DISSECTION OF WORD “SUPPLY” UNDER GST

Introduction

Under the present indirect tax regime where the taxable event was manufacture, sale or provision of service, in
the GST regime which will be integrating the taxes present in current indirect tax regime, the taxable event shall
be the “Supply”. Thus it put end to all the prevailing litigation as whether the activity would be treated as
manufacture or not, and whether an activity shall be treated as sale of goods or rendering of service.

Analysis of term supply

It seems very interesting to know what the term “Supply” actually means. By referring to the provision of Section
7 of CGST Act, 2017, the word ‘inclusion’ used in the scope of supply gives impression that almost everything
would come under purview of this term. But after carefully analyzing the provision of Section 7 of CGST Act,
2017, one would get to know that it actually tries to give so exhaustive meaning to this term.

As per Section 7(1)(a) of CGST Act, 2017

“Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence,
rental, lease or disposal made or agreed to be made for a consideration by a person in the course or
furtherance of business”.

 As per section 2(31) of CGST Act, 2017 :

“Consideration” in relation to the supply of goods or services or both includes
(a) Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or
for the inducement of, the supply of goods or services or both, whether by the recipient or by any
other person but shall not include any subsidy given by the Central Government or a State
Government.

(b) The monetary value of any act or forbearance, in respect of, in response to, for the inducement of,
the supply of goods or services or both, whether by the recipient or by any other person but shall
not include any subsidy given by the Central Government or a State Government.

Provided that a deposit given in respect of the supply of goods or services or both shall not be
considered as payment made for such supply unless the supplier applies such deposit as
consideration for the said supply.

 As per Section 2(17) of CGST Act, 2017 :

“Business” includes –

(a) Any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar
activity, whether or not it is for a pecuniary benefit;

(b) Any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
 (c) Any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency,
continuity or regularity of such transaction;

(d) Supply or acquisition of goods including capital goods and services in connection with
commencement or closure of business;

(e) Provision by a club, association, society or any such body (for a subscription or any other
consideration) of the facilities or benefits to its members;

(f) Admission for a consideration of persons to any premises;

(g) Services supplied by a person as the holder of an office which has been accepted by him in the
course or furtherance of his trade, profession or vocation;

(h) Services provided by a race club by way of totalisator or a licence to book maker in such club; and

(i) Any activity or transaction undertaken by the Central Government, a State Government or any local
authority in which they are engaged as public authorities.

Thus, supply will include in its gamut all kind of activities like sale, transfer, barter, exchange, licence, rental,
lease or disposal which satisfies the twin conditions :

(1) Supply is for the consideration

(2) Supply is in the course or furtherance of business

This clause excludes all the activities which are without consideration or which are not in the course or
furtherance of business but these activities can still be covered under the term “Supply” due to next clauses
provided in this sub-section.

As per Section 7(1)(b) of CGST Act, 2017 :

“Supply includes import of services for a consideration whether or not in the course or furtherance of business”.

Thus, for maintaining the scenario as exist in present scenario of import transactions, all kind of importation
whether for personal purpose or for business purpose would come under supply but it must be for a
consideration.

As per Section 7(1)(c) of CGST Act, 2017 :

“Supply includes the activities specified in Schedule 1, made or agreed to be made without a consideration”

As per schedule 1, all the following activities would come under the purview of term “Supply” whether or not it is
made for consideration :
(1) Sale of business assets on which ITC has been availed.
 (2) Supplies between related persons, except gift upto Rs. 50,000 to employees and Supplies between
deemed distinct persons.
(3) Agent to principal or vice-versa, if agent supplies / receives goods on behalf of principal.
(4) Import from related parties.

If we carefully see these activities, these have compulsorily brought in the gamut of supply to have a check on
these activities as they can be the possible areas where the assessee can use the colouring device to save the
tax liability.

As per Section 7(1)(d) of CGST Act, 2017 :

“Supply includes the activities to be treated as supply of goods or supply of services as referred to in Schedule
II”.

