In-depth analysis of Section-16 - Input Tax Credit under GST Act 2016

By Registrationwala

4th April 2017

 

GST is an abbreviation for Goods and Services. The Goods and Services Tax Bill, or the GST Bill, is formally known as The Constitution (One Hundred and First Amendment) Bill, 2014 and intends a national Value Added Tax (VAT) for all of India from 1st April, 2017.

What is Value Added Tax?

Value Added Tax is a consumption tax imposed on the amount by which the value of a product increases at each stage of its production and for the final sale as well.

What is Input Tax Credit?

Input Tax Credit is the credit manufacturers receive for paying taxes towards the inputs used in the manufacture of products. So, in a way, Input Tax Credit is a system that enables the dealer to balance the input tax against the output tax. It should be noted that the dealers are not eligible for input tax credit on all inputs; respective State acts specify the restrictions and conditions on the eligibility of input tax credit.

One of the biggest advantages of the implementation of GST Act would be the unhindered flow of credit and it would be brought about by making Input Tax Credit available to the purchasing dealer in respect to the Goods and Services Tax paid by the supplying dealer.

Below is a detailed analysis of Section 16 that deals with the above in detail. 

Sub-section What it says Detailed Analysis
 1 Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 35, be entitled to take credit of input tax admissible to him and the said amount shall be credited to the electronic credit ledger of such person

Section 16(1)  specifies that every tax payer is eligible for the credit of taxes paid subject to specifications in 35(5) which says: 

  • The amount of input tax credit on account of IGST available in the electronic credit ledger shall first be utilized towards payment of IGST and the amount remaining, if any, may be utilized towards the payment of CGST and SGST, in that order.
  • The amount of input tax credit on account of CGST available in the electronic credit ledger shall first be utilized towards payment of CGST and the amount remaining, if any, may be utilized towards the payment of IGST.
  • The input tax credit on account of CGST shall not be utilized towards payment of SGST. 

To simplify, ITC will be utilized in the following sequence: 

IGST: IGST > CGST > SGST

CGST: CGST > IGST

SGST: SGST > IGST 

IGST: Integrated Goods and Services Tax

CGST: Central Goods and Services Tax

SGST: State Goods and Services Tax
 2 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, subject to such conditions and restrictions as may be prescribed, 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   

To get hold of inputs held as stock and for inputs contained in semi finished or finished goods held as stock, the person needs to get himself registered within 30 days

Important: 30 days needs to be counted from the day the person was liable to take registration.

Liability to take registration arise under Section 9 read with Schedule III, which states that a person becomes liable for registration when his aggregate

turnover in a financial year exceeds Rupees Ten lakh. A threshold of 5 lacs applies only if a taxable person conducts his business in any of the North Eastern States including Sikkim.
 3  Where any registered taxable person ceases to Section 8 deals with pay tax under section 8, he shall, subject to such conditions and restrictions as may be prescribed, 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 section 7  

Section 8 deals with Composition Levy. A Person registered under composition shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax. 

But if he quits composition, he then may take Input Tax Credit from day immediately preceding the date on which he becomes liable to pay taxes under Sec  7.
 3A  A taxable person shall not be entitled to take input tax credit under sub-section (2), (2A) or subsection (3)in respect of any supply of goods and / or services to him after the expiry of one year from the date of issue of tax invoice relating to such supply.  ITC can be claimed within a period of 1 year from the date of invoice relating to such supply, much similar to the existing CCR- 2004 rules.
 4 The amount of credit under sub-section (2), (2A) or sub-section (3) shall be calculated in accordance with generally accepted accounting principles in such manner as may be prescribed. Generally Accepted Accounting Principles, or GAAP, is a collection of commonly-followed accounting rules and standards that companies must follow when they compile their financial statements. GAAP has been stuck to because it improves the clarity of the communication of financial information which is ever so complicated already.
 5 Where the goods and/or services are used by the registered taxable 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. ITC can be only claimed for parts that are commercialized, that is they are up for business. In cases where other portions are used for different purposes, input tax credit for said goods will be available proportionately.
 6 Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting nontaxable supplies, including exempt supplies but excluding zero-rated supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero rated supplies  When goods are partially for taxable supply and partially for exempted supply, credit of ITC shall be restricted only to extend of goods or services used for GST Taxed good or services. The portion used for exempted supply will not be eligible for input tax credit.
 7 The Central or a State Government may, by notification issued in this behalf, prescribe the manner in which the credit referred to in subsections (5) and (6) above may be attributed  Central or State government is empowered to make rules and issue notifications according to this section.
 8 Where there is a change in the constitution of a registered taxable 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 taxable person shall be. A registered taxable person is allowed to transfer the unutilized credit to old, merged, demerged, amalgamated, leased or transferred business in the manner prescribed
 9 Not with standing anything contained in sub-section (1), (2), (2A) or (3) input tax credit shall not be available in respect of the following -  
 9A motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services— (i) transportation of passengers, or (ii) transportation of goods, or (iii) imparting training on motor driving skills  

Much like CCR-2004, ITC may be claimed on motor vehicles supplied in the usual curse of business. 

