Difference between eligible and ineligible Input Tax Credit under GST
Learn the difference between eligible and ineligible input tax credit under GST with case laws, sections, rules, and example for better ITC compliance
Difference between eligible and ineligible Input Tax Credit GST
Input Tax Credit (ITC) is one of the important concepts under Goods and Services Tax (GST). aIt allows reduction of tax liability on GST from the business accounts by claiming input tax credit for the tax paid on inputs goods, input services, and capital goods used during business operations. However, ITC claims of all kinds are not allowed; therefore, distinguishing between eligible and ineligible ITC is essential in order to prevent non-compliance and consequent penalties. Let Learn the difference between eligible and ineligible input tax credit under GST with case laws, sections, rules, and examples for better ITC compliance.
What is Input Tax Credit (ITC)?
Input Tax Credit (ITC) is a mechanism to avail ITC as per elegibility under GST system that allows businesses to claim credit for the tax paid on purchases of goods and services for only use of their business. This credit can only be used to offset the tax liability on their sales, reducing the overall tax burden. ITC ensures that tax is only paid on the value added at each stage of the supply chain, promoting a seamless flow of credit.
Legal Framework for ITC Under GST
ITC provisions are governed by the Central Goods and Services Tax Act, 2017 (CGST Act) and relevant rules, notifications, and circulars issued by the GST Council. The key sections dealing with ITC are:
Section 16 – Eligibility and Conditions for Taking ITC
This section details us that ITC is available only to a registered person and can only be claimed if the person has received the goods or services, has a valid invoice, and the supplier has filed their GST returns. Additionally, payment for the supplies must be made within 180 days from the invoice date, and ITC should not be restricted under Section 17(5).
Section 17 – Apportionment of Credit and Blocked Credits
This section states that ITC can be availed only for taxable supplies and not for exempt or non-business-related transactions. Section 17(5) lists specific cases where ITC is restricted, such as for motor vehicles (except certain cases), construction of immovable property, food and beverages, and personal expenses.
Section 18 – Availability of ITC in Special Circumstances
This section provides special provisions for claiming ITC in cases like newly registered businesses, conversion from a composition scheme to a regular taxpayer, and transfer of business. The credit is available on stock and capital goods in such cases, subject to prescribed conditions.
Rule 36 – Documentary Requirements for ITC
Rule 36 prescribes the requirement of tax invoices, debit notes, or other valid documents for claiming ITC. It also includes provisions regarding provisional credit under Rule 36(4), which restricts ITC claims to the extent of invoices uploaded by the suppliers in GSTR-1.
Rule 42 & 43 – Reversal of ITC for Exempt Supplies
These rules specify the method of proportionate reversal of ITC in cases where businesses are engaged in both taxable and exempt supplies. It provides the calculation formula and the manner of credit reversal.
Eligibility Criteria for Claiming ITC
These are the golden rules for availing ITC that must be followed to claim ITC under GST. ITC can only be availed by a business if the specific conditions under Section 16 of the CGST Act, 2017, are fulfilled. The eligibility criteria include:
1. Possession of a Valid Tax Invoice or Debit Note – The recipient of the goods or services must be in possession of a proper invoice or debit note issued by a GST registered supplier as per Section 31 of the CGST Act. This document serves as proof of the transaction and is mandatory for ITC claims.
2. Receipt of Goods or Services- ITC cannot be claimed without real receipt of the goods or services. if any receipt of goods in lots or in installments, ITC will only be available when the last installment is received by the regsitered dealer.
3. Tax Payment by Supplier – The supplier must have filed their GST returns and paid the tax to the government. The tax paid by the supplier should be reflected in the recipient’s auto-generated GSTR-2B to validate the ITC claim.
4. Filing of GST Return – The recipient should have filed its GSTR-3B returns for the relevant tax period. Failure to file the returns will disentitle the ITC.
