Requirements for Availing Input Tax Credit Under GST

Input Tax Credit (ITC) refers to the Goods and Services Tax (GST) that a registered taxpayer has paid on acquired goods or services intended for business operations. This credit allows businesses to offset the GST paid on purchases against the GST collected on sales, thereby reducing their overall tax liability. However, the ability to claim ITC is subject to specific conditions outlined in GST law, which have evolved to include provisions like GSTR-2B, making the process more stringent compared to the pre-GST era. Recent legal updates have further refined these claim requirements.

Recent Amendments

July 23, 2024

The Union Budget 2024 introduced several proposed changes impacting Input Tax Credit:

1. Section 17(i) of the CGST Act is being revised to limit ITC blockage for taxes paid under Section 74 for demands up to FY 2023-24. References to Sections 129 and 130 concerning detention, seizure, and confiscation of goods will be removed.
2. Section 31(f) of the CGST Act is being modified to allow for the prescription of a time limit for invoice issuance by recipients under the reverse charge mechanism.
3. New paragraphs 8 and 9 are being added to Schedule III of the CGST Act. These will classify the apportionment of co-insurance premiums by a lead insurer to co-insurers and services by insurers to reinsurers regarding ceding/re-insurance commissions as neither a supply of goods nor services, subject to certain conditions.
4. New sub-sections 16(5) and 16(6) are being introduced into the CGST Act to relax the time limit for availing ITC under Section 16(4), effective from July 1, 2017:
   • For initial GST implementation years (FY 2017-18, 2018-19, 2019-20, and 2020-21): Registered persons can claim ITC for invoices or debit notes pertaining to these financial years in any return filed under Section 39 up to November 30, 2021.
   • For cases with returns filed post-revocation: The deadline to claim ITC for invoices or debit notes, in situations where returns were filed after the cancellation of registration was revoked, will be extended until the filing date of the respective GSTR-3B return, provided this return is submitted within thirty days of the cancellation revocation order.

Criteria for Claiming Input Tax Credit under GST

Section 16 of the CGST Act outlines several conditions that GST-registered buyers must satisfy to claim ITC. These conditions include:

• The purchased goods or services must be exclusively for business purposes, not personal use.
• The buyer must possess a valid tax invoice, debit note, or other payment evidence for the purchase. For example, if a taxpayer identifies an ITC entry in GSTR-2B but has not yet received the corresponding invoice by the return filing date, they cannot claim that ITC in their GSTR-3B.
• The supplier must have filed the tax invoice or debit note in Form GSTR-1, and it must reflect in the buyer's Form GSTR-2B. Without its appearance in GSTR-2B, the ITC cannot be claimed, even if the buyer holds the physical invoice.
• As of January 1, 2022, the provision for provisional ITC claims under Section 16(2)(aa) has been discontinued. This means that the ITC claimed in GSTR-3B must exactly match the actual ITC visible in GSTR-2B. The earlier allowance of claiming 5% provisional ITC beyond GSTR-2B figures is no longer applicable. Therefore, diligent reconciliation of purchase records with GSTR-2B is essential.
• The buyer must have received the goods or services. Goods are considered received upon delivery to the buyer, their representative, agent, or another directed party, accompanied by a title transfer document. Services are deemed received when rendered to the buyer or another directed party. For instance, if an invoice is received but the goods have not yet been delivered, ITC cannot be claimed until physical receipt.
• The buyer is required to file their GST returns using Form GSTR-3B.
• For goods delivered in lots or installments, ITC can only be claimed upon the receipt of the final lot or installment.
• The buyer must remit payment for the supplied goods or services within 180 days from the invoice date. If they fail to do so necessitates the reversal of claimed ITC, along with applicable interest under Section 50. The ITC can be re-claimed once the payment is successfully made to the supplier.
• ITC cannot be claimed on the tax component of a capital good if depreciation has already been claimed on that tax amount.
• ITC related to a tax invoice or debit note for a specific financial year must be claimed within the time limit stipulated by GST provisions, as further detailed in the subsequent section.
• Common credit of ITC, used for both exempt and taxable supplies, or for business and non-business activities, must be accurately identified and apportioned.
• Certain items are specifically excluded from ITC claims under Section 17(5) of the CGST Act, which lists blocked credits.

