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INPUT TAX CREDIT
Input Tax [Sec. 2(62) of CGST Act

"Input tax" in relation to a registered person, means the central tax, State tax, integrated tax or Unión territory tax charged on
any supply of goods or services or both made to him and includes

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 under composition levy

Therefore, 'Input tax credit' is the tax paid by a registered person under the Act whether on forward charge or reverse charge
for the use of such goods or services or both in the course or furtherance of his business.

Capital Goods [Sec. 2(19) of CGST Act]

Capital Goods means goods, the value of which is capitalized 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

Input [Sec. 2(59) of CGST Act]

"Input" means Any goods, Other than capital goods, Used or intended to be used by a supplier in the course or furtherance of
business

Input Service [Sec2(60) of CGST Act] "Input service" means - Any service Used or intended to be used by a supplier In the
course or furtherance of business

1- IGST credit should first be utilized towards payment of IGST

2- Remaining 1GST credit, if any, can be utilized towards payment of CGST and SGST/UTGST in any order and in any
proportion, Le. remaining ITC of IGST can be utilized
• First towards payment of CGST and then towards payment of SGST; or
First towards payment of SGST and then towards payment of CGST; or
Towards payment of CGST and SGST simultaneously in any proportion eg 50:50, 30:70, 40:60 and so on.

3- Entire ITC of IGST should be fully utilized before utilizing the ITC of CGST or SGST/UTGST.
4 ITC of CGST should be utilized for payment of CGST and IGST in that order.
5 ITC of SGST/ UTGST should be utilized for payment of SGST / UTGST and IGST in that order. However, ITC of
SGST/UTGST should be utilized for payment of IGST, only after ITC of CGST has been utilized fully.

6
Cross-utilization of credit is available only between CGST - IGST and SGST/ UTGST-IGST

7
CGST credit cannot be utilized for payment of SGST/UTGST and SGST/UTGST credit cannot be utilized for
payment of CGST

Eligibility and Conditions for taking Input Tax Credit [Sec. 16 of CGST Act]

1. Only registered person can avail ITC.

2. To avail ITC, the registered person will have to fulfill certain conditions specified in section 16(2).

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3. Such inputs are or will be used in the course or furtherance of its business.
4. The amount of such credit shall be credited to the electronic credit ledger of such person.

5. This credit may be utilized in the manner specified in section 49.

A new section 49A has been inserted by the GST Amendment Act 2018 which stipulates that input tax credit may be
utilized on behalf of central tax, state tax/UT tax, integrated tax, central tax, state tax/UT tax, As the case may be,
should be made for payment. This is done only when the input tax credit available on behalf of integrated tax is fully
utilized for the following types of payments:

OUTPUT LIABILITY FIRST SET OFF NEXT SET OFF NOT ALLOWED TO SET OFF

IGST IGST CGST &SGST/UTGST

CGST IGST CGST SGST/UTGST

SGST IGST SGST CGST

UTGST IGST UTGST CGST

(B) Condition for taking input tax credit [Section 16(2)] The following four conditions must be satisfied by a
registered taxable person to avail ITC:

Possession of tax paying He should have a tax invoice or The following prescribed documents are
document debit note issued by a supplier given in the 36th rule given in CGST rules-
registered under this Act or he
should have other documents • Under reverse charge, an invoice issued
by the recipient must be accompanied by
relating to tax paid as prescribed
proof of payment of tax.
in Rule 36 of the CGST Rules.
*Bill of entry or any other similar document
under the Customs Act.

Revised invoice • Document issued by

the input service distributor.

Details of the invoice or debit The details of the invoice or debit This will not be available to the recipient
note should be submitted by the note should be furnished by the or purchaser if the details of such
supplier. supplier in the details of outward invoice or debit note are not furnished
supplies and such details should by the supplier in GSTR-1 or FF or GSTR-
be communicated to the recipient 2B.
of the invoice or debit note.

He has received delivery of the

goods and/or services or both.
Receipt of the goods and/or
services

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Tax on goods and/or services on
Tax leviable on supply actually paid which ITC is being availed has
to Government. actually been paid by the supplier
in cash or by availing ITC.

