This article deals with the eligibility and conditions for taking input tax credit under GST with the help of the case laws and various provisions.
What is Input Tax Credit under GST With Example?
Input Tax Credit refers to the credit a registered taxpayer can claim for the GST paid on purchases of goods or services that are used to supply taxable goods or services. The mechanism ensures the seamless flow of credit across the supply chain, reducing the cascading effect of taxes.
For example, a business pays Rs.10,000 GST on purchases and collects Rs.15,000 GST from sales, it can claim Rs.10,000 as ITC, paying only the balance Rs.5,000 to the government.
Section 16: Eligibility And Conditions For Taking Input Tax Credit
Eligibility for Input Tax Credit (ITC)
- A registered person can claim ITC for input tax charged on goods or services used for business purposes.
- The amount will be credited to their electronic credit ledger as per Section 49.
Conditions for ITC Eligibility
No ITC can be claimed unless:
Possession of Documents
The person has a tax invoice, debit note, or prescribed tax-paying document issued by a registered supplier.
Supplier Details Furnished
The supplier has furnished the invoice/debit note details in their outward supplies statement, and the recipient has received the same under Section 37.
Receipt of Goods or Services:
The goods/services must be received by the recipient.
For deemed receipt: – Goods delivered to another person as directed by the recipient before/during transport.
Services provided on the recipient’s direction.
No Restriction under Section 38
The input tax credit claimed should not be restricted in the Section 38 communication.
Payment of Tax
The tax must be paid to the government (via cash or ITC).
Return Filing
The recipient has furnished their tax return under Section 39.
Special Provisions for Goods in Lots/Installments:
ITC can only be claimed after receiving the last lot/instalment of goods.
Non-Payment to Supplier (180-Day Rule):
If the recipient doesn’t pay the supplier for goods/services (excluding reverse charge supplies) within 180 days from the invoice date:
- ITC availed must be reversed and interest paid.
- ITC can be reclaimed upon payment to the supplier.
Depreciation Clause
ITC cannot be claimed if depreciation has been claimed on the tax component of capital goods or plant and machinery under the Income Tax Act, 1961.
Time Limit for Claiming ITC
ITC cannot be claimed for invoices/debit notes after the 30th of November following the financial year or furnishing of the annual return, whichever is earlier.
Transitional Provisions
- ITC for the financial year 2017–18 was extended till March 2019 under certain conditions.
Extended Claim Period for Older Financial Years
- For financial years 2017-18 to 2020-21, ITC can be claimed in any return filed up to 30th November 2021.
Cancellation and Revocation of Registration
If registration is canceled and later revoked, ITC for relevant invoices/debit notes can be claimed:
- By 30th November following the financial year or filing the annual return, whichever is earlier.
- Within 30 days from the revocation date for the period between cancellation and revocation.
Section 17: Apportionment of credit and blocked credits
Partial Business Use
If goods/services are used partly for business and partly for other purposes, ITC is restricted to the portion attributable to business.
Taxable and Exempt Supplies
If used partly for taxable (including zero-rated) and exempt supplies, ITC is restricted to the portion attributable to taxable supplies.
Definition of Exempt Supplies
Includes reverse charge transactions, securities, sale of land, and sale of buildings (except construction taxed under Schedule II).
Excludes activities/transactions in Schedule III (except as mentioned in Paragraph 5).
Banking & Financial Institutions
They may opt for:
- Either proportionate credit as per taxable supplies or
- Claim 50% of eligible ITC each month (rest lapses).
Exception: This restriction doesn’t apply to supplies made between entities under the same PAN.
Blocked ITC Items
ITC is not allowed for:
(a) Motor Vehicles, Vessels, and Aircraft:
- Blocked: For passenger vehicles (up to 13 persons), vessels, and aircraft.
- Allowed When Used For:
- Further supply (selling/renting/leasing).
- Passenger transportation.
- Training (driving, flying, navigating).
- Transportation of goods.
(b) Related Services:
- General insurance, servicing, repair, and maintenance of motor vehicles, vessels, or aircraft (exceptions apply).
(c) Specific Supplies of Goods/Services:
- ITC is disallowed for the following unless mandatory by law or used for similar outward taxable supplies:
- Food, beverages, and catering.
- Beauty treatment, health services, and cosmetic surgery.
- Club memberships and fitness centers.
- Travel benefits for employee vacations.
(d) Construction Services/Goods:
- ITC is disallowed for:
- Works contract services for building immovable property (except when for resale).
- Construction materials/services used on the taxpayer’s own account, including renovations or repairs capitalized in books.
(e) Special Cases:
- Goods/services taxed under composition scheme (Section 10).
- Goods/services used by non-residents (except imported goods).
- Personal use items.
- Goods lost, stolen, destroyed, written off, or given as gifts/samples.
- Tax paid under Sections 74 (fraud cases), 129 (detention/seizure), and 130 (confiscation).
Additional Provisions
- Manner of Attribution
The government may prescribe rules for how ITC is apportioned.
- Definition of “Plant and Machinery”
- Includes machinery fixed to earth (foundations/support) for outward supply.
- Excludes land, buildings, telecom towers, and external pipelines.
Time limit for claiming ITC under GST
A registered person can claim ITC on an invoice or debit note up to the earlier of the following dates:
- 30th November of the year following the relevant financial year.
- Date of filing the annual return under Section 44.