Chapter-V

Input Tax Credit

Statutory Provision
16. Eligibility and conditions for taking input tax credit
(1) Every registered person shall, subject to such conditions and restrictions as may be
prescribed and in the manner specified in section 49, be entitled to take credit of input
tax charged on any supply of goods or services or both to him which are used or
intended to be used in the course or furtherance of his business and the said amount
shall be credited to the electronic credit ledger of such person
(2) Notwithstanding anything contained in this section, no registered person shall be
entitled to the credit of any input tax in respect of any supply of goods or services or
both to him unless, -
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under
this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both
Explanation- For the purposes of this clause, it shall be deemed that the registered
person has received the goods where the goods are delivered by the supplier to a
recipient or any other person on the direction of such registered person, whether acting
as an agent or otherwise, before or during movement of goods, either by way of transfer
of documents of title to goods or otherwise;
(c) subject to the provisions of section 41, the tax charged in respect of such supply has
been actually paid to the Government, either in cash or through utilization of input tax
credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
PROVIDED that where the goods against an invoice are received in lots or instalments,
the registered person shall be entitled to take credit upon receipt of the last lot or
instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services
or both, other than the supplies on which tax is payable on reverse charge basis, the
amount towards the value of supply along with tax payable thereon within a period of
one hundred and eighty days from the date of issue of invoice by the supplier, an
amount equal to the input tax credit availed by the recipient shall be added to his output
tax liability, along with interest thereon, in such manner as may be prescribed
Provided also that the recipient shall be entitled to avail of the credit of input tax on
payment made by him of the amount towards the value of supply of goods or services
or both along with tax payable thereon.
Ch-V : Input Tax Credit Sec. 16-21

(3) Where the registered person has claimed depreciation on the tax component of the cost
of capital goods and plant and machinery under the provisions of the Income Tax Act,
1961, the input tax credit on the said tax component shall not be allowed.
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice
or debit note for supply of goods or services or both after the due date of furnishing of
the return under section 39 for the month of September following the end of financial
year to which such invoice or invoice relating to such debit note pertains or furnishing of
the relevant annual return, whichever is earlier.

16.1 Introduction
Chapter V of CGST Act deals with input tax credit. This chapter is divided into following
sections:
(i) Section 16: Eligibility and conditions for taking input tax credit.
(ii) Section 17: Apportionment of credit and blocked credits
(iii) Section 18: Availability of credit in special circumstances
(iv) Section 19: Taking input tax credit in respect of inputs and capital goods sent for job
work
(v) Section 20: Manner of distribution of credit by Input Service Distributor
(vi) Section 21: Manner of recovery of credit distributed in excess.
Input Tax Credit is the backbone of the GST regime. GST is nothing but a value-added tax on
goods & services combined. It is these provisions of Input Tax Credit that make GST a value-
added tax i.e., collection of tax at all points in the supply chain after allowing credit for the
inputs/input services and capital goods. The invoice method of value added taxation will be
followed in the GST too, viz., the tax paid at the time of receipt of goods or services or both
will be eligible for set-off against the tax payable on supply of goods or services or both, based
on the invoices with a special emphasis on actual payment of tax by the supplier. The
procedures and restrictions laid down in these provisions are important to make sure that
there is seamless flow of credit in the whole scheme of taxation without any misuse.
16.2 Analysis
(i) Relevant definitions:
(a) Taxable person: Means a person who is registered or liable to be registered under
section 22 or section 24.
(b) Input tax credit: means the credit of “input tax” in terms of section 2(63).
(c) Input tax: "Input tax" in terms of section 2(62) in relation to a registered person, means
the central tax, State tax, integrated tax or Union territory tax charged on any supply of
goods or services or both made to him and includes
— integrated goods and service tax charged on import of goods
— tax payable on reverse charge basis under IGST Act/SGST Act/CGST
Act/UTGST Act.

CGST Act 120

Ch-V : Input Tax Credit Sec. 16-21

— but excludes tax paid under composition levy.

Section 9(3) and 9(4) of CGST Act levies tax on goods or services or both on reverse
charge. 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.
(d) Electronic credit ledger: The input tax credit as self-assessed in return of registered
person shall be credited to electronic credit ledger in accordance with section 41, to be
maintained in the manner as may be prescribed. [Section 2(46) read with Section
49(2)].
(e) “Capital goods” means. -
goods, the value of which is capitalised 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 [Section 2(19)].
(f) Input: “Input” in terms of section 2(59) means
— any goods,
— other than capital goods,
— used or intended to be used by a supplier
— in the course or furtherance of business
(g) Input service: “Input service” in terms of section 2(60) means
— any service
— used or intended to be used by a supplier
— in the course or furtherance of business.
(ii) Section 16
(a) Registered person to take credit: Every registered person subject to Section 49, shall
be entitled to take credit of input tax charged on any supply of goods or services or both
to him which are used or intended to be used in the course or furtherance of his
business. The input tax credit is credited to the electronic credit ledger. Rule 1 of the
ITC Rules provides that input tax credit can be taken on the basis of any of the following
documents:
(i) Invoice issued under section 31
(ii) Debit note issued under section 34
(iii) Bill of entry
(iv) Invoice prepared in respect of reverse charge basis u/s 9(3) and 9(4)
(v) Document issued by ISD u/r 7(1) for distribution of credit referred u/r 4(1)(g)
It is important to observe the words ‘used by him’ and ‘in his business’ appearing in

CGST Act 121

Ch-V : Input Tax Credit Sec. 16-21

section 16(1). These words refer to the registered taxable person in question and not
the legal entity as a whole. So, input tax credit paid in a State must not be in relation to
the business of a taxable person in another State albeit belonging to the same taxable
person. For example, A Company has Branch-A which is a registered taxable person in
Andhra Pradesh conducts conference in a hotel in Lonavla (Maharashtra) where CGST-
SGST is charged by the hotel. This Company also has Branch-M which is a registered
taxable person in Mumbai, Now the provisions of section 16(1) operate as follows:
 CGST-SGST charged by the hotel in Lonavla (Maharashtra) is ‘used in the
business of Branch-A’ in Andhra Pradesh and not in the business of Branch-M in
Mumbai.
 Hotel would not be aware about the above fact and would not resist to issue the
bill in the name of Branch-M because both are branches of the same Company
 Since, CGST-SGST has been charged by the hotel, input tax credit would not be
available to Branch-A as tax paid in Maharashtra is not a creditable tax in Andhra
Pradesh
 Branch-M may be compelled to forego the tax paid to the hotel. However, there
may be a tendency to save this loss by informing the hotel about the GSTIN of
Branch-M. In fact, the Company need to obtain ISD registration in Maharashtra
and distribute this credit entirely to Andhra Pradesh.
 But, Branch-M in Mumbai cannot justify this input tax credit as it is not ‘used by
him’ in ‘his business’ but it is ‘used by another’ in ‘that others business’
 Care should to taken to verify ‘whose’ business each input tax credit relates to;
 If nexus is established between the services of the hotel and the ‘business’ of
Branch-M, input tax credit may be availed by Branch-M. Nexus emerges if inter-
branch supply of services occurs between Branch-M and Branch-A
(b) Conditions for availment of credit by registered person: Subject to section 41, input
tax credit is available only if –
(i) The said goods or services or both are used or intended to be used in the course
or in the furtherance of his business;
(ii) He is in possession of tax invoice/ debit note / tax-paying document issued by a
supplier registered under this Act (listed above);
(iii) He has received the said goods or services or both subject to job-work facilities
and restrictions relating to input tax credit in Section 19;
(iv) The supplier has uploaded the relevant invoice on the GSTN;
(v) The supplier has paid the said amount of tax (as charged in the invoice) to
appropriate Government in cash or by way of utilization of input tax credit, as
admissible;

CGST Act 122

Ch-V : Input Tax Credit Sec. 16-21

(vi) He – claimant of input tax credit – has furnished return under section 39 in
FORM-GSTR 2;
(a) Goods received in instalments: If goods are received in instalments against a single
invoice, credit can be taken upon receipt of last instalment of goods.
(b) Failure to pay to supplier of goods or service or both, the value of supply and tax
thereon: If recipient of goods or service or both has not paid the supplier within 180
days from date of invoice, the amount equal to input tax credit availed along with the
interest will be added to output liability of the recipient. Such non-payment of the value
of invoice must be admitted in the return filed in FORM-GSTR 2 (Rule 2) for the month
immediately following the period of 180 days from the date of issue of invoice. The said
input tax credit can be re-availed on payment of value of supply and tax payable
thereon.
(c) Please note that this condition does not apply for supplies which are payable under
reverse charge basis. This exception has been expressly created in second proviso to
section 16(2) of the Act.
(d) Capital goods on which depreciation is claimed: Where the registered person has
claimed depreciation on the tax component of the cost of capital goods and plant
and machinery under the provisions of the Income Tax Act, 1961, the input tax credit
shall not be allowed on the said tax component.
(e) Time limit to avail the input tax credit: A registered person is not entitled to take input
tax credit on invoice/ debit notes after due date of furnishing of the return under section
39 for the month of September of the subsequent financial year or furnishing of the
relevant annual return, whichever is earlier.
Therefore, input tax credit shall be available to a registered person only if invoice/challan is in
his possession for the goods or services or both are received and the payment of such tax has
been made by the supplier and a return u/s 39 has been filed. Receipt of goods shall include
delivery to any other person as directed by the registered person.
Note: Goods are deemed to be received by a registered person when the supplier delivers the
goods to the recipient/ any other person, on the direction Provided by the registered person to
the supplier. Credit would be available in case goods are directly sent to the job worker
subject to provisions under section 19
In summary among others the following facts are crucial for availment of Input tax credit:
(a) The goods and or services must be used “by him” in the course or furtherance “of his”
business.
(b) Possession of Output Invoice/Supplementary Invoice/ Debit or Credit note/ ISD invoice/
Bill of Entry and other related documents is a must.
(c) The said document must contain all the prescribed particulars specified in the Invoice
Rules. It may be noted that Invoice or such other document can contain additional
details other than those prescribed but NO LESS.

