Tax II, 30 Marks

GUJARAT NATIONAL LAW UNIVERSITY
SEMESTER VIII/BATCH
2018-2023
LAW OF TAXATION II
CONTINUOUS INTERNAL EVALUATION

RESEARCH PAPER
‘INPUT TAX CREDIT MECHANISM UNDER GST’
SUBMITTED TO :
PROF. (DR.) GIRISH R
ASSISTANT PROFESSOR OF LAW
SUBMITTED BY :
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INPUT TAX CREDIT MECHANISM UNDER GST
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Registration No. and Semester: 18B155, VIII Semester
Subject: Law of Taxation II
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TABLE OF CONTENTS
CHAPTER I: INTRODUCTION...........................................................................................4
WHO QUALIFIES FOR A GST INPUT TAX CREDIT?...............................................................5

WHO IS NOT ENTITLED TO INPUT TAX CREDIT?.................................................................5
WHAT IS THE TIME LIMIT OF AVAILING INPUT TAX CREDIT?.............................................6
WHAT IS THE PROCEDURE FOR CLAIMING CREDIT FOR INPUTS IN STOCKS/CAPITAL
GOODS?................................................................................................................................6
WHAT IS CREDIT RESTRICTION?.........................................................................................8
WHAT ARE BLOCKED CREDITS?..........................................................................................9
CHAPTER II: UNDERSTANDING INPUT TAX CREDIT.............................................10
CASE LAWS: SECTION 16(1) IN THE COURSE OF PROMOTING BUSINESS................................11

REVERSAL OF CREDIT IN SPECIAL CIRCUMSTANCES...............................................................12
CHAPTER III: AMBIGUITY OF INPUT TAX CREDIT................................................14
MISUSE OF INPUT TAX CREDIT (ITC)...................................................................................16
CHAPTER IV: RECENT AMENDEMENTS.....................................................................17
CHAPTER V: CONCLUSION AND ANALYSIS..............................................................19
3
CHAPTER I: INTRODUCTION
A constant and continuous chain of Input Tax Credits (ITC) is a basic part of the Goods and
Services Tax (GST). The ITC fills in as a protect against tax flowing. In layman's terms, tax
flowing is inseparable from 'tax on tax.' Credit for taxes collected by the Central Government
is not accessible as a set-off against taxes exacted by State Governments under the ongoing
arrangement of taxation, as well as the other way around. 1 One of the main components of the
GST framework is that it would subject the entire inventory network to a GST that would be
charged simultaneously by the Central and State Governments i.e., input tax credits can be
guaranteed no matter what the area of the supplier, working with the deal and acquisition of
goods2. Due to the fact that the tax collected by the Central or State Governments would be
important for a similar tax system, credit for tax paid at each level would be accessible as a
set-off against tax payable at following stages3.
The GST is made up of the following levies4:

 Central Goods and Services Tax (CGST) [also known as Central Tax] on intra-state
or intra-union territory supply of goods or services or both without the approval/
endorsement of the legislature
 State Goods and Services Tax (SGST) on intra-state supplies of goods or services or
both.
 Union Territory Goods and Services Tax (UTGST) on intra-union territory supplies
of goods or services or both.
 Integrated Goods and Services Tax (IGST) on interstate supplies of goods or services
or both. Additionally, on account of imports, the current Countervailing Duty (CVD)
and Special Additional Duty (SAD) would be supplanted with an integrated tax
1
GST & INDIRECT TAXES COMMITTEE, http://idtc-icai.s3.amazonaws.com/download/pdf18/BareLaw-GSTAct-
2018%2826.11.18%29.pdf, (last visited May 22, 2022).
2
CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS, https://www.cbic.gov.in/resources//htdocs-cbec/gst /ITC
%20_Mechanism.pdf (last visited May 21, 2022).
3
INDIAN INSTITUTE OF COST ACCOUNTANTS OF INDIA, https://icmai.in/TaxationPortal/Publication/Online
Release /Input_Tax_Credit.pdf (last visited, April 29, 2022).
4
CHARTERED CLUB, https://www.charteredclub.com/gst-input-tax-credit/?cv=1 (last visited April 30, 2022).
4
WHO QUALIFIES FOR A GST INPUT TAX CREDIT?
Each enrolled individual is qualified to guarantee input GST number cruncher charges on any
conveyance of goods or services purchased by him that are used or expected to be utilized in
the lead of his business5, as evidenced by any of the following documents as per Section 166:
 Issue of a tax invoice