Schedule II gives the indication about the nature of supply, whether it is to be treated as supply of goods or
supply of service. As per Schedule II :

A. Activity deemed to be supply of goods :

(1) Transfer of title in goods.
(2) Permanent Transfer of business assets.
(3) Supply of Goods by ‘unincorporated association’ or ‘body of persons’ for consideration.

B. Activity deemed to be supply of services

(1) Transfer of right without transfer of title.
(2) Any lease, tenancy, easement, licence to occupy land and any lease or letting out of building for
business or commerce.
(3) Treatment or process to another person’s goods [Job-work, repair, maintenance etc]
(4) Making available business asset for personal / non business use is ‘service’.
(5) Supply of services [Declared Services]
(6) Composite supply.
(a) Works contract in relation to immovable property.
(b) Restaurant or catering transactions.

Such deeming fiction of classification has been inserted to put end to the long prevailing disputes over the
situation as to whether the transaction is to be treated as supply to goods or services. For example work contract,
restaurant, lease etc.

The point to be noted here is that the deeming fiction does not have any reference to the disputed topic in the
current indirect tax regime I,e, Software.

The reference in the Schedule II in the scope of supply in Section 7 of CGST Act also put a person in the position
of dilemma as to whether the schedule II is for the purpose of determining the nature of supply only or it is also
used for the purpose of determining whether the transaction will be treated as supply or not. For this, there is no
clarity in the law also as to the order of reading of schedules. Thus, clarity is required as to whether Section 7 or
Schedule I need to be satisfied to apply Schedule II or it is to be read into independently.
For quick review of Section 7(1), following table can be referred :

Existence of In course or furtherance

Sections Supply of consideration of business
7(1)(a) Goods or Services or both Yes Yes
7(1)(b) Services Yes May or may not be
7(1)(c) Schedule I Activities May or may not be --
7(1)(d) Schedule II Activities -- --

Besides this there is negative list also which is provided in the sub-section 2 of Section 7.

As per Section 7(2) of CGST Act, 2017 :

“Notwithstanding anything contained in sub-section (1), -
(a) Activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local
authority in which they are engaged as public authorities, as may be notified by the Government” on the
recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services”.

As per Schedule III, following activities will be covered under negative list :

(1) Services by an employee to the employer in the course of or in relation to his employment.
(2) Services by any court or Tribunal established under any law for the time being in force.

Explanation : For the purposes of paragraph 2, the term "court" includes District Court, High Court and
Supreme Court.

3. (a) The functions performed by the Members of Parliament, Members of State Legislature, Members
of Panchayats, Members of Municipalities and Members of other local authorities;

(b) The duties performed by any person who holds any post in pursuance of the provisions of the
Constitution in that capacity; or

(c) the duties performed by any person as a Chairperson or a Member or a Director in a body
established by the Central Government or a State Government or local authority and who is not
deemed as an employee before the commencement of this clause.

4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

6. Actionable claims, other than lottery, betting and gambling.

Also, such activities / transactions will be excludible from ‘Supply” which are undertaken when CG / SG / Local
Authority is
 (a) Engaged as public authorities.
(b) Which are notified.

To take care of the future dispute over the nature of supply i.e. whether it is to be treated as supply of goods or
supply of service, Section 7(3) has been inserted.

As per Section 7(3) of CGST Act, 2017 :

“Subject to the provisions of sub-sections (1) and (2), the Government” may, on the recommendations of the
Council, specify, by notification, the transactions that are to be treated as –

(a) A supply of goods and not as a supply of services, or

(b) A supply of services and not as a supply of goods.”

Concluding Remarks

It can be said that Government has very carefully and cleverly drafted the definition of supply to save themselves
from any disputes or adverse situation that may arise in future. This can be seen from the fact of using “includes”
in the definition of supply. Also, the Government has vested power with itself to notify any transaction that will be
treated as supply of goods or supply of service. Also, by inserting the schedules in the CGST Act, all the efforts
have been made by the Government to clarify maximum situation relating to supply so that likely disputes may
not arise in future.
Component sent for free replacement in warranty clause to customer in other State - GST whether
payable?

