual return. For debit notes, the date of issuance of debit note is relevant. RCM Supplies: For supplies from unregistered persons where recipient issues invoice, relevant financial year is when recipient issues invoice. Revoked Registration Cancellation [Section 16(6)]: Time limit extended until return filing for the period of cancellation, if filed within 30 days of revocation, provided original time limit hadn't expired. Reversal of ITC in case of non-payment of tax by supplier [Section 41 read with Rule 37A]: If supplier fails to furnish GSTR-3B by 30th September of the following FY, recipient must reverse ITC by 30th November. Re-availment possible if supplier subsequently files GSTR-3B. 4. Apportionment of Credit & Blocked Credits (Section 17) 4.1 Apportionment of ITC [Section 17(1) & (2)] Business vs. Other Purposes: If goods/services are used partly for business and partly for other purposes, ITC is restricted to the business portion. Taxable vs. Exempt Supplies: If goods/services are used partly for taxable (including zero-rated) and partly for exempt supplies, ITC is restricted to the taxable portion. Exception: Zero-rated supplies (exports, SEZ supplies) are not exempt; ITC is available even if no tax is payable on output. Full credit is available for inputs/capital goods exclusively for taxable supply; no credit for those exclusively for exempt supply. Common ITC is apportioned. Value of Exempt Supply: Includes supplies under reverse charge, transactions in securities, sale of land, and sale of building (subject to conditions). Excludes activities specified in Schedule III (except for specific cases). 4.2 Blocked Credits [Section 17(5)] ITC is not allowed on certain specified goods and services, even if used for business. Motor Vehicles, Vessels, Aircrafts & Related Services: Blocked: Motor vehicles for transport of persons with seating capacity $\le 13$ (excluding driver), vessels, aircrafts, and related general insurance, servicing, repair, maintenance services. Exceptions (ITC Allowed): Used for further supply of such vehicles/vessels/aircrafts. Used for transportation of passengers. Used for imparting training on driving/navigating/flying. Vessels/aircrafts used for transportation of goods. Services received by a manufacturer of such vehicles/vessels/aircrafts. Services received by a supplier of general insurance services for such vehicles/vessels/aircrafts insured by them. Leasing/renting/hiring of vehicles/vessels/aircrafts when used for making outward taxable supply of same category or as element of taxable composite/mixed supply. Leasing/renting/hiring services provided by employer to employees under statutory obligation. Demo vehicles (ITC not blocked as they promote sale of similar vehicles). Motor vehicles for transportation of persons with seating capacity $> 13$ are NOT blocked. Motor vehicles for transportation of goods (e.g., trucks) are NOT blocked. Food & Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic & Plastic Surgery, Life Insurance, Health Insurance, Club Membership, Travel Benefits: Blocked: Generally, ITC is blocked. Exceptions (ITC Allowed): When used for making outward taxable supply of the same category of goods/services or as an element of a taxable composite/mixed supply. When provided by an employer to its employees under a statutory obligation. Works Contract Services for Immovable Property: Blocked: For construction of immovable property (other than plant and machinery) on one's own account. Exceptions (ITC Allowed): When the works contract service is availed by a works contractor for further supply of works contract service (sub-contracting). For construction of eligible plant and machinery (ITC allowed to all recipients, irrespective of capitalization). When the value of works contract service is not capitalized (ITC allowed to all recipients, irrespective of business line). "Construction" includes re-construction, renovation, additions, alterations, or repairs to the extent of capitalization. "Plant and machinery" means apparatus, equipment, and machinery fixed to earth, used for making outward supply of goods/services, including foundation and structural supports. Excludes land, building, civil structures, telecommunication towers, and pipelines laid outside factory premises. Ducts and Manholes used in optical fiber cable networks are considered part of "plant and machinery," so ITC is NOT restricted. Inward Supplies Charged to Tax Under Composition Levy: ITC is not available for goods/services received from a composition supplier. Inward Supplies Received by a Non-Resident Taxable Person: ITC is not available, except for tax paid on imported goods. Inward Supplies for CSR Obligations: ITC is not available for goods/services used for Corporate Social Responsibility (CSR) activities. Inward Supplies for Personal Consumption: ITC is not available for goods/services used for personal consumption. Goods Lost, Stolen, Destroyed, Written Off, or Disposed of by Gift/Free Samples: ITC is blocked because no tax is payable on their outward supply. Tax Paid in Fraud Cases, Detention, Confiscation: ITC is not available for tax paid under Sections 74 (evasion of taxes), 129 (detention of goods/conveyances), and 130 (confiscated goods/conveyances). 