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INPUT TAX CREDIT: LIMITATIONS ON AVAILMENT




Introduction

Over the last five years, too much water has flown over and GST law, as originally legislated

has undergone substantial changes in law, rules, scheme, and procedures. We can also say

that GST has been a dynamic tax law so far Hundreds of Notifications, Circulars, Legislative

and Procedural changes, 47 GST Council meetings, over seven hundred writs and thousands

of advance rulings are witnesses to this dynamism. Out of all Input Tax Credit is one topic that

has the most amendments and is most litigated.

An uninterrupted and seamless chain of the input tax credit is one of the key features of the

Goods and Services Tax. Input tax refers to the tax paid on the purchase of goods and

services, which are to be used further in the process of making outward supplies. When you

buy a product/service from a registered dealer, you pay taxes on the purchase. On selling, you

collect the tax. You adjust the taxes paid at the time of purchase with the amount of output

tax (tax on sales) and the balance liability of tax (tax on sales minus tax on purchase) has to be

paid to the government. This mechanism is called the utilization of input tax credit


Conditions on Availment

Section 16 of the CGST Act lays down the conditions to be fulfilled by GST-registered buyers to claim ITC.

  1. Every registered person shall, subject to such conditions and restrictions as may be prescribed, 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

  2. No registered person shall be entitled to claim input tax credit unless:

  • He holds a tax invoice or debit note or any other document issued by the supplier.

  • He has received the goods or services or both. In case the goods are delivered to any other person, on the direction of the buyer, the goods shall be deemed to be received.

  • The tax charged in respect of such supply has been actually paid to the Government, either in cash or through the utilization of input tax credit.

  • Details of such tax invoice or debit note are furnished by the supplier in Form GSTR-1and the same has been communicated to the buyer through GSTR-2B.

  1. Further, if a recipient fails to pay to the supplier of goods or services, the amount in respect of such supply along with the tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, the buyer is required to add such tax in his output tax liability along with interest. The buyer is also allowed to reclaim such input tax credit on subsequently making the payment to the supplier.

  2. ITC cannot be claimed if the registered person has claimed depreciation on the tax component of the cost of capital goods and plant & machinery.

  3. A registered person can avail ITC in respect of invoices or debit notes up to the earlier of the following dates:

  • 30th November following the end of the financial year to which such invoice/debit note pertains, or

  • Furnishing of the relevant Annual Return


The limitation imposed by Rule 36(4)

Provisional ITC means ITC that buyers claim in their GST returns for which invoice is not reported or yet to be reported by their vendors or suppliers with the government. The ITC claims on a provisional basis have been removed from the revised Rule 36(4) from 1st January 2022. As per the sub-rule (4) inserted in rule 36 of the Central Goods and Service Tax Rules, a taxpayer filing GSTR-3B can claim input tax credit only to the extent of the eligible credit available in GSTR-2B. Until 31st December 2021, this was 105% of the ITC in GSTR-2B/GSTR-2A


The limitation imposed by Rule 86B

Rule-86B limits the use of input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule has an overriding impact on all the other CGST Rules.

Applicability: This rule is applicable to registered persons having a taxable value of supply (other than exempt supply and zero-rated supply) in a month that is more than Rs.50 lakh. The limit has to be checked every month before filing each return.

The restriction imposed: The applicable registered persons cannot use ITC in excess of 99% of output tax liability. In simple words, more than 99% of the output tax liability cannot be discharged by using the input tax credit.

However, there are some expectations of the rule -

  • The Income tax paid is more than 1 lakh

  • Refund received on account of export under LUT of inverted tax structure is more than 1 lakh in a financial year.

  • If the registered person under concern has discharged his liability towards output tax by electronic cash ledger for an amount in excess of 1% cumulatively of the total output tax liability up to the said month in the current financial year.

  • If the registered person under concern is any of the following:

    • Government department

    • Public sector undertaking

    • Local authority

    • Statutory Authority


The limitation imposed by Section 17

Apportionment of credit and blocked credits

  1. If goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes or partly for effecting taxable supplies and partly for effecting exempt supplies then credit to the extent of usage for business or taxable supplies respectively can be availed.

(Section 17(1) & (2))

  1. Exempted supplies include:

  • Exempted Supply

  • Supply on which recipient is liable to pay tax under reverse charge

  • Transaction in securities

  • Sale of land

  • Sale of building subject to para 5(b) of Schedule II of the CGST Act.


Banking Company or non-banking company or a financial institution

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 2 options

Option 1:

An amount equal to fifty percent of the eligible input tax credit

Option 2:

Comply with section 17(2)

Note:

  • The option once availed cannot be reversed during the same financial year

  • Restriction of fifty percent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number


Blocked Credits

The input tax credit is not available for claims in the following cases-

  1. Motor vehicles, with a seating capacity of less than or equal to 13 persons (including the driver), goods transport agencies, vessels, and aircraft, except for a few cases. So as an exception, ITC is allowed in the below cases:

    1. Such motor vehicles and conveyances are further supplied i.e. sold.

    2. Transport of passengers and goods.

    3. Conveyance is used for imparting training on driving, flying, and navigating such vehicles or conveyances.

  2. Services of general insurance, servicing, repair, and maintenance relating to motor vehicles, vessels, or aircraft in Sl. no.1.

  3. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. Exception: If the goods and/or services are taken to deliver the same category of services or as a part of a composite supply, the input tax credit will be available For Example, if Mr. A purchases cosmetic creams to supply to a customer, then ITC on purchases will be allowed.

  4. Membership in a club, health, and fitness center.

  5. Rent-a-cab, health insurance, and life insurance except in the following cases where it is allowed:

  6. Government makes it obligatory for employers to provide it to their employees by law. For example, the mandatory cab services for female staff in night shifts.

  7. Goods and/or services are taken to deliver the same category of services or as a part of a composite supply, input tax credit will be available. For example, if Mr. A takes the service of rent-a-cab to supply to Mr. B, a customer, then the ITC on purchases will be allowed.

  8. Leasing, renting or hiring motor vehicles, vessels, or aircraft, except cases in Sl.no. 1.

  9. Travel benefits are extended to employees on vacation such as leave or home travel concessions.

  10. Works contract service for construction of an immovable property (except plant & machinery or for providing a further supply of works contract service).

  11. Goods and/or services for the construction of an immovable property whether to be used for personal or business use.

  12. Goods and/or services where tax has been paid under the composition scheme.

  13. Goods and/or services used for personal use.

  14. Goods or services or both are received by a non-resident taxable person except for any of the goods imported by him.

  15. Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

  16. ITC will not be available in the case of any tax paid due to non-payment or short tax payment, excessive refund or ITC utilized or availed by the reason of fraud or willful misstatements or suppression of facts or confiscation and seizure of goods.

  17. Special cases: Standalone restaurants will charge only 5% GST but cannot enjoy any ITC on the inputs.


Reversal of Credit under Special Circumstances

The registered person is required to reverse all the ITC that has been availed by him in the event that he chooses to pay tax under the composition scheme or where the goods or services supplied by him become wholly exempt or his registration gets canceled for any reason.





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