Concept of Input Tax Credit: © Indirect Taxes Committee, ICAI

1
Concept of Input Tax

Credit
© Indirect Taxes Committee, ICAI

2
What is Input Tax Credit
 Input means any goods other than capital goods used or intended to be used by a
supplier in the course or furtherance of business.
 Input service means any service used or intended to be used by a supplier in the
course or furtherance of business.
 Input credit means facility to deduct the tax paid on inputs at the time of
payment of tax on output and pay the balance to the government.
 Mr Rajesh manufactures output ‘B’ using input ‘A’. GST that he paid at 12% on
his purchase of Rs 1,00,000 of input ‘A’ is Rs 12,000. After value addition to
input ‘A’, he sold output ‘B’ at the price of Rs 1,50,000 by levying tax of Rs
18,000 at 12% on his customer. Before paying the tax that he collected from the
customer to the government, he deducts the tax of Rs 12,000 that he already paid
on his input to his supplier and pays the remaining balance of Rs 6,000 to the
government.
Principles on Input Tax Credit 3
 System for a seamless flow of credit
 Extends to inter-State supplies
 Credit utilization would be as follows [Sec 49(5)]:
Allowed for Payment of
Credit of:
IGST CGST SGST
IGST  (1)  (2)  (3)
CGST  (2)  (1)
SGST  (2)  (1)
*The numbers represent the order of utilization of credit

 Expectation: Accumulation of unutilized GST credits would be avoided except
in cases of exports
Cross Utilisation of ITC
4
Compensation
IGST CGST SGST UTGST Cess
Tax on Output
Less: Tax Credit
IGST on input 1st Priority 2nd Priority 3rd Priority 4th Priority Not Available
CGST on input 2nd Priority 1st Priority Not Available Not Available Not Available
SGST on input 2nd Priority Not Available 1st Priority Not Available Not Available
UTGST on input 2nd Priority Not Available Not Available 1st Priority Not Available
Compensation
cess Not Available Not Available Not Available Not Available Not Available

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6

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Rules for availing Input Tax Credit
To avail input tax credit, the following conditions need to be satisfied
 Input tax credit is available to only to a registered person

 He should be in the possession of taxpaying documents issued by a
supplier
 He should have received the goods and/or services
 The tax charged on such supply has been actually paid to the
government
 He has furnished the returns

Conditions for Availment of ITC by a
Registered Taxable Person – Sec 16 8
Tax actually paid by

Basis - tax invoice / the supplier to the
He has furnished the
debit note issued by credit of the
Goods and/or services monthly return in
a registered supplier, appropriate
have been received* Form GSTR-3 under
or other prescribed Government, either in
Section 39
taxpaying document cash or by utilization
of ITC

Conditions for Availment of ITC by a
Registered Taxable Person – Sec 16 9
Note:
• Credit only upon receipt of the last lot/ instalment in case of goods received in lots / instalments.
• Goods deemed to be received by a taxable person when the supplier delivers the goods to the
recipient/ any other person, on the direction provided by the taxable person to the supplier.
• Exception in case of goods being directly sent to job worker
• If the recipient of services fails to pay (value + tax) within 180 days from date of invoice, (ITC
availed + interest @ 18%) shall be added to his output tax liability. ITC available when amount
discharged later

Failure to make payment to supplier of input
goods/services 10
The recipient of input goods or services should make payment to the supplier
within 180 days from the date of issue of invoice by the supplier. Otherwise, ITC
shall have to be reversed.
Example: Tripura Hardwares Ltd. is a registered dealer under GST. It received
goods from its supplier with the invoice dated August 13, 2018 for amount
Rs 2,24,000 (value of supply is Rs 2,00,000 and GST is Rs 24,000). According to
GST Act, when should it pay Rs 2,24,000 to its supplier. If it makes the payment on
April 10, 2019, what next?
On or before February 9, 2019 within 180 days from August 13, 2018. If it makes
payment on April 10, 2019. If not paid, it has to show Rs 24,000 as output tax for
March 2018 while uploading GSTR 2 of March 2018. It has to pay interest at the
rate of 18% p.a. from August 13, 2018 till the date of payment of tax of Rs 24,000.
It can re-avail input credit of Rs 24,000 in April when it makes payment to the
supplier. Time limit specified above for availing ITC is not applicable in this case.
ITC in case of Capital Goods 11
Depreciation claimed on Tax component of the cost of ITC not Available

capital goods under IT Act
Example:
Cost of asset = Rs. 500000
GST -12%(say) = Rs. 60000
Total Cost Rs. 560000
If Depreciation charged on If Depreciation charged on

