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Section 16 of GST – Eligibility and conditions

Section 16 of GST – Eligibility and conditions

November 19, 2024

Section 16 of GST Act 2017 – Eligibility and conditions for taking input tax credit. Check out details for GST Section 16 as per CGST Act 2017. Complete Analysis of GST Section 16, Section 16 of GST provide details for Eligibility and conditions for taking input tax credit. Explanation of Goods and Service Tax all Sections. Check Section Wise Analysis of GST Act 2017, Chapter Wise Analysis of GST All Sections. in this article you may find complete details regarding Section 16 of CGST Act 2017 – Eligibility and conditions for taking input tax credit, gst all section and definitions. Now Check more details from below…..

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Section 16 of GST – Eligibility and conditions for taking input tax credit

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, 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 and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, –

  • (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
  • (b) he has received the goods or services or both

Explanation—For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered 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;

(ii) 1where the services are provided by the supplier to any person on the direction of and on account of such registered person]

(c) subject to the provisions of 2 [section 41 or section 43A], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

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

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days 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 such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income Tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or 3 [invoice relating to such] debit note pertains or furnishing of the relevant annual return, whichever is earlier. 4 [Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019]

Related Provisions of the Statute

Section or Rule Description
Section 17 Apportionment of credit and blocked credits
Section 31 Tax invoice.
Section 34 Credit and debit notes
Section 39 Furnishing of returns.
Section 41 Claim of input tax credit and provisional acceptance thereof
Section 43A Procedure for furnishing return and availing input tax credit
Section 49 Payment of tax, interest, penalty and other amounts
Schedule I Activities to be treated as supply even if made without consideration
Rule 54 Tax invoice in special cases
Rule 86 Electronic Credit Ledger

Introduction

Chapter V of CGST Act deals with input tax credit. The availment or otherwise of Input Tax Credit forms the cornerstone in a GST regime. GST can be understood as a system of value-added tax on goods and / or services. It is these provisions of Input Tax Credit that make GST a value-added tax i.e., collection of tax at all points in the supply chain after allowing for credit of taxes paid on inputs / input services and capital goods. The invoice method of value added taxation has been followed in the GST regime too, viz., the tax paid at the time of receipt of goods or services or both would be eligible for set-off against the tax payable on supply of goods or services or both, based on the invoices with a special emphasis on actual payment of tax by the supplier. As on date, there is a debate going on between the tax payer and the Government as to whether the emphasis placed by the Statute on payment of taxes by the Supplier to enable a Recipient to avail credit, is fair or not and whether it adds on to the compliance burden or not. The procedures and restrictions laid down in these provisions are important to make sure that there is seamless flow of credit in the whole scheme of taxation without any misuse.

Analysis

(i) Relevant definitions:

(a) Taxable person (2(107)): Meansa person who is registered or liable to be registered under section 22 or section 24. As such, the liability to pay tax devolves on every ‘taxable person’ whether or not registration has been sought. A plain reading of the input tax credit provisions makes it clear that input tax credit would be available only to a registered person and to a limited extent pre-registration credits are available under section 18(1).

In case taxes are paid after registration for past periods, the credit for period beyond 1 month from registration may not be available even if it is a bona fide error. This may not be the intention but law does not enable such credits. (However, credit for period beyond 1 month from registration only holds true in cases where a person applies for registration within a period of 30 days from the date on which he becomes liable to obtain registration)

(b) Input tax credit: means the credit of “input tax” in terms of section 2(63).

(c) Input tax: “Input tax” in terms of section 2(62) in relation to a registered person, means the Central tax, State tax, Integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes:

— integrated goods and service tax (IGST) charged on import of goods.

— tax payable on reverse charge basis under IGST Act/SGST Act/CGST Act/UTGST Act.

— but excludes tax paid as a composition levy.

Section 9(3) and 9(4) of CGST Act (similarly section 5(3) and 5(4) of the IGST Act) levies tax on goods or services or both on reverse charge. Therefore, ‘input tax credit’ is the tax paid by a registered person under the Act whether as a forward charge or reverse charge for the use of such goods or services or both in the course or furtherance of his business.

(d) Electronic credit ledger: The input tax credit as self-assessed in the return of registered person shall be credited to electronic credit ledger in accordance with section 41, to be maintained in the manner as may be prescribed. [Section 2(46) read with Section 49(2)].

(e) “Capital goods” meansgoods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business [Section 2(19)].

(f) Input: “Input” in terms of section 2(59) means:

— any goods, — other than capital goods,

— used or intended to be used by a supplier

— in the course or furtherance of business

(g) Input service: “Input service” in terms of section 2(60) means

— any service

— used or intended to be used by a supplier

— in the course or furtherance of business.

(h) “Works Contract” in terms of Section 2(119)means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

(ii) Section 16

  • Registered person to take credit: Every registered person subject to Section 49 (payment of tax), shall 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. The input tax credit is credited to the electronic credit ledger. Rule 36 of the Central Goods and Service Tax Rules, 2017 provides that input tax credit can be taken on the basis of any of the following documents:

(i) Invoice issued under section 31 by supplier of goods or services.

(ii) Debit note issued under section 34 by supplier of goods or services.

(iii) Bill of entry or any similar documents under Custom Act, 1962.

(iv) Invoice prepared in respect of supplies made under reverse charge basis issued u/s 31(3) (f).

(v) Invoice/ Credit Note issued by ISD for distribution of credit in accordance with Rule 54(1) of CGST Rules, 2017.

