Abdulla Pettiwala

An optimum tax levy is where the customer is not saddled with the cascading effect of levies. To ensure that appropriate credits are made available by the government to enable the benefits to flow down the final consumers, without any cascading effect of taxes, and the matching of input credits to taxable output is achieved, the need for elaborate codification is required.

The codification of apportionment of credits is done in Sec 17 and 18 read with Rule 42 of the CGST law for Inputs and input services and in Rule 43 for input on capital goods.

The core principle one must keep in sight, while navigating the law for ITC, is that ITC can be availed on tax paid on inputs utilised for rendering taxable output supply.

Whilst the matching principle under CENVAT Credits has been done away with; the regulations form an enabler to ensure the principle is not digressed though meandering at times.

All expenses by a business – revenue or capital would carry an element of input tax credit considering that generally all supply of goods and services are included within the ambit of GST levy.

A. Input tax in respect of ‘inputs and input services’ (“INIS”) –

An expenditure in a business could be specific to the output supplies or would be in terms of common overheads which may be difficult to identify to a specific activity. Such common overheads need to be identified and a proportional allocation is required to be done towards taxable output for availment of input tax credit.

The expenditure incurred by a registered person in the course of his business or for furtherance of his business inter-alia would be INIS (i) on which GST has been collected by the supplier or (ii) paid by him under reverse charge (Sec 9(4) or 9(5) of CGST Act – reverse charge mechanism).

The GST collected by the supplier and the input tax paid under reverse charge on the total expenditure would be the input tax on the INIS of a registered person – “T”

The “T” has to be segregated into the input tax on INIS which is to be excluded from credit availability. This is done by identifying the INIS which can be directly attributable as exclusively utilised for –

(a) personal purpose – “T1”

(b) exempt supplies – “T2”

(c) supplies specified to be excluded from credit availability u/s 17(5) – “T3”

The balance remaining after removal of T1, T2 and T3 – “C1”. C1 is the ITC on INIS credited to the electronic credit ledger through reporting in the GSTR-3B.

Next step is to identify input tax on INIS used exclusively for effecting taxable output supply – “T4”.

Post exclusion of T4 the balance remaining is the common ITC – “C2”.

C2 is now required to be allocated to determine that which can be attributed towards taxable and exempt output supply.

The ITC attribution towards exempt output supply is done in the ratio of turnover for exempt supply (“E”) to total turnover of the registered person (“F”) – “D1”

Further, the ITC attribution towards non-business purpose or personal purpose is flat @ 5% of common ITC – “D2”

D1 and D2 are to be reversed in the electronic credit ledger by reporting in GSTR 3B.

The balance remaining after removal of D1 and D2 from C2 shall be that portion of common ITC for business purpose used for taxable output supply – “C3”.

To conclude the input tax credit on INIS available to a registered person would be a sum of T4 and C3 which in effect determines the INIS on taxable output supplies.

B. Input tax in respect of ‘Capital Goods’

The tax paid on the capital goods used by a registered person in the course of business or for furtherance of business shall be available for ITC.

Similar to the apportionment of credits for INIS, where the capital goods are used partly for business purpose and partly for other purpose, or partly for effecting taxable supplies and partly for effecting exempt supplies, the attribution to the purpose of business or for effecting taxable supplies would need to be done.

Thus, of the total tax paid on the capital goods received by the registered person,

First,

(a) Exclude, the tax paid on capital goods exclusively used or to be used for personal purpose or for effective exempt supplies.

This is to be disclosed in GSTR 3B and will NOT be credited to the electronic credit ledger.

(b) Include, the tax paid on capital goods exclusively used or to be used for effecting taxable output supplies or zero-rated supplies.

This will be credited to the electronic credit ledger as also disclosed in GSTR 3B.

(c) The balance amount of tax remaining on the capital goods used or intended to be used for other supplies (“A”) shall be credited to the electronic credit ledger.

The useful life of such goods would have to be considered at 5 years from the date of the invoice.

Thus, for capital goods other than those identified under (a) or (b) the ratio of credit available for every tax period would need to be done for five years from date of invoice.

The sum of “A” on all the capital goods credited in the electronic credit ledger (“Tc”) shall be the common credit in respect of capital goods for the first tax period of those assets.

Second, the ITC on common capital goods for a month (“Tm”) would be Tc / 60.

Third sum up all “Tm” on the common capital goods to arrive at the common ITC (“Tr”) on which the attribution ratio is to be applied.

Fourth, to derive the ITC on capital goods attributable to exempt supplies (“Te”), apply the ratio of value of exempt supply (“E”) to turnover of total supply (“F”).

The Te would be required to be calculated for each tax period (monthly or quarterly) for five years and is to be added to the output tax liability of the person, along with applicable interest.