So, ITC on motor vehicles may be claimed by a travel operator who derives money out of the business but not by any company or entity which uses motor vehicles for private purposes.
 B goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee  

Again, similar to CCR-2004, ITC may not be claimed for supplies used by the employees for personal use or consumption. 

There's a catch here which can be exploited.

In a meeting of the employees, goods supplied for consumption in the meeting may not be eligible for ICT, but say the employees have a meeting with a consultant they are working with, then the Input Tax Credit can be claimed over such a supply because it then ceases to be a personal affair; it becomes pure business to the government 
 C goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery To put it bluntly, ITC is allowable for plants and machineries
 D goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery  We have WCT (Works Contract Tax) for immovable property, so ITC may not be claimed except for plant and machineries.
 E goods and/or services on which tax has been paid under section 8; and   ITC not allowed for persons registered under composition schemes
 F goods and/or services used for private or personal consumption, to the extent they are so consumed   ITC cannot be claimed over private or personal consumption
 10  Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component  If the person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, then the credit of such input tax shall not be allowed. This is very similar to the existing CCR- 2004
 11  Notwithstanding anything contained in this section, but subject to the provisions of section 28, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless  
 A  he is in possession of a tax invoice, debit note, supplementary invoice or such other taxpaying document as may be prescribed, issued by a supplier registered under this Act or the IGST Act   ITC can be claimed through tax-paying like invoice, debit note, supplementary invoice or such other as prescribed
 B  he has received the goods and/or services  self-explanatory
 C  the tax charged in respect of such supply has been actually paid to the credit of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply   ITC may be claimed after payment of Tax in cases where GST needs to be paid under reverse change mechanism. When the goods against an invoice are received in lots, then taxable person shall be entitled to the credit upon the receipt of last lot
 D  he has furnished the return under section 27  Consolidated returns to be filed by 20th of the next month
 12  Where any registered taxable person who has availed of input tax credit switches over as a taxable person for paying tax under section 8 or, where the goods and / or services supplied by him become exempt absolutely under section 10, he shall pay an amount, by way of debit in the electronic credit or 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 on the day immediately preceding the date of such switch over 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   

A registered taxpayer shall pay through reversal of credit or in cash an amount equal to ITC in respect of inputs held in stock and inputs contained in semi finished or finished goods stock on the day immediately preceding the day 

  • when he switches over to pay tax under section 8
  • when the goods/services supplied by him become exempt under section 10 
After such payments, if there is any balance in electronic input ledger, it shall automatically lapse
 13  The amount payable under sub-section (12) shall be calculated in accordance with generally accepted accounting principles in such manner as may be prescribed   As explained in pointer 4, GAAP is followed for financial clarity
 14  In case of supply of capital goods on which input tax credit has been taken, the registered taxable person shall pay an amount equal to the input tax credit taken on the said capital goods reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods under sub-section (1) of section 15, whichever is higher   In case you have taken ITC on capital goods, you have to pay an amount equal to the ITC reduced by say X, an amount that will be a specified fraction of ITC or the tax that was imposed in the transaction - whichever is higher
 15  A taxable person shall not be entitled to take input tax credit in respect of any invoice for supply of goods and/or services, after the filing of the return under section 27 for the month of September following the end of financial year to which such invoice pertains or filing of the relevant annual return, whichever is earlier  You cannot claim Input Tax Credit after filing your annual returns. IT HAS TO BE BEFORE.
 16  Where credit has been taken wrongly, the same shall be recovered from the registered taxable person in the manner as may be prescribed in this behalf   This is to keep a check on miscreants. If the credit has been claimed falsely, it can be recovered as prescribed then. 

 

That's a detailed analysis of each segment of Section 16. To point out a glitch, there's no law that seems to provide for any measures to recover the tax that has been collected by the supplying dealers but has not been deposited to the government. Even in presence of such a law, the government would not be bothered to chase the defaulting supplying dealer because the tax would have been recovered from the purchasing dealer by denying him the ITC. To make GST Bill all the more effective and more importantly fair, we need stricter measures for defaulters so that government recovers its money from the person who owes it to them. 

All in all, it has to be said that GST functions well to ensure a less turbulent flow of cash through the dynamics of business and section 16 is the facilitator of it all.

 

In-depth analysis of Section-16 - Input Tax Credit under GST Act 2016

2017-04-04