It is important to observe the words ‘used by him’ and ‘in his businesses as appearing in section 16(1). These words refer to the registered taxable person in question and not the legal entity. So, input tax paid in a State must not be in relation to the business of a taxable person in another State, albeit belonging to the same person. For example, A Company has Branch-A which is a registered taxable person in Andhra Pradesh conducts conference in a hotel in Lonavla (Maharashtra) where CGST-SGST is charged by the hotel. This Company also has Branch-M which is a registered taxable person in Mumbai, now the provisions of section 16(1) operate as follows:

· CGST-SGST charged by the hotel in Lonavla (Maharashtra) is ‘used in the business of Branch-A’ in Andhra Pradesh and not in the business of Branch-M in Mumbai;

· Hotel would not be aware about the above fact and would not resist to issue the bill in the name of Branch-M because both are branches of the same Company;

Since, CGST-SGST has been charged by the hotel, input tax credit would not be available to Branch-A as tax paid in Maharashtra is not a creditable tax in Andhra Pradesh;

· Branch-M may be compelled to forego the tax paid to the hotel. However, there may be an urge to save this loss by providing the GSTIN of Branch-M to the hotel. In fact, the Company is rightly required to obtain ISD registration in Maharashtra and distribute this credit entirely to Andhra Pradesh;

· But, Branch-M in Mumbai cannot justify this input tax credit as it is not ‘used by him’ in ‘his business’ but it is ‘used by another (distinct person)’ in ‘that other (distinct persons’) business’;

· Care should to taken to verify ‘whose’ business each input tax credit relates to, that is, which is the exact distinct person who is eligible to each item of credit;

· If nexus is established between the services of the hotel and the ‘business’ of Branch-M, input tax credit may be availed by Branch-M. Nexus emerges if interbranch supply of services occurs between Branch-M and Branch-A; and

· Alternatively, based on the amount of potential credits of Branch-A being as CGST + MGST amount and forfeited as credit, the company may decide to obtain ISD registration in the State of Maharashtra and transfer the same amounts as IGST from Maharashtra to Andhra Pradesh.