 Debit note
 Bill of entry
 Invoice structured on a reverse charge basis
 Document issued by an Input Service Distributor for the purpose of distributing GST
input tax credits.
An individual who applies for enlistment in the span of 30 days of becoming responsible for
registration may claim input tax credits for inputs held in stock and inputs contained in semi-
finished or finished items held in stock on the day immediately preceding the date he
becomes liable to pay tax. Except for those paying tax under the composition method, all
registered individuals are eligible to claim input tax credits.7
An individual who enrolls voluntarily is qualified for guarantee input tax credits for inputs
held in stock and inputs contained in semi-finished or finished items held in stock on the day
immediately preceding the date of registration grant. 8
A person who has ceased to pay tax under the composition scheme is qualified to claim input
tax credits on inputs held in stock, semi-finished or finished goods held in stock, and capital
goods on the day immediately preceding the day on which he stops to pay tax under the
composition scheme.9
5
MASTER INDIA, https://www.mastersindia.co/blog/input-tax-credit/, (last visited April 30, 2022).
6
Service Tax Act, 2017 No. 12 of 2017, Act of Parliament 2017.
7
GST & INDIRECT TAXES COMMITTEE, https://idtc-icai.s3-ap-southeast-1.Amazonaws.com/download/pdf19/
Volume-I-%28BGM-16-04-2019%29.pdf (last visited May 22, 2022).
8
MAHAGANPATI & CO., https://vmgfca.com/knowledge/gst/, (last visited May 21, 2022).
9
TAXGURU, https://taxguru.in/income-tax/analysis-input-tax-creditconceptgst.html#:~:text=Note%2D%20ITC
% 20can%20only %20be,or%20depreciation%20on%20Ca, (last visited May 7, 2022).
5
WHO IS NOT ENTITLED TO INPUT TAX CREDIT?
 Individuals who are not GST registered;

 Individuals registered under the composition scheme.
WHAT IS THE TIME LIMIT OF AVAILING INPUT TAX CREDIT?
Time Limit of availing credit in respect of any invoice/debit note for the supply of
goods/services shall not be available after the due date for filing the return for the month of
September following the end of the financial year to which such invoice relates, or the
relevant annual return, whichever is earlier.10 However, in special circumstances, credit on
inputs in stock shall not be available after the expiration of one year from the date of issue of
the tax invoice.
WHAT IS THE PROCEDURE FOR CLAIMING CREDIT FOR INPUTS IN STOCKS/CAPITAL

GOODS?
Procedure for claiming credit for inputs in stocks/capital goods11:

 A declaration in Form GST ITC-01 shall be made by the registered person within
thirty days of the date of credit entitlement;
 Specification of the inputs and capital goods for which credit is being claimed must be
made;
made;
made;
 In specific instances, the person's claim for input tax credit shall be confirmed against
the supplier's outward supply return's relevant details.
Therefore, Input Tax Credit is the foundation for India's largest indirect tax reform, which
aims to eliminate the cascading effect of taxes and promote seamless credit, has become a
10
11
Ibid.
6
Rigmarole in light of multiple impediments to the free flow of credit throughout the tax
chain, and Input Tax Credit appears to be a lost ball in the weeds in the form of:
a. Section 16 litmus test;
b. Time limits set forth in Section 16(4);
c. Mischievous Rule 36(4);
d. The enigmatical GSTR 2A/2B;
e. Credit restriction in accordance with Section 17 (5);
f. Rule 86A(Blockage of Credit);
g. Rule 86B(1% Cash payment);
h. Reversals owing to 180 days condition;
i. Reversals pertaining to Rule 42/43;
j. ITC restrictions through Rate Notifications;
k. Broken limbs in form of GSTR 2 in absentia;
l. GSTR3B as proxy to GSTR 3.
Input tax credits on stocks/capital goods purchased for new registrations, etc12.
SR. ELIGIBLE PERSONS CREDIT ENTITLED AS ON RESTRICTION/