CGST Act 123

Ch-V : Input Tax Credit Sec. 16-21

(d) Supplier of goods and/ or services must upload the details of such documents in the
common portal i.e. GSTN.
(e) Vesting condition for claiming input tax credit is the return u/s 39 and not the supply per
se.
(f) Input tax credit in case of supplies in instalment would be receipt of last instalment of
goods.
(g) The law casts an obligation on the receiptent of goods and/or services who avails the
credit to effect payment to the supplier within a period of 180 days from the date of
invoice. If such payment is not effected by the recipient to the supplier Rule 2 obligates
removal of input tax credit so availed leading to consequential levy of tax, interest and
penalty.
(h) Claim of depreciation on tax component disqualifies a recipient of Capital goods from
availment of input tax credit.
(i) ITC cannot be availed after the due date of filing the return for September month of the
next Financial year or on furnishing the Annual Return whichever is earlier.
(j) No registered person is permitted to avail any input tax credit pursuant to an order of
demand on account of fraud, willful misstatement, or suppression of fact.
ITC in case of Capital Goods

16.3 Comparative review:

Aspect Credit under present system Input tax credit under GST
Definition of “capital Defined in Cenvat Credit Rules Comparatively wider definition.
goods”
Definition of “input” Defined in Cenvat credit Rules Exhaustive definition and does
which has inclusion and not contain inclusion or
exclusion limb. exclusion limb.
Definition of “input Defined in Cenvat credit Rules Exhaustive definition and does
services” which has inclusion and not contain inclusion or

CGST Act 124

Ch-V : Input Tax Credit Sec. 16-21

exclusion limb. exclusion limb.

Electronic credit ledger No such concept Electronic credit ledger required
to be maintained for crediting
and utilising input tax credit

Statutory Provision
Section 17: Apportionment of credit and blocked credit
(1) Where the goods or services or both are used by the registered person partly for the
purpose of any business and partly for other purposes, the amount of credit shall be
restricted to so much of the input tax as is attributable to the purposes of his business.
(2) Where the goods or services or both are used by the registered person partly for
effecting taxable supplies including zero-rated supplies under this Act or under the
Integrated Goods and Services Tax Act, and partly for effecting exempt supplies under
the said Acts, 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.
(3) The value of exempt supply under sub-section (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 , transactions in securities, sale of land and, subject to clause (b) of paragraph 5
of Schedule II, sale of building.
(4) 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
advances shall have the option to either comply with the provisions of sub-section (2),
or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit
on inputs, capital goods and input services in that month and the rest shall lapse.
Provided that the option once exercised shall not be withdrawn during the remaining
part of the financial year.
Provided further that the restriction of fifty per cent. shall not apply to the tax paid on
supplies made by one registered person to another registered person having the same
Permanent Account Number
(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1)
of section 18, input tax credit shall not be available in respect of the following namely:
(a) motor vehicles and other conveyances except when they are used-
(i) for making the following taxable supplies, namely: -
(A) further supply of such vehicles or conveyances; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or
conveyances;
(ii) for transportation of goods.
(b) the following supply of goods or services or both, -

CGST Act 125

Ch-V : Input Tax Credit Sec. 16-21

(i) food and beverages, outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery except where an inward supply of goods or
services or both of a particular category is used by a registered person for
making an outward taxable supply of the same category of goods or
services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre,
(iii) rent-a-cab, life insurance, health insurance except where
1. the Government notifies the services which are obligatory for an
employer to provide to its employees under any law for the time
being in force; or
2. such inward supply of goods or services or both of a particular
category is used by a registered person for making an outward
taxable supply of the same category of goods or services or both or
as part of a taxable composite or mixed supply; and
(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 and machinery), except where it is an input service for further
supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an
immovable property (other than plant and machinery) on his own account,
including when such goods or services or both are used in the course or
furtherance of business;
Explanation. - For the purpose of clause (c) and (d), the expression “construction”
includes re-construction, renovation, additions or alterations or repairs, to the
extent of capitalization, to the said immovable property.
(e) goods or services or both on which tax has been paid under section 10;
(f) goods or services or both received by a non-resident taxable person except on
goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free
samples; and
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.
(6) The Government may prescribe the manner in which the credit referred to in sub-
sections (1) and (2) may be attributed.
Explanation. - For the purposes of this Chapter and Chapter VI, the expression ‘plant
and machinery’ means apparatus, equipment and machinery fixed to earth by
foundation or structural support that are used for making outward supply of goods or
services or both and includes such foundation and structural supports but excludes

CGST Act 126

Ch-V : Input Tax Credit Sec. 16-21

(i) land, building or any other civil structures,

(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises

17.1 Introduction
The input tax credit eligibility is based on whether the same is used for taxable supplies or
zero rated supplies. Where the goods or service is used for both taxable and exempted
supplies, only proportionate credit is eligible for registered person, Further, a list of ineligible
input tax credit is also Provided.
17.2 Analysis
(a) Proportionate credit:
ITC based ON usage in business

ITC based ON use of Inputs

The value of exempt supplies shall include supply on which tax is paid under Reverse Charge,
transaction in securities, sale of land and sale of building subject to clause (b) of Paragraph 5
of Schedule II. Please note that supplies in respect of which the outward supplier is not liable
to pay tax but the recipient is made liable to pay the tax, then due to section 17(3), for the
limited purpose of restricting input tax credit to the supplier (who is not made responsible to
pay tax due to RCM provisions) the value of these supplies will be regarded as ‘exempt
supplies’ while arriving at the net available input tax credit. Doubts have been raised whether
such supplies should be included as exempt supplies by the recipient who pays the tax (on
RCM basis). This is not the case, as the recipient has not made such supply.

CGST Act 127

Ch-V : Input Tax Credit Sec. 16-21

In case, goods or services or both are partly used in taxable supplies and partly in non-taxable
supplies, then amount of credit shall be restricted to the taxable supplies. Taxable supplies
include zero rated supplies and exempt supplies shall include non-taxable supplies.
Provisions in respect of SEZ developers/units in GST contrasts with the current VAT laws
where certain States allow input tax credit to SEZ developers / units, only if such goods or
services or both qualify as inputs or input services (used or intended to be used in the course
or furtherance of business). And in certain other States, SEZ developers and units are allowed
credit (refund) without examining the end use of the goods purchased.
(b) Banking Company or financial institution including NBFC engaged in accepting
deposits, extending loans or advances: There is an option allowed as detailed in Rule 3 as
follows:
(i) Refrain from availing input tax credit relatable to ‘non-business purposes’ and not avail
any credit restricted u/s 17(5) (discussed in detail below) and make this election known
in FORM-GSTR 2 or
(ii) Avail full extent of credit on inter-branch supply of services of the banking or NBFC
company and also avail 50% of ‘all other’ input tax credits. ‘All other’ credits refer to
input tax credit that would have been available u/s 16 before administering the
restriction in this section.
6. Ineligible input tax credit: input tax credit shall not be available in respect of the
following
(i) Motor vehicle and other conveyance except when they are used for making the
following taxable supplies , namely-
(a) Further supply of such vehicles or conveyances or
(b) Transportation of passenger or
(c) Imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) Motor vehicle and other conveyance except used for transportation of goods
(iii) Supply of goods and/or services such as –
(a) food and beverages, outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery except where such supply of goods or services of
each category is used for making an outward taxable supply of the particular
category of goods or services or both or as an element of a taxable composite or
mixed supply
(b) membership of a club, health and fitness centre
(c) rent-a-cab, life insurance, health insurance except where it is notified by the
Government as obligatory for an employer to provide to its employees under any
law for the time being in force; or such inward supply of goods or services or both
of a particular category is used by a registered person for making an outward

CGST Act 128

Ch-V : Input Tax Credit Sec. 16-21

taxable supply of the same category of goods or services or both or as part of a

taxable composite or mixed supply; and
(d) travel benefits to employees on vacation i.e. leave or home travel concession.
(iv) Works contract services when supplied for construction of immovable property, other
than plant and machinery, except where it is for further supply of works contract service;
It is important to note that credit of GST paid on works contract services will be allowed only if
the output is also works contract services.
(v) Goods or services received by a taxable person for construction of an immovable
property on his own account, other than plant and machinery, even though it is used in
course or furtherance of business;
“Construction” includes re-construction, renovation, additions or alterations or repairs, to the
extent of capitalization, to the said immovable property. Please note that ‘alterations’ and
‘repairs’ are also included in this definition.
(vi) Goods or services or both on which the tax paid under composition scheme
(vii) goods or services or both received by a non-resident taxable person except on goods
imported by him
(viii) Goods or services or both used for personal consumption
(ix) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
(x) Tax paid in terms of sections 74, 129 and 130
7. Plant and machinery: means apparatus, equipment, machinery fixed to earth by
foundation or structural support that are used for making outward supply of goods or services
or both and includes such foundation and structural supports but excludes land, building or
any other civil structures, telecommunication towers; and pipelines laid outside the factory
premises.
The analysis of above provision in a pictorial form is summarised as follows:
Restrictions on ITC: Sec 17(5)
Blocked credits
(a) Motor Vehicles
 Transportation of Goods, or
 Making the following taxable
ITC for Motor Except services:
Vehicles will not when I. Further supply of such
be available they are vehicles/conveyances, or
used for: II. Transportation of passengers, or
III. Training for
driving/flying/navigating such
vehicles/conveyances.