Question: We are in business of manufacturing computer parts, which are Generally sold to the customers
under one year warranty. We provide free replacement against warranty to our customers on free of
charge basis. Do we have to send these goods under tax invoice by charging IGST, if the customer
is in different State? The customer could be unregistered or registered.

Answer: The invoice / challan would be made by charging IGST at nil rate. This will be on 'free of charge'
basis adjusted against previous payment and tax with previous invoice number. The replaced part
or goods shall also move back with similar description. You may also mention on the top that the
invoice / challan is for a replacement of goods under warranty against previous) Invoice with its
number.

Job worker with turnover above - 75lakhs

Question: We are exclusively running a shop providing photocopy, colour printing, digital printing and binding
jobs to various persons. We have a turnover more than Rs. 75 lakhs from this business alone.

What is our liability under CST laws?

Answer: As per the facts provided by you, since your activities are not covered under any Service Tax
exemption, you will not get any composition scheme benefit and will have to pay at normal
applicable rate of duty for supply of services for intra-State supplies (Local supplies) at applicable
rate CGST/SGST.

Rental of Commercial property - June, 2017 rent paid on 30-6-2017 by tenant without any invoice - Tax
liability under GST

Question: My main source of income is rental income, among various properties I have a commercial property
which I have given on rent to a bank. I am a taxable person under the CST regime. I normally
receive rent in advance for the services to be used by the bank against my invoice. However, for
the month of July, 2017, even without my issuing of invoice, the bank in order to save tax paid the
amount on 30th June by cheque in my account with only Service Tax on it, in order to avoid payment
of GST. Till 30th of June I had not even issued the invoice for the services to be provided in the
month of July.

Am I required to pay Service Tax as paid by them or I am required to pay GST and whether I can
claim the differential amount of about 3 per cent?

Answer: In your case, by mutual agreement, you were paying taxes on the basis of invoice out of the three
events, i.e., date of issue of invoice or receipt or provision of service, which arrangement has been
deviated by the bank for making exception so as to prevent some liability under the GST regime.
All the three criteria are in existence even in GST regime. You should insist on payment of GST,
 without disturbing the practice which was existing as per your contract and go by the date of
issuance of invoice to be the decisive criteria.

You can also claim the differential from the bank after paying the GST and claim Service Tax paid
as your credit under transitional provisions by filing suitable return so that you are not charged full
duty of 18% of GST with interest.

Foreign outward remittances for payment of commission - GST implication

Question: We are in a business of manufacturing various types of medicines. We have recently migrated to
GST from VAT / Central Excise regime. We also export various medicines to foreign destinations
specially USA. For this purpose foreign outward remittances are made by us on the following
counts;-

(a) We pay commission to various agents for scouting of customers abroad. Agents are located
in USA.

(b) We need to register and get approval of our product from U.S. Drug authorities, before
allowing us sale of medicines in their territory.

(c) We also need approval for our plant in India by US drug authorities which they do after
visiting our Indian plant and conducting audit of our processes and facilities.

Kindly let us know, how these transactions are to be treated under G.S.T.?

Answer : Under IGST, 2017 the normal rule is the place of supply is a place where recipient is located but
there are exceptions to this general principle, which are applicable to your query.

Section 13(1) states

(1) The provisions of this section shall apply to determine the place of supply of services
where the location of the supplier of services or the location of the recipient of services is
outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to
(13)shall be the location of the recipient of services:

Provided that where the location of the recipient of services is not available in the ordinary
course of business, the place of supply shall be the location of the supplier of services.

For (a), the place of supply of service shall be overseas as these are intermediary services,
therefore no tax shall be paid by you on your outward remittance. According to Section 13(8)(B) -
The place of supply of the following services shall be the location of the supplier of services in case
of intermediary services.
 For (b), since the fee is required to be paid to register before Drug authorities, therefore place of
supply shall be in U.S.A. and no tax liability shall be incurred in India. Section 13(5) states that -

The place of supply of services supplied by way of admission to or organization of a cultural,

artistic, sporting, scientific, educational or entertainment event or a celebration, conference, fair,
exhibition or similar events, and of services ancillary to such admission or organization, shall be the
place where the event is actually held.