NO. CONDITIONS
1. Person applied for Inputs held in stock The day Cannot avail
registration within and inputs immediately credit of goods
30 days from the contained in semi- preceding the and / or services
date of liability to finished or finished date from which after 1 year
pay tax and goods held in stock. he becomes from tax invoice
registered. liable to pay date.
tax.
The amount of
2. Person applied for - -
credit calculated
registration after 30
in the manner
days from the date of
prescribed in
liability to pay tax.
12
7
3. Person who is not Inputs held in stock The day
Input Tax
required to register, and inputs immediately
Credit rules.
but obtains voluntary contained in semi- preceding the
registration. finished or finished date of grant of
Credit on
goods. registration.
capital goods
4. Switching over from Inputs held in stock The day
shall be
composition scheme and inputs immediately
reduced by five
to regular taxation or contained in semi- preceding the
percent per
where exempt finished or finished date of
quarter or part
supply. goods and on the switchover or
thereof from
capital goods. when supplies
the date of
become taxable.
invoice/other
relevant
document.
WHAT IS CREDIT RESTRICTION?
Input tax credits might be asserted on goods/services traceable to only business-related

supplies. Where goods/services are utilized to some extent to impact taxable supplies and
partially to impact exempted supplies, or where goods/services are used for business and to
some degree for other reasons, the credit amount is limited as stipulated in Rule 7 of the Input
Tax Credit Rules:
Total Input Tax

Less: Input Tax on inputs/input services used exclusively for non- business/exempt purposes
or where credit not allowed specifically. Less: Input Tax Input Tax on inputs and input
services used exclusively for taxable supplies including zero rated supplies(T)
Common Input Tax Credit
Less: Input Tax Credit attributable to exempt/non-business supplies
Eligible Common Input Tax Credit(C)
Eligible Total Input Tax Credit = T+ C13
13
8
WHAT ARE BLOCKED CREDITS?
Input Tax Credit shall not be available in respect of the following14:

• Motor vehicles and other conveyances, except when they are used for providing the
taxable supplies of further supply of vehicles/conveyances, transportation of
passengers/goods, or imparting training on driving, flying, navigating such
vehicles/conveyances;
• goods/services provided in relation to food and beverages, outdoor catering, beauty

treatment, health services, cosmetic and plastic surgery except when used for
providing similar taxable supplies;
• Membership of club, health and fitness centre;
• Rent-a-cab, life insurance, health insurance (except where mandated by Government),
except when they are used for providing similar services;
• Travel benefits extended to employees on vacation;
• Works contract services supplied for construction of immovable property, other than
plant and machinery, except when used for similar service;
• goods/services received for construction of immovable property(excluding plant &
machinery) on own account;
• goods/services on which tax has been paid under Composition scheme;
• goods/services received by a non-resident taxable person except on goods imported
by him;
• goods/services used for personal consumption;
• goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
• any tax not paid/credit wrongly availed by reasons of fraud/ wilful misstatement/
suppression , etc.
14
The Central Goods and Service Tax Act, 2017 No. 12 of 2017, Act of Parliament 2017.
9
CHAPTER II: UNDERSTANDING INPUT TAX CREDIT
Section 16(1)15Every registered person is entitled, subject to prescribed conditions and