5. Time Limit for Claiming ITC – Section 16(4) outlines clearly that ITC should be claimed within earlier of the due date for furnishing the return for September or notified by the GST deparment (since last two year theat month is notified november) after the end of financial year to which the invoice pertains.
6. Annual returns filling - Should also file of annual return on GSTR-9 and GSTR 9C as per criteria of turnover to file the returns that returns. .
Businesses need to maintain proper document of Invoice debit note and releted docuement to prove valid claim of ITC and ensure compliance with these conditions to avoid legal complications. Failure to adhere to these requirements can lead to ITC rejection, penalties, and increased tax liability.
Section-Wise and Rule-Wise Analysis of Eligible ITC
Eligible ITC as per Section 16 of CGST Act
Section 16 of the CGST Act, 2017, lays down the fundamental provisions for availing Input Tax Credit (ITC). It defines the scope, conditions, and restrictions applicable to taxpayers seeking ITC on inputs, input services, and capital goods used in their business.
1. Section 16(1): provides basic provisions for claiming input tax credit. It defines what is covered in the scope and conditions and their restrictions on those taxpayers who have availed inputs, input services, and capital goods in his business.
2. Section 16(2): It lists the conditions necessary for claiming ITC, including:
- Possession of a valid tax invoice or debit note.
- Receipt of goods or services by the taxpayer.
- Payment of tax by the supplier to the government.
- Filing of the corresponding GST return by the recipient.
3. Section 16(3): ITC is not available on tax paid under the composition scheme. Businesses opting for composition levy cannot claim ITC on their purchases.
4. Section 16(4): ITC must be claimed within a stipulated time frame. The deadline for claiming ITC is:
- The due date of filing the return for September following the end of the financial year to which the invoice pertains, or
- Section 16(4A): The date of filing the annual return (whichever is earlier).
Proper compliance with above provisions will ensure that businesses maximize their tax credits through the quality observance of GST, thereby minimizing chances of rejection or further penalties.
Rule 36 of CGST Rules: Documentary Requirements for ITC
Rule 36 of the CGST Rules prescribes the documentary requirements for claiming ITC. The rule states that a taxable person should have valid tax invoices, debit notes, or other prescribed documents for goods or services received. The rule emphasizes that the ITC can only be claimed if these documents are uploaded by the supplier in the GST portal. Additionally, it mandates that taxpayers ensure their purchase invoices are duly matched and reconciled with their suppliers' GST returns before claiming credit. Non-compliance can result in disallowance of ITC.
Rule 37 of CGST Rules: Reversal of ITC for Non-Payment
The rule 37 of the CGST Rules deals with the reversal of Input Tax Credit in the event of the supplier's failure to pay tax to the government by a prescribed time. If a taxpayer claims ITC on purchases and the same is not remitted by the supplier within 180 days from the date of an invoice, it is obligatory to reverse the credit by the recipient. The rule also specifies that interest will be charged from the date of claiming the ITC until the reversal is made. This ensures accountability in the supply chain and prevents misuse of ITC.
Ineligible ITC under GST (Blocked Credits)
Section 17(5) of CGST Act
Here are the details for each point mentioned under Section 17(5) of the CGST Act, which blocks certain types of Input Tax Credit (ITC):
- Motor Vehicles (except when used for transportation of goods, training, or passenger transport): ITC on motor vehicles is generally ineligible unless the vehicles are used for specific purposes, such as transporting goods, providing training, or transporting passengers. This exclusion prevents claiming ITC for personal or non-business use of vehicles.
- Food, Beverages, and Outdoor Catering (except when used for further supply): ITC is blocked for food, beverages, and outdoor catering services unless the expenditure is for the purpose of further supply of such items. This is to prevent businesses from claiming ITC on expenses related to employee welfare or personal consumption.
- Health & Beauty Services (except when mandated under any law): Expenses related to health and beauty services, such as spa treatments or fitness services, are blocked for ITC unless they are required by law (e.g., medical insurance premiums). This rule ensures that personal lifestyle and wellness expenses cannot be claimed as ITC.