Filing of return He has filed the return. Note – Details of supplies in GSTR-2
should be filed in the 15th month
following the month in which the supply
is received.

After submission of such details, the

electronic credit ledger will be credited
with the respective ITC.

Goods Received in lots

Where goods or articles on bill/challan are received in a batch or instalments, the registered person will be entitled to
credit only on receipt of the last batch or instalment.

Example-ABC Company placed an order for 500 ACs from DEF Company in the month of August. The delivery of ACs
will be done over a period of four months from the month of September and thus the last part of the delivery of ACs
will be received in the month of December. In such a case, ABC Company can avail ITC if the last installment is
received in the month of December itself.

D) Time limit for payment to supplier

If payment is not made by the recipient to the supplier of goods or services within a period of 180 days from the date
of issue of invoice, then the following points are important for refunding the input tax credit-

1. If the recipient fails to pay the tax payable along with the value of goods or services or both within a period of 180
days from the date of issue of invoice to the supplier, an amount equal to the input tax credit availed by him will be
added to the output tax liability along with interest.

2. However, when the recipient pays the value of goods or services or both to the supplier along with the tax due
then he becomes entitled to avail credit of tax on such inputs. 3. If the recipient has made partial payment, he will be
allowed to take proportionate credit.

Example- Texa Ltd. purchased goods from DEF Ltd. on which they have availed input tax credit, but the company did
not make payment to the supplier even within 180 days from the date of issue of invoice. Such ITC will be added to
the output tax liability along with interest.

However, once payment is made to the supplier, Texa Limited will be entitled to avail this credit period without any
time limit.

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(E) Claimed depreciation on the tax components of the cost of capital goods) [section 16 (3)]

Where a registered person has claimed depreciation in respect of tax on the cost of capital goods and plant and
machinery under the provisions of the Income Tax Act, 1961, he will not be allowed input tax credit in respect of the
tax.

Example – A Ltd. purchased machinery worth ₹ 1,00,000 on which it paid GST of ₹ 18,000 at the rate of 18%. If the
company has claimed depreciation in respect of tax on the cost of capital goods under the Income Tax Act, the
company will not be allowed to take input tax credit on ₹ 18,000.

(F) Time Limit for Input Tax Credit [Section 16(4)]

A registered person cannot avail the benefit of input tax credit of an invoice or debit note of goods or services after the date
of—

✓ Due date of furnishing of return under section 39 for the month of September next financial year (i.e. 20th October to which
the invoice or debit note is issued, or

✓ Date of filing the relevant annual return.

As per the Finance Act, 2020, the date of issue of debit note has been superseded by the date of issue of invoice. Formerly, the
date of the debit note was linked to the date of the invoice, which meant that the last date for credit of a debit note was linked
to the date of its original invoice. But now the debit note will be treated independently to check credit eligibility.

Apportionment of Credit and Blocked Credits) [Section 17]

(A) (A) Blocked credit i.e. Input Tax Credit not available on certain items (Negative List) [Section 17 (5)
Input tax credit in relation to the following items Will not be available in:

1) Motor Vehicles etc Motor vehicles, other vehicles having a maximum seating capacity of 13
persons (including driver), in relation to ships and aircraft, when used for
providing taxable supplies of-

(A) transportation of passengers; Or

(B) imparting training in driving, flying, navigating on such motor vehicles or

other vehicles; Or

(C) For transportation of goods.

(D) further supply of such motor vehicle, ship or aircraft

Example-

1. Driving schools are allowed to take input tax credit on cars purchased for
driving purposes.

2. Car dealers are allowed to take a tax credit on cars purchased for resale.

3. A taxi driver is allowed to take input tax credit on cars purchased for use as
taxis.
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1A) S ervice of general insurance, Servicing, repair and maintenance of general insurance (under parts (A) (B),
service, repair etc. of motor vehicle, (C), (D) of point (1) above on motor vehicles, ships acquired by or acquired by
vessel air- craft a taxable person

(Other than aircraft) (a) Engaged in the manufacture of motor vehicles, ships
or aircraft.