Deadline for Availing Input Tax Credit

The deadline for claiming ITC against an invoice or debit note is determined by the earlier of these two dates:

• November 30 of the financial year immediately following the year to which the invoice or debit note pertains.
• The actual date of filing the annual return in Form GSTR-9 for that specific financial year.

For example, if a company, ABC Ltd., has a purchase invoice dated December 8, 2021 (for FY 2021-22), and wishes to claim the associated GST. The two relevant dates would be:

• November 30, 2022.
• The filing date for the annual GST return for FY 2021-22, which is typically December 31, 2022.

The earlier of these dates, November 30, 2022, represents the final opportunity for ABC Ltd. to claim ITC for FY 2021-22. This credit could be availed in any tax period from April 2021 up to October 2022. It is important to note that for debit notes, this condition applies to the debit note's date, not the original invoice's date.

Ineligible Categories for Input Tax Credit Claims

Input Tax Credit cannot be claimed in the following scenarios:

• Motor Vehicles and Conveyances: ITC is generally restricted for motor vehicles with a seating capacity up to 13 persons (including driver), goods transport agencies, vessels, and aircraft. Exceptions apply if these are intended for further supply (resale), passenger or goods transport, or used for training purposes in driving, flying, or navigating.
• Related Services for Conveyances: Services such as general insurance, servicing, repair, and maintenance pertaining to the aforementioned motor vehicles, vessels, or aircraft are also ineligible for ITC.
• Personal Consumption Items: Food and beverages, outdoor catering, beauty treatments, health services, and cosmetic or plastic surgery are ineligible. However, if these goods or services are procured to provide the same category of services or as part of a composite supply, ITC may be allowed. For example, purchasing cosmetic creams for resale to a customer would qualify for ITC.
• Club Memberships and Wellness: Memberships to clubs, health, and fitness centers do not qualify for ITC.
• Rental and Insurance Services: Rent-a-cab services, health insurance, and life insurance are typically ineligible for ITC, with exceptions where:
  • Providing these benefits to employees is mandated by law (e.g., mandatory cab services for female staff on night shifts).
  • The goods or services are acquired to deliver identical services or as part of a composite supply (e.g., a business providing rent-a-cab services to customers can claim ITC on its own rented cabs).
  • Leasing, renting or hiring motor vehicles, vessels or aircraft, except for those specifically restricted in the first point.
• Employee Travel Benefits: Travel benefits provided to employees for vacation, such as leave or home travel concessions, are not eligible for ITC.
• Works Contract for Immovable Property: Works contract services for constructing immovable property are ineligible, except when for plant and machinery or for further supply of works contract services.
• Construction of Immovable Property: Goods and/or services used for constructing any immovable property, whether for personal or business use, are not eligible for ITC.
• Composition Scheme Supplies: No ITC is allowed on goods or services where tax has been paid under the composition scheme.
• Personal Use: Goods or services utilized for personal consumption are not eligible for ITC.
• Non-Resident Taxable Persons: ITC is generally unavailable for goods or services received by a non-resident taxable person, excluding imported goods.
• Lost or Disposed Goods: Goods that are lost, stolen, destroyed, written off, or given as gifts or free samples are ineligible for ITC.
• Fraudulent ITC: ITC cannot be availed if the tax was paid due to non-payment, short payment, excessive refund, or ITC utilized/availed through fraud, willful misstatements, suppression of facts, or confiscation and seizure of goods.
• Special Cases: Standalone restaurants, despite charging 5% GST, are typically not eligible to claim ITC on their inputs.
• Corporate Social Responsibility (CSR): Expenditure on CSR initiatives by corporations is not eligible for ITC.

For additional details on ineligible ITC claims, please refer to the article on ‘Ineligible ITC under GST’.