Further,

  • If the turnover for any period / month is not available, then the turnover for the previous tax period / month if the be considered.
  • Where there is a shift from (a) to (c) then the value of “A” is to be determined by reducing the input tax @5% for every quarter or part thereof for the period the asset was under (a) and the balance is to be credited to the electronic credit ledger.
  • Where there is a shift from (b) to (c) then the value of “A” is to be determined by reducing the input tax @5% for every quarter or part thereof for the period the asset was under (a) and the balance is to be added to the aggregate value of Tc.      

C. ITC on INIS and Capital goods held in stock

The business or any event in the real world may not always begin with base zero; and we would have instances where a person would be having stock of inputs or capital goods on the day be is granted registration under the GST Laws on the day when he moves from composition to regular tax payment or on the day he is entitled to take ITC on voluntary registration, or when a registered person first becomes liable to pay tax due to the supply becoming taxable. [Rule40]

The tax paid on inputs held in stock and inputs contained in semi-finished or finished goods shall be available for ITC, where

(a) A person obtains registration under the GST when applying for registration within 30 days of him being liable for registration.

(b) Registration is granted to a person opts for voluntary registration u/s 25(3)

(c) A person becomes liable to pay tax u/s 9 and stops paying composition tax u/s 10

(d) An exempt supply of goods and / or services by a registered person becomes a taxable supply  

The ITC would also be available on the capital goods for (c.) and for (d.) above, where the capital asset is used exclusively for providing exempt supply prior to the day the supply becoming taxable. This ITC will be available after reducing the tax paid @ 5% for every quarter or part thereof from the date of the invoice.

The ITC on inputs and input services and on capital goods would not be available for the invoices more than a year old.

A declaration, giving details of the stock on the day preceding the event(s) [in (a.) to (d.)], certified by a practicing Chartered Accountant or Cost Accountant would be required to made online to the effect  that the registered person is eligible to avail ITC, in GST ITC-01, within 30 days.

D. Reversal of credits availed

Nothing being constant, there could be instances where the credits availed and standing to the credit of registered persons electronic credit ledger or cash ledger would be required to be reversed and paid either in cash or by way of debit in those ledgers. [Rule 44]

The events to trigger the need for reversal and/or payment on inputs held in stock and inputs contained in semi-finished and finished goods and capital goods held in stock on could be,

(a) A person paying tax u/s 9 chooses to pay composition tax under u/s 10 [Sec 18(4)]

(b) A taxable supply of goods and / or services become wholly exempt [Sec 18(4)]

(c) Due to cancellation or suspension of registration [Sec 29]

The amount of credit to be reversed for the stock of inputs and inputs contained in semi-finished and finished goods is only on those invoices on which credit has been availed by the registered person.

As for the capital goods held in stock the credit pertaining to the useful life of the asset is to be reversed and paid in cash.

The useful life of the assets is to be determined by reducing the months the asset has been used from a total of 60 months (considering the life of the asset as five years as mandated).  

A certificate of a Chartered accountant or a Cost accountant would be required where the invoices for the stocks are not available and the prevailing market value is considered for determining the value of input tax on the stock of inputs and inputs contained in semi-finished and finished goods and capital goods.

The amount of input tax to be reversed is to be considered as output tax liability of the registered person and is to be disclosed in GST ITC 03 for cases under Sec 18(4) [(a.) and (b.) above] and GSTR 10 for cancellation of registration[(c.) above].

E. Supply of Capital Goods on which inputs had been availed

A registered person disposes off or writes off the capital goods on which credit has been availed [Sec 18(6) read with Rule 44(6)]

The useful life of the assets is to be determined by reducing the months the asset has been used from a total of 60 months (considering the life of the asset as five years as mandated). 

The tax credit pertaining to the period of the useful life of the asset is to be compared with the output tax on transaction value for supply of the capital asset and the higher of the two is to be taken as output tax liability of the registered person and details furnished in Form GSTR 01.

To sum up the ITC on INIS and Capital Goods:

ITC is available for INIS and Capital goods used exclusively for taxable supply and zero-rated supply.

ITC on common INIS (C2) would have to be excluded in the ratio of the turnover of exempt supply to total turnover.   

ITC is available on INIS for stock held on the first day a person becomes registered or becomes liable to pay tax.

ITC is required to be reversed on INIS for the stock held on the day a person becomes not liable to pay tax or his registration is cancelled.

ITC on common capital goods would be available and an amount of apportionment in the ratio of exempt turnover to total turnover to be paid as output tax along with interest for each month for a period of 60 months.

ITC is required to be reversed in proportion to the balance life of the asset in the event of any capital goods which are disposed off or written off.