restrictions and in the manner specified in Section 4916, to claim credit for input tax paid on
supplies of goods or services or both to him that are used or intended to be used in the course
or furtherance of his business, and the said amount is credited to the registered person's
electronic credit ledger.
Section 2(94) of the CGST Act 17, 2017 — "registered person" includes an individual who is
registered under Section 25 but does not include an individual who has a Unique Identity
Number. According to Section 2(62) of the CGST Act, 2017 18, "input tax" in relation to a
registered person means the CGST, SGST, IGST, or UTGST levied on any supply of goods
or services or both made to him and includes: (a) the IGST levied on import of goods; and (b)
the tax payable under the reverse charge mechanism, but excludes the composition levy tax.
Section 2(19) of the 2017 CGST Act19 "capital goods" implies goods whose worth is
capitalized in the records of the person claiming the input tax credit and which are used or
intended to be used in the conduct or furtherance of business. As such, it is a state of mind
that can never be established as a fact but can only be inferred from established facts. 20
In the case of SAIL v. CCE (1996)21, SAIL's Rourkela factory, raw naphtha is utilized to
create fertilizers. At the time, raw naphtha was excisable at a reduced rate of duty. The tariff
concession was permissible if the raw naphtha was intended for use in the manufacturing of
fertilizer. Due to prevailing circumstances, namely the low, uncertain, and intermittent
availability of electricity, the reformed gas created from naphtha during the interim stage of
manufacture had to be vented and was not employed in the fertilizer manufacturing process.
The court held that the term "intended for use" as used in the exemption notification refers to
the raw naphtha being 'intended for use' in the manufacture of fertilizer, not to its actual use.
Thus, SAIL is entitled to the benefit of the exemption notification in relation to raw naphtha
that it used in its plant for the manufacture of fertilizer but which, for reasons beyond its
15
16
Ibid.
17
Ibid.
18
Ibid.
19
Ibid.
20
TAXGURU, https://taxguru.in/income-tax/analysis-input-tax-credit-conceptgst.html#:~:text=Note%2D%20ITC
%20can%20only%20be,or%20depreciation%20on%20Ca, (last visited May 7, 2022).
21
SAIL v. CCE (1996) 4 SCC 163.
10
control, did not result in the manufacture of fertilizer but had to be vented out during the
interim stage of reformed gas.
CASE LAWS: SECTION 16(1) IN THE COURSE OF PROMOTING BUSINESS
In the case of State of Tamil Nadu v. Burmah Shell Oil Storage and Distributing Co. of India
Ltd. And Anr22, where the Petitioner's major business was trading in oil and oil-related
products, it was determined that periodic sales of scrap, unserviceable oil drums, and old
furniture were an ancillary and incidental business.
Hindustan Zinc Limited v. Commercial Tax Officer 23, the Petitioner's primary business was
manufacturing and dealing in non-ferrous items, it was determined that the sale of tender
forms was an ancillary and connected activity to its primary business United India Insurance
Co. Ltd. v. Commissioner of Commercial Taxes, Bangalore and Anr 24. The petitioner
conducted business in general insurance and sold used products received in exchange for
claim settlements. The sale of old products was deemed to be incidental to the company's
primary operation.
Citibank v. Sales Tax Commissioner25, the petitioner was in the banking business and in some
instances would recover debts from defaulters through the auctioning of defaulters' assets.
The bank's operation of selling hypothecated assets was deemed to be ancillary to its
business. Fundamental Requirements for Claiming Input Tax Credit. The following
requirements must be met in order to obtain input tax credits under GST. Individuals must be
registered under the GST Law. A tax invoice or debit note issued by the registered supplier
that clearly shows the tax amount. There must have been a receipt for goods or services.
Suppliers are required to file returns and pay applicable taxes to the government. If items are
obtained in many lots or instalments, ITC may be claimed upon receipt of the final lot or
instalment. No input tax credit is allowed where input tax credit is incorporated in the cost of
capital goods and depreciation on such tax is claimed. If an input tax credit is not claimed
within the statutory time period, it will be denied.]
22
Tamil Nadu v. Burmah Shell Oil Storage and Distributing Co. of India Ltd. And Anr. AIR 1973 SC 1045.
23
Hindustan Zinc Limited v. Commercial Tax Officer 1990 WLN (UC) 220.
24
United India Insurance Co. Ltd. v. Commissioner of Commercial Taxes, Bangalore and Anr. 1986 (2)
KarLJ107.
25
Citibank v. Sales Tax Commissioner 2016 IAD (Delhi) 581.
11
REVERSAL OF CREDIT IN SPECIAL CIRCUMSTANCES
If a recipient fails to pay the supplier of goods or services or both (other than supplies on
which tax is payable on a reverse charge basis) the amount towards the value of the supply
and the tax payable thereon within 180 days of the date of the supplier's invoice, an amount
equal to the recipient's input tax credit, plus interest, shall be added to the recipient's output
tax liability in the manner prescribed.26
If only a portion of the payment is made, the reversal will be commensurate to the amount
that was not paid to the provider. If the recipient pays the supplier later, he may claim input
tax credit - third proviso to Section 16(2) of the CGST Act. In reality, the recipient may claim
input tax credits only if the provider has actually paid the tax. Then why is the government
concerned about invoice payment to the supplier? Why is the government functioning as a
collection agent? 27
The goal appears to be to avoid fake input tax credit transfers, e.g., if an individual has an
extra input tax credit, he can transfer it to others. However, the proposed treatment appears to
be worse than the problem, as it will affect several legitimate transactions 28. Frequently, in the
case of major works contracts, a portion of the contract is retained and released beyond the
warranty period.
Additionally, some deductions from invoices are frequent for a variety of reasons. In that
event, this clause will be extremely inconvenient for taxable persons. Post-sale discounts are
prevalent in business. All of these transactions will be impacted. 29 Proportionate reversal if
only a portion of the invoice (including tax) is paid - If (say) 85 percent of the supplier's
invoice (including tax) is paid, only 15% of the tax amounts should be reversed 30. Pay tax
with interest even though the provider has already paid the full amount of tax to the
government.
26
TAXMANN, https://gst.taxmann.com/commentary.aspx (last visited May 20, 2022).
27
INDIAN INSTITUTE OF COST ACCOUNTANTS OF INDIA,
https://icmai.in/TaxationPortal/Publication/OnlineRelease /Input_Tax_Credit.pdf (last visited May 20, 2022).
28
29
INDIAN INSTITUTE OF COST ACCOUNTANT OF INDIA,
https://icmai.in/TaxationPortal/Publication/OnlineRelease Input_Tax_Credit.pdf (last visited May 20, 2022).
30
12
On the one hand, post-supply discounts are not allowed as a deduction from 'value' for GST
purposes. On the other hand, if less money is given to the supplier, the corresponding input
tax credit must be revoked with interest, even if the provider has paid the entire tax amount to
the government.31
Therefore, when an Input Tax Credit is required to be reversed under particular