- Club Membership Fees: ITC is blocked for expenses related to club memberships, including health clubs, fitness centers, or social clubs. This is because such services are deemed in general to be personal and not related to trade or business in any way.
- Goods Lost, Stolen, or Destroyed: ITC cannot be recovered claimed on goods that are lost, stolen, or destroyed. This ensures that businesses are not able to benefit from tax credits on goods they no longer possess or have no longer in a usable condition, maintaining fairness in the tax system.
- Construction of Immovable Property (except for plant and machinery): ITC is blocked on expenses related to the construction of immovable property, such as buildings. However, ITC is allowed for the construction of plant and machinery used for business purposes, as these assets are directly tied to business operations.
- Travel Benefits to Employees (except when required by law): ITC cannot be claimed on expenses related to travel benefits provided to employees, such as allowances for travel or accommodation, unless the expenses are mandated under law (e.g., business travel requirements). This ensures that businesses do not exploit the system for employee benefits that are not related to business activities.
Rule 42 & Rule 43 of CGST Rules: Reversal of ITC
- Rule 42 applies to input and input services. It mandates that ITC used for making exempt supplies or for non-business purposes must be reversed proportionately. The formula prescribed under Rule 42 helps businesses determine the amount of ITC that needs to be reversed based on the value of taxable and exempt supplies. The reversed ITC must be added back to the output tax liability in the monthly return.
- Rule 43 applies to capital goods used for both taxable and exempt supplies. ITC on such capital goods must be distributed over 60 months, and the portion attributable to exempt supplies must be reversed. If the usage of capital goods changes over time (e.g., from taxable to exempt), the ITC reversal must be adjusted accordingly.
In short, Proper compliance with these rules is essential to avoid penalties and incorrect ITC claims, ensuring that businesses adhere to the GST framework effectively.
ITC related to exempt supplies must be reversed.
ITC on capital goods used partly for business and partly for personal use must be reversed proportionately.
Latest Case Laws on ITC
- M/s. Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019) In this case, the ITC on the construction of commercial property was at issue. Here, the assessee claimed ITC on GST paid for constructing a shopping mall. The authorities disallowed it on Section 17(5) of the CGST Act saying no ITC can be made in respect of property under construction. The high court acknowledged the concerns of the petitioner but rejected the denial of ITC. It strengthened the restrictive provisions in GST law.
- Aristo Bullion Pvt. Ltd. vs Union of India (2022) - The case is based on ITC mismatch between GSTR-2A and GSTR-3B. Tax authorities rejected ITC in cases where suppliers had not uploaded invoices in GSTR-2A. The court held with tax authorities stating that ITC eligibility is only possible if the suppliers have duly complied. This case further enhanced the significance of checking supplier compliance to avoid rejection of ITC.
- Aristo Bullion Pvt. Ltd. vs Union of India (2022) - the taxpayer claimed Input Tax Credit for purchases made but the ITC was denied because there was a mismatch between the details filed in GSTR-2A and GSTR-3B. In GSTR-2A, the supplier had paid lesser tax, and this caused the mismatch. The GST law prescribes that an ITC will be available only if the necessary returns are furnished by the supplier and the figures tally in the two forms. The court rejected the ITC and upheld it, as purchase data should always match with the GST returns furnished by the supplier for complete transparency and to check misuse of credit. This judgment reiterates the requirement for proper filing and reconciliation for an ITC to be available.