For (c), the place of supply shall be in India. Section 13(4) provides that the place of supply of services supplied
directly in relation to an immovable property, including services supplied in this regard by experts and estate
agents, supply of accommodation by a hotel, inn, guest house, club or campsite, by whatever name called grant
of rights to use immovable property, services for carrying out or coordination of construction work, including that
of architects or interior decorators, shall be the place where the immovable property is located or intended to be
located.

Therefore, the place of supply is in India and same shall be subjected to IGST to be paid by you on reverse
charge basis as the USA office may not have a local registered office.
No GST on free food supplied by religious institutions

The Government on 11-7-2017said free food supplied in anna kshetras (food areas) run by religious institutions
have been kept out of the Goods and Services Tax (GST) ambit. Besides, prasadam distributed by religious
places of worship like temples, mosques, churches, gurdwaras and dargahs, would not attract any GST.
Clarifying on media reports which suggested that the GST would be levied on free food supplied in anna kshetras
run by religious institutions, a Finance Ministry statement said "this is completely untrue. No GST is applicable on
such food supplied for free". However, some of the inputs and input services required for making prasadam
would be subject to the GST. These include sugar, vegetable edible oils, ghee, butter, service for transportation of
these goods, among others. [Source: Business Standard, New Delhi, dated 12-7-2017]

Claiming credits on employee reimbursements

Various expenses are claimed by employees such as :

 Travel expenses .

 Telephone expenses

 Hotel expenses

 For company to avail credit, invoices issued by vendor for travel, telephone or hotel expenses etc., should
provide correct GSTIN of company

 Employees should be instructed to provide company's GSTIN to vendors

 Vendor to issue invoice in the name of company
 Necessary modifications to be made in system to ensure employees:

(a) enter necessary information (such as invoice number, invoice date, GSTIN of vendor, taxable value, tax
amount etc.) at the time of claiming expense reimbursements.

(b) same should be verified at the time of processing of claims.

The amount equivalent to car entitlement is reduced from the basic salary of the employee and a notional amount
is added as a prerequisite in employees' CTC (Cost-To-Company), it said.

"(There would be no) GST liability since such benefits are extended by the company to the employee for official
use / purposes (the underlying employment contract should also substantiate the same)," the PwC analysis said.
Since the company has purchased the car, in light of specific restriction on credit eligibility for motor vehicles, tax
paid on procurement of motor vehicle should not be eligible for a credit to the company, it observed.

As regards lunch organised by companies where food is directly supplied to the employees by the caterer and an
invoice (at a subsidised rate) is raised to the company, the GST liability should not arise. But for this, an
agreement
would need to be signed between the company and the caterer to this effect.

"Taxes paid on outdoor catering would be available as credit where company discharges (CST on outward supply
to the employee at open market value, otherwise the same would be a cost," PwC said.
Further, there would not be CST liability on annual health check-up facility to employees since there is no
underlying supply per se by the company. Taxes paid in relation to health services should not be eligible for the
credit.

"The company which provides these services like medical insurance, health insurance or personal accident
insurance they will charge CST on these transactions. But the company which buys it for its employees will not
be able to take credit. The present regime is more or less same to that of the previous one. The only difference
they have in the GST is that if there is a gift given by the employer to the employee and the value is more than
Rs. 50,000 in a year in that case the employer has to pay CST on that. So, regularly what an employer gives to
an employee nothing much has changed," said MS Mahi, senior director (indirect tax)at Deloitte Haskins & Sells
LLP.

While the new regime does not put CST liability on companies in a slew of perks such as mobile bill expenses,
relocation benefits and temporary accommodation to their staff, offers like free cab service and sale of used
laptops would attract the CST levy. Both free cab service and sale of laptops would come under the ambit of
supply and hence tax will be levied.

With cab facility being a related party transaction (and employee not eligible to claim input tax credit), CST would
need to be paid as per the open market value (which may be considered as the amount paid by the company to
transporter).

