The idea of GST was mooted by the Vajpayee Government in the year 2000, and the constitutional amendment for the same was passed by Loksabha on 6th May 2015. GST or the Good and Services Tax essentially is an amalgamation of major indirect taxes in India. It is a comprehensive tax levied not only on the sale of goods and services but also on all the other aspects like manufacturing, sale and consumption of the same at a national level.
It is safe to say that the GST regime is on its way to bring glory to the Indian economy. But one thing that stands out is its design of Input Tax Credit.
Input tax credit under GST states that if you are a manufacturer, wholesaler, supplier, agent, e-commerce operator registered under the act, then you are eligible to claim the input tax credit for tax paid on your purchases.
However, there are a certain set of goods and services on which the Act does not allow any credit. Chapter V of CGST Rules which talks about Input tax credit contains section 17(5) having a comprehensive list of supplies on which Input tax credit is blocked.
Input tax credit means at the time paying the output tax; you can reduce the tax you have already paid on the inputs.
Let us try the following example
Ram charges his clients a total of Rs 6,00,000 in a month. He charges rupees 1,08,000 GST (@18%) on the services provided. He has paid certain expenses for the furtherance of his business which resulted in a total of rupees 5,50,000. Now, the GST paid on these expenses by him i.e. 18% of 5,50,000 = Rs 99,000. This 99,000 is his input tax credit which he can reduce from his output tax liability of rupees 1,08,000. Thus, he has deposit only Rs 9,000.
The input tax credit mechanism under GST is structured as such to avoid double taxation which was one of the biggest flaws of the previous tax system.
Let us read what the law has to say about Section 17(5)
Notwithstanding anything that sub-section (1) of section 16 and subsection (1) of section 18 contains, ITC will not be available in respect of the following,
For clauses third and fourth, the expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
We observe that certain categories as mentioned in section 17(5) are ineligible for claiming input tax credit. The mechanism of input tax credit is much simplified under the GST regime. If you want to file your GST returns you can trust earlyGST by H&R Block for filing your returns for you.