- D.Y. Beathel Enterprises vs State Tax Officer (2021) – this case involved the reversal of Input Tax Credit (ITC) by the tax authorities. The State Tax Officer had sought the reversal of ITC claimed by the taxpayer. However, the taxpayer pleaded that the supplier had paid the tax in due course and, hence, the claim for ITC was legitimate. The court held it in favor of the taxpayer to the effect that if the supply had paid his tax under GST laws, it was not wrong to reverse such ITC amount. The court held that subject to the proviso that "the tax covered under such claims has been really paid by such supplier and other conditions of these provisions are duly satisfied, every recipient of taxable supply shall also be entitled for claiming ITC". This case restated the principle that ITC should not be reversed unless there is a specific violation in the tax payment or documentation process
Relevant Notifications & Circulars
- Notification No. 39/2021 – Central Tax (21st December 2021) – This notification required me to claim ITC on the basis of details appearing in GSTR-2B, that is the auto-drafted return showing eligible ITC. This amendment was provided in order to curb fraudulent claiming of ITC and making sure that the business only claims ITC when their supplier has filed their GST return. Therefore, if there is non-compliance in relation to this notification, then it would attract penalties and also denial of ITC.
- Circular No. 183/15/2022-GST (27th December 2022) – It clarifies that ITC is not available under GST on CSR-related expense incurred. The GST council reiterated that CSR expenses were not incurred for business purposes. Hence, ITC is not admissible. This has really affected businesses in general and particularly those spending more on community development initiatives.
- Notification No. 39/2021 – Central Tax (21st December 2021) prescribes that Input Tax Credit (ITC) be claimed by the details reported under GSTR-2B. GSTR-2B is an automatically generated statement reporting the ITC that could be availed by a taxpayer from the supplier's returns. The effect of this notification is that the businesses cannot claim more credits than what reflects in GSTR-2B, as it reconciles the mismatch in buyer and seller's reporting. Non-compliance or mismatches can result in the disallowance of ITC.
- Circular No. 183/15/2022-GST, issued on December 27, 2022: This provides clarification over the availability of Input Tax Credit (ITC) on inputs used for conducting Corporate Social Responsibility (CSR) activities in form of goods or services. Here, it categorically states that ITC shall not be availed on an expense incurred specifically for CSR because the same relates to non-commercial activities. For such reasons, in-line with guidelines any goods and service used on grounds of CSR to donate and also for other causes of welfare among the communities or society may not be utilized and claimed ITC, for items purchased under and for a given business enterprise because it calls forth that those taxes are on extraneous businesses activity.
Examples of Eligible & Ineligible ITC
Examples of Eligible ITC
Example 1: A retailer purchases goods worth ₹50,000 for resale and pays GST of ₹9,000. Since the goods are purchased for resale and used in the business, the retailer is eligible to claim an ITC of ₹9,000.
Example 2: A software company buys a computer system worth ₹80,000 and pays GST of ₹14,400. Since the computer is used for business operations, the company is eligible to claim an ITC of ₹14,400 on the purchase.
Example 3: A logistics firm buys fuel for transportation vehicles, costing ₹20,000 with ₹3,600 GST. Since the fuel is used for the business of transporting goods, the firm can claim an ITC of ₹3,600 on the purchase.
Examples of Ineligible ITC
Example 1: A manufacturing company buys luxury cars for the use of its executives and incurs ₹2,00,000 GST on the purchase. Since motor vehicles are blocked for ITC unless used for specific business purposes, the company cannot claim the ITC on the vehicles.
2. Example 2: A company incurs GST of ₹1,00,000 on a catering service for an office party. Since the catering is not for further supply of goods and services, the company cannot claim the ITC on this expense.
3. Example 3: A business spends ₹1,50,000 on the construction of a corporate office and incurs ₹27,000 GST on the services. As the construction of immovable property is blocked for ITC under Section 17(5), the business cannot claim the ITC on this expenditure.
Conclusion
Distinction between eligible and ineligible ITC under GST, therefore, holds the key for businesses to adhere to the statutory requirements. Conditions for claiming ITC are stated in Section 16 and Section 17 of the CGST Act, besides rules, notifications, and case laws. Strict adherence to such conditions would, therefore, minimize tax liability as well as ensure no penalty.
For further updates on ITC, businesses should regularly check GST notifications and rulings from the GST Council.
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