CGST Act 129

Ch-V : Input Tax Credit Sec. 16-21

Note: Where any amount has been paid on goods or services or both, in lieu of tax, under
composition scheme, no credit on such amount would be allowed.
(b) Supply of goods and services being:

(c) Construction of Immovable Property (other than plant & machinery)

17.3 Comparative review:

Aspect Credit under present system Input tax credit under GST
Proportionate credit No explicit distinction made Specific distinction made
between goods or services between goods or services
used for business and non- used for business and non-
business business

CGST Act 130

Ch-V : Input Tax Credit Sec. 16-21

Works contract credit Restriction to inputs only Credit Allowed when used for
further supply of works
contract
Credit on inputs used Input or Input Service used for Restriction to both inputs and
for construction of civil construction not eligible. input services.
immovable property
Credit related to works Plant and machinery not Plant and machinery is
contract and excluded from restriction of excluded from restriction of
construction w.r.t plant credit credit
and machinery

17.4 FAQ
Q1. Where goods or services or both is received, which is used for both taxable and non-
taxable supplies, what would be the input tax credit entitlement for the registered
person?
Ans. The input tax credit of goods or service or both used in taxable supplies can only be
taken by registered person.
17.5 MCQ
Q1. Which of the following is included for computation of taxable supplies for the purpose of
availing credit:?
(a) Zero-rated supplies
(b) Exempt supplies
(c) Both
Ans. (a) Zero Rated supplies

Statutory Provision
Section 18: Availability of credit in special circumstances
(1) Subject to such conditions and restrictions as may be prescribed-
(a) A person who has applied for registration under the Act within thirty days from the date
on which he becomes liable to registration and has been granted such registration shall,
be entitled to take credit of input tax in respect of inputs held in stock and inputs
contained in semi-finished or finished goods held in stock on the day immediately
preceding the date from which he becomes liable to pay tax under the provisions of this
Act.
(b) A person, who takes registration under sub-section (3) of section 25 shall, be entitled to
take credit of input tax in respect of inputs held in stock and inputs contained in semi-

CGST Act 131

Ch-V : Input Tax Credit Sec. 16-21

finished or finished goods held in stock on the day immediately preceding the date of
grant of registration.
(c) Where any registered person ceases to pay tax under section 10, he shall be entitled to
take credit of input tax in respect of inputs held in stock, inputs contained in semi-
finished or finished goods held in stock and on capital goods on the day immediately
preceding the date from which he becomes liable to pay tax under section 9
PROVIDED that the credit on capital goods shall be reduced by such percentage points
as may be prescribed
(d) 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 input tax in respect of
inputs held in stock and inputs contained in semi-finished or finished goods held in
stock relatable to such exempt supply and on capital goods exclusively used for such
exempt supply on the day immediately preceding the date from which such supply
becomes taxable:
PROVIDED that the credit on capital goods shall be reduced by such percentage points
as may be prescribed
(2) A registered person shall not be entitled to take input tax credit under sub-section (1), in
respect of any supply of goods or services or both to him after the expiry of one year
from the date of issue of tax invoice relating to such supply.
(3) Where there is a change in the constitution of a registered person on account of sale,
merger, demerger, amalgamation, lease or transfer of the business with the specific
provision for transfer of liabilities, the said registered person shall be allowed to transfer
the input tax credit which remains unutilized in his electronic credit ledger to such sold,
merged, demerged, amalgamated, leased or transferred business in such manner as
may be prescribed.
(4) Where any registered person who has availed of input tax credit opts to pay tax under
section 10 or, where the goods or services or both supplied by him become wholly
exempt, he shall pay an amount, by way of debit in the electronic credit ledger or
electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in
stock and inputs contained in semi-finished or finished goods held in stock and on
capital goods, reduced by such percentage points as may be prescribed, on the day
\immediately preceding the date of exercising such option or, as the case may be, the
date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying
in his electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable under sub-section
(4) shall be calculated in such manner as may be prescribed
(6) In case of supply of capital goods or plant and machinery, on which input tax credit has
been taken, the registered person shall pay an amount equal to the input tax credit
taken on the said capital goods or plant and machinery reduced by such percentage
points as may be prescribed or the tax on the transaction value of such capital goods or

CGST Act 132

Ch-V : Input Tax Credit Sec. 16-21

plant and machinery determined under section 15, whichever is higher:

Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as
scrap, the taxable person may pay tax on the transaction value of such goods
determined under section 15.
18.1 Introduction
Input tax credit is available to a registered person on inputs held in stock, inputs contained in
semi-finished and finished goods and on capital goods in some cases which are discussed
below.
18.2 Analysis
(e) Eligibility of input tax credit on inputs held in stock and contained in semi-
finished and finished goods held in stock: The credit on inputs held in stock and inputs
contained in semi-finished goods and finished goods held in stock is available in the following
manner:

 Declaration in FORM GST ITC 1 must be filed within thirty (30) days from the date of
becoming eligible to input tax credit. Rule 5 requires a declaration to be filed containing
details of stocks and capital goods along with a certificate from a Chartered Accountant
or Cost Accountant where the credit so claimed exceeds Rs.2 lakhs.
 The supplier will not be entitled to credit of goods and or services or both after expiry of
1 year from date of tax invoice.

CGST Act 133

Ch-V : Input Tax Credit Sec. 16-21

 The credit on capital goods shall be reduced by five (5) percentage per quarter or part
thereof from the date of invoice.
 Such credits are subject to verification of details furnished by the supplier in GSTR - 1
or GSTR – 4 on the common portal.
To summarize, the credit of input tax can be taken as and when the person applies for the
registration but the entitlement of credit of inputs would be from the day liability to tax arises.
Examples:
(i) A person becomes liable to pay tax on 1st August 2017 and has obtained registration on
15th August 2017. Such person is eligible for input tax credit on inputs held in stock as
on 31st July 2017.
(ii) Mr. A applies for voluntary registration on 5th June 2017 and obtained registration on
22th June 2017. Mr. A is eligible for input tax credit on inputs in stock as on 21st June
2017.
(iii) Mr. B, registered person was paying tax under composition rate upto 30th July 2017.
However, w.e.f 31st July 2017. Mr. B becomes liable to pay tax under regular scheme.
Mr. B is eligible for input tax credit on inputs held in stock as on closure of business
hours as on 30th July 2017.
Illustration (Rule 5):
Akshat Steels Limited is a manufacturer of iron & steel. It procures raw materials and inputs
such as iron ore, chemicals, gases, etc. and capital goods including plant & machinery, for the
manufacture of such iron & steel. In this example, it has been assumed that iron & steel
(which is the outward supply of Akshay Steels Ltd) is exempt from payment of taxes until 31-
Mar-2020. Iron & steel become taxable with effect from 01-Apr-2020. The method of availment
of input tax credits on inputs contained in stock and capital goods as on 31-Mar-2020 is
covered by this illustration
Particulars Amount
Value of inputs in stock on 31-Mar-2020 1,00,000
IGST @18% 18,000
All inputs were procured after 01-Jul-2019
Value of inputs contained in semi-finished goods held in stock on 31-Mar-2020 4,00,000
CGST @ 6% 24,000
SGST @ 6% 24,000
All inputs contained in semi-finished goods were procured after 01-May-
2019
Value of inputs contained in finished goods held in stock on 31-Mar-2020 50,000
CGST @ 6% 3,000
SGST @ 6% 3,000

CGST Act 134

Ch-V : Input Tax Credit Sec. 16-21

Only inputs worth Rs.40,000 in finished goods were procured after 01-Apr-
2019
Credit available in respect of inputs:
CGST (Note 1) 26,400
SGST (Note 2) 26,400
IGST (Note 3) 18,000
Total credit available on inputs 70,800
Value of capital goods used exclusively in relation to exempted goods held on 20,00,000
31-Mar-2020
IGST @ 18% 3,60,000

Credit available in respect of capital goods:

Date of invoice of capital goods 22-Jan-
2020
Date from which the exempt goods become taxable 01-Apr-
2020
No. of quarters from date of invoice 1
Percentage points to be reduced (5% per quarter) (Note 4) 5%

IGST paid on the capital goods used exclusively in relation to goods exempted 3,60,000
up to 31-Mar-2020
ITC to be reduced by 45% (18,000)
Credit (IGST) available on capital goods 3,42,000
Working notes:
Note 1: CGST credits on inputs in stock held on 31-Mar-2020:
a ITC on the value of inputs
b ITC on the value of inputs contained in semi-finished goods: All inputs 24,000
were acquired within 1 year prior to the effective date on which the
goods become taxable. Hence, entire ITC would be allowed.
c ITC on the value of inputs contained in finished goods: Out of the total 2,400
stock of Rs. 50,000/-, inputs totalling to Rs. 10,000/- are older than 1
year from the effective date on which the goods become taxable.
Therefore, ITC to this extent stands disallowed. ITC on inputs
contained in stock of Rs. 40,000 would be eligible. [Eligible credit =
40,000 * 6%]
CGST credit available on inputs 26,400

CGST Act 135

Ch-V : Input Tax Credit Sec. 16-21

Note 2: SGST credits on inputs in stock held on 31-Mar-2020:

a ITC on the value of inputs
b ITC on the value of inputs contained in semi-finished goods: Refer 24,000
Note 1
c ITC on the value of inputs contained in finished goods: Refer Note 1 2,400
SGST credit available on inputs 26,400
Note 3: IGST credits on inputs on stock held on 31-Mar-2020:
a ITC on the value of inputs: All inputs were acquired within 1 year prior 18,000
to the effective date on which the goods become taxable. Hence, entire
ITC would be allowed.
b Input tax credit on the value of inputs contained in semi-finished goods -
c Input tax credit on the value of inputs contained in finished goods -
IGST credit available on inputs 18,000
Note 4: Rule 5(1)(a) of the Input Tax Credit Rules provides that input tax credit on capital
goods can be claimed after reducing 5% per quarter of a year or part thereof, from the date of
invoice in respect of which capital goods are received. Therefore, the number of quarters is 1,
being the first quarter of the year 2020.The reversal of credit would therefore be, to the extent
of 5% of the IGST credit of Rs.3,60,000, i.e., IGST credit on capital goods would stand
reduced to the extent of Rs.18,000.
Illustration (Rule 7):
Rule 7 of the Input Tax Credit Rules, 2017
Sl. SGST/
No Particulars Reference CGST UTGST IGST
1 Total input tax on inputs T 1,00,000 1,00,000 50,000
and input services for the
tax period May 2018

