Wednesday, June 7, 2017

Input Tax Credit ITC & Point of Taxation under GST

The process of deducting the tax paid on inputs from the tax payable on sale of output, is known as Input Tax Credit.

Some of the most commonly used  Input Tax Credit Rules are discussed hereunder as follows

GST Rule No.
Title of GST Rule
Section under Law
Intent of the Rule
Documentary Requirements for claiming ITC
Section 31 & 34
To prescribe various documents on basis of which ITC can be claimed

No Input Tax Credit of GST paid under any demand due to fraud, willful misstatement &  suppression of facts.
Reversal of ITC in case of non-payment of consideration
Section 16(2)
Where a supplier has not made payment for goods procured by it within  a period of 180 days from the date of issue of invoice, then supplier shall reverse the ITC availed by him n such goods
The amount of ineligible credit shall be added to the output tax liability of the recipient
Section 50(1)
Interest shall be payable by from the date of availment of such ITC till the date of its addition in output tax liability of the supplier 
Procedure for Distribution  of ITC by an Input Service Distributor

Prescribes  the procedure as  well as various conditions for distribution of ITC by Input Service Distributor
Conditions & Restrictions in respect of inputs goods sent to the job worker
Section 143

Conditions & restriction on availability of ITC subject to  movement of goods & compliance of various formalities.

 ITC Shall Be Available Only If Following Conditions Are Satisfied:
        i.            Registered Persons Only: Input Tax Credit shall only be available to registered taxable persons only if such details as prescribed under GST Invoice Rules are contained therein [Rule 1(2)]  .

     ii.            Payment to be made within 180 days: ITC on input services shall be claimed only when payment of invoice value of such services along with tax component shall be paid within a period of 120 days from the date of such invoice. Section 16(2)  & [Rule 2(1)]

If payment for input services have been made after expiry of 180 days from the date of invoice, an amount equal to the input tax credit along with interest thereon shall be added to the output tax liability of person claiming such ITC.  Section 16(2) &  [Rule 2(2)]

   iii.            No ITC of GST paid in pursuance of any demand raised by GST Authorities.
Where  a demand has been raised on account of fraud, willful  misstatement & suppression of facts, then any GST paid under such demand shall not be allowed as Input Tax Credit. [Rule 1(3)]

    iv.            Possession of Tax Invoice, Debit note etc: Person claiming ITC must have invoice, debit note  issued to him by the registered taxable supplier.

      v.            Receipt of entire Installments of goods: In case goods are to be received in installments, then all the installments of such goods have been received.

    vi.             Tax by Supplier have actually been deposited to the credit of Central Govt: ITC shall be allowed  only when such amount of tax has been deposited by supplier with relevant government. One of the mechanisms to check whether tax has actually been deposited with relevant government is through matching of Invoices in electronic credit ledger .

Example: If Ramesh Ltd. claimed ITC of Rs. 12,500 on purchase of goods from Shyam Ltd. then  GST Electronic Credit ledger will check whether Shyam Ltd has disclosed this sales in its return. If this transaction is found in the return of Shyam Ltd, then GST system will treat this transaction as matched & this credit of INR 12,500 shall be allowed to the Ram & Co.

 vii.            Furnishing of Return by the Supplier:    A registered person can claim ITC only when the supplier from whom goods have been procured have filed his returns under GST.


A person who is taxable under GST shall be eligible to claim ITC on the goods delivered to some other person if such goods are delivered on the request on the request of such taxable person. A challan  shall be issued by principal manufacturer for delivery of goods to the job worker both in case of capital goods as well as inputs.

Further, details of challans of goods sent to job worker shall be included in Form GSTR1 of the principal manufacturer.

Example Principle manufacturer can claim ITC on goods delivered to a job worker on his instructions. In such a case receipt of goods by job worker will be considered as receipt of goods by principal manufacturer.

Further, goods sent to job worker shall be received back by the job worker within a period of 1year from the date of receipt of such goods, than it shall be treated as supply of goods by principal to job worker & consequently tax & interest liability shall arise for job worker. 


Any registered taxable person who has claimed  ITC on capital goods can send such capital goods directly to job worker without bringing the same to his principal place of business. Further, the capital goods so sent shall be received back by the principal manufacturer within 3 years from the date on which such goods were sent or the date of completion of job whichever is earlier otherwise it will be deemed as supply of capital goods &  consequences of interest & taxes shall follow for job worker in respect of such capital goods.

The details of challans of goods sent to job worker shall also be included in Form GSTR1 of the principal manufacturer for that period.


(a) Under GST  input tax credit shall be allowed in one installment provided GST component on such capital goods has not capitalized & no depreciation is claimed on  such tax portion.

(b) ITC on manufacture(fabrication) of Capital Goods allowed.
If some inputs have been used for manufacture(fabrication) of capital goods the cost of which have been capitalized in the books of accounts then ITC shall be available in such cases as was decided in the case of CCE , Balgaum v. Hindalco Industries Limited (2012).


Proportionate ITC shall be allowed in cases where goods are partly used for business purposes & partly for non business purposes.

