Sec 18 – Availability of credit in special circumstances

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Sec 18 – Availability of credit in special circumstances 2017-04-14T11:50:43+00:00

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  • Ashish BadalaCA Ashish Badala
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    (1) Subject to such conditions and restrictions as may be prescribed-
    (a) a person who has applied for registration under this 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-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 provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised 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 of 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 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.

    Priya MadrechaPriya Madrecha
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    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 semifinished 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.
    •    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 31Mar-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-May2019
    Value of inputs contained in finished goods held in stock on 31-Mar-2020      50,000
    CGST @ 6%      3,000
    SGST @ 6%      3,000
    Only inputs worth Rs.40,000 in finished goods were procured after 01-Apr2019
    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 31-Mar-2020      20,00,000
    IGST @ 18%      3,60,000

    Credit available in respect of capital goods:
    Date of invoice of capital goods     22-Jan2020
    Date from which the exempt goods become taxable     01-Apr2020
    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 up to 31-Mar-2020      3,60,000
    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 were acquired within 1 year prior to the effective date on which the goods become taxable. Hence, entire ITC would be allowed.     24,000
    c     ITC on the value of inputs contained in finished goods: Out of the total 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%]     2,400
    CGST credit available on inputs          26,400
    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 Note 1      24,000
    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 to the effective date on which the goods become taxable. Hence, entire ITC would be allowed.      18,000
    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.
    No     Particulars     Reference      CGST       SGST/
    UTGST       IGST
    1     Total input tax on inputs and input services for the tax period May 2018     T     1,00,000     1,00,000     50,000

    Out of the total input tax (T):
    2     Input tax used exclusively for non-business purposes (Note 1)     T1     10,000     10,000     5,000
    3     Input tax used exclusively for effecting exempt supplies (Note 1)     T2     10,000     10,000     5,000
    4     Input tax ineligible under     T3     5,000     5,000     2,500
    Section 17(5) (Note 1)
    Total           25,000     25,000     12,500
    ITC credited to Electronic Credit Ledger (Note 1)     C1 = T -(T1 + T2 +T3)     75,000     75,000     37,500
    Input tax credit used exclusively for taxable supplies (including zerorated supplies)     T4     50,000     50,000     25,000
    Note 1: T1, T2, T3 and T4 shall be determined as
    above and declared in
    Form GSTR-2
    Common credit     C2 = C1 – T4     25,000     25,000     12,500
    Aggregate value of exempt supplies for the tax period May 2018
    (Note 2 & 3)     E     25,00,000     25,00,000     25,00,000

    Total Turnover of the registered person for the tax period May 2018
    (Note 2)     F     1,00,00,000     1,00,00,000     1,00,00,000
    Credit attributable to exempt supplies     D1 = (E/F) * C2     6,250     6,250     3,125
    Credit attributable to nonbusiness purposes     D2 = C2 * 5%     1,250     1,250     625

    Net eligible common credit     C3 = C2 –
    (D1 + D2)     17,500     17,500     8,750
    Total credit eligible
    (Exclusive + Common)     G = T4 + C3     67,500     67,500     33,750
    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, 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.
    No     Particulars     Reference     IGST
    1     ITC on capital goods used exclusively for nonbusiness purposes (Note 1)     T1     10,000
    2     ITC on capital goods used exclusively for effecting exempt supplies (Note 1)     T2     10,000
    Total          20,000
    3     ITC on capital goods used exclusively for taxable supplies (including zero-rated supplies) (Note 1)     T3      50,000
    4     ITC on capital goods (other than T1, T2 and T3) (Annexure A)     A= b+f     3,90,000
    5     ITC on capital goods whose residual life remain in beginning of tax period (Annexure A)     Tr     6,500
    7     Aggregate value of exempt supplies for the tax period May 2018 (Note 2 & 3)     E     25,00,000
    8     Total Turnover of the registered person for the tax period May 2018 (Note 2)     F     1,00,00,000
    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
    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 GST purpose is 5 years         c     60
    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 GST purpose is 5 years         g     60
    ITC attributable for May 2018 (1 month)         Tm2 = f/g     4000
    Aggregate of ITC on common credits         Tr = Tm1 + Tm2     6500

    Rule 9 of the Input Tax Credit Rules, 2017
    Illustration 1: Where input tax credit lapses
    Sl.
    No     Particulars     Referen ce      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           01 April 2019
    (Can be opted in Financial year beginning)
    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)

    6     ITC attributable to residual life     C = (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

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

    7     Balance ITC – will lapse            1,400

    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)

    6     ITC attributable to residual life     C = (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

    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
    3     Date of inward supply and use of capital 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:
    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

    (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 transfer of business      Rule 10 of CCR Rules, 2004     Specific section covering the sale, merger etc
    Reversal     on     goods
    becoming exempt     Rule 11(3) of CCR, 2004     To be reversed as per section 18(4)

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