Out of the total input tax

(T):
2 Input tax used exclusively T1 10,000 10,000 5,000
for non-business
purposes (Note 1)
3 Input tax used exclusively T2 10,000 10,000 5,000
for effecting exempt
supplies (Note 1)
4 Input tax ineligible under T3 5,000 5,000 2,500

CGST Act 136

Ch-V : Input Tax Credit Sec. 16-21

Section 17(5) (Note 1)

Total 25,000 25,000 12,500
ITC credited to Electronic C1 = T -(T1 75,000 75,000 37,500
Credit Ledger (Note 1) + T2 +T3)
Input tax credit used T4 50,000 50,000 25,000
exclusively for taxable
supplies (including zero-
rated supplies)
Note 1: T1, T2, T3 and
T4 shall be determined as
above and declared in
Form GSTR-2
Common credit C2 = C1 - 25,000 25,000 12,500
T4
Aggregate value of E 25,00,000 25,00,000 25,00,000
exempt supplies for the
tax period May 2018
(Note 2 & 3)

Total Turnover of the F 1,00,00,000 1,00,00,000 1,00,00,000

registered person for the
tax period May 2018
(Note 2)
Credit attributable to D1 = (E/F) 6,250 6,250 3,125
exempt supplies * C2
Credit attributable to non- D2 = C2 * 1,250 1,250 625
business purposes 5%

Net eligible common C3 = C2 - 17,500 17,500 8,750

credit (D1 + D2)
Total credit eligible G = T4 + 67,500 67,500 33,750
(Exclusive + Common) C3
Note 1: T1, T2, T3 and T4 shall be DETERMINED AS ABOVE and declared in Form GSTR-2
Note 2: If the registered person does not have any turnover for May 2018, then the value of E
and F shall be considered for the last tax period for which such details are available
Note 3: Aggregate value excludes taxes
Note 4: The registered person is expected to make such computation for each tax period and
for the whole year as well. In case the resultant computation results in short credit availed,

CGST Act 137

Ch-V : Input Tax Credit Sec. 16-21

then such credit can be claimed in the electronic credit ledger. Further, if on computation for
the whole year, the registered person has claimed excess credit on a month on month basis,
then such excess credit claimed for the year shall be added back to the output liability and will
be liable for payment with interest.
Illustration (Rule 8):
Sl. Particulars Reference IGST
No
ITC on capital goods used exclusively for non-
1 business purposes (Note 1) T1 10,000
ITC on capital goods used exclusively for effecting
2 exempt supplies (Note 1) T2 10,000
Total 20,000
3 ITC on capital goods used exclusively for taxable T3 50,000
supplies (including zero-rated supplies) (Note 1)
4 ITC on capital goods (other than T1, T2 and T3) A= b+f 3,90,000
(Annexure A)
5 ITC on capital goods whose residual life remain in Tr 6,500
beginning of tax period (Annexure A)
7 Aggregate value of exempt supplies for the tax E 25,00,000
period May 2018 (Note 2 & 3)
8 Total Turnover of the registered person for the tax F 1,00,00,000
period May 2018 (Note 2)
10 Credit attributable to exempt supplies Te = (E/F) * Tr 1,625
Note 1: T1, T2 and T3 should be declared in Form GSTR-2. T3 alone will be credited to the
electronic credit ledger
Note 2: If the registered person does not have any turnover for May 2018, then the value of E
and F shall be considered for the last tax period for which such details are available
Note 3: Aggregate value excludes taxes

CGST Act 138

Ch-V : Input Tax Credit Sec. 16-21

Annexure A - ITC on capital goods whose residual life remain

Sl. No Particulars Reference Amount

For May 2018

1 Inward supply value of Machinery X a 12,50,000
IGST @ 12% b 1,50,000
Invoice Value 14,00,000
Date of inward supply 12 April 2018
Life of the capital goods (in months) - for c 60
GST purpose is 5 years
ITC attributable for 1 month Tm1 =b/c 2500
2 Inward supply value of Machinery Y e 20,00,000
IGST @ 12% f 2,40,000
Invoice Value 22,40,000
Date of inward supply 21 May 2018
Life of the capital goods (in months) - for g 60
GST purpose is 5 years
ITC attributable for May 2018 (1 month) Tm2 = f/g 4000
Aggregate of ITC on common credits Tr = Tm1 + Tm2 6500

CGST Act 139

Ch-V : Input Tax Credit Sec. 16-21

Rule 9 of the Input Tax Credit Rules, 2017

Illustration 1: Where input tax credit lapses
Sl. Referen
No Particulars ce Amount

1 Value of capital goods 1,00,000

IGST @ 12% A 12,000
Invoice Value 1,12,000

01 April 2019
(Can be opted in Financial year
2 Date of shift to composition scheme beginning)
Date of inward supply and use of
3 capital goods 01 September 2017
4 Period of use (days) 577
Period of use (months) 19

5 Residual life in months B 41

(Considering full life as 5 years)

C=
6 ITC attributable to residual life (A*B/60) 8,200
(To be added to the output tax
liability of the registered person)

5 Balance of ITC as on 31.03.2019 10,000

ITC utilized for capital goods for

6 residual life 8,200

7 Balance ITC - will lapse 1,400

CGST Act 140

Ch-V : Input Tax Credit Sec. 16-21

Illustration 2: Where input tax credit becomes payable

Sl. No Particulars Reference Amount

1 Value of capital goods 1,00,000

IGST @ 12% A 12,000
Invoice Value 1,12,000

2 Date of shift to composition scheme 1st April 2019

3 Date of inward supply and use of capital goods 01 September 2017
4 Period of use (days) 577
Period of use (months) 19

5 Residual life in months B 41

(Considering full life as 5 years)

C=
6 ITC attributable to residual life (A*B/60) 8,200
(To be added to the output tax liability of the
registered person)

5 Balance of ITC as on 31.03.2019 1,500

6 ITC utilized for capital goods for residual life 8,200

7 Balance tax payable 6,700

CGST Act 141

Ch-V : Input Tax Credit Sec. 16-21

Illustration 3: Where no payment is required

Sl. No Particulars Reference Amount

1 Value of capital goods 1,00,000

IGST @ 12% A 12,000
Invoice Value 1,12,000

2 Date of shift to composition scheme 1st April, 2023

Date of inward supply and use of capital
3 goods 01 September 2017
4 Period of use (months) 67
Period of use (years) 5 years 7 months

5 Residual life in months B -

(Considering full life as 5 years)

6 ITC attributable to residual life C = (A*B/60) 0

(No payment required)
(f) Input tax credit and change in constitution of registered person: The change in
constitution of registered person due to sale merger, demerger, amalgamation, lease or
transfer of business with provision for transfer of liabilities envisages that:
(i) The registered person is allowed to transfer the input tax credit remaining unutilized in
the electronic credit ledger .to such sold, merged, demerged, amalgamated, leased or
transferred business.
(ii) Rule 6 prescribes such credit transfer be made on the Common Portal in FORM GST
ITC 2 and in case of demerger, credit to be transferred must be apportioned to the
value of assets transferred in the arrangement to each such unit.
(iii) Chartered Accountant or Cost Accountant to certify that the arrangement contains a
specific provision for the transfer of liabilities.
(iv) Form GST ITC 2 filed by the transferor will have to be accepted by the transferee on the
Common Portal. Please refer to discussion on Registrations in case of such
arrangements to examine the timing of seeking registration by transferee.
(v) Transferee to duly account for the stocks capital goods received in books of accounts.
The analysis of above provision in a pictorial form is summarised as follows:

CGST Act 142

Ch-V : Input Tax Credit Sec. 16-21

ITC: Change in Constitution of registered Person

(g) When registered person switches over from regular scheme to composition
scheme:
 Pay an amount by debiting electronic cash ledger / credit ledger, equivalent to input tax
credit of -
— Inputs held in stock
— Inputs contained in semi-finished or finished goods held in stock and
— Capital goods
 On the day immediately preceding the date of such switch over.
 Balance of input tax credit lying in the electronic credit ledger, after payment of the
above said amount, shall lapse.
 Such amount is calculated in manner to be prescribed
The above provision is also applicable where goods or services supplied by registered
person is absolutely exempt.
Switching from regular to composition- Pay and Exit

CGST Act 143

Ch-V : Input Tax Credit Sec. 16-21

(h) Supply of capital goods on which input tax credit is taken: The registered person
shall:
 Pay an amount equal to input tax credit taken on such capital goods
 Reduced by percentage points as prescribed or
 Tax on the transaction value of such capital goods, whichever is higher.
Supply of Capital goods on which ITC already taken