Rs.500000 Rs.560000
ITC Available ITC not Available
“capital goods” means the goods, the value of which is capitalized in the books of accounts of the
person claiming the credit and which are used of intended to be used in the course or furtherance
of the business
ITC on the Basis of use of Inputs – Sec 17 12
For Business Note: Attribution

ITC Available
purposes
of ITC to be made
Use of input tax as per the manner
credit prescribed in the
For Other ITC Rules
ITC not Available
Purposes
“input” means any goods other than capital goods used or intended to be used by a supplier in the course
or furtherance of business
“input service” means any service used or intended to be used by a supplier in the course or furtherance
of business

13
Example
 M/S traders, a furniture dealer bought furniture worth Rs 2,00,000 by paying GST at 12%.
Total value of supplies with tax is Rs 2,24,000. Out of this, Rs 1,00,000 worth of furniture
has been used for personal purpose.
 Hence, ITC is available only on Rs 12,000.

ITC on the Basis of use of Inputs – Sec 17 14
Use of input tax

credit: Partly for
Note: Attribution
Zero- Non- of ITC to be made
Taxable Exempt Nil-rated as per the manner
rated taxable
Supplies Supplies Supplies
Supplies Supplies prescribed in the
ITC Rules
ITC ITC not

ITC Available ITC not available
Available available
Alternative to apportionment between taxable and exempt supplies in case of banking companies
and financial institutions:
• Yearly option to avail a standard rate of 50% of eligible ITC on inputs, capital goods and input
services on a monthly basis
• 50% shall not be applied on tax paid on supplies made by one registered person to another
registered person having same PAN
Restrictions on ITC – Sec 17(5)
Blocked credits 15
a) Motor Vehicles
 Transportation of goods , or
 Making the following taxable services:
ITC for Motor Except i. Further supply of such vehicles /
Vehicles will when conveyances, or
NOT be they are ii. Transportation of passengers, or
available used for iii. Training for driving / flying /
navigating such vehicles /
conveyances
Note: Where any amount has been paid on goods and / or services, in lieu of tax, under
composition scheme, no credit on such amount would be allowed.

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Examples
 Balaji bricks is in the manufacturing of bricks. It buys a car for its employees. Is
ITC available on such a car?
Input tax credit is not available even if car is meant for official purpose.
 Maruti true value purchases a car for resale. Can it avail ITC?
 It can avail ITC, as it is for further supply of such vehicles or conveyances
 Royal driving school purchases Indica for providing training on driving.

 ITC is available.

Blocked credits 17
b) Supply of goods and services being:

Allowed ONLY if goods /
Cosmetic services of a particular
Food and Outdoor Beauty Health
and Plastic category are used towards
Beverages Catering Treatment Services
Surgery making taxable outward
supplies of the same category
Life / health
Rent-a-cab
Insurance
Health and Travel

Membership
Allowed ONLY if where the services are notified as Fitness Benefits to
of club
obligatory for an employer to provide an employee Centre employees
or services of a particular category are used
towards making taxable outward supplies of the
same category NEVER allowed
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Examples
 Reddy’s Labs purchases 100 cases of cold drinks for distributing in its dealer meet. Is ITC
available?
 ITC is not available.
 Taj Krishna purchases 100 bottles of beverages to be served in a Buffet lunch. Is ITC
available?
 A company takes group health insurance policy for its employees by paying insurance
premium of Rs 10,00,000 and GST, as it is mandatory under Government regulations. Is ITC
available?
 TCS provides LTC to its employees. Is ITC available?
 No

