The Central Board of Indirect Taxes and Customs (CBIC) has clarified the application of the 50% input tax credit (ITC) option available to banks, financial institutions and non-banking financial companies (NBFCs) under Section 17(4) of the Central Goods and Services Tax Act, 2017.
The Board has addressed which registrations can exercise the option, when other registrations of the same institution must follow it, and the circumstances in which supplies between registrations having the same Permanent Account Number (PAN) qualify for relaxation from the 50% restriction.
The circular also prescribes the manner of reporting ITC availment and reversals in FORM GSTR-3B, including the treatment of invoices through the Invoice Management System (IMS). Significantly, it advises field formations against taking an adverse view of different reporting methods adopted in earlier periods, provided the amount of ITC availed accords with the principles clarified.
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The clarification follows representations about varying practices adopted by banks and financial institutions in apportioning credit towards taxable supplies, including zero-rated supplies.
50% ITC Option Depends On Activities Of Each Registration
Section 17(4) provides an option to eligible banks and financial institutions, including NBFCs engaged in accepting deposits or extending loans and advances, to avail 50% of eligible ITC instead of proportionate credit under Section 17(2).
The CBIC has clarified that eligibility for this option must be examined with reference to the activities of the individual GST registration, described in the circular as a “distinct person”.
A registration that does not undertake the specified deposit-taking or lending activities neither has the option nor is required to comply with Section 17(4), even if it belongs to a banking company or financial institution.
The circular gives the example of a registration engaged exclusively in bullion trading. Such a registration cannot adopt the 50% mechanism merely because it forms part of a bank or financial institution.
Conversely, a registration undertaking the specified banking or lending activities can exercise the option even if it also supplies other services.
One Registration’s Choice Binds Other Qualifying Registrations
The circular clarifies that qualifying registrations of the same institution cannot independently choose different ITC apportionment methods once one of them opts for Section 17(4).
Where one eligible registration exercises the option, all other registrations of that banking company or financial institution that undertake the specified deposit-taking or lending activities must also comply with Section 17(4).
This requirement also covers qualifying registrations that supply other services alongside those activities.
The distinction is significant for institutions operating through multiple GST registrations: registrations undertaking the specified financial activities must follow the common approach, while registrations exclusively undertaking unrelated activities remain outside the Section 17(4) option.
Same PAN Alone Does Not Qualify Supplies For Relaxation
The Board has also clarified the scope of the second proviso to Section 17(4), which provides relaxation from the restriction on availing only 50% of eligible ITC.
According to the circular, this relaxation is available only for supplies received from another registration having the same PAN where that supplying registration has also opted to comply with Section 17(4).
Therefore, a common PAN by itself is insufficient. The supplying registration must also fall within the Section 17(4) framework.
This clarification is relevant to institutions with registrations carrying on different activities. Supplies from a same-PAN registration outside that framework do not qualify for the relaxation merely because the supplier and recipient belong to the same institution.
GSTR-3B Reporting Where IMS Was Not Used
The circular sets out a sequence for determining eligible credit and reporting reversals under Section 17(4), read with Rule 38 of the CGST Rules.
Where IMS was not used, the taxpayer must first ascertain the eligibility of ITC from the amount auto-populated in GSTR-3B from GSTR-2B, excluding reverse-charge credit, together with ITC claimed on inward supplies liable to reverse charge.
For credit established as eligible under Section 16, the following procedure applies:
- Credit on inputs and input services used for non-business purposes, and credit attributable to supplies covered by Section 17(5), must be permanently reversed in Table 4(B)(1).
- Credit on inputs and input services covered by the second proviso to Section 17(4) may be availed.
- Of the remaining ITC, 50% is admissible. The balance must be permanently reversed in Table 4(B)(1) of GSTR-3B for the same tax period.
The procedure distinguishes permanent reversals from credit that is temporarily unavailable because the conditions for eligibility have not yet been fulfilled.
Temporarily Ineligible Credit Can Be Reclaimed On Fulfilling Conditions
Where ITC cannot presently be established as eligible because conditions under Section 16 remain unfulfilled, but may become eligible later, it must be temporarily reversed in Table 4(B)(2) of GSTR-3B for that tax period.
Once the requisite conditions are fulfilled, the credit may be reclaimed in Table 4(A)(5) of a subsequent return, subject to the time limit under Section 16(4).
The reclaimed credit must then undergo the applicable eligibility, availment and reversal procedure described in the circular. It must also be disclosed in Table 4(D)(1) of the subsequent period’s GSTR-3B.
Thus, reclaiming temporarily reversed credit does not remove the requirement to apply the Section 17(4) restriction wherever applicable.
IMS: Invoices For Potentially Eligible Future Credit Must Be Kept Pending
The circular separately addresses the procedure after notification of CGST Rules amendments relating to IMS, expressly including cases where IMS was used before those amendments.
Under this procedure, taxpayers may accept, reject or keep pending invoices and other inward-supply documents received through IMS.
Where credit is presently ineligible because a Section 16 condition has not been fulfilled, but may become eligible in future, the corresponding invoice or document must be kept pending on IMS.
Such credit will consequently remain unavailable in GSTR-2B and will not be auto-populated in GSTR-3B.
Credit relating to accepted and deemed-accepted documents will become available in GSTR-2B and flow into GSTR-3B. The taxpayer must then apply the prescribed availment and reversal procedure to the relevant auto-populated credit, together with credit claimed on reverse-charge inward supplies.
Protection For Past Reporting Methods, Subject To Correct Credit Availment
Recognising that taxpayers may have followed different reporting practices in earlier periods, the CBIC has directed field formations not to take an adverse view solely because a different methodology was used.
This protection is conditional: the amount of ITC availed under Section 17(4) must be consistent with the principles set out in the circular.
The clarification therefore addresses differences in reporting methodology; it does not provide blanket acceptance of excess or otherwise inadmissible credit.
Issued under Section 168(1) of the CGST Act to ensure uniform implementation, the circular asks authorities to issue suitable trade notices publicising its contents and to bring implementation difficulties to the Board’s attention.
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