circumstances, the credit shall be calculated as follows32:
• For inputs held in stock, the reversal of input tax credits shall be determined
proportionately to the corresponding invoices on which credit was claimed.
• In the absence of the aforementioned tax invoices, the credit reversal amount shall be
determined using the existing market price of the items on the date of the relevant
event for which reversal is required.
• For capital items, the input tax credit corresponding to the remaining residual life in
months shall be calculated pro rata, assuming a residual life of five years.
CHAPTER III: AMBIGUITY OF INPUT TAX CREDIT
Since the inception of the input tax credit system in India (whether as Modified Value Added
Tax/Central Value Added Tax) (MODVAT/CENVAT) credits under the central
31
32
13
excise/service tax regimes or as ITC under the GST regime), it has been a major cause of
litigation under the indirect taxation system.
To begin, the controversy centers on the eligibility of input tax credits for a variety of capital
items, input commodities, and input services. It is frequently argued by the agency and
taxpayers who each understand it differently.
Second, the integration of fictitious input tax credits (obtained on the basis of fictitious
invoices from non-existent enterprises) into the supply chain has been a continuous source of
contention for tax administrators. This has resulted in significant revenue leakage from the
system, and catching such cases needs a high level of investigative abilities, many approvals,
and indefinite energy.
Thirdly, the obligation for interest and penalties associated with excessive input tax credit
claims is another point of contention. The terms "availed or taken" and "used or exploited"
were completely ambiguous. The department's and taxpayers' differing interpretations of
these words resulted in a great deal of litigation.
During the early stages of the credit system's adoption, the act of obtaining credit (whether
used or not) was subject to interest and penalty. However, modifications to the CENVAT
credit rules (Regulations 14&15 of the CENVAT credit rule 2004) in 2012 made the
provision and use of CENVAT credit subject to interest; a further clarification was added to
the rules in 2015, where it was clearly stated as two distinct circumstances. Initially as
CENVAT taken but not utilised, and afterwards as CENVAT taken and utilized, this change
resolved the question regarding interest. However, the penalty remained on the act of
obtaining excess credit, regardless of whether it was used or not.
These ambiguous characteristics of input tax credits resurfaced in the GST regime as well.
Numerous charges have already been filed by tax authorities alleging fraudulent input tax
credit going through the supplier chain. This equates to a revenue loss of more than Rs 15000
crores in the first year of GST implementation, according to a recent parliamentary response
to a query.
14
Additionally, the GST retains the ambiguity regarding the imposition of interest and the
penalty for excessive input tax credit claims. According to Section 73 of the CGST act 33, if an
input tax credit is improperly claimed or utilized, the taxpayer is obliged to pay interest
calculated in accordance with Section 5034, as well as a penalty decided in accordance with
the CGST act's requirements. This penalty may be as much as 100% of the tax amount. This
means that even if the taxpayer does not use the input tax credit for payment and instead
claims it incorrectly, the taxpayer is responsible for interest. This is a flagrant violation of the
2015 amendments to service tax and central excise, under which interest was assessed only
on the portion of excess claim used for payment.
This uncertainty has begun to generate litigation in cases of transitional credit verification,
when the taxpayer is reversing an incorrect or excessive transitional credit but is resisting
payment of interest and penalty, particularly where the credit was not used. The GST council
must give clarification on the subject in order to avoid such vexing disagreements between
taxpayers and the government.
The GST regime has reintroduced a new controversy regarding interest and penalties on input
tax credits. In the GST regime, individuals are required to set off their whole liability when
filing returns, which is in contrast to the previous system of taxation. There is no provision
for partial payment of liabilities, and until the entire liability is satisfied, the tax is not deemed
paid, and so interest and penalties will be assessed on the entire amount. This creates
significant difficulty for businesses, as they are required to pay interest and penalties on their
whole bill, even if they have a sizable amount of input tax credit in their credit ledger 35. This