  • Credit in case registration cancelled: When ‘registered person’ is only entitled to take credit, registration is a pre-requisite to claim credit. And if registration once obtained is later cancelled, no further credits from the date of cancellation would be eligible. Not only will that, as at the date of such cancellation reversal of credits under section 29(5) come into operation without any provision for refund of any surplus credit after such reversal too. Care must be taken that registration is not cancelled so that credits are not endangered. This aspect becomes significant while planning M&A transactions where business is transferred on a given date to another existing or new entity. In all these transactions, ‘credit preservation’ would be a key component in the M&A transaction structure. Credits can be irretrievably lost if there were a break in the registration position of transferor or transferee. Reference may be had to section 85 and rule 41 for detailed discussion about credit transfer in such transactions.
  • Credit in case registration suspended: Suspension of registration is NOT cancellation of registration. However, during the period of suspension, there is presumption of stoppage of business as a result, inward supplies during suspension are not admissible as it contradicts with such suspension. Please note that suspension is the result of ‘application’ by taxable person as noted from rule 21A. It does not lie with the taxable person to make such application for suspension of registration pending settlement of all dues to enable cancellation of registration and at the same time assert the existence (and continuation) of business by claiming credit on inward supplies. As such, where registration is suspended, credit is NOT admissible due to the presumption that is contrary to the premise in section 16(1).
  • Wastage of inputs in the course of production: Credit in respect of inputs that may have been wasted during the course of production of finished products does not cease to be ‘used or intended to be used’ in the course or furtherance of business. As such, there is no restriction to read into the language of section 16 (1). In fact, the full extent of credit would be available whether the extent of wastage of inputs in the course of production of finished goods is within normal wastage norms or even exceeds that to be called abnormal wastage of inputs. Unless there is a diversion of inputs (in respect of which credit has been availed), there is no embargo on taking and retaining input tax credit. Section 17(5)(h) restricts credit on “goods lost” since these can no longer be used for the purpose of business but does not provide for restriction of credits on “loss of goods” which could be a process loss inherent to the nature of product on which credit has been availed. Therefore, “goods lost” must be given a completely different meaning as compared to “goods lost during production / process or a normal / abnormal loss”. Please note that such in-process loss occurring in the course of job work would receive different treatment. Where the job work loss (of inputs) is normal loss, then credit claimed by the Principal would be undisturbed, but credit related to abnormal loss (of inputs) would be regarded as ‘non return of inputs by job worker’ which is ‘deemed to be supply’ under section 19(3) and 19(6), in case of capital goods.
  • Input-Output nexus: The CENVAT Credit Rules, 2004 under the excise and service tax regime allowed for credits on input and input services used for manufacture of excisable goods or for rendering taxable services. The credit under GST law is available on procurements which are “used” or “intended to be used” in the course or furtherance of business. Hence, any procurements though not having any remote connection with the manufacturing or rendering of outward supplies, would also qualify for input tax credit so long as it is used or intended to be used for the purpose of business. Eg. Air Conditioner installed in the cabin of the Managing Director, Maharashtra has no correlation with the car manufactured at the Company Plant in Gujarat but the credit of tax relating to such air conditioner would be available since the air conditioner has been installed for the purpose of business.
  • “One-to-one correlation” of credit from unrelated businesses with single GSTIN: There is a well-accepted principle in any value added tax system to inquire whether the given set of rules requires ‘one-to-one correlation’ for credit admissibility and utilization. An example may present this principle better. Say, a proprietor runs a furniture trading business in Indore, MP and a software services business in Jabalpur, MP. If the given tax system does not permit cross-utilization of credit (validly availed) in the furniture trading business with the output liability in the software services business then, it can be said that that tax system requires ‘one-to-one correlation’. But, if another tax system (which GST is) allows such cross-utilization, then it can be said that ‘one-to-one correlation’ is NOT required. Taking this principle into the furniture business, credit availed in respect of inputs purchased for customer ‘A’ can be utilized towards payment of output tax supplied to customer ‘B’. This too, is an example of the principle at work. As long as all credits and corresponding output tax liability are contained within one single GSTIN, such cross-utilization is freely permitted.
  • Setting-up of business and credit relating to pre-setup expenditure (preliminary and pre-operative) of such business: It is well known that ‘commencement of business’ is not the same as ‘commencement of entity’. An entity may be incorporated to explore business possibilities. Or an entity may be incorporated to implement a business opportunity. Where expenses are incurred without a ‘business’ in existence, credit is doubtful although the underlying expenses are seemingly business-like and business-linked like rent, consultancy, travel, etc.
  • Credit involved in sunk costs of abandoned and unfructified projects: While new businesses may have certain aspects to be examined (i) date from when business is said to be commenced (ii) actually used in business, there is another aspect where income-tax appears to be more liberal than GST law. This may be presented with an example. Say, in case (A) a mineral exploration company applies for 10 sectors to search or prospect mineral deposits, discovers 8 sectors to have deposits, finalizes 6 sectors to be viable for extraction and extracts minerals only in 4 sectors. Here, it may be stated that it is the nature of this industry that in order to arrive at those 4 viable sectors to extract mineral, prospecting costs must be incurred on 10 sectors. And there are judicial authorities that allow expenditure in unsuccessful sectors (areas where mineral deposits expected) as admissible deduction in arriving as gross total income for income-tax purposes because that is the nature of the business and only by starting with 10 sectors can the company reach those 4 sectors to extract. Now, say in case (B) a film production company launches 3 films and it has paid writers and purchased the scripts for all 3 films and then paid fees to directors/actors for 2 films and finds distributors for only 1 film. Now, in computing gross total income for the film business of this production company, expenditure on film 1 and 2 are not ‘used in business’ against income earned from film 3. Here, expenditure incurred on film 1 and 2 may be treated as a ‘loss-making venture’ and set-off against income from film 3 which is ‘profitable venture’. As to the correctness of the treatment in income-tax is a matter that turns on its unique facts but for GST purposes following key points may be noted (a) factual tests in case A and case B are not identical, in case A it is the nature of the business to ‘spend on several to earn from few’ and in case B, it is clear that there loss-making ventures have no contributory value to the profitable venture (b) requirement in section 16(1) is ‘actual end-use’ so that there is output tax due and where inward supplies do not result in output tax, credit is ineligible (see section 17(2) and 17(5)(h) for explanation) (c) although there is no requirement for ‘one-to-one correlation’ in GST, non-use of inward supplies is not going to still pass muster and be admissible and if non-use (resulting in taxable outward supplies) was not a criteria then, section 17(2) and 17(5)(h) would be otiose. Now, without laying down any rule of a direct link between credit in GST and costs such in projects that are abandoned or unfructified, experts caution that admissibility of credit under section 16(1) in these cases cannot be without further inquiry.
  • Credit involved in ‘capital or debt’ raising activities: There are a host of instances due to ‘remoteness’ of connection between taxable outward supplies and the expenditure involving GST credit. Experts caution that absence of a specific embargo in, say, section 17(5) for such cases is reason enough to claim credit but consider that these expenditure have been a riddled with controversy and contested as to whether they are ‘used in business’.
  • Costing-pricing inter-relationship: Credit may be availed in respect of inputs whose cost may not be included in the pricing of the product and consequently, not included in the transaction value – this may create a concern as to whether this credit is admissible or not. As explained by the Hon’ble Supreme Court in CCE, Pune v. Dai IchiKarkaria1999 (112) ELT 353, the nature of Modvat scheme is such that the cost of purchase of inputs lowered because credit, does not immediately, directly and proportionately impact the assessable value of the finished product manufactured using the inputs.
  • GST credit is subject to ‘conditions precedent’ and ‘conditions subsequent’: GST law has laid down certain conditions in sections 16 to 18 of CGST Act. Some of these conditions are ‘before’ claiming input tax credit, some are ‘after’ claiming credit. It is true that in Eicher Motors Ltd. v. UoI 1999 (106) ELT 3 (SC) it was held that Modvat credit is an ‘indefeasible right’. But, every ‘right’ becomes ‘indefeasible’ after it is ‘vested’. Rights are relevant only when it is legally recognized and by that recognition enforceable in a Court of law for infringement or other threat it is enjoyment by its owner. If these attributes are missing, then it is not a right but a reward or a benefit allowed by the magnanimity of the law. And by that reason, it can be taken away without reason or explanation. But, lawful rights once vested become indefeasible and until they are vested, these rights are ‘inchoate’ (or in formation), that is, there are not ‘yet’ vested. This makes identification of ‘vesting conditions’ very important. If the vesting conditions are satisfied, then the rights are vested and hence, indefeasible. As a corollary, unless the rights are vested, they remain ‘in choate’ and can be taken away by operation of law. The law that can take away ‘in choate rights’ may be (a) conditions linked to vesting or (b) prescription. Conditions linked to vesting of input tax credit in GST, can be found in section 16(2), among others. Notice that every ‘taxable person’ is liable to pay tax (and be compelled, in accordance with the law prescribed, to pay the tax levied) but only a ‘registered person’ is eligible to ‘take’ credit. Care must be taken of the ‘effect’ of these two central aspects, namely, (a) conditions linked to vesting or (b) prescription, If any of these central aspects are not satisfied, then even if credit may be ‘provisionally’ allowed, will need to be returned back. And until ‘conditions precedent’ are not satisfied, credit cannot be taken and in case ‘conditions subsequent’ are not satisfied, credit (provisionally) taken must be paid back or returned. Below are list of conditions linked to claim of input tax credit:
  • Time limit to avail the input tax credit: A registered person is not entitled to avail input tax credit on tax invoice/ debit notes after the due date of furnishing of the return under section 39 for the month of September of the subsequent financial year or furnishing of the relevant annual return, whichever is earlier. In fact, not only is registration a pre-requisite (see, ‘registered taxable person’ shall be entitled to claim credit) but filing of return under section 39 is also a requirement. Input tax credit is a right that does not ‘vest’ until the last of conditions in section 16(2) are fulfilled. Until then, this right i.e., input tax credit is inchoate (or incomplete or in-formation) and not a vested right. Rights that are not yet vested can lapse by limitation unless effective steps to actualize those rights are taken by the person. And once the right stands vested, it becomes indefeasible except by operation of subsequent inherent conditions. In other words, input tax credit which is a right in law of the taxable person is not fully mature and is not available to the taxable person until all pre-conditions (steps to actualize available rights) have been taken. Section 16(2) lays down these steps that can be taken immediately or in course of time. And once all these steps are taken then the right i.e. ‘available’ becomes a right that can be ‘availed’. After the credit stands availed, it is available without any time limit. Section 18(4) provides a condition (known at the time of availing credit) that this credit will be reversed if the outward supplies become exempted. Other than this situation, the credit availed is permanently available to the taxable person. Now, in a situation where the credit that is ‘available’ is somehow delayed and ‘not taken’, it would still be available but not beyond the limitation prescribed in Section 16(4). Once the limitation prescribed in section 16(4) sets in, the credit which is ‘not availed’ by virtue of the limitation prescribed is proper in view of the principle of reaching finality in respect of all ‘available’ credits that may ‘not’ be intended to be availed. Experts suggest that in case of doubt, one can avail the credit and then reverse under protest under intimation to revenue. This would ensure that the time limitation would not be the reason for not taking ITC once clarity emerges from Courts.