(b) in the supply of general insurance services to such motor vehicle, ship or
aircraft.

Question- Mr. Ajay has purchased a bus with capacity of 24 seats for his
factory. why

Is he eligible to claim ITC for the purchase of bus? Answer- Yes, since the
capacity of the bus exceeds the limit of 13 persons, he is eligible to claim ITC.

Question: M/s AB Limited got the car used for traveling by its directors
repaired and serviced, can they claim ITC on the bill for repair and servicing?
Food, beauty, health services etc. The following supplies of goods or services or both which are intended
primarily for personal use:

Provided for or for the consumption of employees— (i) food and beverages,
outdoor dining, beauty treatments, health services, cosmetic and plastic
surgery;

(ii) membership of a club, health and fitness centre;

(iii) Life insurance and health insurance on hire-a-cab, motor vehicle, ship or
aircraft (except parts (A), (B), (C), (D) of point (1) Premium, but credit will be
available if the Government has made it mandatory to provide such services
under the notification;

(iv) Allowance of travel benefits to employees such as leave or home travel

concession.

Exception - Provided that if the above goods or services are received by the
registered person for supplying taxable goods or services of the same
category and as part of a mixed supply or a composite supply. So he will get
the benefit of input tax credit.

Example: A beauty parlor shop purchases beauty products which will be used
in the external supply of services. This shop will be allowed to take input tax
credit on the purchase of goods.
(3) Work Contract Service A contract service (other than plant and machinery) supplied for the
construction of an immovable property, but when the service is received for
supplying a contract service, credit will be available. Note - 'Construction'

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includes re-construction, renovation, addition or alteration or repair to the
extent of capitalization.
(4) Construction of Immovable Receipt by a taxable person for his own account of goods or services or both
Property for the construction of any immovable property (other than plant or
machinery), whether such goods or services or both are used in the course of
business or also does to advance, includes. Note - 'Construction' includes re-
construction, renovation, addition or alteration or repair to the extent of
capitalisation.
5) Input used under Composition Goods or services or both on which tax has been paid under section 10
Scheme (Composition Scheme).
(6) Input by Non- resident Receipt of goods or services or both (other than imported goods) by a non-
resident taxable person.

(7) Personal Consumption Using goods or services or both for personal consumption.
8) Goods Lost, Stolen etc. Any item lost, stolen, destroyed, written off or disposed of as a gift or free
sample.
(9) Evasion etc. Any tax paid in accordance with the provisions of sections 74, 129 and 130.
✓ Section 74: Wrongful taking and utilization of input tax credit by
fraudulently or knowingly making false statements or concealing facts.
Section 129: Stopping, seizure and release of goods and vehicles in transit.
Section 130: Seizure of goods or vehicles and levy of penalty.

b. Proportionate Credit with rule 42 & 43 of CGST:

Full ITC cannot be taken on inward supplies in the following two cases, although proportionate ITC is
allowed –

a. When a registered person uses the goods or services or both partly for the purpose of business and partly
for other purposes.

Use of input tax credit

Other purpose ITC not Business purpose ITC available

available

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b. When a registered person uses goods or services or both partly to make taxable supplies, partly to make
zero rated supplies (supplies and exports to SEZ) and partly to make exempt supplies.

Use of input tax credit

credit

Taxable supply ITC available including Exempt/non taxable/nil rated Supply-ITC

Zero rated Supplies not available

Reversal of input tax credit in case of non-payment of consideration (Rule 37).

A registered person who has availed input tax credit on inward supply of goods and services or both, but fails to pay
the value of such supply along with the tax due within a period of 180 days from the date of issue of invoice to the
supplier An amount equal to the input tax credit received by the recipient will be added to his output tax liability
along with interest.

Example: Ram, a registered person under GST, purchased goods worth ₹ 10,000 from Heri, on which he availed ITC of
₹ 1,800. Ram fails to pay Heri within 180 days. Hence, the input tax credit received by Ram i.e. an amount equal to Rs.
1,800 along with interest will be added to his output tax liability.