"Used laptops are given by the company to employees on FoC basis or at subsidised value. Such transaction
would be treated as supply and accordingly, liable to GST," the PwC analysis said.

GST is billed as game-changer tax reform which has subsumed most of the indirect taxes such as VAT, Service
Tax, octroi, luxury tax, Special Additional Duty (SAD) and Central Sales Tax levied by Centre and States. With the
rollout ofthis, all goods and services barring a few such as petroleum and alcohol have been kept under four-tier
tax structure of 5, 12, 18 and 28 per cent besides applicable cess. This has paved the way for 'One Nation One
Tax' turning India into a unified market.

[Source: Financial Chronicle, New Delhi, dated 10-7-20171

GST - Returns - Procedure for
The basic features of the returns mechanism in GST include electronic filing of returns,
uploading of invoice level information and auto-population of information relating to Input
Tax Credit (ITC) from returns of supplier to that of recipient, invoice-level information
matching and auto-reversal of Input Tax Credit in case of mismatch. The returns
mechanism is designed to assist the taxpayer to file returns and avail ITC.

Under GST, a regular taxpayer needs to furnish monthly returns and one annual return.
There are separate returns for a taxpayer registered under the composition scheme, non-
resident taxpayer, taxpayer registered as an Input Service Distributor, a person liable to
deduct or collect the tax (TDS/TCS) and a person granted Unique Identification Number. It
is important to note that a taxpayer is NOT required to file all types of returns. In fact,
taxpayers are required to file returns depending on the activities they undertake.

All the returns are to be filed online. Returns can be filed using any of the following
methods:

1. GSTN portal (www.gst.gov.in)

2. Offline utilities provided by GSTN

3. GST Suvidha Providers (GSPs) - If you are already using the services of ERP
providers such as Tally, SAP, Oracle etc., there is a high likelihood that these ERP
providers would provide inbuilt solutions in the existing ERP systems.

Following table lists the various types of returns under GST Law:
Return Description Who Files Date for filing
GSTR - 1 Monthly Statement of Registered Person 10th of the next
Outward supplies of Goods month
or Services
GSTR – 2 Monthly Statement of Registered Person 15th of the next
Inward supplies of Goods or month
Services
GSTR - 3 Monthly Return for a normal Registered Person 20th of the next
taxpayer month
GSTR - 4 Quarterly Return Taxable Person opting for 18th of the month
Composition Levy succeeding the
quarter
GSTR - 5 Monthly Return for a non- Non-resident Taxpayer 20th of the month
resident taxpayer Succeeding the
tax period &
within 7 days after
expiry of
registration
GSTR - 6 Monthly Return for an Input Input Service Distributor 13th of the next
Service Distributor (ISD) month
GSTR - 7 Monthly Return for Tax Deductor 10th of the next
authorities month
deduction tax at source
GSTR - 8 Monthly Statement for e- E-Commerce Operator 10th of the next
Commerce Operator month
depicting supplies effecting
through it
GSTR - 9 Annual Return Registered Person other 31st December of
than an lSD, TDS / TCS next Financial Year
Taxpayer Casual Taxable
Person and Non-resident
Taxpayer
GSTR - Final Return Taxable Person whose Within three
10 registration has been months of the
surrendered or cancelled date of
cancellation or
date of order of
cancellation,
whichever is later.

Filing process

A normal taxpayer has to file the following returns :

GSTR – 1
GSTR – 2
GSTR - 3

1. GSTR-1 (Statement of Outward Supplies) :

a. This return signifies the tax liability of the supplier for the supplies effected
during the previous month.

b. It needs to be filed by the 10th of every month in relation to supplies effected

during the previous month. For example, a statement of all the outward
supplies made during the month of July 2017 needs to be filed by 10th August,
2017.

2. GSTR-2 (Statement of Inward Supplies) :

a. This return signifies accrual of ITC (Input Tax Credit) from the inputs received
during the previous month.

b. It is auto-populated from the GSTR-1s filed by the corresponding suppliers of

the Taxpayer except for a few fields like imports, and purchases from
unregistered suppliers.

c. It needs to be filed by the 15 th of every month in relation to supplies received

during the previous month. For example, a statement of all the inward supplies
received during the month of July 2017 needs to be filed by 15 th August, 2017.