Example: Mr. X a Chartered Accountant, provides professional services to  M/s ABW ltd. Further, X also provides income tax consultancy for filing ITR of director of M/s ABW ltd. Mr X raised a combined invoice of Rs. 60,000. In such cases , ITC in relation to personal ITR of director of M/s ABW Ltd shall be disallowed whether clearly identifiable in the invoice raised by Mr. X or calculation in proportionate basis whether taking hors devoted as base or any other reasonable  basis.


Person making supply of exempt goods shall not be eligible to avail ITC in respect of inputs used in supply of such goods.    


Banks, Financial Institutions, NBFC's can avail ITC  by exercising any of the following two options:
a)      To take proportionate ITC in proportion of taxable services as per Section 17(2)
b)     To avail 50% of ITC in all inputs, capital goods in that particular month.


Any expenditure on construction services shall not be eligible for ITC to the extent it has been capitalized in the books of accounts. Further, any expenditure on construction activity shall be eligible for ITC provided it has not been capitalized in the books of account & consequently no depreciation has been claimed on it.

Example: Expenditure on repair & maintenance in factory building  that has been charged to P& L account shall be eligible for ITC. Further, any capital expenditure on construction activities  which has been capitalized in the books of accounts shall not be eligible for ITC.


a)      An input service distributor shall distribute the ITC pertaining to a particular month in that month only & details of such distribution shall be incorporated by it in Form  GSTR -6 [Rule 4]

b)     Input Service Distributor shall distribute the amount of Eligible & ineligible input tax credit separately which will lead to allocation of ineligible credit to those states to which it  pertains. Further, the amount of CGST, SGST & IGST shall be separately disclosed.
c)      ITC shall be allocated on the basis of ratio  between turnover of supplier  & total aggregate turnover.

        Formula  =                    Turnover of the supplier     *  Total Input Credit to be distributed
                                          Aggregate Turnover of all Suppliers

d)     If  Input Service Distributor & Supplier are located in the same state : Then
                                 i.            CGST will be tfd as CGST
                               ii.            SGST will be tfd as SGST
                             iii.            IGST will be tfd as IGST

                However, if ISD & supplier are located in different states, then  CGST/IGST & SGST credit          shall be tfd as IGST Credit.

e)      ISD shall issue an ISD Invoice as prescribed under Rule 7(1) of invoice rules indicating that such invoice is issued for  distribution of Credit only. ISD shall issue a debit note to the respective supplier for reduction of  credit. Further any  reduction  in ITC shall be apportioned to the individual supplier in the ratio in which ITC was originally distributed to the suppliers.


Reversal of credit under GST means reversal of the credit already taken by the taxpayer. Our objective of this article is to decode the circumstances under which Input Tax Credit already availed by the taxpayer shall be reversed.

Situations under ITC under GST shall be Reversed:
         i.            Supplier opting for Composition Scheme: Where a registered person who has already availed ITC, but later opted to pay GST under Composition Scheme, he shall pay an amount by way of debit in Electronic Cash Ledger, equal to ITC on stock in trade & inputs forming part of stock of finished goods held in stock including Capital Goods as may be determined in a prescribed manner on the basis of individual invoices for inputs to be used in manufacturing or production .

       ii.            Goods or services or both procured by the supplier becomes subsequently exempt.
In case goods procured by a supplier becomes exempt after their procurement then , the supplier who has procured such inputs shall be liable to  reverse the GST Input Tax Credit already availed by him in the books of accounts as well as in the GST Returns filed by him on the basis of  invoices of such inputs.

Form GST ITC-03 : ITC to be reversed in situation (i) & (ii)  shall form part of the output tax liability of the supplier and the details of such amount shall be furnished in FORM GST ITC-03 and the details furnished here shall be duly certified by a practicing chartered accountant or cost accountant.

     iii.            Cancellation of registration.
In case of registered person whose registration is cancelled, he shall be liable to pay by way of debit in the Electronic Credit Ledger, equivalent to ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods on the day immediately preceding the date of cancellation of registration or the output tax payable on such goods, whichever is higher, as may be determined in the prescribed manner.

FORM GST ITC- 10 : The ITC so determined to be reversed in case of Cancellation of registration shall form part of the output tax liability of the registered person and the details of the amount shall be furnished in FORM GST ITC-10 and the details so furnished shall be duly certified by a practicing chartered accountant or cost accountant.

Note: Input Tax Credit to be reversed shall be determined on basis of market price of goods if invoices for stock in trade are not available with the supplier.
If invoices for goods held as stock in trade are not available with the supplier, then Input Tax Credit shall be calculated & reversed on the basis of prevailing market price  as on the date of occurrence of any of the events mentioned above.  
Reversal of ITC for Capital Goods:

Capital goods which are held in stock or are being used by the manufacturer,  the Input Tax Credit to be reversed shall be  determined on the basis of remaining useful life in months i.e. on a  pro-rata basis. For the purpose of calculation of  remaining  life useful life shall be taken as Five years.

Contributed by Team GST at Sandeep Ahuja & co