Apportionment of Credit in case of Banking Company and Financial Institution (Ans. - In appropriate case,
total input tax creditor Banking Company and Financial Institution) [Section 17(4)]

There are two options for availing input tax credit on services provided by a financial institution including a banking
company or NBFC in the form of accepting deposits, granting loans or advances -

(a) such person may take ITC in accordance with the provisions of section 17(2), or

(b) Such persons can avail the benefit of an amount equal to 50% of the admissible input tax paid on inputs, capital
goods and input services every month but the remaining ITC will be exhausted.

Important points-

1. An option once exercised cannot be withdrawn during the remaining part of the financial year.

2. The restriction of 50% ITC will not apply to tax paid on supplies made by a registered person to another registered
person (i.e. branch) having the same Permanent Account Number.

3. The company or entity shall not take credit of tax paid on inputs and input services which are made for non-
business purposes and for the use of supplies referred to in section 17(5). The company or institution will take input
tax credit of 50% of the remaining amount of input tax.

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Availability of CREDIT in special circumstances [Section 18]

Avail credit in special circumstances

Person liable for Exempt supply

Not liable for
registration under GST Who stops paying tax
registration + becoming taxable
+ Apply for registration under the
Voluntary supply by a registered
within 30 days + Grant composition scheme
registration taken person
of registration

Entitled to draw Authorized to For the authorized Authorized to take

benefits up to the day avail benefits up person taking benefits benefit up to the day
immediately preceding to the day up to the day immediately
the date on which he immediately immediately preceding preceding the date on
becomes liable to pay preceding the the day on which he which such supply
tax date of issue of becomes liable to pay becomes taxable
registration tax under section 9,

Eligibility to claim credit:

Eligibility to claim credit: :
inputs held in stock
inputs held in stock
Inputs contained in semi-finished goods
Inputs contained in semi-finished goods
• Inputs contained in finished stock.
Inputs contained in finished stock
Note: No credit will be available on
capital goods and input services. Capital Goods (5% per quarter from date of
invoice)

Note: No credit will be given on input services.

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1. Entitlement of ITC at the time of registration/voluntary registration or switching to regular tax paying status or coming
into tax-paying status [ Section 18(1)]

(a) Person who has applied for fresh registration - A person who has submitted an application for registration under this Act
within 30 days of becoming liable to registration, shall in respect of such registration before the day on which he becomes
liable to pay tax under the provisions of this Act, credit of input tax on inputs contained in stock and inputs contained in semi-
finished stock or finished goods Will be entitled to take.

Note: Input tax credit is not allowed on capital goods.

(b) Voluntarily Registration A person who voluntarily takes registration (section 25(3)) shall, on the day before the
date of grant of registration, register the amount of inputs contained in stock and semi-finished stock or finished
goods. Will be entitled to take credit of input tax on vested inputs.

Note: Input tax credit is not allowed on capital goods.

(c) Credit of Input Tax on Stocks and Capital Goods when Composition Scheme Ceased when any registered person ceases to
pay tax under section 10 (Composition Levy) is before the date on which he becomes liable to pay tax under section 9 (regular
taxable person),

✓ Inputs contained in stock,

✓ Inputs contained in semi-finished stock or finished goods and

✓ You will be entitled to take credit of input tax in respect of capital goods. Provided that the credit on capital goods shall be
reduced by the prescribed percentage points. (5% per quarter or part thereof in the year from the date of bill on which the
capital goods were received by the taxable person.)

(d) Input Tax Credit on Stocks-Capital Goods when exempt supply becomes taxable supply.

Where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be
entitled to take credit of the following input tax in respect of the supply immediately before the date on which his supply
becomes taxable -

• Inputs contained in stock and inputs contained in semi-finished stock or finished goods in respect of such exempt supplies
and

• On capital goods which have been wholly used for such exempt supplies

Provided that the credit on capital goods shall be reduced by the prescribed percentage points. (5% per quarter or part thereof
in the year from the date of BRIL on which the capital goods were received by the taxable person.)