5. Credit in Special Circumstances (Section 18) 5.1 Entitlement of ITC New Registration (within 30 days of liability): ITC on inputs held in stock, inputs in semi-finished/finished goods held in stock on the day immediately preceding liability date. Voluntary Registration: ITC on inputs held in stock, inputs in semi-finished/finished goods held in stock on the day immediately preceding registration grant date. Switching from Composition Levy to Regular Scheme: ITC on inputs held in stock, inputs in semi-finished/finished goods, and capital goods on the day immediately preceding the date of switching. Credit on capital goods reduced by 5% per quarter/part thereof from invoice date. Exempt Supply Becoming Taxable: ITC on inputs held in stock, inputs in semi-finished/finished goods, and capital goods (exclusively used for such exempt supply) on the day immediately preceding the date supply becomes taxable. Credit on capital goods reduced by 5% per quarter/part thereof from invoice date. Time Limit for Availing ITC (for above cases): Within 1 year from the date of issue of invoice. Declaration: Electronic declaration in FORM GST ITC-01 within 30 days of becoming eligible. If total claim > ₹2,00,000, certified by CA/CMA. 5.2 Reversal of ITC Switching to Composition Levy or Exempt Supplies: ITC must be reversed. Inputs: Reversed proportionately based on corresponding invoices. If invoices not available, use prevailing market price (certified by CA/CMA). Capital Goods: ITC involved in remaining useful life (5 years) reversed on a pro-rata basis. Reversal amount added to output tax liability. Balance ITC in electronic credit ledger lapses. Cancellation of Registration: Requires reversal of ITC on inputs, semi-finished/finished goods, capital goods/P&M on the day preceding cancellation. Calculated similar to switching to composition levy. 5.3 Amount Payable on Supply of Capital Goods/P&M (Section 18(6)) If capital goods/P&M on which ITC was taken are supplied outward, higher of: ITC taken, reduced by 5% per quarter/part thereof from invoice date (i.e., ITC for remaining useful life). Tax on transaction value of such capital goods/P&M. If refractory bricks, moulds, dies, jigs, fixtures are supplied as scrap, tax can be paid on transaction value. 5.4 Transfer of ITC on Change in Constitution (Section 18(3)) On sale, merger, demerger, amalgamation, lease, transfer of business, unutilized ITC can be transferred to the new entity if there's a specific provision for liability transfer. Demerger: ITC apportioned in ratio of asset value of new units. Details furnished in FORM GST ITC-02, certified by CA/CMA. Transferee accepts on common portal. Separate Registration for Multiple Places of Business (Rule 41A): Unutilized ITC can be transferred to newly registered places of business within the same State/UT in the ratio of asset value. Details furnished in FORM GST ITC-02A within 30 days. Transferee accepts on common portal. 6. How ITC is Utilised (Section 49 & Rule 88A) ITC is credited to a registered person's electronic credit ledger. 6.1 Order of Utilisation [Section 49(5), 49A, 49B, Rule 88A] IGST Credit: Must first be utilized towards payment of IGST. Remaining IGST credit can be utilized towards payment of CGST and SGST/UTGST in any order and in any proportion. Entire IGST credit must be fully utilized before using CGST or SGST/UTGST credit. CGST Credit: Utilized towards payment of CGST and IGST, in that order. Cannot be utilized for payment of SGST/UTGST. SGST/UTGST Credit: Utilized towards payment of SGST/UTGST and IGST, in that order. Can be utilized for IGST only after CGST credit is fully utilized for IGST. Cannot be utilized for payment of CGST. Cross-utilization is only between CGST-IGST and SGST/UTGST-IGST. 6.2 Restrictions on Utilisation of ITC (Rule 86A) Commissioner can restrict ITC utilization if there's reason to believe it's fraudulently availed or ineligible due to: ITC availed on invoices/debit notes from non-existent supplier, supplier not conducting business, or without actual receipt of goods/services, or where tax hasn't been paid to Government. Registered person availing ITC is non-existent or not conducting business at registered place. Registered person availing ITC doesn't possess valid tax invoice/document. Restrictions can be imposed for up to 1 year. Commissioner can withdraw if conditions no longer exist. 6.3 Restrictions on Use of Electronic Credit Ledger (Rule 86B) For registered persons with taxable supply (other than exempt/zero-rated) > ₹50 lakh in a month, ITC from electronic credit ledger cannot discharge > 99% of output tax liability. The remaining 1% must be paid via electronic cash ledger. Exceptions: Income tax paid > ₹1 lakh in last 2 FYs (for specified persons). Refund of ITC > ₹1 lakh in preceding FY (from zero-rated supplies or inverted duty structure). Output tax liability discharged via electronic cash ledger > 1% of total cumulative output tax liability in current FY. Government Departments, PSUs, local authorities, statutory bodies.