Blocked credits 19
c) Construction of Immovable Property (other than plant and machinery)
Goods or services received by a

Works contract services,
taxable person for construction of an
except where it is an input
immovable property on his own
service for further supply of
account even when used in course or
works contract service
furtherance of business;
Construction includes re-

construction, renovation,
ITC not Available additions or alterations or
repairs to the extent of
capitalisation
Restrictions on ITC : Sec 17(5)
Blocked credits 20
 Taxes on supply of goods or services paid u/s 10
 Goods or services or both received by a non-resident taxable person except on goods

imported by him, shall not be allowed
 Goods or services or both used for personal consumption
 Goods lost, stolen, destroyed, written off or disposed of by way of gift or free supplies and
 Any tax paid in accordance with the provisions of sections 74, 129 and 130 (fraud cases).
Plant and machinery means means apparatus, equipment, and machinery fixed to earth by foundation
or structural support that are used for making outward supply of goods or services or both and includes
such foundation and structural supports but excludes— (i) land, building or any other civil structures;
(ii) telecommunication towers; and (iii) pipelines laid outside the factory premises.

Example
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 A company buys sand, bricks and other construction related material
and appoints a contractor to construct a parking area for its employees.
Is ITC allowed?
 The input tax paid on such goods and services is not allowed as credit.
However, when contractor obtains services from a sub-contractor, ITC
is available to contractor.
 A book publishing house gives free samples of text books to the
professors of University. Is ITC available?
 No GST is applicable on such outward supplies. Hence, input tax
credit is not available.
 During the investigation, it was found that Mr. Raj defaulted GST
payment of Rs 5 lakh, which was subsequently paid.
 ITC is not available
ITC Not Available
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-Food and beverages, outdoor catering, beauty -Except when used towards making taxable outward -Membership of a club,
treatment, health services, cosmetic and plastic surgery supplies of the same category health and fitness centre
-Rent a cab, life insurance and health insurance -Except where the services are notified as obligatory -Travel benefits (LTC or
for an employer to provide an employee HTC etc.)
-Works contract services when supplied for construction -Except where such immovable property is plant and -Goods/services on
of an immovable property machinery or it is an input service for further supply which tax paid by a
of works contract service person Composition
Scheme
-Goods/services used for
-Goods/services received by a taxable person for -Except where such immovable property is plant and
personal consumption
construction of an immovable property on his account machinery
even when used in the course or furtherance of business
-Goods lost, stolen,

-Except when goods are imported by him destroyed, written off or
-Goods/services received by a non-resident taxable disposed of by way of
person gift or free samples
-Motor Vehicles and Other Conveyances -Except when used for
•Transportation of goods -Any tax paid in

•Further supply of such vehicles / conveyances, accordance with the
provisions of sections
•Transportation of passengers 74, 129 and 130 (fraud
© Indirect Taxes Committee, ICAI etc)
•Training for driving / flying / navigating such vehicles /
conveyances
Eligibility and Time Limit for Availing ITC 23
Earlier of :
Admissible to take 1. Annual Return filing
ITC on supplies ITC amount will be Date
Registered Taxable used / intended to be credited to the 2. Return filing date for
Person – 16(1) used in the course / electronic Credit September of the
furtherance of Ledger following FY
Eligibility and Time Limit of ITC
business
Availment
ITC available in On the day

Person applied for
respect of: immediately
registration within 30
a) Inputs preceding the date
days of becoming One Year from
b)Semi-finished from which he
liable to register, and the date of issue
Good becomes liable to pay
registration granted of tax invoice
c) Finished Goods tax
18(2)
On the day
Person applied for
immediately
Voluntary Same as above
preceding the date of
Registration
registration
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 Example: Mr. Shiv, a registered dealer under GST received goods/services on