can be illustrated using the following example:
• For the month of February 2019, Company XYZ is required to pay a tax of Rs 100
crore. The company has Rs 60 crore in input tax credits and hence must pay Rs 40
crore in cash. The Company is cash-strapped in February. As a result, the firm cannot
deduct his Rs 60 Cr tax burden from ITC under the current structure. It would have to
wait until the company has Rs 40 crore in cash before it can discharge its whole
33
34
Ibid
35
GST & INDIRECT TAXES COMMITTEE, https://idtc-icai.s3-ap-southeast-1.Amazonaws.com/download/pdf19/
Volume-I-%28BGM-16-04-2019%29.pdf (last visited May 22, 2022).
15
liability of Rs 100 crore. Additionally, the corporation would be charged interest and
penalties on the entire debt of Rs 100Cr at the time of filing the return.
This appears to be entirely irrational and contrary to the natural fairness principle. As a result,
the matter was brought before the GST council. At the GST council's 31st meeting, it was
recommended that interest and penalties be applied only to the cash component of the entire
tax liability. This advice, however, has not yet been adopted through adequate notice. At the
moment, there is a state of confusion, with taxpayers relying on the GST council's advice and
the government issuing requests based on the fact that no notification has been issued in this
regard. Thus, it is headed for an increase in the number of conflicts and litigation, which can
be resolved only by appropriate legislative amendments and prompt implementation of GST
council recommendations.
MISUSE OF INPUT TAX CREDIT (ITC)
Over Claiming of Input Tax Credit is the most straightforward approach to take advantage of
the Input Tax Credit system. There is a limit to this for established enterprises that are subject
to GST on their own output, as excessive credit claims would suggest an implausibly low
margin. However, there is significantly greater room for new enterprises to exaggerate input
claims without raising suspicion, as big initial purchases of capital goods and other inputs are
expected at startup, but are not immediately followed by similar levels of sales.
Export fraud also results in fraudulent claims for commodities that are not really exported
from the country, which is a problem under GST. This type of fraud may entail the sale of
fictitious commodities or genuine commodities that have been sold on the domestic market.
A fraudulent claim for ITC credit of Rs.1 costs the government the same as a fraudulent
refund worth Rs.1. As a result, it is one of the primary issues raised by ITC refunds that
receives special attention.
CHAPTER IV: RECENT AMENDEMENTS
16
A critical adjustment has been made to Section 16 of the Central Goods and Services Tax
Act, 2017, which now requires the provider to file a return and communicate it to the
recipient in order to claim the credit. While this sounds straightforward, the receiver taxpayer
has been subjected to nightmares in the lack of a reliable credit-matching function on the
GST system. That was never carried out. On the contrary, the government amended the law
to ensure that the reconciliation that the portal failed to perform is carried out by taxpayers
themselves, using whatever tool is available.
Among these revisions, the adoption of Rule 36(4) in the Central Goods and Services Tax
Rules, 2017 – which limited ITC on unmatched invoices to a specific proportion of matched
invoices – was a critical one that drove taxpayers to begin manually matching credit. It was
made public in October 2019. Subsequently, the ITC allowed on unmatched invoices was
lowered from 20% to 5%.
While this restriction on ITC claims has been challenged in court on the grounds that it is
unconstitutional because it is not backed by a substantive provision of law, the majority of
taxpayers have followed it to avoid adverse consequences such as credit denial and the
interest and penalties that follow.
In November 2020, the government will make available on the GST portal a new form
GSTR-2B that will provide information of ITC based on invoices recorded by suppliers in
their GSTR-1 outward supply statement.
This was offered as a static statement that would be provided one day after the GSTR-1 filing
deadline. Additionally, the government published a thorough guidance on how to match the
credit using GSTR-2B while leaving the dynamic statement option (GSTR-2A) intact on the
portal. Following the implementation of GSTR-2B, taxpayers have started receiving demand
notifications for excess ITC claimed in GSTR-3B beyond the amount claimed in GSTR-2B.
Section 16 of the CGST Act was amended on January 1. It provides legislative support for
Rule 36(4), rebutting the notion that it is unlawful. Additionally, it establishes which Form