Section 16(4) provides for time limit for taking credit for Invoices and Debit Notes. Bill of Entry is not mentioned in Section 16(4) and hence it appears that there is no time limit for taking credit in case of Bill of Entry.

It would be important to note that the due date for availing credit of debit notes, it is linked to the financial year to which invoice relating to such debit note pertains to and not the financial year in which the debit note has been issued.

Illustration

Document Type Document Date Due date for taking credit*
Invoice 05.07.2018 Returns for the month of September 2019
Debit Note 05.07.2018 (Debit Note relates to invoice raised on 05.03.2018) Returns for the month of September 2018
Debit Note 05.12.2018 (Debit Note relates to invoice raised on 05.03.2018) Returns for the month of September 2018 – Effectively, credit cannot be availed for debit notes issued after 6 months from the end of the financial year to which the invoice pertains to, though there is no time limit for issuance of Debit Note in Section 34 (unlike the time limit prescribed for Credit Notes under the said Section)

assumed that Annual Returns have been filed after the filing of the returns for the month of September

Vide Removal of Difficulty Order no. 2/2018-Central Tax dated 31st December 2018, it has been stated that the time limit for taking input tax credit for the period 2017-18 has been extended. The input tax credit for the invoices or debit note supply of which occurred during the period 2017-18 has been allowed to be taken till the due date of furnishing the return of March 2019 i.e. 20th April 2019. However, the availability of input tax credit was subject to the condition that the supplier has uploaded the invoice details in Form GSTR 1 till the due date of furnishing the return for the month of March 2019.

From the above, it can be seen that the due date for taking of input tax credit is the due date of filing the return for the month of September. Further, for the period 2017-18, the due date of taking input tax credit has been allowed upto the due date of filing the return for the month of March 2019 if the supplier had uploaded the invoice details. In the case of AAP & Company, Chartered Accountants, the Gujarat High Court held the following in brief:

