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GST: Input Tax Credit Explained (Part 2/7)

Section 17: Apportionment of credit and blocked credits

Section 17(1) says that where the goods and/or services are 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.

  • Interpretation:

Section 17(1) talks about apportionment of credit when inputs are used partly for business purposes and partly for other purposes. The input tax credit shall be available for the inputs used in business purposes only.

The following flow chart would help in simpler understanding:

171

Section 17(2) says that where the goods and/or services are used by the registered taxable person partly for effecting taxable supplies including zero-rated supplies under this Act or under the IGST Act, 2016 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.

An explanation to section 17(2) says that for the purposes of section 17(2) exempt supplies shall include supplies on which recipient is liable to pay tax on reverse charge basis under section 8(3).

 

  • Interpretation:

Section 17(1) talks about apportionment of credit when inputs are used partly for taxable supplies including zero rated supplies and partly for exempt/non-taxable supplies. The input tax credit shall be available for the inputs used in taxable supplies including zero rated supplies only.

The following flow chart would help in simpler understanding:

172

Section 17(3) says that 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 section 17(2), or avail of, every month, an amount equal to 50% of the eligible input tax credit on inputs, capital goods and input services in that month.

An explanation to section 17(3) says that the option once exercised shall not be withdrawn during the remaining part of the financial year.

  • Interpretation:

This section allows any banking company or a financial institution including a non-banking financial company to claim input tax credit in either of the following two manners:

  1. Either identify the inputs including capital goods and services used only towards taxable outward supplies and take tax credit for those inputs only, or
  2. Take tax credit at 50% of all available credits including capital goods and services during a month.
  • Either of the two options once chosen cannot be changed during the Financial Year.

 

Section 17(4) says that in spite of anything contained in section 16(1) and sections 18(1), 18(2), 18(3) and 18(4), input tax credit shall not be available in respect of the following—

  • Motor vehicles and other conveyances, except when they are used-
  • (i) For making the following taxable supplies, namely-
  • Further supply of such vehicles or conveyances, or
  • Transportation of passengers, or
  • Imparting training on driving, flying, navigating such vehicles or conveyances,
  • (ii) For transportation of goods.
  • Supply of goods and services, namely—
  • (i) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward supply of the same category of goods or services,
  • (ii) Membership of a club, health and fitness centre,
  • (iii) Rent-a-cab, life insurance, health insurance except where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force, and
  • (iv) Travel benefits extended to employees on vacation such as leave or home travel concession.
  • Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service,
  • 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 first explanation to section 17(4)(d) says that for the purpose of section 17(4)(d) the term ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

The second explanation to section 17(4)(d) says that ‘Plant and Machinery’ means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.

  • Goods and/or services on which tax has been paid under section 9,
  • Goods and/or services used for personal consumption,
  • Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples, and
  • Any tax paid in terms of section 67 (Determination of tax not paid or short paid or input tax credit wrongly availed or utilized by reason of fraud), section 89 (Detention and release of goods and conveyances in transit) or section 90 (Confiscation of goods or conveyances and levy of penalty).

 

  • Interpretation:

This section provides a Negative List of items on which Input Tax Credit shall not be available under GST, and the exceptions where such credit may be allowed.

  • Issues:
  • The author is of the opinion that Section 17(4)(b) is a very constraining clause and the items listed shall be allowed for input tax credit.
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GST: Input Tax Credit Explained (Part 1/7)

GST: An Inevitability

GST or Goods and Services Tax is a reality in India now. Why I say “is a reality” is because its implementation is now a foregone conclusion. For those still wondering if it would actually come into force, an amendment in the Constitution has been made to the effect which implies that all other taxes like Excise Duty, State VAT, Central Sales Tax and Service Tax etc. will cease to be leviable after 16-Sep-2017. So, it is only a matter of time it becomes an Act.

Introduction:

For all business entities; Input Tax Credit, its availment and use is a key focus area. It is because the amount of Input Credit available is equivalent to hard cash. Any admission or rejection of claim of Input Tax Credit hits the Cash Flows and the Working Capital Requirements. So let us discuss all about Input Tax Credit as we move towards the dawn of a new taxation era, The GST era.

Chapter-V: Input Tax Credit

Chapter-V of the Model GST Law talks about Input Tax Credit and contains seven sections detailed as follows:

Section 16 Eligibility and conditions for taking input tax credit
Section 17 Apportionment of credit and blocked credits
Section 18 Availability of credit in special circumstances
Section 19 Recovery of Input Tax Credit and interest thereon
Section 20 Taking input tax credit in respect of inputs sent for job work
Section 21 Manner of distribution of credit by Input Service Distributor
Section 22 Manner of recovery of credit distributed in excess

Section 16: Eligibility and conditions for taking input tax credit

Section 16(1) says that every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 44, be entitled to take credit of input tax charged on any supply of goods and services 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.