(GSTR-2A or GSTR-2B) to be used for the matching exercise. The revised provision
provides tax authorities with a formidable option for denying ITC if the supplier fails to
record the invoice on its GSTR-1. Additionally, Rule 36(4) is revised to allow the recipient to
17
receive only matched credit, and the previous provision allowing a specific amount of
unmatched credit is repealed.
With effect from January 1, 2022, taxpayers will be unable to claim ITC unless the respective
supplier files his returns on time [as opposed to the previous position, which was either
legally arguable or some ITC was available under Rule 36(4)].
CHAPTER V: CONCLUSION AND ANALYSIS
18
This clause was motivated by the historical backdrop of tax evasion by a little level of
undertakings and the powerlessness of the public authority to distinguish and contain the
issue in an orderly way. The Government expects that by enacting this regulation, the market
will self-weed out the bad apples - which is a reasonable assumption. What is mistaken is an
inability to fathom the cascade repercussions of doing as such practically speaking and the
subsequent intricacies. While the work expected to guarantee consistence will lessen, the
choose of organizations shutting and accordingly decreasing assortments has not been treated
in a serious way enough.
A survey conducted stated nearly 83 percent of the more than 1,200 companies polled were
unable to optimize input tax credit (ITC) claims in 2020-21, requiring most of them to defer
payments to non-compliant vendors. 36
According to the report, a global firm in India suffered a total loss of Rs 850 crore as a result
of poor ITC claim administration.37 This included Rs 50 crore in unclaimed ITC and Rs 800
crore in interest losses due to vendors' late submission. Another lifestyle company lost almost
Rs 200 crore due to ITC mismanagement, Rs 30 crore in unfiled ITC, and Rs 170 crore in
interest loss due to vendor late filing. Mid-sized businesses also experienced losses of Rs 15-
20 crore as a result of poor ITC management, according to the report. In 2021, more than 10
million Indian businesses would be required to collect ITC. Small vendors failing to file
invoices was a key source of inefficiency in the ITC optimization process, with 10 percent of
all valid ITC claims being held up owing to vendor delays. Large firms began holding the
goods and services tax (GST) amount during vendor payments until the vendor uploaded
invoices and it reflected in GSTR-2A, despite the fact that losses due to non-filing of invoices
by vendors forced almost all of those enterprises to hold payments of non-compliant vendors.
Close to 33% of organizations view the ITC claims process as unreasonably tedious and
badly designed. It features the shortcomings in the standard organization's return recording
process. 40% of GSTINs file quarterly filings, which causes ITC to be delayed. As vendor
36
CR Sukumar, Many Companies Unable to optimise Input Tax Credit Claims for FY21: Survey, THE
ECONOMIC TIMES, (May 23, 2022, 8:18 PM),
https://economictimes.indiatimes.com/news/economy/finance/many-companies-unable-to-optimise-input-tax-
credit-claims-for-fy21-survey/articleshow/83533495.cs.
37
Ibid.
19
payments are completed, this new practice forces businesses to do purchase reconciliation on
a more frequent basis.
Apart from raising awareness and improving vendor management, the process of refunding
unutilized ITC should be made simpler and an automated refund procedure should be put in
place. By allowing firms to receive their money on schedule, they will be able to better
manage their working capital. It will also assist them in saving time and reducing physical
labour. One of the most significant advantages of GST is that it was designed from the
ground up as a technology-enabled tax system.
By and large, the public authority has not successfully restricted the gamble of
misrepresentation since there was no sensible human capacity tracking and tracing the
perpetrators and culprits - who could/would constantly make apparition associations and/or
phantom bills. Against this backdrop, it's unsurprising that the Government wishes to contain
this threat.
GST, on the other hand, provides remarkable traceability. With Invoice Matching, all
erroneous bills and claims are eliminated. Yes, the issue of bogus corporations still exists,
but, with PAN and bank account linking, the traceability and discoverability are so great that
it will be nearly hard for individuals to perpetrate fraud and remain undiscovered.
A proposed acclimation to the proposed law that has the effect of decoupling payment from
the availability of input tax credits and reattaching it to invoice submission and matching will
bring the desired law to life and make it elective and useful for all.
20

