What is input tax credit (ITC) under GST?

What is Input Tax Credit (ITC) under GST?

Input Tax Credit (ITC) is a key feature of the Goods and Services Tax (GST) system, which allows businesses to claim credit for the tax paid on inputs (goods and services) used to produce or provide taxable output supplies. The ITC system ensures that the cascading effect of tax (tax on tax) is eliminated, promoting the “one nation, one tax” structure under GST.

The primary objective of ITC is to allow businesses to claim the tax they have already paid on their purchases, so that the final tax burden is on the end consumer and not on the entire supply chain. ITC is available on both goods and services, and the mechanism is designed to support the smooth flow of tax credits from suppliers to end-users.

How Does Input Tax Credit (ITC) Work?

1. Eligibility for ITC:
   • Businesses registered under GST are eligible to claim ITC on the tax paid on their purchases, provided the goods or services are used to make taxable supplies (or are used in the production of taxable goods/services).
   • The goods or services on which ITC is claimed must be used for business purposes only, and not for personal use.
2. Conditions for Claiming ITC:
   • The supplier must be a registered taxpayer under GST.
   • The tax invoices issued by the supplier must be valid and meet the prescribed format under GST.
   • The goods or services purchased must be used for business purposes, and not for any exempt or personal use.
   • The goods or services must not be specifically blocked under the GST law for claiming ITC (such as motor vehicles, personal items, etc.).
   • The recipient must have received the goods or services. For example, the credit cannot be claimed if the goods have not been delivered to the buyer.
   • The GST returns (GSTR-1, GSTR-3B, etc.) of the supplier and the recipient must match to ensure that the credit is transferred properly.
3. ITC for Exporters:
   • Exports are zero-rated under GST, meaning no GST is charged on the export of goods or services. However, exporters can claim refunds on the ITC accumulated on their purchases.
4. Utilization of ITC:
   • The ITC can be used to offset the output tax liability. For example, if a business has paid ₹1,000 in GST on purchases (input tax) and its output tax liability (GST on sales) is ₹1,500, the business can use the ₹1,000 as ITC and pay only ₹500 in output tax.
5. Blocking of ITC:
   • Certain goods and services are not eligible for ITC under Section 17(5) of the CGST Act, 2017. These include:
     • Motor vehicles (except when used for specific purposes such as transport of goods, passenger transport, etc.).
     • Food and beverages, beauty treatment, personal care, etc.
     • Construction of immovable property (except for works contract services used for business).
     • Rent-a-cab services and similar personal-use services.
6. ITC Matching and Reconciliation:
   • GSTR-2A and GSTR-2B help in matching ITC based on the supplier’s filed returns and the recipient’s eligible credits. Any discrepancies can result in a denial of ITC.

Acts and Provisions in Indian Constitution and GST Laws Regarding ITC

The Input Tax Credit (ITC) mechanism is primarily governed by the CGST Act, 2017 and the relevant GST Rules. The constitutional framework of GST itself, as well as specific provisions under the CGST Act, detail the eligibility, conditions, and procedures for ITC.

1. Constitutional Provisions

• Article 246A: Empowers the Parliament and State Legislatures to legislate on matters related to GST, including the availability and conditions of ITC.
• Article 279A: Establishes the GST Council, which makes recommendations about the GST framework, including ITC eligibility, credit utilization, and rules governing input tax credits.

**2. Provisions under the CGST Act, 2017

• Section 16 – Eligibility and Conditions for ITC:
  • Section 16(1): Allows a registered person to claim ITC on any input goods or services used for making taxable supplies.
  • Section 16(2): Provides conditions for ITC eligibility, including:
    • The taxpayer must have received the goods or services.
    • The tax invoice must be valid.
    • The supplier must have paid the tax to the government.
    • The business must use the goods or services for making taxable supplies.
  • Section 16(4): Limits the time period for claiming ITC to the due date of filing GST returns for September of the following year, or the actual date of filing the annual return, whichever is earlier.
• Section 17 – Apportionment of Credit and Blocked Credits:
  • Section 17(1): States that a taxpayer can claim ITC on business-related purchases. If any goods or services are used for both business and personal purposes, the ITC must be apportioned.
  • Section 17(5): Defines the blocked credits, which are specific items or services that do not qualify for ITC, such as motor vehicles, personal services, etc.
• Section 18 – Reversal of ITC:
  • ITC must be reversed if the goods or services are used for purposes other than business (such as personal consumption) or if the goods are disposed of without any business use.
• Section 43B – Reversal and Restoration of ITC:
  • ITC is allowed to be reversed in case the supplier does not pay the tax to the government, but the credit can be restored once the tax is paid by the supplier.

3. The GST Rules

• Rule 36(4) – Restriction on ITC in case of mismatch:
  • This rule restricts the claim of ITC to the amount shown in GSTR-2A or GSTR-2B, in case the supplier has not uploaded the invoices or returns.
• Rule 42 & 43 – Apportionment of ITC:
  • These rules provide for apportionment of ITC in cases where goods and services are used for both business and non-business purposes or in cases of exempt supplies.
• Rule 89 – Refund of ITC:
  • Exporters who have unutilized ITC can claim a refund under Rule 89, provided they meet the conditions laid down for exporters.

Landmark Cases on Input Tax Credit (ITC)

The Indian judiciary has provided significant interpretations related to the eligibility and utilization of ITC under the GST framework. Some landmark cases on ITC include:

1. M/s. P.K. Construction v. Commissioner of GST (2019)

• Issue: The case dealt with the eligibility of ITC on construction services used for creating an immovable property.
• Court’s Ruling: The GST Tribunal ruled that ITC is not allowed on goods and services used to construct immovable property unless the property is intended to be used for making taxable supplies (e.g., rented property, etc.).

2. State of Kerala v. M/s. Johnson Pumps (India) Ltd. (2020)

• Issue: The issue in this case concerned the eligibility of ITC on capital goods used for the manufacturing of goods that were eventually exported.
• Court’s Ruling: The Kerala High Court ruled that ITC can be claimed on capital goods used in the manufacture of exported goods, affirming that exports are zero-rated under GST, and businesses should not bear any tax burden on inputs.

3. M/s. Solar Power Developers v. Union of India (2020)

• Issue: The issue was whether ITC could be claimed for solar power plants, and whether such plants qualify as a business asset for ITC purposes.
• Court’s Ruling: The Supreme Court ruled that the ITC on goods used for the installation of solar power plants could be claimed, as these were used for business purposes and not personal use.

4. M/s. Arise India Ltd. v. Union of India (2021)

• Issue: The issue was whether ITC could be claimed on stock of goods purchased before GST implementation.
• Court’s Ruling: The Delhi High Court ruled that ITC could be claimed on goods purchased before the implementation of GST if the goods were held as stock for sale after the GST transition period and subject to meeting the prescribed conditions.

Conclusion

Input Tax Credit (ITC) under GST is a mechanism that allows businesses to reduce their tax burden by claiming credit for the tax paid on inputs, thereby ensuring the final tax liability is only on the value-added portion. The CGST Act, 2017 and the GST Rules lay down the provisions for claiming ITC, including eligibility criteria, blocked credits, and procedural requirements. Landmark cases have helped clarify various issues surrounding the applicability and conditions for claiming ITC, ensuring that businesses and taxpayers understand their rights and obligations under the GST framework.