Please note that there is no saving clause in the event the taxable person entertained a bona
fide view as to the non-taxability of certain supplies or availability of an exemption which is
later overturned by a superior Court and demand crystallizes. In this scenario, limitation of
availment of input tax credit lands a double blow to this taxable person. That is, not only would
GST have been paid on inputs, input services and capital goods on which no credit would
have been availed (due to this bona fide view having been entertained) but also, the full extent
of the output tax becomes payable (without any relief towards credit that would otherwise have
been available) due to the decision of the superior Court. Please exercise great caution while
entertaining view about non-taxability or exemption. At the same time, please note it is not
permitted to take a hyper-conservative view – where even with the availability of a clear and
absolute exemption, the taxable person chooses to pay GST in order to protect credit from the
limitation – cannot be taken in view of the mandatory nature of such exemptions as clearly
stated in explanation to section 11(3). Also, please note the difference between ‘taxable
person’ and ‘registered person’ – are two deliberately dissimilar phrases used in the law – and
credit is allowed u/s 16(1) only to a ‘registered person’ where as u/s 9(1) tax levied is payable
by every ‘taxable person’ implying that the liability subsists even if not registered but credit
avails, only if registered.
(i) Refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap:
Taxable person may pay tax on transaction value under section 15.
18.3 Comparative review:
Aspect Credit under present system Input tax credit under GST
Credit on stock-in-hand Rule 3(2) of CCR Rules, 2004 Specified persons in specified
situations are eligible for input
tax credit on stock
Credit on sale merger or Rule 10 of CCR Rules, 2004 Specific section covering the
transfer of business sale, merger etc
Reversal on goods Rule 11(3) of CCR, 2004 To be reversed as per section
becoming exempt 18(4)

CGST Act 144

Ch-V : Input Tax Credit Sec. 16-21

Statutory Provision
19. Taking input tax credit in respect of inputs and capital goods sent for job work
(1) The “principal” shall, subject to such conditions and restrictions as may be prescribed,
be allowed input tax credit on inputs sent to a job-worker for job-work.
(2) Notwithstanding anything contained in clause (b) of sub-section (2) of section 16, the
“principal” shall be entitled to take credit of input tax on inputs even if the inputs are
directly sent to a job worker for job-work without being first brought to his place of
business.
(3) Where the inputs sent for job-work are not received back by the “principal” after
completion of job-work or otherwise or are not supplied from the place of business of
the job worker in accordance with clause (a) or clause (b) of sub-section (1) of section
143 within one year of being sent out, it shall be deemed that such inputs had been
supplied by the principal to the job-worker on the day when the said inputs were sent
out:
Provided that where the inputs are sent directly to a job worker, the period of one year
shall be counted from the date of receipt of inputs by the job worker.
(4) The “principal” shall, subject to such conditions and restrictions as may be prescribed,
be allowed input tax credit on capital goods sent to a job-worker for job-work.
(5) Notwithstanding anything contained in clause (b) of sub-section (2) of section 16, the
“principal” shall be entitled to take credit of input tax on capital goods even if the capital
goods are directly sent to a job worker for job-work without being first brought to his
place of business.
(6) Where the capital goods sent for job-work are not received back by the “principal” within
a period of three years of being sent out, it shall be deemed that such capital goods had
been supplied by the principal to the job worker on the day when the said capital goods
were sent out:
Provided that where the capital goods are sent directly to a job worker, the period of
three years shall be counted from the date of receipt of capital goods by the job worker.
(7) Nothing contained in sub-section (3) or sub-section (6) shall apply to moulds and dies,
jigs and fixtures, or tools sent out to a job-worker for job-work.
Explanation. ––For the purpose of this section, “principal” means the person referred to
in section 143
19.1 Introduction
This provision relates to availment of credit of input tax on goods sent for job work.
19.2 Analysis
(i) Relevant Definitions:
 Job work: Any treatment or process undertaken by a person on goods belonging to
another registered person (section 2(68).

CGST Act 145

Ch-V : Input Tax Credit Sec. 16-21

 Reference may also be made to entry 3 of the Schedule II where treatment or process
applied to another person’s goods is a supply of services.
 Job worker: A person who undertakes any treatment or process on goods belonging to
another registered person.
 Principal: A person on whose behalf an agent carries on the business of supply or
receipt of goods or services or both.
(ii) Entitlement of credit on inputs: The principal can take credit of input tax on inputs
sent to job-worker subject to fulfilment of the following conditions:
 Rule 10 of ITC Rules provides the following:
o To issue a challan for transfer of inputs to the job-worker including where they
are sent directly (to maintain paper trail of transaction)
o Challan is to contain all details as required in respect of an invoice in Rule 8 (of
Invoice Rules). Reference may be made to Chapter VII relating to Tax Invoice,
credit & debit notes for the particulars to be included in the document & for
detailed description.

o All challans issued in respect of inputs sent to job-worker and those received
back are to be reported in GSTR-1
o In case of non-receipt of the inputs within the time prescribed, the challan issued
will be deemed to be invoice for the implied supply of inputs
 The inputs, after completion of job-work, are received back by the principal within 1 year
of their being sent out.
 In case of direct supply , the period of 1 year shall be reckoned from the date the job
worker receives such inputs.
 The credit of inputs can be taken even if inputs are sent directly to job-worker’s
premises without bringing it to principal’s place of business.
 If the inputs are not received back within 1 year, it shall be deemed that such inputs had
been supplied by principal to the job worker on the day when the said inputs were sent
out.
(iii) Entitlement to credit on capital goods: The principal can take credit of input tax on
capital goods sent to job-worker subject to the fulfilment of the following conditions:
 The capital goods, after completion of job-work, are received back by him within 3 years
of their being sent out.
 The principal can take credit of capital goods even if such capital goods are sent
directly to job-worker’s place without bringing to principal’s place of business.
 If the capital goods are not received back within 3 years, it shall be deemed that such
capital goods had been supplied by principal to the job worker on the day when the said
capital goods were sent out.

CGST Act 146

Ch-V : Input Tax Credit Sec. 16-21

 Procedures listed in respect of inputs under Rule 10 of the Input Tax Credit Rules will
apply to capital goods also (refer above).
Please note that job-working must not be confused with repair or maintenance. Job-working
creates the functionality of an article but repair or maintenance restores or improves the
functionality already created and possessed by that article or thing.
19.3 Comparative review
Aspect Credit under present Input tax credit under
system CGST
Definition of “job work” Defined in Cenvat Credit Defined to mean undertaking
Rules to mean processing of any treatment or process by
material supplied to job a person on goods belonging
worker to complete whole or to another registered person
part of manufacturing
process
Eligibility of Cenvat credit to Principal is eligible for Cenvat Similar in CGST. Principal is
principal manufacturer credit eligible for Cenvat credit
Conditions for return of inputs For inputs – 180 days For inputs – 1 year
and capital goods For capital goods – 2 years For capital goods – 3 years
Reversal of credit if Credit to be reversed To be treated as deemed
inputs/capital goods not supply on the day when such
returned within specified time inputs/capital goods are sent
out
Re-credit if goods returned Re-credit allowed Not applicable
after specified time
19.4 Related provisions
Section Description
143 Special procedure for removal of goods for certain purposes
19.5 FAQs
Q1. Whether the principal is eligible to avail input tax credit of inputs sent to job worker for
job work?
Ans. Yes. The principal is eligible to avail the input tax credit on inputs sent to job worker for
job work.
19.6 MCQs
Q1. The inputs sent to job work has to be received back within:
(a) 1 year
(b) 2 years
(c) 180 days

CGST Act 147

Ch-V : Input Tax Credit Sec. 16-21

Ans. (a) 1 year.

Q2. The principal is entitled to avail the credit on capital goods sent to job worker directly:
(a) Yes
(b) No
(c) May be
Ans. (a) Yes.
Q3. If the capital goods sent to job workerhas not been received within 3 years from the
date of being sent:
(a) Principal has to pay amount equal to credit taken on such capital goods
(b) No need to pay amount equal to credit taken on such capital goods
(c) It shall be treated as deemed supply of capital goods to the job worker
(d) None of the above
Ans. (c) It shall be treated as deemed supply of capital goods to the job worker

Statutory provision
20. Manner of Distribution of Credit by Input Service Distributor (ISD)
(1) The Input Service Distributor shall distribute the credit of central tax as central tax or
integrated tax and integrated tax as integrated tax or central, by way of issue of a document
containing, the amount of input tax credit being distributed in such manner as may be
prescribed
(2) The Input Service Distributor may distribute the credit subject to the following
conditions, namely:
(a) the credit can be distributed to recipients of credit against a document containing such
details as may be prescribed;
(b) the amount of the credit distributed shall not exceed the amount of credit available for
distribution;
(c) the credit of tax paid on input services attributable to recipient of credit shall be
distributed only to that recipient;
(d) the credit of tax paid on input services attributable to more than one recipient of credit
shall be distributed amongst such recipient(s) to whom the input service is attributable
and such distribution shall be pro rata on the basis of the turnover in a State or turnover
in a Union Territory of such recipient, during the relevant period, to the aggregate of the
turnover of all such recipients to whom such input service is attributable and which are
operational in the current year, during the said relevant period.
(e) the credit of tax paid on input services attributable to all recipients of credit shall be
distributed amongst such recipients and such distribution shall be pro rata on the basis
of the turnover in a State or turnover in a Union Territory of such recipient, during the

CGST Act 148

Ch-V : Input Tax Credit Sec. 16-21

relevant period, to the aggregate of the turnover of all recipients and which are
operational in the current year, during the said relevant period.
Explanation –For the purposes of this section,
(a) the “relevant period” shall be-
(i) if the recipients of credit have turnover in their States or Union Territories
in the financial year preceding the year during which credit is to be
distributed, the said financial year; or
(ii) if some or all recipients of the credit do not have any turnover in their
States or Union Territories in the financial year preceding the year during
which the credit is to be distributed, the last quarter for which details of
such turnover of all the recipients are available, previous to the month
during which credit is to be distributed.
(b) the expression of ‘recipient of credit’ means the supplier of goods or services or
both having the same Permanent Account Number as that of Input Service
Distributor.
(c) the term ‘turnover’ in relation to any registered person engaged in the supply of
taxable goods as well as goods not taxable under this Act, means the value of
turnover, reduced by the amount of any duty or tax levied under entry 84 of List I
of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the
said Schedule
20.1 Introduction
This Section sets forth the way input tax credit (of services) is distributed to supplier of goods
or services or both of same entity having same PAN. Procedure for distribution is given in Rule
4 of Input Tax Credit Rules.
Analysis
(i) An ISD shall distribute the eligible ITC in accordance with Rule 4 elucidated in the
following paras.
(ii) Input Service Distributor (ISD) is an office of the supplier of goods or services or both
where a document (like invoice) of services attributable to other locations are received
(since they might be registered separately). Since the services relate to other locations
the corresponding credit should be transferred to such locations (having separate
registrations) as services are supplied from there. Care should be taken to ensure that
an inter-branch supply of services should not be misinterpreted as a distribution by ISD.
Please recollect that ISD cannot be an office that does any supply of its own but must
be one that merely collects invoice for services and issues prescribed document for its
distribution.
Examples hereunder are as per rules.
Illustration: Corporate office of XYZ company Ltd., is at New Delhi, having its business
locations of selling and servicing of goods at New Delhi, Chennai, Mumbai and Kolkata. For