  1. Sub-rule 1 of Rule 61 of the CGST Rules/GGST Rules provides that the return required to be filed in terms of Section 39(1) of the CGST/GGST Act is to be furnished in Form GSTR-3.
  2. It would be apposite to state that initially it was decided to have three returns in a month, i.e. return for outward supplies i.e. GSTR-1 in terms of Section 37, return for inward supplies in terms of Section 38, i.e. GSTR-2 and a combined return in Form GSTR-3. However, considering technical glitches in the GSTN portal as well as difficulty faced by the tax payers it was decided to keep filing of GSTR-2 and GSTR-3 in abeyance. Therefore, in order to ease the burden of the taxpayer for some time, it was decided in the 18th GST Council meeting to allow filing of a shorter return in Form GSTR-3B for initial period. It was not introduced as a return in lieu of return required to be filed in Form GSTR-3. The return in Form GSTR-3B is only a temporary stop gap arrangement till due date of filing the return in Form GSTR-3 is notified.
  3. It would also be apposite to point out that the Notification No.10/2017 Central Tax dated 28th June 2017 which introduced mandatory filing of the return in Form GSTR-3B stated that it is a return in lieu of Form GSTR-3. However, the Government, issued Notification No.17/2017 Central Tax dated 27th July 2017 and omitted the reference to return in Form GSTR-3B being return in lieu of Form GSTR-3.
  4. The Government amended rule 61(5) “with effect from 1 July 2017” to state that GSTR 3B is a ‘substitute’ for GSTR 3 under section 39.Though experts are not too satisfied with this retrospective amendment to overcome the Guj. HC decision in AAP & Co., it appears to provide a remedy to the procedural impasse that was faced by all. As a result, following are the key features:
  • credit in respect of supplier invoices dated 2017-18 may be claimed in any month during 2017-18 vide GSTR 3B filed but not later than that for the month of March 2018 (operation of section 16(4) read with new rule 61(5));
  • credit in respect of supplier invoices dated 2017-18 may be claimed in any month during 2018-19 vide GSTR 3B filed but not later than that for the month of March 2019 (Removal of Difficulty Order No. 2); and
  • credit in respect of supplier invoices dated 2018-19 may be claimed in any month during 2018-19 and during 2019-20 vide GSTR 3B filed but not later than that for the month of Sept 2019.
  • Time limit ‘limitation’ or ‘prescription’: although time limit prescribed in section 16(4) or even 18(2) for that matter, has been referred to as ‘limitation’ (in above discussions), care must be taken to note the difference between ‘limitation’ and ‘prescription’. Limitation is when a right continues but is no longer enforceable after lapse of certain time. For eg., input tax credit taken by the exporter in case of zero-rated supplies, the exporter is eligible to claim refund. In the event refund is not filed within 2 years from relevant date, the refund is barred. And this does not mean the credit is liable to be reversed. It will continue and may be utilized to pay any output tax by the same exporter. Here, the 2-year time limit to claim refund (on zero-rated supplies made) is a limitation. Notice that the right (input tax credit) remains but it is no longer enforceable (even though condition of making zero-rated supplies is met) to receive refund. Whereas, prescription is when the right itself vanishes after lapse of specified time. For eg., ‘right’ to input tax credit (that has clearly satisfied all vesting conditions) itself vanishes by lapse of this time limit specified in section 16(4). Lapse of input tax credit after this time limit on the ground that all vesting conditions had been satisfied.
  • Deemed receipt of goods: Section 16 permits a registered person to avail credit only after he has received the said goods or services or both. However, in case of bill to-ship to transactions (including where such goods are sent for job work), by which the registered person instructs his supplier to ship the goods to another person on his behalf, the date of receipt of goods by such another person shall be deemed to be the date of receipt of goods by the said registered person.

Therefore, what exactly does ‘received’, mean in this context? Does it refer to actual receipt of goods at factory premises or even constructive receipt of goods would suffice? Broadly, receipt of goods may be said to be complete when goods have been supplied as per the recipient’s instructions and the supplier is discharged from any further liability on such goods. The delivery must be complete in all respects to the utmost satisfaction of the recipient. The point of acceptance in cases of pre-requisite of quality control may have to be clear.

For example, an interesting scenario may be encountered when goods imported by a registered person are supplied directly to his customers in India from the port without bringing such imported goods (physically) to his factory premises. Would the importer still be entitled to ITC of IGST paid on imported goods although such goods were never received at his factory premises? The answer is ‘Yes’. The importer, after fulfilling all the import formalities is deemed to have received the goods and thus, eligible to avail input tax credit of IGST paid on imports.

This scenario, i.e. in bill-to-ship-to model, where it is amended to include services also which deemed that goods are provided by recipient when the supplier delivers the goods to any other person on the direction of and on account the recipient shall be applicable in case of such services also. However, please note that this fiction for delivery of goods or services is not an attempt at encroaching upon the Place of Supply provisions of IGST Act but merely to satisfy the conditions for taking credit in certain cases where someone else collects goods or enjoys services.

It is important to note that where delivery (goods or even services) are ‘on behalf of’ Recipient, if there is a further transaction between Recipient and Consignee, that needs to be examined if that is also a supply or not. For eg. raw material supplier may be instructed by an OEM in first transaction of supply to deliver goods to job-worker (on behalf of OEM) but there is a second transaction between Recipient (OEM) and Consignee (job-worker) whether it is returned after processing or it is supplied to another buyer or it is destroyed (attracting section 19(3)) or liable to any other treatment in GST.

Delivery ‘on behalf of’ is permitted not only for goods but also for services as they are liable to answer for tax incidence on the second transaction that follows as an obvious consequence of the instructions given to deliver to another person (or distinct person) by the Recipient of supply (and claiming credit) in the first transaction.

  • Goods received in instalments: If goods are received in instalments against a single invoice, credit can be availed upon receipt of last instalment of goods. Illustration – A consignment of coal is to be dispatched from Kolkata to Mumbai using five trucks. An invoice was issued to the recipient on March 30, 2018. Four trucks reached the claimant by March 30, 2018 but the truck carrying the final lot of the consignment reached the recipient only on April 2, 2018. In this case, input tax credit for the entire consignment can be availed only in the month of April 2018.

It is important to note that, foreclosure of delivery schedule is permitted. And where goods are delivered to a certain extent and deliveries are foreclosed by Recipient of supply, it is permitted to claim credit on to the extent delivered on pro-rata basis. However, foreclosure may not always be possible. And this rule is specifically addressed to indivisible equipment that is delivered in parts or lots. In such cases, credit cannot be claimed on incomplete equipment stating foreclosure.

  • Receipt of Services: The recipient can claim credit only upon receipt of services except a situation mentioned in Explanation to Section 16(2) (b). In the commercial world, while it is easy to demonstrate receipt of goods (by way of physical stock, e-way bill, GRN etc), the same is not to be in case of services which is an intangible in nature. Determination of actual receipt of services could be a formidable task especially when the contracting period for provision of service extends beyond a tax period but consideration is received in advance.