February 25, 2018. Eligible input tax credit for the same is Rs 1,25,000. He can
claim ITC any time after February 25, 2018. However, he can’t claim after
 i. October 20, 2018 (due date of furnishing of GST return for September
2018) or
 ii. Date of filing of annual return for the financial year 2017-18 (due date is
December 31, 2018)
 whichever is earlier.
 If annual report is uploaded on December 31, the credit can be claimed on or

before October 20, 2018. If annual report is uploaded on October 12, the credit
can be claimed on or before October 12, 2018.
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Example
 Mr. Kanishka is in manufacture and sale of cosmetics in Bangalore. He became
liable to register under GST on November 10, 2018, as his aggregate turnover just
crossed threshold limit on that day. He applied for registration on November 15,
2018 and was allotted GSTIN on November 17, 2018. From when is he eligible for
ITC?
 He is eligible for input tax credit on input held in stock as on November 9, 2018.
 The closing stock on November 9, 2018 is worth Rs 1,00,000. Out of which Rs
20,000 worth of stock was bought and was invoiced on September 10, 2017 and
GST on such invoice was Rs 1,000. Is ITC available on Rs 1,000
 ITC is not available.

26
Example
 Mr. Tripathi manufactures and sells plastic toys and his aggregate turnover is Rs 12 lakh.
He applied for GST registration voluntarily on November 12, 2018 and GSTIN was
allotted on November 16, 2018.
 ITC is available to him on input held in stock as on November 15, 2018.
 ITC is not available to him after the expiry of 1 year from the date of issue of tax invoice
relating to such supply

Eligibility and Time Limit for Availing ITC 27
Earlier of :
1. Annual Return
Eligibility and Time Limit of ITC Availment
filing Date
ITC available in
On the day 2. Return filing date
respect of: for September of
immediately
Registered taxable a) Inputs/ Capital the following FY
preceding the date
person ceases to pay Goods
from which he
composition tax b)Semi-finished
becomes liable to
Good
pay tax u/s 8
c)Finished Goods
One Year from the
date of issue of tax
On the day invoice 18(2)
Where exempt immediately
supply become Same as above preceding the date
taxable supply on which supply
becomes taxable

28
Example
 Mr. Akash is in the business of selling gift items. He opted for Composition
Scheme and pays GST at 1% rate. His aggregate turnover crosses threshold
exemption of Rs 1 cr. Consequently, he ceases to pay under composition scheme
from October 16, 2018. From when is he eligible to take ITC?
 He is entitled to take input tax credit on input stock held on October 15, 2018.
However, credit on capital goods shall be computed proportionately for
remaining useful life of the asset.
 For example, fresh milk is exempt under GST as of now. If government
announces it as taxable, similar clause as above is applicable.

Eligibility of ITC in case of New Registrations –
Sec 18(1) 29
Person liable for Entitled to credit of Relevant Date: As

registration u/s Who applies for input tax w.r.t on the preceding
25(1) registration within inputs held in stock, date on which he
30 days semi-finished or becomes liable to
( finished goods pay tax

Eligibility of ITC in case of New Registrations
(Voluntary Registration) – Sec 18(1) 30
Entitled to credit of
Relevant Date: As on
input tax w.r.t inputs
Person liable for the preceding date on
held in stock, semi-
registration u/s 25(3) which registration is
finished or finished
granted
goods

Switching from Composition / Exempt Supply
to Normal Tax / Taxable Supply – Sec 18(1) 31
Entitled to
credit of input
Relevant Date:
tax w.r.t inputs
Person ceases As on the
held in stock,
to pay tax u/s preceding date
semi-finished
10 on which liable
or finished
to pay u/s 9
goods and
Capital Goods
Entitled to credit of
input tax w.r.t inputs Relevant Date: As on
Goods or Services held in stock, semi- the preceding date
becoming taxable finished or finished from which supply
goods and Capital becomes taxable
Goods
Credit on Capital Goods to be available after reducing 5% per quarter of a year or part from the
date of invoice or such other document on which capital goods were received by taxable person
Conditions for claiming credit under – Sec
18(1) 32
 Purchase invoice should not be earlier than 1 year from the relevant date
 Declaration in Form GST ITC-01 to be filed within 30 days from the date
of him becoming eligible
 Details of Inputs held in stock / semi finished or finished goods and

capital goods to be furnished in Form GST ITC-01 within 30 days from
the relevant date
 Declaration in Form GST ITC-01 to be certified by a practicing Chartered