Provided that credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto shall not exceed—

  • 1/3 of the total input tax in the financial year in which the said goods are received,
  • 2/3 of the total input tax, including the credit availed in the first financial year, in the financial year immediately succeeding the year referred to in clause (a) in which the said goods are received, and
  • The balance of the amount of credit in any subsequent financial year.
  • Interpretation:

Section 16(1) can be interpreted as the sub-section enabling entitlement to:

  • all registered taxable persons
  • as per time and manner specified in Section 44 (further linked to Section 36)
  • shall be allowed to take credit for tax paid on any goods purchases and services availed
  • if used or intended to be used for business purposes
  • and such credit shall be credited in the electronic credit ledger of the assessee.
  • Change from Existing Laws:
  • Under the existing Central Excise Act, Service Tax Rules and DVAT Act, eligibility was allowed if input goods or services are used “in or in relation to” manufacture/outward service/sale. These words have been deleted here, thereby widely increasing the scope of eligible inputs.
  • The proviso to Section 16(1) allows credit for items which was not available under existing laws.

 

  • Issues:
  • The author is of the opinion that the words “input tax charged” should have been written as “input tax incurred”. The reason is that the tax charged in the invoice is always referred to the Output tax. Input tax charged refers to a situation where the assessee is under obligation of Reverse Charge Mechanism of tax payment.

Section 16(2) says that notwithstanding anything contained in section 16, but subject to the provisions of section 36, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services 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 taxpaying document(s) as may be prescribed,

  • He has received the goods and/or services,
  • The tax charged in respect of such supply has been actually paid to the account of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply, and
  • He has furnished the return under section 34.

 

Provided that where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or installment.

Provided further that where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months 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 the manner as may be prescribed.

Explanation to section 16(2) says that for the purpose of section 16(2)(b), it shall be deemed that the taxable 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 taxable 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.

  • Interpretation:

Section 16(2) can be interpreted as the sub-section laying down conditions for taking input tax credit, which have to be cumulatively complied with, as follows:

  • possession of tax invoice/debit note/any other prescribed document
  • receipt of goods or services
  • tax must have been paid the supplier
  • purchaser must file his return
  • Change from Existing Laws:

The number of conditions has been reduced and only four conditions have been laid down which provides clarity and ease.

  • Issues:
  • The author is of the opinion that the First Proviso is laying down a restrictive condition and that the input tax credit shall be allowed as and when any lot is received. The author finds no reason to defer the availability to the receipt of the last lot.
  • Moreover, the above would also create a hindrance while filing of returns as the inputs and outputs of the buyer and supplier would not match. There is no clarity on its treatment.
  • The author finds that the Second Proviso does not lay down any manner of reclaim of input tax credit if payment is made after three months to the service provider.

Section 16(3) says that where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component.

  • Interpretation:

It is a self-explanatory literal interpretation.

  • Change from Existing Laws:

No change from existing laws.

  • Issues:

No.

Section 16(4) says that a taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services after furnishing 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 or furnishing of the relevant annual return, whichever is earlier.

  • Interpretation:

Let us understand with an example assuming the appointed date of implementation is 01-Apr-2017:

ABC Limited received an invoice dated 15-Apr-2017 and another invoice dated 15-Mar-2018 (i.e. FY 2017-18).Both these invoices and their input tax credit were not claimed in the returns by omission. Section 16(4) allows taking credit for both these invoices till the filing of return for the month of September 2018 or 31st December 2018 which is the due date of filing of Annual Return for the FY 2017-18, whichever is earlier.

  • Change from Existing Laws:

As per Cenvat Credit Rules, 2004 the input tax credit can be taken only upto one year from the date of invoice.

  • Issues:
  • The author is of the opinion that in Section 16(4), the word “furnishing” shall be replaced by “due date of furnishing” of return. The use of the word “furnishing” leads to the interpretation that if the assessee does not furnish the relevant return, he may be able to avail credit without limitation upto the date of furnishing of return.
  • The words “invoice relating to such debit note pertains” create a restriction for availing input tax credit. It means date of the invoice against which the debit note has been issued will be checked for allowing credit.

Example: Suppose a debit note is raised on 31-Oct-2018 for an invoice dated 31-Oct-2017 under price escalation clause of a long term contract. In this case, eligibility of credit for the debit note shall be checked from the date of invoice it relates to i.e. 31-Oct-2017 meaning thereby as per Section 16(4), if the return for September 2018 has been filed (due date 20-Oct-2018), then the input credit on this debit note shall not be allowed.

  • Proviso to Section 16(1) read with Section 16(4) creates ambiguity. While the proviso says that credit shall be allowed in instalments over three years, Section 16(4) says the maximum time to claim input tax credit stands upto filing of return for September of the next Financial Year or Annual Return for the relevant Financial Year whichever is earlier.

More to follow… Leave queries in comments.