2. Amount payable on supply of capital goods or plant and machinery on which ITC has been taken [Section 18 (6)]

2. In case of supply of capital goods or plant and machinery on which input tax credit has been taken, the registered person
shall pay the amount of higher of the following -

• Equal to the ITC taken on capital goods or plant and machinery reduced by 5% per quarter or part thereof in a year from
the date of issue of bill for such goods; Or

• Tax on the value of transactions of capital goods or plant and machinery determined under section 15.
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However, where refractory bricks, molds and dies, jigs and fixtures are supplied as scrap, the taxable person shall be liable to
pay the transaction value of such goods determined under section 15. Can pay tax on.

Reversal of ITC on switching to composition levy or exit from tax-paying status

Change from regular Where any such registered person is—

scheme to composition • Who has availed input tax credit and now opts to pay tax under section
scheme or supply become 10 or,
exempt from tax [Section • The supply by which goods or services or both are supplied is
18(4)] completely exempt from tax

he shall, by way of debit in the electronic credit ledger or from the

electronic cash ledger on the day before the date of exercising such
option or on the day before the date of exemption from such tax, as the
case may be, input tax in respect of Will pay an amount equal to the
credit of-
• Inputs contained in stock,
• Inputs contained in semi-finished stock or finished goods and
• On capital goods which will be reduced by 5% per quarter from the
date of bill.
Provided that if the balance of input tax credit after payment of such
amount is If there is any balance left in the electronic credit ledger, it will
also be lost.
Reversal of Credit Section 18(4) (change from regular plan to composition plan) or Section
29(5)

(Cancellation of Registration Certificate), the inputs vested in the stock,

Inputs contained in semi-finished stock or finished goods and

capital goods held in stock

The amount of input tax credit in respect of goods shall be reversed in

the following manner - ✓ For inputs contained in stock, and for inputs
contained in semi-finished and finished goods, proportionate calculation
of input tax credit shall be made on the basis of the same bill, The credit
on which the credit was availed by the registered taxable person.

✓ Input tax credit included in months of remaining useful life for capital
goods held in stock will be calculated on pro-rata basis and useful life
will be taken as five years.

Example-

Capital goods were used for 4 years, 6 months and 15 days. Useful
remaining life, in months 5 months (part of the month is considered as

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complete) Input tax credit taken on such capital goods = C Input tax
credit in respect of useful remaining life = C x 5/60
Reverse of separate credits The amount specified above will be set aside separately for input tax
for each tax credit of central tax, state tax, Union territory tax and integrated tax.
Estimation of amount if Where tax invoices relating to inputs held in stock are not available -
invoice not available then the registered person shall, on the basis of the prevailing market
value of the goods on the effective date of any event referred to in
section 18(4) or section 29(5), as the case may be, But the amount will be
estimated.
Reversal of credit shall form The above details shall be duly certified by a practicing Chartered
part of Output Tax liability Accountant or Cost Accountant.

Transfer of ITC on account of change in constitution of registered person

Change in Constitution [Sec. 18 (3)] Where there is a change in the constitution of a registered
person by reason of sale, merger, dissolution, amalgamation,
lease or transfer of business in which liabilities have also been
transferred under specific provisions, then such registered
person shall, in his electronic credit ledger The remaining input
tax credit will be allowed to be transferred to such sold, merged,
dissolved, amalgamated, leased or transferred business in the
prescribed manner.
Transfer of credit on sale, merger, er, Registered person submitting details of sale, merger, dissolution,
amalgamation, lease or transfer of a amalgamation, lease or transfer or change in ownership of the
business business for any reason, in the electronic credit ledger along with
the request for transfer of input tax credit to the transferee in
Form GST ITC-02 Will deposit in. However, in case of demerger,
the input tax credit will be divided in proportion to the value of
assets of the new units as specified in the demerger scheme.
Certificate by Practicing CA or CMA The transferor shall also submit a copy of the certificate issued
by a practicing-chartered accountant or cost accountant
certifying that by sale, merger, dissolution, amalgamation, lease
or transfer of the business, the transfer of liabilities specific to

Has been done with provision.