Explanation to Section 16(2) (b) has been amended to include services. It has been stated that the registered person will be deemed to have received the services where the services are provided by the supplier to any person on direction of and on account of such registered person. Experts see that this amendment could be followed retrospectively even though the amendment does not state it to be retrospective. Reference may be had to tools of interpretation of statutes which state that substantive vested rights cannot be taken away even by an Amending Act. Drafting tools like ‘proviso’ and ‘explanation’ are often used to bring about an amendment. A proviso carves out an exception to advance the object and suppress the mischief sought to be overcome by the extant law. An explanation aids in more accurately expressing the legislative intent that always was. As important as it is to understand the ‘nature and scope’ of amending provisions; Of equal importance is the ‘effect’ of these amendments. It is common understanding that when amendments are clarificatory, they will be retrospective, but when they are substantive, they will be prospective. Date of notification brings the amended law into the statute book but merely because amended law takes facts, that occurred previously into consideration, it does not make it an ex post facto law and come under challenge. Hon’ble Supreme Court in Sundaram Pillai v. Pattabiraman 1985 AIR 582 SC laid down some guiding principles of the effects that these drafting tools – proviso and explanation – can have on the construction of the amended law by the amendments so made. And for advancing the mischief that occurred before the explanation to section 16(2) whereby credit could have been denied even though those services are delivered ‘on behalf of’ the Recipient, this explanation would deserve retrospective effect for being clarificatory in nature to avoid the mischief.

The person receiving any services may be different from the person who is liable to make the payment as the recipient under the law. The definition of recipient under the GST law has been defined to mean the person liable to make the payment. However, there are multiple cases where the payment is made by a particular person, but the services are received by another person. In such a situation, the person liable to make the payment will be deemed to have received the services.

For instance, X is providing advisory services to Z for which the payment is agreed to be made by Y. In this situation, Y will be deemed to have received the services as per the new deeming fiction in the Explanation to Section 16(2). Thereby, Y will be allowed to avail input tax credit even though he is not in actual receipt of the services.

  • Failure to pay to supplier of goods or service or both, the value of supply and tax thereon: Where the recipient of goods or services or bothhave failed to pay the supplier within 180 days from date of invoice, input tax credit availed, in proportion to such unpaid consideration shall be added to the recipient’s output tax liability along with interest as may be applicable. Such non-payment of the value of invoice must be disclosed in FORM-GSTR 2 filed for the month immediately following the expiry of 180 days from the date of issue of invoice. However, such input tax credit may be reclaimed as and when the unpaid amount (including taxes) is subsequently paid.

One may note that this condition, experts say, does not apply to supplies that are liable to tax under reverse charge and supplies made without consideration as specified in Schedule I. Conspicuous by its absence within this carved out provision is, import of goods. While reverse charge is excluded from the condition of having to make payment within 180 days, GST paid on import of goods does not fall within the ambit of reverse charge under section 9(3) or 9(4) of the CGST Act or Section 5(3) or Section 5(4) of the IGST Act although IGST paid on import of goods is akin to reverse charge. The question that now arises is – whether there can be reverse charge liability other than under section 9(3) and 9(4). The definition in section 2(98) does not permit such extended application. The privilege to prescribe pre-conditions for vesting of right to input tax credit belongs to section 16 and therefore, there is no other provision from where any overriding right to claim credit on goods imports may be borrowed or imputed. On the other hand, IGST paid under reverse charge on import of services is covered under Section 5(3) of the IGST Act as a result of which an importer of service would be entitled to credit of IGST paid even if the service provider remains unpaid beyond the said period of 180 days. Based on the above reasoning, credit of taxes paid on import of goods will not be available if the payment of value of goods is not made within 180 days. An alternative argument that may possibly be taken is that the person who avails the credit is required to pay the value of supplies within 180 days from the date of issue of invoice. The term invoice has been defined to mean invoice raised under Section 31 and Section 31 provides that invoice can be issued by a registered person. Since the vendor outside India is not registered in India, the invoice raised by him is not an invoice in terms of Section 31 and hence the criteria of 180 days is not applicable even in case of import of goods since the ‘invoice’ as per GST Laws is missing in this transaction.

It would be relevant to note that Section 15 of the CGST Act deals with valuation of supplies and provides for addition in the value of supply in case the price is not sole consideration or if the transacting parties are related. Such addition is made for GST purposes (to arrive at the tax payable) but commercially, such amount is neither recorded in the books nor paid by the transacting parties and hence in all such cases where additions are made to the value of supply, the recipient will be denied the credit since he does not make payment to the extent of such additions. The CGST Rules have accordingly been amended w.e.f June 13, 2018 to provide that such additions made under Section 15(2) (b) will be deemed to have been paid by the recipient to the supplier.

Another aspect to consider is section 63 of Indian Contract Act where consideration (payment) in respect of executed contracts may be accepted lesser than contracted. Although this is contrary to the terms agreed, it is provided in Indian law for Seller to accept less than agreed owing to the time value of money and the certainty that comes with immediate payment. When less is accepted in place of more that was due, it does not give rise to remedy of specific relief or relief of repudiation of contract as it is already executed. Such admitted reduction in consideration is enforceable under the original contract and does not amount to amendment of original contract or substitution with new contract again for the reason that it is already executed. Credit note may still be issued because the value originally agreed is less than that now demanded in terms of section 63 of Indian Contract provided such CN is issued within the time limit prescribed in section 34. However, paying less that originally agreed would attract reversal of credit (in hands of Recipient-Payer) under rule 37 and this is condition linked to CN under 15(3)(b)(ii) regarding reversal of corresponding amount of credit. But, experts caution that for the same reasons that CN is permissible in these cases (by operation of law in section 63 of Indian Contract Act), it would clearly amount to shortpayment which requires credit reversal under rule 37.

