The implementation of the Goods and Services Tax (GST) is one of the biggest tax reforms in the country. The principle reason why GST is such a landmark tax reform is because, for the first time in the history of the country, there will be the ability for the tax payer to take credit for all taxes incurred in the supply chain that are eligible for credit.
This is vastly different from the pre GST scenario, where credit for state taxes was not allowed while paying central taxes and vice versa. For example, an IT service provider liable to pay tax on services rendered is permitted to take credit of central levies ie service tax and excise duty, but is not permitted to take credit of state VAT / Central Sales Tax on its purchases. This results in a cascading effect on taxes, as not creditable taxes increase the cost base of the service provider, in turn increasing the price of the service on which the service tax is levied.
Under the GST regime, all taxes paid will be creditable while paying tax on the next leg of the economic chain. As such, there will be tax only on the net value add at each stage. However, there are rules attached to the manner in which input tax credit can be claimed. It is essential that these rules are followed to ensure that there is no loss of credit in the chain. These have been elaborated further in the following paragraphs:
Who is eligible to claim credit of input taxes?
Only a registered person is entitled to claim credit of input taxes and therefore it is essential that a supplier takes a registration in each state where it has credit pools.
Can credits be claimed on all types of expenses?
Input tax credit can be claimed with respect to:
- Input services; and
- Capital goods
Input tax credit on capital goods can be claimed in the first year of purchase, provided income tax depreciation is not claimed on the GST paid thereon. There would be a requirement to reverse credit in the event of sale of the capital goods in subsequent years, based on a depreciated value.
Capital goods would cover all goods which are capitalized in the financial statements.
What are the conditions to be fulfilled for claiming credit of input tax?
The following conditions would have to be fulfilled in order to claim credit of input taxes paid:
- The expenses / tax in question would have to be declared as an inward supply in its return of inward supplies (GSTR 2) and would have to be electronically matched with the corresponding return of outward supplies (GSTR 1)
- The expenses should be incurred in the course or furtherance of business
- The goods / services should have been received
- Possession of a tax invoice, debit note, or such other taxpaying document
- The expenses should not fall within the list of expenses for which credit will not be allowed
- The vendors should be paid within 180 days from the date of the invoice
What happens when the tax paid to the supplier has not been deposited by him and not disclosed in his return?
When a supplier does not disclose a supply made in his return and has therefore failed to discharge the taxes with respect to the same, the customer would not be entitled to such credit.
These mismatches are reflected in the customer’s auto populated return for inward supplies and the customer is given time until the filing of his return for the subsequent return to rectify the same.
Discrepancies not ratified are added to the output liability of the customer in the return succeeding the month to which the error pertains to. In other words, a recipient claiming input tax credit has effectively 2 months from the month of procurement to rectify mismatches in the claims he makes.
This is in line with the philosophy of seamless flow of credit through the chain from manufacturer/ importer to the end customer and also with the concept of matching of invoices, ie, linking the invoice disclosed and tax payment by the supplier to the availment of input credit to the purchaser. .
What happens when the supplier is not registered and has therefore not charged a tax on his invoice?
Where GST on taxable supplies has not been charged by a supplier, one of the reasons for this could be that his turnover is below the threshold for registration.
Given this, he would qualify as an unregistered dealer. A person making purchases from an unregistered dealer is required to discharge GST on such purchases as the recipient of service under reverse charge.
He would subsequently be eligible to input credit of such tax paid subject to it qualifying as an input credit.
What are the list of goods/ services that are not eligible as credits?
- Motor vehicles - except when
- used for further taxable supply of such vehicle or conveyance;
- used for providing taxable service of transportation of goods/ passengers;
- Imparting training on driving, flying, navigating such vehicle or conveyance
- Any goods / service that are given as personal use of for consumption by the employee (examples: health and fitness center, rent-a-cab, life and health insurance etc)
- Works contract services used for construction of immovable property(except plant and machinery);
- Goods or services received by a taxable person for construction of immovable property on his own account (except plant and machinery);
- Goods/ services on which tax has been paid under composition scheme;
- Goods/ services used for private or personal consumption;
- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Are there any restrictions applicable in case the input tax credit pertains to expenses incurred for exports / exempt / non taxable supplies?
Input tax credit would be available for expenses incurred for exports / supplies to SEZ’s. Such input tax credit could be utilized to pay domestic liability or could be claimed as a refund.
Input tax credit for expenses exclusively incurred for exempt / non taxable supplies would not be available. Such credit would have to be tracked separately.
Additionally, proportionate reversal method has been prescribed for common credits.
What are the conditions applicable for common input credits used for both business and non-business purposes?
In the event of common inputs / assets / services that are used for both business as well as non-business purposes, 5% of input tax credit would have to be reversed.
What is the time limit for availing credit of input taxes?
Input tax credit can be claimed on invoices issued within the financial year upto September 30 of the following year. Therefore, for an invoice dated August 1, 2017 as well as an invoice dated March 31, 2018, the last date for the claim is September 30, 2018.
Do watch this space for our next article in the GST series – Place of supply: Relevant provisions for the IT / ITES segment
The above blog is based on inputs from our GST knowledge partner, BMR Advisors. The blog is with the intent to provide general guidance and does not render any definitive opinion. Prior professional advice is recommended before implementation of any aspects covered above.