3. GSTR-3 : This is a consolidated return. It needs to be filed by the 20 th of every

month. It consolidates the following details:

a. Outward Supplies (Auto-Populated from GSTR-1)

b. Inward Supplies (Auto-Populated from GSTR-2)
c. ITC availed
 d. Tax Payable
e. Tax Paid (Using both Cash and ITC)

Note: Payment should be made on or before 20 th of every month.

Annual return :
This return needs to be filed by 31 st December of the next Financial Year. In this return,
the taxpayer needs to furnish details of expenditure and details of income for the entire
Financial Year.

The population of these returns is explained by the following graphic:

Supplier – 1 Supplier – 2 Supplier – 3 Supplier – 4
GSTR - 1 GSTR - 1 GSTR - 1 GSTR - 1
↓
Taxpayer
Taxpayer
GSTR – 1
GSTR – 2
(Signifies Tax Liability)
(Signifies ITC Availability)

↓
Taxpayer
GSTR – 3
(Cash to be paid = Tax Liability - ITC Available)

NOTE:
1. Taxpayer's GSTR-2 is auto-populated from the Suppliers' GSTR-ls.
2. Taxpayer's GSTR-3 is significantly auto-populated from tax payer's GSTR-l and
GSTR-2.

Return filing milestones:

GSTR – 1  File via GSTN/Easy upload tools provided by GSTN/GSPs
 Periodical uploading allowed
 Filed by 10th
 Frozen after 10th
GSTR – 2  Auto-populated from GSTR-1s filed by a Taxpayer's Suppliers
 Changes allowed between 10th and 15th
 Filed by 15th
GSTR – 3  Occurs between 15th and 17th. Taxpayer can add additional
invoices.
 Filed by 20th
 Payment can be made anytime before or on 20th

Revision of returns:

The mechanism of filing revised returns for any correction of errors/ omissions has been
done away with. The rectification of errors/ omissions is allowed in the subsequent
returns. However, no rectification is allowed after
furnishing the return for the month of September following the end of the financial year
to which, such details pertain, or furnishing of the relevant annual return, whichever is
earlier.

Penal provisions relating to returns:

Any registered person who fails to furnish form GSTR-l, GSTR-2, GSTR-3 or Final Return
within the due dates, shall be liable to pay a late fee of Rs. 100 per day, subject to a
maximum of Rs. 5,000.

ITC Matching and Auto-Reversal:

1. It is a mechanism to prevent revenue leakage.

2. The process of ITC Matching begins after the due date for filing of the return (20th
of every month). This is carried out by GSTN.

3. The details of every inward supply furnished by the taxable person (i.e. the
"recipient" of goods and/or services) in form GSTR-2 shall be matched with the
corresponding details of outward supply furnished by the corresponding taxable
person (i.e. the "supplier" of goods and/or services) in his valid return. A return
may be considered to be a valid return only when the appropriate GST has been
paid in full by the taxable person, as shown in such return for a given tax period.

4. In case the details match, then the ITC claimed by the recipient in his valid returns
shall be considered as finally accepted and such acceptance shall be
communicated to the recipient. Failure to file valid return by the supplier may lead
to denial of ITC in the hands of the recipient.

5. In case the ITC claimed by the recipient is in excess of the tax declared by the
supplier or where the details of outward supply are not declared by the supplier in
his valid returns, the discrepancy shall be communicated to both the supplier and
the recipient. Similarly, in case, there is duplication of claim of ITC, the same shall
be communicated to the recipient.

6. The recipient will be asked to rectify the discrepancy of excess claim of ITC and in
case the supplier has not rectified the discrepancy communicated in his valid
returns for the month in which, the discrepancy is communicated, then such
excess ITC as claimed by the recipient shall be added to the output tax liability of
the recipient in the succeeding month.