  • Capital goods on which depreciation is claimed: Input tax credit shall not be allowed on the tax component of the cost of capital goods and plant and machinery if depreciation on such tax component has been claimed under the provisions of the Income Tax Act, 1961.

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There may however, be instances where an assessee is unable to avail input tax credit on capital goods for various reasons, say for example, the department has objected to it or some other reason. In such cases, assessee may decide to capitalize the tax component and avail depreciation on tax component also. Whenever the dispute relating to eligibility of input tax credit on capital goods is resolved, assessee may avail Input Tax Credit and correspondingly reverse the depreciation claimed under Income Tax Act, 1961 on tax component. Similar provisions existed under CENVATCredit Rules and the Hon’ble Gujarat High Court in the case Genus Electrotech Limited reported in 2013 (296) ELT 175 (Guj.) held that after reversal of entry for deprecation, assessee could reavail credit. The ratio of this decision under the CENVATCredit Rules, 2004 will equally hold good under the GST law since the provisions are similar. Although, there was no time limit for availing tax credit on capital goods under the CENVAT Credit Rules, 2004, under the GST law, credit cannot be availed after the due date of filing the returns for the month of September following the end of the financial year or the date of filing the annual return, whichever is earlier. It would be worthwhile to note that Rule 37(4) which provides for re-availing input tax credit for an unrestricted period is applicable only in respect of ITC reversed earlier for non-payment of consideration to the supplier within 180 days and not for re-claim of ITC on account of reversal of depreciation as discussed above.

It may be interesting to note that Section 16(3) states that input tax credit shall not be allowed in cases where depreciation has been claimed on “the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961.” The use of the words plant and machinery in addition to ‘capital goods’ requires special attention. Capital Goods have been defined to mean goods used or intended to be used in the course or furtherance of business, the value of which has been capitalized in the books of account.

  • Unmatched credit capped at ’10 per cent’: section 16(2)(c) places an onerous burden on trade to claim credit ‘after’ tax has been deposited with the Government by the supplier. This clause operates like a ‘condition precedent’ to claim credit.

         Government’s response to this ‘impossible eventuality’ is that credit cannot be given in respect of tax not received by exchequer. To balance the two sides, Government has enabled GSTR 1 filed by suppliers to appear in GSTR 2A of the recipient. Though this by itself is no assurance that supplier has subsequently filed GSTR 3B (for the entire turnover reported in GTSR 1) but Government considers ‘liability to tax admitted in GTSR 1’ is basic responsibility that must be ensured. Remember, condition precedent in 16(2)(c) has not moved one bit in all this ‘matching’ process. And if credit appears in GSTR 2A (by supplier filing GSTR 1), that would give some assurance to permit credit to be claimed by recipient. However, actual ‘matching of credits’ as contemplated under section 42 remains suspended. And credit has been claimed unilaterally (without any formal credit matching) by claiming bona fide credits in GSTR 3B. Now, rule 36(4) has been inserted vide notification 49/2019-CT dated 9 Oct 2019 and it applies to all returns filed after 9 Oct 2019, that is, to Sept returns as well. This sub-rule states that (i) eligible credits appearing in GSTR 2A will be allowed (total credits minus ineligible credits under 17(2), 17(5), etc.) and (ii) additional unmatched ad hoc credit of 10 per cent of the eligible credits. On one hand, condition precedent in section 16(2) (c) continues to hover over the taxpayer’s shoulders, on the other hand, the GSTR 2A based ‘quasi matching’ exercise is allowed with a 10 per cent additional relief. Trade is still relying on ‘impossible eventuality’ where until 8 Oct 2019 ‘all’ credits were being claimed, and suddenly, this new provision seeks to curtail credits to 110 per cent of such ‘quasi matched’ and eligible credits. The limit was 20% which reduced to 10% w.e.f 1st Jan, 2024. However relaxation has been provided while filing of returns for the period February to August 2024 and will be applicable on a cumulative basis for these months while filing of return for September 2024.

  • Provisional credit: section 155 makes it incumbent on registered person to satisfy the eligibility, conditions and compliances to take credit. Credit cannot be forced into registered persons hands by law or its officers. Credit that could have been taken is omitted, then that credit lost forever. Similarly, eligibility of exemption later turns out to be inadmissible, input tax credit that could have been claimed had it been known that tax was actually payable on the outward supply, cannot be allowed if the time limit prescribed has passed. Where credit has been taken on the notion that tax is applicable on outward supply, credit so taken (and / or utilized) will be recoverable. Decisions under Cenvat credit scheme that are popularly referred as ‘revenue neutral’ would no longer guide the interpretation in GST. Quick reference may be had to CCE (A), Ahd v. Narayan Polyplast 2005 (179) ELT 20 (SC) and CCE, Vadodara v. Narmada Chematur Pharmaceuticals Ltd. 2005 (179) ELT 276 (SC).