CGST Act 149

Ch-V : Input Tax Credit Sec. 16-21

example, if the software license and maintenance is used at all the locations, invoice
indicating CGST and SGST is received at Corporate Office. Since the software is used at all
the four locations, the input tax credit of entire services cannot be claimed at New Delhi. The
same has to be distributed to all four locations. For that reason, the Delhi Corporate office has
to act as ISD to distribute the credit.
Illustration (Rule 4):
Rule 4: Input Tax Credit Rules, 2017
The example Provided below illustrates the application of Rule 4 of the Input Tax Credit Rules
for distribution of credits by an Input Service Distributor (ISD) in terms of Section 20.
Yoko Infotech Ltd. has its head office in Mumbai, for which it additionally has an ISD
registration. The company has 12 units across India including its head office. It receives the
following invoices in the name of the ISD at Mumbai, for the month of January 2018:
Invoice A: Rs. 100,000 @ IGST 18,000 issued by Peace Link Technologies (registered in
Uttar Pradesh) for repairs executed in 2 units – Bangalore, Kolkata, Gurgaon (Note:
Gurgaon location is not registered as it is engaged in making only exempt supplies);
Invoice B: Rs. 300,000 @ CGST 27,000, SGST 27,000 issued by M/s. Tec Force (registered
in Pune) for repairs executed in 3 units – Mumbai, Bangalore, Kolkata;
Invoice C: Rs. 500,000 @ IGST 90,000 issued by M/s.Georgia Marketing (registered in
Bangalore) for marketing services for the company as a whole;
Invoice D: Rs. 10,000 @ CGST 900 & SGST Rs.900 issued by M/s.Gopal Coffee works
(registered in Mumbai) for supply of beverages during the month to its Mumbai unit.
All taxes have been considered at 18% (CGST and SGST at 9% each).
The turnover of each of the units during the year 2016-17 is: Mumbai: 1 crore; Bangalore 2
crore; Kolkata 1 crore; Gurgaon 2 crore; each of the other 8 units: 50 lakhs, resulting in the
aggregate turnover of the company in the previous financial year, of 10 crores.
Distribution of credits by the ISD:
Particulars Invoice Bangalore Kolkata Mumbai Gurgaon 8 units Total
Invoice A
T/o in State Note 1 2 crore 1 crore - 2 crore - 5 crore
Pro-rata 40% 20% - 40% - 100%
ratio
Credit 18,000 7,200 3,600 - 7,200 - 18,000
Type IGST IGST IGST - IGST -
Invoice B
T/o in State Note 2 2 crore 1 crore 1 crore - - 4 crore
Pro-rata 50% 25% 25% - - 100%

CGST Act 150

Ch-V : Input Tax Credit Sec. 16-21

ratio
CGST Credit 27,000
 Distribution 13,500 6,750 6,750 - - 27,000
Type CGST IGST IGST CGST - -
SGST Credit 27,000
 Distribution 13,500 6,750 6,750 - - 27,000
Type SGST IGST IGST SGST - -
Invoice C
T/o in State Note 3 2 crore 1 crore 1 crore 2 crore 0.5 * 8 10
crore crore
Pro-rata 20% 10% 10% 20% 5% * 8 units 100%
ratio
Credit 90,000 18,000 9,000 9,000 18,000 4,500 * 8 90,000
units
Type IGST IGST IGST IGST IGST IGST
Invoice D
Attributable Note 4 - - Yes - - -
to
Credit 900 - - 900 - - 900
(ineligible)
Type CGST - - CGST - -
Credit 900 - - 900 - - 900
(ineligible)
Type SGST - - SGST - -

Credit of CGST, Total eligible credits distributed as CGST, SGST and IGST as
SGST and IGST on applicable
invoice (Refer Note below)
CGST 27,000 - - 6,750 - - 6,750
SGST 27,000 - - 6,750 - - 6,750
IGST 108,000 52,200 26,100 9,000 25,200 4,500 each 148,500
(viz. total of
36,000)
TOTAL 162,000 52,200 26,100 22,500 25,200 36,000 162,000

CGST Act 151

Ch-V : Input Tax Credit Sec. 16-21

It can be seen from the illustration that credit of CGST of Rs. 27,000 is distributed as CGST
credit only to the extent of Rs. 6,750; likewise, credit of SGST of Rs. 27,000 is distributed as
SGST credit only to the extent of Rs. 6,750. This is because, the intra-State service billed to
the ISD is attributable to 1 unit in the same State as the ISD and 2 other units located in
different State. Thus, the balance of CGST credit and SGST credit is distributed as IGST to
such units. This is the reason why the credit of IGST lying with the ISD prior to distribution is
only Rs. 108,000 while the credit of IGST that is distributed aggregates to Rs. 148,500.
Note 1: The credit of IGST should always be distributed as IGST credit to all the units to which
the service is attributable, regardless of where they are located.
 The credits should be distributed only to those units to which the service is attributable.
Given that the service mentioned in the case of Invoice A is attributable only to
Bangalore, Kolkata and Gurgaon, the entire input tax credit applicable to the case
should be distributed to the said 3 units, on a pro rata basis in the ratio of their
respective ‘Turnover in State’ to the aggregate of the 3 ‘Turnover in State’ (i.e., 2 Cr +
1Cr + 2 Cr). Further, no differentiation is made to whether the unit is registered or not,
and therefore, credit attributable to the Gurgaon unit is distributed to that unit although it
is not registered, which implies, it is a loss of credit.
 The ‘turnover in State’ is arrived at a value for the ‘relevant period’. Since all 12 units
were operational during the preceding financial year, the relevant period would be the
preceding financial year.
Note 2: The credit of CGST and SGST should be distributed as IGST credit to all the units
located outside the State in which the ISD is located, and as CGST and SGST respectively, in
case of distribution of credit to a unit located in the same State as the ISD. Thus, the CGST
and SGST credits are distributed as IGST credits to Bangalore and Kolkata, and as CGST &
SGST respectively, to Mumbai.
 Given that the service supplied in terms of Invoice B is attributable only to Bangalore,
Kolkata and Mumbai, the entire input tax credit applicable to the case should be
distributed to the said 3 units, on a pro rata basis in the ratio of their respective
‘Turnover in State’ to the aggregate of the 3 ‘Turnover in State’ (i.e., 2 Cr + 1Cr + 1 Cr).
Note 3: The credit of IGST is distributed as IGST credit to all the units to which the service is
attributable.
 Invoice C relates to a supply of service that is attributable to all the units, and hence,
the credits would be distributed on a pro-rata basis of the ‘Turnover in State’ of each of
the units, to the aggregate of ‘Turnover in State’ of all the 12 units, i.e., Rs.10 Cr.;
 For convenience of presentation, only one column is shown to reflect the distribution to
each of the 8 units, having the same ‘turnover in State’, and to which the same invoice
is attributable.
Note 4: Given that the services for receipt of food and beverages would not be eligible input
services, the taxes relating to Invoice D should be distributed as ineligible input tax (900 +
900), and the distribution must be done separately.

CGST Act 152

Ch-V : Input Tax Credit Sec. 16-21

Since the service is wholly attributable to the Mumbai unit, the distribution is done only to such
unit.
(iii) Distribution of credit where ISD and recipient are located in different States under
CGST Act: As per Rule 4(1) (e) of ITC Rules ISD shall distribute as prescribed, credit of
CGST as CGST or IGST and credit of IGST as IGST by issuing prescribed document
mentioning the amount of credit distributed to recipient of credit located in different
States.
Illustration: In the above illustration, if the corporate office of XYZ Ltd being an ISD
situated in Delhi receives invoices indicating ` 4 lakhs of CGST in one service and ` 7
lakhs as of IGST in another case. It shall distribute CGST of ` 4 Lakhs as CGST or as
IGST and credit of IGST of ` 7 Lakhs also as IGST to its locations at Chennai, Mumbai
and Kolkata under a prescribed document containing the amount of credit distributed.
(iv) Distribution of credit where ISD and recipient are located in different States under
SGST Act: ISD could distribute as prescribed credit of SGST as IGST only (and not as
SGST of other State) by issuing a prescribed document containing the amount of credit
distributed.
Illustration: In the above illustration, corporate office of XYZ Ltd., also received SGST
of ` 6 Lakhs along with ` 4 Lakhs of CGST. It can distribute SGST credit as IGST to its
locations at Chennai, Mumbai and Kolkata under a prescribed document containing the
amount of credit distributed.
(v) Distribution of credit where ISD and recipient are located within the State under
CGST Act: In cases where an entity has different registration within the same State by
an entity, it may have to distribute credit to such location also similar to locations with
different registrations outside the State. In order to enable the same, it is Provided that
ISD can distribute in the prescribed manner, credit of CGST as CGST and credit of
IGST as IGST by issuing prescribed document mentioning the amount of credit
distributed to recipient being a business vertical.
Illustration: ABC Ltd., having its office at Bangalore is having another business vertical
in Mysore which is separately registered. In such a case out of input tax credit of ` 4
lakhs of CGST. The credit attributable to ABC Ltd, Bangalore, shall be distributed to
Mysore location as CGST. Similarly out of input tax credit of Rs. 10 Lakh of IGST, the
credit attributable to ABC Ltd, Banglore shall be distributed to Mysore location as IGST.
(vi) Distribution of credit where ISD and recipient are located within the State under
SGST Act: Similar to the provisions of CGST as indicated supra under CGST Act, even
under the SGST Act, it is Provided that an ISD can distribute in the prescribed manner,
credit of SGST and IGST as SGST (of the same State and none other State) by issuing
prescribed document mentioning the amount of credit distributed to recipient being a
business vertical.
Illustration: In the same example of ABC Ltd., above the input tax credit say ` 6 lakhs
of SGST shall be distributed as SGST.