7. Similarly, duplication of ITC claimed by the recipient shall be added to the output
tax liability of the recipient in the month in which, such duplication is
communicated.

8. The recipient shall be liable to pay interest on the excess or duplicate ITC added
back to the output tax liability of the recipient from the date of availing of ITC till
the corresponding additions are made in their returns.

9. Re-claim of ITC refers to taking back the ITC reversed in the Electronic Credit
Ledger of the recipient by way of reducing the output tax liability. Such re-claim
can be made by the recipient only in case the supplier declares the details of the
Invoice and/or Debit Notes in his valid return within the prescribed timeframe. In
 such case, the interest paid by the recipient shall be refunded to him by way of
crediting the amount to his Electronic Cash Ledger.

[Issued by Directorate General of Taxpayer Services]

GST - Input Tax Credit Mechanism - Procedure for

Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, "ITC") is
one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading
of taxes. Cascading of taxes, in simple language, is 'tax on tax'. Under the present
system of taxation, credit of taxes being levied by Central Government is not available as
set-off for payment of taxes levied by State Governments, and vice versa. One of the
most important features of the GST system is that the entire supply chain would be
subject to GST to be levied by Central and State Government concurrently. As the tax
charged by the Central or the State Governments would be part of the same tax regime,
the credit of tax paid at every stage would be available as set-off for payment of tax at
every subsequent stage.

Let us understand how' cascading' of taxes takes place in the present regime. Central
Excise duty charged on inputs used for manufacturing of final product can be availed as
credit for payment of Central Excise duty on the final product. For example, to
manufacture a pen, the manufacturer requires, plastic granules, refill tube, metal clip,
etc. All these 'inputs' are chargeable to Central Excise duty. Once a 'pen' is manufactured
by using these inputs, the pen is also chargeable to Central Excise duty. Let us assume
that the cost of all the above mentioned inputs is say, Rs. 10/- on which Central Excise
duty @ 10% is paid, means Re. 1. The cost of the manufactured pen is say Rs. 20/-, the
Central Excise duty payable on the pen @10% will be Rs. 2/- . Now the manufacturer of
the pen can use the duty paid on inputs, i.e. Re.1/- for payment of duty on the pen. So he
will use Re. 1 paid on inputs and he will pay Re. 1/- through cash (1+1= 2), the price of
the pen becomes Rs. 22/-. In effect, he actually pays duty on the 'value added' over and
above the cost of the inputs. This mechanism eliminates cascading of taxes. However,
when the pen is sold by the manufacturer to a trader, he is required to levy VAT on such
sale. But under the present system, the manufacturer cannot use the credit of Central
Excise duty paid on the pen for payment of VAT, as the two levies are being levied by
Central and State Government respectively with no statutory linkage between the two.
Hence, he is required to pay VAT on the entire value of the pen, i.e. Rs. 22/-, which
actually includes the Central Excise duty to the tune of Rs. 2/-. This is cascading of taxes
or tax on tax, as now VAT is not only paid on the value of pen i.e. Rs. 20/- but also on tax
i.e. Rs. 2/-.

Goods and Services Tax (GST) would mitigate such cascading of taxes. Under this new
system, most of the indirect taxes levied by Central and the State Governments on
supply of goods or services or both, would be combined together under a single levy. The
major taxes / levies which are going to be clubbed together or subsumed in the GST
regime are as under:

Centre Taxes  Central Excise Duty

 Additional duties of Excise
 Excise duty levied under Medicinal & Toilets
Preparation Act
 Additional duties of customs (CVD & SAD)
  Service Tax
 Surcharges & Cesses
State Taxes  State VAT / Sales Tax
 Central Sales Tax
 Purchase Tax
 Entertainment Tax (other than those levied by local
bodies)
 Luxury Tax
 Entry Tax (All forms)
 Taxes on lottery, betting and gambling
 Surcharges & Cesses

GST comprises of the following levies:

a. Central Goods and Services Tax (CGST) [also known as Central Tax] on intra-State
or intra-Union Territory without legislature supply of goods or services or both.

b. State Goods and Services Tax (SGST) Jalso known as State Tax] on intra-State
supply of goods or services or both.

c. Union Territory Goods and Services Tax (UTGST) [also known as Union Territory
Tax] on intra-Union Territory supply of goods or services or both.

d. Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] on inter-
State supply of goods or services or both. In case of import of goods also, the
present levy of Countervailing Duty (CVD) and Special Additional Duty (SAD)
would be replaced by integrated tax.