Transferee will accept the details The transferee shall, on the common portal, accept the details
furnish by transferor furnished by the transferor and on such acceptance, the balance
credit specified in Form GST ITC-02 shall be credited to his
Entry in Books of Accounts by electronic credit ledger.
transferee
The inputs and capital goods transferred will be duly accounted
for in the accounts of the transferee.

Meaning of Input Service Distributor

Companies may have their headquarters in one place and their units in other places which may be registered
separately. Many times, the headquarters takes over certain services which are for use by all the units throughout the
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country. Bills for such expenses are issued in the name of the Head Office. But the head office itself does not provide
any outward supplies hence the credit accruing on account of such input services cannot be utilized. Since the
expenditure incurred is for the business of all the units, it is natural that the credit of input services in respect of such
bills should be divided among all the consuming units.

The ISD mechanism enables such proportionate distribution of credit of input services among all consuming units. It
is important to note that the ISD mechanism is meant to distribute credit only on bills relating to input services and
not on goods (inputs or capital goods).

As per Section 2(61) of the CGST Act, Input Service Distributor means the office of the supplier of goods or services
or both who receives the tax bill issued under Section 31 for receipt of input services and maintains the same
Permanent Account Payment on services to a supplier of other goods or services or both having PAN number

Issue prescribed documents for distribution of credit of central tax, state tax, integrated tax or union territory tax.

ISDs are required to mandatorily obtain separate registration as ISDs and apply for the same in Form GST REG-1.
There is no prescribed limit of total turnover for registration of ISD. Other locations may be registered separately.
Since the services relate to other places, similar credit from where such services are to be transferred will have to be
registered as ISD (which have separate registration).

1. Distribution of Credit by Input Service Distributor

The Input Service Distributor will distribute the credit by issuing the prescribed documents in the following manner-

• Central tax in the form of central tax or integrated tax,

• State tax in the form of state tax or integrated tax, and

• Integrated tax as integrated tax.

Example- Corporate office of ABC Limited is situated in Bangalore as ISD, the company received some bills on receipt
of common services on which central tax of ₹ 4 lakh, state tax of ₹ 4 lakh and integrated tax of ₹ 7 lakh were
imposed. Has happened.

The company can distribute this central tax, state tax and integrated tax as integrated tax up to ₹ 15 lakh through ISD
bills to units located in Delhi, Chennai, Mumbai and Kolkata.

(b) Condition for Distribution of Credit: The Input Service Distributor may distribute credit subject to the following
conditions, namely -

(I) the credit can be distributed to the recipients of services only through the prescribed documentation;

(ii) the amount of credit distributed shall not exceed the amount of credit available for distribution;

(iii) Credit of tax paid on input services shall be distributed only to the recipient to whom it is payable.

The services will be related to;

(iv) Credit of tax paid on input services shall be distributed among more than one recipient or all the recipients in
proportion to their turnover if such services relate to more than one or all the recipients.

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Example – If an ISD has 4 units across the country. If an input service specifically belongs to only one unit but the bill
is raised in the name of ISD, the ISD can distribute credit only to that unit and not to other units. If input services
have been received for all the units, credit will be distributed in proportion to the turnover of all the units.

(c) Invoice/Credit Note/Debit Note issued by ISD

A person registered as an Input Service Distributor having the same PAN and State Code may issue a bill or, as the
case may be, a debit note or a credit note for transferring the credit of the common input goods, in which the
following details should be included-

• Name, address and GSTIN of the registered person: respectively numbers which should not exceed sixteen
characters

• Date of issue;

• GSTIN and original bill number of the supplier of common service whose credit is to be transferred to the input
service distributor;

• Input service distributor name, address and GSTIN; The taxable value, rate and amount of credit to be transferred,
and

• Signature or digital signature of the registered person or his authorized representative.

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