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GUJARAT NATIONAL LAW UNIVERSITY

CONTINUOUS INTERNAL EVALUATION

‘INPUT TAX CREDIT MECHANISM UNDER GST’

GNLU Project* Details and Academic Integrity Form

Registration No. and Semester: 18B155, VIII Semester

Subject: Law of Taxation II

Faculty Member: Prof. (Dr.) Girish R

Faculty Member Assistant:

Allocation Date: 26th March 2022

Title Registration Date: 12th February 2022

Reason for selection of title:

Synopsis Filing Date:

Final Version Filing Date: 29th May 2022

Faculty’s pre-submission progress report, if

Extension of timeline requested and approved

Faculty Member Signature

Academic Integrity Declaration

WHO QUALIFIES FOR A GST INPUT TAX CREDIT?...............................................................5

CHAPTER II: UNDERSTANDING INPUT TAX CREDIT.............................................10

CASE LAWS: SECTION 16(1) IN THE COURSE OF PROMOTING BUSINESS................................11

CHAPTER III: AMBIGUITY OF INPUT TAX CREDIT................................................14

MISUSE OF INPUT TAX CREDIT (ITC)...................................................................................16

CHAPTER IV: RECENT AMENDEMENTS.....................................................................17

CHAPTER V: CONCLUSION AND ANALYSIS..............................................................19

The GST is made up of the following levies4:

WHO QUALIFIES FOR A GST INPUT TAX CREDIT?

 Issue of a tax invoice

WHO IS NOT ENTITLED TO INPUT TAX CREDIT?

 Individuals who are not GST registered;

WHAT IS THE TIME LIMIT OF AVAILING INPUT TAX CREDIT?

WHAT IS THE PROCEDURE FOR CLAIMING CREDIT FOR INPUTS IN STOCKS/CAPITAL

Procedure for claiming credit for inputs in stocks/capital goods11:

a. Section 16 litmus test;

b. Time limits set forth in Section 16(4);

c. Mischievous Rule 36(4);

d. The enigmatical GSTR 2A/2B;

e. Credit restriction in accordance with Section 17 (5);

f. Rule 86A(Blockage of Credit);

g. Rule 86B(1% Cash payment);

h. Reversals owing to 180 days condition;

i. Reversals pertaining to Rule 42/43;

j. ITC restrictions through Rate Notifications;

k. Broken limbs in form of GSTR 2 in absentia;

l. GSTR3B as proxy to GSTR 3.

SR. ELIGIBLE PERSONS CREDIT ENTITLED AS ON RESTRICTION/

WHAT IS CREDIT RESTRICTION?

Input tax credits might be asserted on goods/services traceable to only business-related

Total Input Tax

Eligible Total Input Tax Credit = T+ C13

Input Tax Credit shall not be available in respect of the following14:

• goods/services provided in relation to food and beverages, outdoor catering, beauty

CHAPTER II: UNDERSTANDING INPUT TAX CREDIT

Section 16(1)15Every registered person is entitled, subject to prescribed conditions and

CASE LAWS: SECTION 16(1) IN THE COURSE OF PROMOTING BUSINESS

REVERSAL OF CREDIT IN SPECIAL CIRCUMSTANCES

Therefore, when an Input Tax Credit is required to be reversed under particular

CHAPTER III: AMBIGUITY OF INPUT TAX CREDIT

MISUSE OF INPUT TAX CREDIT (ITC)

CHAPTER IV: RECENT AMENDEMENTS

CHAPTER V: CONCLUSION AND ANALYSIS

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