In summary, among others the following facts are crucial for taking Input tax credit:

  1. The claimant should be registered under the GST Law to avail the input tax credit (except for certain exceptions covered under Section 18)
  2. The goods and/ or services must be used “by him” in the course or furtherance “of his” business.
  3. Possession of original tax Invoice/Supplementary Invoice/ Debit note/ ISD invoice/ Bill of Entry and other related documents is a must.
  4. The said document must contain all the particulars prescribed / specified in Rule 46 of Central Goods and Service Tax Rules, 2017 relating to a Tax Invoice. It may be noted that the Tax Invoice or such other document can contain additional details other than those prescribed but NO LESS. For details of invoice, see Chapter VI of the CGST Rules. This requirement has been relaxed wef September 4, 2018. The registered person can avail input tax credit if the documents contain the following minimum details.

a. Amount of tax charged

b. Description of goods or services

c. Total value of supply of goods or services or both

d. GSTIN of the supplier and recipient

e. Place of supply in case of inter-State supply

5. Supplier of goods and/ or services must upload the details of such documents in the common portal i.e. GSTN. Subject to section 41 and 43A being claim of ITC and provisional acceptance thereof, the supplier must have remitted the tax charged on such supplies. The new return filing mechanism (Section 43A) may allow taking of input tax credit to the recipient in certain situations and subject to certain conditions even if payment of tax is not made by the supplier. So, payment of tax by the supplier has been made subject to the procedure in the new return filing mechanism which is yet to be notified.

6. Vesting condition for claiming input tax credit is filing return u/s 39 and not making supply out of such inward supplies.

7. The claimant should have received the goods / services. Input tax credit in case of supplies in installment, would be on receipt of last installment of goods.

8. The law casts an obligation on the recipient of supply availing credit to effect payment to the supplier within a period of 180 days from the date of invoice. If such payment is not effected/partially effected by the recipient to the supplier, Rule 37 obligates reversal/proportionate reversal of input tax credit so availed leading to consequential levy of tax and interest.

9.  Claim of depreciation on the GST component disqualifies a recipient of Capital goods and plant and machinery from taking input tax credit.

10.  ITC cannot be availed after the due date of filing the return for September month of the next financial year or on furnishing the Annual Return whichever is earlier.

No registered person is permitted to avail any input tax credit pursuant to an order of demand on account of fraud, willful misstatement, or suppression of fact.

Note: The last point is important as many of the cases in a routine manner the show cause notice would invoke these mala fide intentions and if not contested, the ITC would not be available to the receiver even if otherwise eligible.

16.3 Issues and Concerns

(i) A consignment of coal is to be dispatched from Kolkata to Mumbai through five trucks for which the invoice was sent along with the first truck. Four trucks reached the claimant by March 30, 2018 but the truck carrying the final lot of the consignment falls down a gorge and is never received. Would this deny the input tax credit that should have otherwise been available on coal received on the first four lots? The answer is ‘No’. The recipient in Mumbai needs to obtain a credit note from the supplier in Kolkata in respect of that lot which would never be received and accordingly avail ITC relating to the coal received at the business premises.

(ii) Section 16 allows a recipient of supply to avail credit only when he has received the goods or services or both. For example, in an Annual Maintenance Contracts for machines entered into on November 1st, 2017, the supplier is under an obligation to render services arising over a period of 12 months (ending 31st October, 2018) but in respect of which an invoice is raised and consideration is received on the date of entering into the agreement i.e 1st November 2017 in this case. In such cases, the fate of input tax credit contained in the said invoice is left hanging in the balance considering the fact that input tax credit in respect of an invoice received during the year cannot be claimed after the due date for filing the return for the month of September of the succeeding year. In the given case, the receipt of service is said to be completed (i.e., AMC period ends) on October 31st, 2018, while the time limit for claiming credit is October 20th, 2018. Possible solution to overcome this situation could be to convert the AMC into Monthly / Quarterly Maintenance Contracts, if agreeable to the supplier. Alternatively, could it be interpreted that an AMC, is primarily an assurance which is received on the date of entering into the AMC and what on the date of commencement of the AMC. The above issue also arises in case of an insurance contract. It is possible for one to interpret or read down the law in such cases since every business operates on a concept of going concern. These issues would most certainly be put to test in the times to comefollows is only a continuing obligation of the supplier and hence the service may be deemed to have been received

In case of a recipient who has reversed credit on account of non-payment of consideration within 180 days, can he avail credit in instalments as and when the payment is made to the supplier or should he reclaim the credit only when the entire amount including taxes has been paid to the supplier. Given that the third proviso to Section 16(2) (d) allows availing of credit on payment of ‘the amount towards the value of supply of goods or services or both’ and not ‘an amount’, reading strictly it may be construed that the entire amount would have to be paid for availing of credit earlier reversed. Consideration paid which is non-monetary form is also a consideration and for the scheme to work one needs to read harmoniously. It is a common practice that some deductions are there in the invoice without GST being deducted. Then can it be said that the whole consideration has not been paid and credit denied until the whole amount with taxes paid? The credit should be available for value deductions by customer without impacting the GST as well as non-monetary payments.

16.4 Comparative review

Aspect Credit under erstwhile system Input tax credit under GST
Definition of “capital goods” Defined in Cenvat Credit Rules Comparatively wider definition.
Definition of “input” Defined in Cenvat credit Rules having inclusion and exclusion limbs Exhaustive definition and does not contain inclusion or exclusion limb.
Definition of “input services” Defined in Cenvat credit Rules which has inclusion and exclusion limb. Exhaustive definition and does not contain inclusion or exclusion limb.
Electronic credit ledger Similar to CENVAT credit register maintained in Form RG23A Electronic credit ledger required to be maintained for crediting and utilising input tax credit

While CENVAT Credit Rules identified three components for taking credit, namely Input, Input Services and Capital Goods, the GST law allows input tax credit on goods and services with goods being further classified into inputs and capital goods in certain cases. 

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