The protocol to avail and utilise the credit of these taxes is as follows:

May be utilized further

Credit of To be utilized first for for payment of
payment of
CGST CGST IGST
SGST/UTGST SGST/UTGST IGST
IGST IGST CGST, then SGST/UTGST

Credit of CGST cannot be used for payment of SGST/UTGST and credit of SGST/UTGST
cannot be utilised for payment of CGST.

Some of the technical aspects of the scheme of Input Tax Credit are as under:

A. Any registered person can avail credit of tax paid on the inward supply of goods or
services or both, which is used or intended to be used in the course or furtherance
of business.

B. The pre-requisites for availing credit by registered person are :

a. He is in possession of tax invoice or any other specified tax paying

document.
b. He has received the goods or services. "Bill to ship" scenarios also included.
c. Tax is actually paid by the supplier.
 d. He has furnished the return.
e. If the inputs are received in lots, he will be eligible to avail the credit only
when the last lot of the inputs is received.
f. He should pay the supplier, the value of the goods or services along with the
tax within 180 days from the date of issue of invoice, failing which the
amount of credit availed by the recipient would be added to his output tax
liability, with interest [Rule 2(1) & (2) of ITC Rules]. However, once the
amount is paid, the recipient will be entitled to avail the credit again. In case
part payment has been made, proportionate credit would be allowed.

C. Documents on the basis of which credit can be availed are:

a. Invoice issued by a supplier of goods or services or both

b. Invoice issued by recipient alongwith proof of payment of tax
c. A debit note issued by supplier
d. Bill of entry or similar document prescribed under Customs Act
e. Revised invoice
f. Document issued by Input Service Distributor

D. No ITC beyond September of the following FY to which invoice pertains or date of

filing of annual return, whichever is earlier

E. The Input Service Distributor (ISD) may distribute the credit available for
distribution in the same month in which, it is availed. The credit of CGST, SGST,
UTGST and IGST shall be distributed as per the provisions of Rule 4(1)(d) of ITC
Rules. ISD shall issue invoice in accordance with the provisions made under Rule
9(1) of Invoice Rules.

F. ITC is not available in some cases as mentioned in Section 17(5) of CGST Act,
2017. Some of them are as follows:

a. motor vehicles and other conveyances except under specified

circumstances.

b. goods and / or services provided in relation to:

i. Food and beverages, outdoor catering, beauty treatment, health

services, cosmetic and plastic surgery, except under specified
circumstances;
ii. Membership of a club, health and fitness center;

iii. Rent-a-cab, life insurance, health insurance except where it is

obligatory for an employer under any law;

iv. Travel benefits extended to employees on vacation such as leave or

home travel concession;

c. Works contract services when supplied for construction of immovable

property, other than plant & machinery, except where it is an input service
for further supply of works contract;
 d. Goods or services received by a taxable person for construction of
immovable property on his own account, other than plant & machinery, even
when used in course or furtherance of business;

e. Goods and / or services on which tax has been paid under composition
scheme;

f. Goods and / or services used for private or personal consumption, to the

extent they are so consumed;

g. Goods lost, stolen, destroyed, written off, gifted, or free samples; and

h. Any tax paid due to short payment on account of fraud, suppression,

misdeclaration, seizure, detention.

G. Special circumstances under which ITC is available:

a. A person who has applied for registration within 30 days of becoming liable
for registration is entitled to ITC of input tax in respect of goods held in stock
(inputs as such and inputs contained in semi-finished or finished goods) on
the day immediately preceding the date from which he becomes liable to
pay tax.

b. A person who has taken voluntary registration under Section 23(3) of the
CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in
stock (inputs as such and inputs