CGST Act 153

Ch-V : Input Tax Credit Sec. 16-21

(vii) Conditions to distribute credit by ISD: The conditions to distribute the credit by ISD
are as follows:
(a) Credit to be distributed to recipient under prescribed documents containing
prescribed details. Such document should be issued to each of the recipient of
credit.
(b) Credit distributed should not exceed the credit available for distribution.
(c) Tax paid on input services used by a particular location (registered as supplier),
is to be distributed only to that location.
(d) Credit of tax paid on input service used by more than one location who are
operational is to be distributed to all of them based on the pro rata basis of
turnover of each location in a State to aggregate turnover of all such locations
who have used such services.
Note: The period to be considered for computation is the previous financial year of that
location. If it does not have any turnover in the previous financial year, then previous quarter
of the month to which the credit is being distributed.
(viii) For a detailed discussion on Tax invoice or Credit note to be issued by an ISD
reference maybe made to Chapter VII. The said Chapter VII clearly indicates the
particulars to be included in such a document.
Illustration 1: A Ltd as an ISD has input service credit of ` 35 lakhs used by more than one
locations, to be distributed among recipients locations X, Y and Z. The turnover of X, Y, Z in
preceding financial year, is ` 10 crores, ` 15 crores and ` 5 crores respectively. The credit of
` 5 lakhs pertains to input service received only by Z. The credit attributable to X, Y, Z are as
follows:
Particulars Amount (in `)
Total Credit to be distributed as ISD 35 Lakhs
Credit of service used only by Z location 5 Lakhs
Credit available for distribution for all units 30 Lakhs
Credit distributable to X 10 Lakhs
10 crores / 30 crores * 30 Lakhs
Credit distributable to Y 15 Lakhs
15 crores /30 crores * 30 Lakhs
Credit distributable to Z 10 Lakhs
5 crores / 30 crores * 30 Lakhs 5 Lakhs
Credit directly attributable to Z 5 Lakhs
Illustration 2: Distribution of input tax credit by an ISD to its units is shown as under:
M/s XYZ Ltd, having its head Office at Delhi, is registered as ISD. It has three units in different
State namely ‘Delhi’, ‘Jaipur’ and ‘Gujarat’ which are operational in the current year. M/s XYZ

CGST Act 154

Ch-V : Input Tax Credit Sec. 16-21

Ltd furnishes the following information for the month of July 2018 & asks to distribute the
credit to various units.
(i) CGST paid on services used only for Delhi Unit: ` 300000/-
(ii) IGST, CGST & SGST paid on services used for all units: ` 1200000/-
(iii) Total Turnover of the units for the Financial Year 2017-18 are as follows:-
Unit Turnover (`)
Delhi 5,00,00,000
Jaipur 3,00,00,000
Gujarat 2,00,00,000
Total 10,00,00,000
Solution: Computation of Input Tax Credit Distributed to various units: -
Particulars Total Delhi Jaipur Gujarat
Credit
Credit distributed to all Units
Available
CGST paid on 300000 300000 0 0
services used only
for Delhi Unit.
IGST, CGST & SGST
paid on services 1200000 600000 360000 240000
used in all units-
Distribution on pro
rata basis to all the
units which are
operational in the
current year (Refer
Note1)
Total 1500000 900000 360000 240000
Note 1: Credit distributed pro rata basis based on the turnover of all the units are as under: -
(a) Unit Delhi: (50000000/100000000)*1200000 = ` 600000
(b) Unit Jaipur: (30000000/100000000)*1200000 = ` 360000
(c) Unit Gujarat: (20000000/100000000)*1200000 = ` 240000
Relevant period for distribution of credit:
(a) If the recipient of credit has turnover in their State in preceding financial year of the year
in which credit is distributed – Such financial year.
(b) If some or all recipients do not have any turnover in their State in preceding financial
year of the year in which credit is distributed – Last quarter for which details of such

CGST Act 155

Ch-V : Input Tax Credit Sec. 16-21

turnover of all the recipients are available, previous to the month during which credit is
to be distributed.
The analysis of above provision in a pictorial form is summarised as follows:
Input Service Distributor – Sec. 20.
 ITC is distributed to supplier of goods or services or both of same entity having the
same PAN
 Common Services used at for

Office/
Distribution of Credit where ISD and recipient are
Corporate located in different State under CGST ACT or SGST
office of ACT
Supplier Distribution of Credit where ISD and recipient are
located in within State under CGST ACT or SGST ACT

Input Service Distributor

Illustration 3: Consider an example where a Company has a Branch-M in Mumbai and a

Branch-D in Delhi. This Company is also incorporated in Delhi. Branch-M incurs various
expenses that are supply of services in Delhi where CGST-SGST is liable to be charged in
Delhi by that supplier. Obviously, credit of this tax cannot be availed by Branch-D because the
underlying expense is not ‘in relation to business’ of Branch-D because it is exclusively in
relation to business of Branch-M. When credit cannot be claimed by Branch-D and Branch-M
does not want to forego this credit, the option available is for Branch-M to obtain ISD
registration in Delhi. Now, in exactly, the same manner, if Branch-M incurs expenses in
Maharashtra (say in Nasik), the implications would be that credit not allowable to Branch-M for
these supplies and Branch-D is eligible to obtain ISD registration in Maharashtra, if credit is
not to be foregone.

CGST Act 156

Ch-V : Input Tax Credit Sec. 16-21

From this example, the following questions arise for careful consideration:
Question Response
(i) Is ISD registration required in ‘all but Yes. If tax charged by the supplier is not
one’ States for a registered taxable IGST but CGST-SGST of the host-State
person? where supplies are taking place, then a
(All but one may all States/UT other registered taxable person would require ISD
than Home State) registration in each those host-States except
home-State
(ii) Is ISD registration an entity-level office Yes, ISD is an entity-level office because
in a given State or is it a registered section 2(61) defines ISD as “....means an
taxable persons-specific office in other office of the supplier ….which receives tax
States (outside the home State of that invoice…..” It does not say it is an “office of
registered taxable person)? the registered taxable person which receives
tax invoice….”
(iii) Will ISD registration be required for No. One entity-level ISD registration in all
each registered taxable person in ‘all States will suffice for credit distribution
but one’ States? requirement of all registered taxable persons
(All but one may all States/UT other having same PAN
than Home State)
(iv) Can an ISD distribute credit of taxes No, since ISD is an entity-level registration,
paid in that State alone (whether IGST one ISD in a State can distribute credit to all
or CGST-SGST) to registered taxable registered taxable persons in all other States
persons in all other States or only to having same PAN. Further, this ISD can also
that State for whose benefit the ISD distribute credit to separately registered
registration was obtained? business verticals in that same State
(v) When GSTIN registration is obtained in Yes, GSTIN registration does not permit
one State, is there any need to also distribution of credit. If taxes are paid that is
obtain ISD in the same State or is not related to the business of that registered
GSTIN and ISD registrations mutually taxable person in that State, then for want of
exclusive in a given State? ‘nexus’, credit cannot be availed by him. And
to save from loss of credit, ISD registration is
the only option to distribute this credit
whichever registered taxable person (called
‘recipient of credit’) satisfies this nexus test.
(vi) Can a Company who has independent Yes, absolutely. This is because each
operations in all 29 States and 2 UTs registered taxable person stated to be truly
and is therefore registered in all 31 independent of other business (of registered
locations also be required to have 31 taxable persons) and receives supplies in
ISD registrations? those host-States where CGST-SGST paid in
those host-States is to be distributed to the
relevant home-State
(vii) Is it possible, when GSTIN registration No, for the reasons stated in (vi) & (i) above,

CGST Act 157

Ch-V : Input Tax Credit Sec. 16-21

is already available in any given State, it would not be possible to avoid ISD
for the Company to completely avoid registration
ISD registration?
(viii) If a Company, in order to avoid ISD It is possible that a Company may consider
compliances, decides to avoid ISD the possibility doing so subject to legitimate
registration in every State where it is credits which can be availed as an ISD
already having GSTIN registration?
(ix) If a Company were to instruct all Yes, it is possible for a Company to misdirect
registered taxable persons in a State a supplier. This supplier will only look for
who may have credit loss in other States genuine GSTIN and similarity of name. It is
misdirect the suppliers into issuing tax not the supplier’s responsibility to examine
invoice with GSTIN of that State? ‘nexus’ while issuing tax invoice
(x) Is ISD registration, therefore, necessary Yes, as explained in (vii) above, ISD
in every State where this ‘nexus’ test registration is necessary in every State where
cannot be fulfilled by each registered ‘nexus’ test is not fulfilled
taxable person?
(xi) Therefore, if multiple ISD registrations Yes, only if ‘nexus’ is established between
or GSTIN-plus-ISD registrations are the ‘no nexus’ supplies in a State and the
unavoidable (as explained above), is registered taxable person in that same State.
there any solution to resolve this If no such ‘nexus’ exists, credit claim by
multiplicity of monthly and quarterly registered taxable person becomes improper.
compliances? If nexus is established, please examine
valuation of inter-branch supply of services is
as per proviso to Rule 2 or as per Rule 4 of
Valuation Rules
ISD is not merely a matter of compliance but involves great revenue implications to a
registered taxable person. Compliance will also not be nominal. So, this is yet another
indicator that the business model that has been in place until now has reached end-of-life and
a new model needs to be examined. Please consider the following example of a CA in practice
with branches in 3 States where the facts are as follows:
Common facts for consideration:
Head office Maharashtra
Branch offices West Bengal and Delhi
Client base All 3 States
Skills based Distributed in all offices, based on the assignment, staff from all offices
join to complete the assignment
Completion Sign-off only by Partners who are in Maharashtra and West Bengal