Accountant or Cost Accountant if the value of credit claimed exceeds Rs.
2,00,000
ITC – Change in Constitution of Taxable
Person Sec 18(3) 33
Transfer of Unutilized
On account of: ITC in the books
 Sale, allowed to such:
Change in
 Merger,  Sold,
Constitution of
 Demerger,  Merged,
Registered Taxable
 Amalgamation,  Demerged,
Person
 Lease, or  Amalgamated,
 Transfer of business  Leased, or
 Transferred Business
 ITC shall be apportioned in the ratio of value of assets of the new units in case of demerger scheme
 Transferor to submit certificate from a practicing Chartered Accountant certifying whether the sale /
merger / de-merger / amalgamation / lease / transfer has been done with specific provision for transfer
of liabilities
 Transferee to furnish details of credit available in Form GST ITC-02

Switching from regular to over composition-
Pay and Exit – Sec 18(4) 34
Eligible credit under earlier law carried forward in the return
Amount equivalent to the credit of input tax in respect of input held in stock or input
contained in semi-finished goods or finished goods held in stock and capital goods as
on appointed day
Such amount shall be payable by debiting the electronic credit ledger or cash
ledger
Balance in electronic credit ledger shall lapse
Declaration for input tax reversed to be submitted in Form GST ITC-3

Example 35
 Mr. Ganguli purchases a machinery on August 10, 2017 by paying GST of Rs 5,00,000.
He avails ITC on the said amount immediately. He opts for composition scheme from
January 5, 2018. Since, ITC is not available under composition scheme, ITC that was
availed in August 2017 will have to be reversed.
 Assuming useful life of machinery is 5 years (60 months), life of asset used is
approximately 5 months (from August 10 to January 5) and remaining life is 55 months.
ITC will have to be reversed proportionately 5 lakh ×55/60 = Rs 4,58,333.
 If he has balance of Rs 1,00,000 in his electronic credit ledger, after reversing of ITC to
the extent of balance available, he has to pay the balance of Rs 3,58,333 through
electronic cash ledger. If balance in his electronic credit ledger is Rs 6,00,000, after
reversing the whole amount of Rs 4,58,333, the remaining balance of Rs 1,41,667 will
lapse.

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1

Concept of Input Tax

© Indirect Taxes Committee, ICAI

*The numbers represent the order of utilization of credit

Less: Tax Credit

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

 Input tax credit is available to only to a registered person

© Indirect Taxes Committee, ICAI

Tax actually paid by

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

Depreciation claimed on Tax component of the cost of ITC not Available

If Depreciation charged on If Depreciation charged on

For Business Note: Attribution

© Indirect Taxes Committee, ICAI

 Hence, ITC is available only on Rs 12,000.

© Indirect Taxes Committee, ICAI

Use of input tax

ITC ITC not

© Indirect Taxes Committee, ICAI

 Royal driving school purchases Indica for providing training on driving.

© Indirect Taxes Committee, ICAI

b) Supply of goods and services being:

Health and Travel

© Indirect Taxes Committee, ICAI

c) Construction of Immovable Property (other than plant and machinery)

Goods or services received by a

Construction includes re-

 Goods or services or both received by a non-resident taxable person except on goods

 Goods or services or both used for personal consumption

© Indirect Taxes Committee, ICAI

-Goods lost, stolen,

•Transportation of goods -Any tax paid in

ITC available in On the day

 Example: Mr. Shiv, a registered dealer under GST received goods/services on

 If annual report is uploaded on December 31, the credit can be claimed on or

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

Person liable for Entitled to credit of Relevant Date: As

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

 Details of Inputs held in stock / semi finished or finished goods and

 Declaration in Form GST ITC-01 to be certified by a practicing Chartered

 Transferee to furnish details of credit available in Form GST ITC-02

Eligible credit under earlier law carried forward in the return

Balance in electronic credit ledger shall lapse

Declaration for input tax reversed to be submitted in Form GST ITC-3

© Indirect Taxes Committee, ICAI

© Indirect Taxes Committee, ICAI

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