Goods and Services Tax is said to be the biggest indirect tax reform made in last 70 years of independence. The genesis of GST was in the historic speech of 28th February 2006 which marked the 14 years long journey of framing the GST reforms and rules. The rulebook giving the central GST rules has been updated several times, the last update being on 23rd of March, 2018. The Central Board of Excise and Customs has published the CGST rules, 2017.
One of the most remarkable changes brought in by GST is undoubtedly the input tax credit mechanism. The structure of ITC under GST is such that it has overcome the tax-on-tax nature of the previous system.
Thus, it is important to study about the input tax credit, and section 17 of the GST act talks about the various aspects about credits.
Section 17 of the GST Act has 5 sub-sections as explained below:
ITC restricted to supplies availed about business activity:
Section 17 subsection 1 says that where the goods and / or services are used by the registered tax payer partly for utilisation in his / her business activities and partly for any other purposes, then the input tax credit will be restricted to an amount which is attributable for business purposes.
ITC restricted to taxable supplies
Section 17 subsection 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 and partly for effecting exempt supplies, 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.
Note – For section 17(2), exempt supplies shall include supplies on which recipient is liable to pay tax on reverse charge basis u/s 9(3).
The value of exempt supply under subsection (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transaction in securities, sale of land and, subject to clause(b) of paragraph (5) of schedule II, sale of building.
Input tax credit for the banking sector
Two options are available under this subsection. 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 advance shall have the option to either:
Note – The option once exercised shall not be withdrawn during the remaining part of the year.
Blocked Credits Under ITC
Subsection (5) of section 17 gives a detailed list of the transactions not eligible for input tax credit. It goes as follows:
Input tax credit means the tax paid while purchasing / availing any goods / services or both which, at the time of payment of the output tax can be reduced while computing the final liability. 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. There will be no tax-on-tax charged under the input tax regime of GST.
A registered person in the GST act including an input service distributor can avail ITC on the basis of any of the following document:
Procedure of ITC essentially involves the fulfilment of certain conditions. A registered person will be eligible to claim ITC on the fulfilment of ALL the following conditions:
On Sale, Merger, Amalgamation, Lease or Transfer
Input tax credit being the backbone of GST has benefited a lot to the government as well as the tax payers. A registered person is eligible to claim ITC subject to certain conditions and exceptions. However, to claim input tax credit, you and all your vendors need to file returns accurately. Reconciling your returns with your vendors can be a daunting task, but you can outsource it to earlyGST so that you can claim your rightful input tax credit hassle-free.