Business models and their comparison are as follows:

CGST Act 158

Ch-V : Input Tax Credit Sec. 16-21

Criteria Under Current Law Under GST Law – A Under GST Law – B
ST (GST) Centralized at Mumbai All 3 branches All 3 branches
registration
Billing to From all 3 offices From Mumbai only From all 3 offices
clients
Internal None Branches issue tax Every branch including
billing invoice to HO at ‘cost HO to bill each other for
plus 10%’ as per Rule 4 their respective
of Valuation Rules contribution on ‘revenue
split’ or ‘proportion of
contribution’ method
ST credit of Availed at Mumbai due Branches and HO avail Branches and HO avail
branches to centralized input tax credit on tax input tax credit on tax
registration (ISD invoices issued by invoices issued by
registration not required) respective suppliers respective suppliers
including internal bills
ST credit at Mumbai credits, entity- HO retains credit of all HO retains credit of all
HO level credits and branch- entity-level credits and entity-level credits
specific credits also avails credit of tax
invoice issued by
branches
Loss, cost None IGST outflow on non- Nexus risk on credits:
or risk credit costs included in  entity-level costs like
valuation and 10% mark- audit fee
up. Non-credit costs of  central vendor bills
branches are salaries, like data-telecom,
depreciation, etc. travel, etc.
Administrative challenge
in assignment-level
billing allocation
Mitigation NA Branch to invoice HO on GST does not impose
30th in respect of client- any ‘one-to-one’
level billings due on 1st correlation of credits.
of next month so that the Entity-level credit can be
incremental IGST contended to be allowed
outflow from HO to in HO.
branches is recovered Assignment-level billing
quickly allocation left to each
branch to self-regulate

CGST Act 159

Ch-V : Input Tax Credit Sec. 16-21

There is no doubt that the above are not recommendations but case for comparative
illustration regarding application of the law to a business and to highlight that it is impossible
to continue the current business model in GST, at least in many sectors.
The illustrations considered in this section are matters to be considered for discussion/
deliberations only and are not views envisaged. The reader may or may not agree with the
views in the discussion in this Chapter/section.
20.2 Comparative review
These provisions are similar to the provisions contained in the Rule 7 of CENVAT credit rules
for distribution of credit of input service by an ISD.
It appears that the distribution of credit among the recipients prescribed in CENVAT credit
Rules has been continued in proposed GST law. The conditions for distribution of credit for
each recipient also appear to be continued as before.
20.3 Related provisions
Section Description
Section 2(61) Definition of Input Service Distributor
Explanation to Section 20(2) Definition of relevant period.
20.4 FAQ
Q1. Whether CGST and IGST credit can be distributed by ISD as IGST credit to units
located in different States?
Ans. Yes. CGST credit can be distributed as IGST and IGST credit can be distributed as
IGST by an ISD for the units located in different States.
Q2. Whether SGST credit can be distributed as IGST credit by an ISD to units located in
different States?
Ans. Yes. ISD can distribute SGST credit as IGST for the units located in different States.
Q3. Whether the ISD can distribute the CGST and IGST Credit as CGST credit?
Ans. Yes. CGST and IGST credit can be distributed as CGST credit by an ISD.
Q4. Whether the SGST and IGST Credit can be distributed as SGST credit?
Ans. Yes. ISD can distribute SGST and IGST credit as SGST.
Q5. What are the conditions to be fulfilled by ISD to distribute the credit?
Ans. The conditions to be fulfilled by ISD to distribute credit are:
(a) Credit distributed to recipient under prescribed documents, which is issued to
each of the recipient of credit.
(b) Credit distributed should not exceed the credit available for distribution.
(c) Tax paid on input services used by a particular location (registered as supplier),
to be distributed only to that location.
(d) Credit of tax paid on input service used by more than one location who are

CGST Act 160

Ch-V : Input Tax Credit Sec. 16-21

operational is to be distributed to all of them based on the pro rata basis of

turnover of each locations in a State to aggregate turnover of all such locations
who have used such services.
Q6. What are the documents through which the credit can be distributed by ISD?
Ans. The document under which the credit can be distributed is yet to be prescribed. The act
provides that the credit can be distributed only through prescribed document.
Q7. How to distribute common credit among all the units of a ISD?
Ans. The common credit used by all the units can be distributed by ISD on pro rata basis i.e.
based on the turnover of each unit to the aggregate turnover of all the units to which
credit is distributed.
20.5 MCQ
Q1. The ISD may distribute the CGST and IGST credit to recipient outside the State
as_______
(a) IGST
(b) CGST
(c) SGST
Ans. (a) IGST
Q2. The ISD may distribute the CGST credit within the State as____
(a) IGST
(b) CGST
(c) SGST
(d) Any of the above.
Ans. (b) CGST
Q3. According to the condition laid down for distribution of credit, ISD can distribute_____
(a) Credit in excess of credit available
(b) Only certain percentage of total credit available
(c) Credit equal to the total credit available for distribution.
(d) All of the above.
Ans. (c) Credit equal to the total credit available for distribution.
Q4. The credit of tax paid on input service used by more than one supplier is ________
(a) Distributed among the suppliers who used such input service on pro rata basis of
turnover in such State.
(b) Distributed equally among all the suppliers
(c) Distributed only to one supplier.
(d) Cannot be distributed.
Ans. (a) Distributed among the suppliers who used such input service on pro rata basis of
turnover in such State.

CGST Act 161

Ch-V : Input Tax Credit Sec. 16-21

Statutory provision
21. Manner of recovery of credit distributed in excess
Where the Input Service Distributor distributes the credit in contravention of the provisions
contained in section 20 resulting in excess distribution of credit to one or more recipients of
credit, the excess credit so distributed shall be recovered from such recipient(s) along with
interest, and the provisions of section 73 or 74, as the case may be, shall apply mutatis
mutandis for determination of amount to be recovered
21.1 Introduction
The CGST Act clearly lays down that credit distribution is not ‘to self’, that is, a registered
taxable person cannot distribute credit to himself. Each registered person being a distinct
person u/s 25, must distribute to another registered taxable person but having the same PAN
to whom the credit is most accurately attributable. And the consequence of incorrect
distribution, due to inadvertence or misapplication of the provisions, are discussed here.
21.2 Analysis
(i) Excess Credit distributed in contravention of provision:
Excess credit distributed to one or more recipient of credit in contravention of ISD
provision under Section 20 is recoverable from the recipient of such credit along with
Interest. The recovery will be under the provisions of Section 73 or 74.
Example-1 Total Credit Available to ISD is 15,00,000/- & the credit distributed to all the
units is ` 16,50,000/- (i.e. Delhi 10,00,000, unit Jaipur ` 4,00,000 & unit Gujarat `
2,50,000). What will be the consequences?
Solution: The excess credit of 1,50,000 (` 16,50,000- ` 15,00,000) distributed will be
recovered from the recipient along with interest and the provisions of section 73 or 74
shall apply mutatis mutandis for effecting such recovery.
Example-2 Total Credit Available to ISD is ` 15,00,000/- & the credit should have been
distributed equal to all the units as all units had equal turnover, however credit
distributed in violation of Section 21, as under:
Delhi ` 7,00,000, Jaipur ` 6,00,000, Gujarat ` 2,00,000.
What will be the consequences?
Solution: The excess credit of ` 2,00,000 (` 7,00,000- ` 5,00,000) shall be recovered
from Delhi and ` 1,00,000 (` 600,000 – ` 5,00,000) shall be recovered from Jaipur
along with interest and the provisions of section 73 or 74 shall apply mutatis mutandis
for effecting such recovery.
The analysis of above provision in a pictorial form is summarised as follows:

CGST Act 162

Ch-V : Input Tax Credit Sec. 16-21

Excess Credit distributed by Input Service Distributor

Excess Credit Distributed by ISD

Credit distributed in excess of Excess credit distributed to

what was available one or more Recipient of credit

Recovery of such excess credit with

interest from the recipient of credit.
21.3 Comparative review
Currently recovery provision is specified in Rule 14 of CENVAT Credit Rules. The CENVAT
credit taken or utilized wrongly or has been erroneously refunded, is recovered along with
interest under the provisions of sections 11A and 11AB of the Excise Act or sections 73 and
75 of the Finance Act.
Currently, there is no specific provision for excess distribution of credit by ISD. Now specific
provision is Provided in the proposed GST law providing for recovery of amount along with
interest. Further, the relevant period for recovery of excess amount distributed is also
Provided in GST law.
21.4 Related provisions
Section Description
Section 20 Manner of distribution of credit by Input service distributor
Section 73 Determination of tax not paid or short paid or erroneously refunded or
input tax credit wrongly availed or utilized for any reason other than fraud
or any wilful misstatement or suppression of facts.
Section 74 Determination of tax not paid or short paid or erroneously refunded or
input tax credit wrongly availed or utilized due to fraud or any wilful-
misstatement or suppression of facts.
21.5 FAQ
Q1. Whether the excess credit distributed could be recovered by the department?
Ans. Yes. Excess credit distributed could be recovered along with interest from recipient by
the department.
Q2. What are the consequences of credit distributed in contravention of the provision of the
Act?
Ans. The credit distributed in contravention of the provision of the Act is to be recovered from
the unit to which it is distributed along with interest.

CGST Act 163