The introduction of goods and services tax (GST) brought about a paradigm shift in the indirect taxation landscape in India by replacing a complex and fragmented tax structure with a unified system, aligning with the vision of “one nation, one tax.”
The seamless credit mechanism under GST allowed businesses to claim input tax credits at each stage of the supply chain, effectively eliminating the cascading effect of taxes and thereby improving efficiency and transparency in the tax system. Therefore, businesses must understand the nuances of this critical component of the GST eco-system, as it directly affects their day-to-day operations and cash flow management.
What is Input Tax Credit?
Input tax credit (ITC) is an integral and essential part of the GST that ensures tax is levied only on the incremental value addition done by the businesses at each stage of the overall supply chain. The credit for taxes paid on inputs, capital goods, or input services against the output tax payable is the cornerstone of the GST regime.
This credit mechanism showcases the inherent essence of GST as a tax on value addition, where the ultimate responsibility of paying GST lies with the end consumer of goods or services. However, taxpayers must fulfil specific requirements to enter the credit chain and avail of this credit.
From the government’s perspective, adhering to the procedures and restrictions outlined in the GST law ensures a seamless flow of tax collection and credit being granted throughout the taxation ecosystem, thus preventing abuse or misuse.
Conditions for availing of ITC
The eligibility to claim ITC is contingent upon fulfilling both “conditions precedent” and “conditions subsequent.” This implies two things. Certain conditions must be satisfied before and after claiming the credit to remain compliant with the GST regime.
(A) Conditions precedent (prerequisite conditions)
The registered person can claim credit on procurement of input, input services, or capital goods used in the course or furtherance of business. It may be noted that an entity having an active GST registration will be entitled to avail the input tax credit when such procurement is related to business purposes. Once this primary condition is satisfied, taxpayers should ensure that the following parameters are met in toto to enjoy the vested right.
i. Documentary evidence
The first condition for availing ITC is valid documentary evidence, including tax invoices, debit notes, and bills of entry. One needs to ensure that the tax invoice complies with the e-invoicing requirements, as applicable.
Failure to comply with these provisions on the supplier’s part can result in the recipient (or buyer) being disallowed by the ITC. In cases where the supply is subject to reverse charge (i.e., the tax is to be paid by the recipient), a self-invoice would suffice as a valid document for availing credit.
ii. Receipt of goods or services
The recipient must have received the goods or services. In cases where the invoice pertains to the previous month, but the actual receipt is in the subsequent month, the ITC on such supplies is deferred to the subsequent month. It is noteworthy that if the supply is received by another person on the instruction of the recipient, it will be considered as though the recipient has received the supplies, commonly referred to as the “bill to ship to” scenario.
iii. Supplier’s compliance with GST regulations
Another key aspect is that tax charged from the recipient must be deposited by the seller, in the government’s account. This condition imposes an arduous responsibility on the recipient to ensure that the supplier pays the collected tax in the government treasury. It is pertinent to note that there is no mechanism provided to the recipient to ensure such fulfilment, creating a deadlock where the recipient’s legitimate credit depends on the supplier’s tax payment.
The denial of credit due to the supplier’s default is a contentious issue between the GST authorities and the taxpayers, often leading to litigation and filing of numerous writ petitions in various High Courts. Thus far, the courts have generally ruled in favour of the taxpayers, granting them relief for the legitimate credit.
iv. Auto-populated details in the GST return
ITC availability is limited to the information the supplier provides in its monthly GST compliances via Form GSTR-1. Thus, recipients can claim credit only for the relevant month’s invoices reflected in their Form GSTR-2A/2B. This requirement necessitates taxpayers to regularly perform reconciliation to ensure that the invoices in their records align with the supplier’s filings.
v. Filing of return
The recipient must file the GST returns for availing credit of eligible input tax. Thus, ensuring that the above conditions are met is essential, enabling the recipient to claim input tax credit.
(B) Conditions subsequent (post conditions)
The taxpayers should keep in mind the following parameters to ensure that ITC availed is rightfully utilised
i. Payment to the vendor within 180 days
Taxpayers should pay their vendors within 180 days from the invoice date to avoid interest implications. Failure to make payment within the stipulated period results in the reversal of ITC and interest liability. This condition is, however, not applicable in case of reverse charge transactions, import of goods, and transactions between related parties and distinct persons.
ii. ITC is not blocked or ineligible
Taxpayers should ensure ITC claims do not fall under the category of ‘blocked credit’ as specified under GST. It is important to exercise caution, particularly when rate notifications impose restrictions on ITC claims.
iii. The time limit for availing of input tax credit
GST mandates availment of ITC pertaining to a financial year till 30 November of the subsequent year or the date of annual return, whichever is earlier. Even though all the prescribed conditions are satisfied, any unclaimed ITC beyond the specified time frame will lapse and become unavailable for utilisation. Therefore, timely availability of ITC is crucial to maximise its benefits and prevent the loss of eligible credits.
In a scenario when the ITC claimed exceeds the GST output tax liability, taxpayers can carry forward such accumulated ITC over subsequent financial years without any time limit.
In the case of export-rated supplies of goods or services, taxpayers can claim a refund of the accumulated ITC. Similarly, in domestic transactions, taxpayers can claim a refund of the accumulated ITC in certain situations. This includes cases where the credit has accumulated due to an inverted duty structure, where the tax paid on inputs is higher than the tax payable on output supplies. However, it’s important to note that the refund of ITC on capital goods is restricted.
Bottom Line
GST has evolved over the years, with the government proactively addressing the concerns of the taxpayers and ensuring smooth compliance. As ITC is an essential aspect of the overall GST legislation and directly affects the business’s operations, taxpayers should take note of the above conditions to ensure that they avail their due and legitimate credit in time for the input tax credit.
