INDIRECT TAX

INPUT TAX CREDIT

→ Input tax credit is allowed for capital goods, inputs, and input services.

Section Topic

16 Eligibility and Conditions to claim ITC

Apportionment of credits and Blocked

17
Credits

18 Credit in special circumstances

 Section 16: ELIGIBILITY AND CONDITIONS TO CLAIM ITC

Section Particulars Notes

16(1) Eligibility to claim ITC • Reg. under GST is necessary.
• ITC is s.t. provisions of Sec 49 i.e. payment of tax,
interest, penalty, lates fees etc.
• ITC available for G/S used in the "Course or
furtherance of Business."
• "Intention to use" must be there.
• ITC is credited in Electronic Credit Ledger

16(2) Conditions to claim ITC • 6 clauses under this subsection

• (a), (aa), (b), (ba), (c), (d)
• ITC can be availed only if all above conditions are
satisfied
 Section 16(2): Conditions to be Satisfied for Taking Input Tax Credit
Section Particulars Notes
16(2)(a) Possession of Tax paying
Documents like:
Document
• Invoice issued by supplier/recipient in case of RCM
•Debit Note issued by supplier
• Bill of entry prescribed under Custom Act
• Revised Invoice
• Document issued by Input Service Distributor

Document should contain:

• Amount of tax charged
• Description of G/S
• Total VOS
• GSTIN of supplier & recipient
• Place of Supply in case of Inter-State supply.

ITC can't be availed if obtained by fraud or willful misstatements or

hiding facts

16(2)(aa) Details of Supplier & • Supplier should furnish the details of all the outward supplies
Recipient should match made by him in Form GSTR-1
↓

• Details are uploaded electronically/automatically to recipient in

GSTR-2A i.e. Statement of Inward Supplies
↓

• GSTR-2B i.e. ITC Statement will be updated for every GSTR-1 filed
by suppliers

16(2)(b) Receipt of Good or • ITC can be claimed if G/S(s) is received.

Services • In case of "Bill To - Ship To" Model, where good are delivered to
third party on direction of the registered person who bought the
goods, it would be deemed that goods have been received by
Purchaser i.e. registered person & would get ITC.

Question:
X is a trader who places an order on Y for a consignment of chemicals. X receives a buying order from Z for the
same quantity of chemicals. X instructs Y to deliver the goods to Z, and in turn he raises an invoice on Z. Would
X be entitled to ITC?

Solution:
Though the goods are not physically received at the premises of X, the condition of Section16(2)(b) is satisfied,
and X is entitled to ITC on the consignment.

Section Particulars Notes

16(2)(ba) ITC must not be restricted The details of input tax credit in respect of the said supply
is communicated to such registered person

16(2)(c) Tax charged is actually • Recipient can claim ITC only if the respective supplier has actually
paid to Government paid tax charged on the G/S either by utilizing ITC or Cash Ledger.
• On basis of details available in GSTR-2A & GSTR-2B [auto-

16(2)(d) Furnishing of Return • Returns should be filed in Form GSTR-3B

∙ 1st Proviso to Goods received in Lots → ITC can be taken only upon receipt of the last lot/installment.
Sec 16(2)
Section Particulars Notes
16(3) ITC Not Admissible if • If the person taking the ITC on capital goods and plant and machinery has
Depreciation Claimed on claimed depreciation on the tax component of the cost of the said items under
Tax Component the Income-tax Act 1961, the ITC on the said tax component shall not be allowed.
• In other words, either depreciation on the tax component can be claimed
under Income Tax Act or ITC of such tax paid can be availed under GST laws.

16(4) Time Limit to taking ITC W.e.f 01/10/2022, this section has been amended as follows:
A registered person shall not be entitled to take ITC in respect of any invoice or
debit note for supply of goods or services or both.
i) after the 30th day of November following the end of financial year to which
such invoice or debit note pertains
ii) furnishing of the relevant annual return
w.e.earlier
• This time limit doesn't apply to re-avail the ITC that had been reversed earlier

Provision regarding Debit Note:

Eg: Mr. X sells good worth Rs. 100 (exclusive of CGST & SGST @ 9% respectively) to Mr. A on 20-02-2022 [F.Y.
21-22]. Hence Mr. A could avail its ITC before 30-11-22 or date of filing return, w.e.earlier. But on 10-05-2023
[F.Y. 22-23] goods are returned by Mr. A. Therefore, the ITC of the good returned will also be returned to Mr.
X.
Ques: What will the time-limit for Mr. X to claim the ITC of the goods returned? Which F.Y. will be
applicable? Invoice or Debit note F.Y.?
Answer: It has clarified that with effect from 01.01.2021, in case of debit notes, the date of issuance of debit
note (not the date of underlying invoice) shall determine the relevant financial year for the purpose of
section 16(4).
Hence, the time-limit to claim the ITC is 30-11-23 or date of filing return, w.e.earlier
∙ 2nd Payment for the Invoice to • The registered person must pay to the supplier, the value of the goods and/or
proviso to be made within 180 Days services along
Sec 16(2) with the tax within 180 days from the date of issue of invoice.
OR • If he fails to do so, he shall furnish the:
Rule 37: o details of such supply,
Procedure o the amount of value not paid, and
for Reversal o the amount of input tax credit availed of proportionate to such amount not
of ITC paid
To the supplier in Form GSTR-2 [Statement of purchases in a month] for the
month immediately following the period of 180 days from the date of the issue
of the invoice.
• Interest will be paid @ 18% from the date of availing credit till the date when
the amount.
• However, once the recipient makes the payment of value of goods and/or
services along with tax, he will be entitled to avail the credit again without any
time limit u/s 16(4).
• Proportionate credit would be allowed, in case of part payments

Exceptions to this proviso a) Supplies on which tax is payable under reverse charge
b) Deemed supplies without consideration
c) Additions made to the value of supplies on account of supplier’s liability, in
relation to such supplies, being incurred by the recipient of the supply
 Section 17: Apportionment of credits and Blocked Credits
BLOCKED CREDITS
The negative list covers mainly items of personal consumption, inputs use of which results into formation of an
immovable property (except plant and machinery), telecommunication towers, pipelines laid outside the factory
premises, etc. and taxes paid as a result of detection of evasion of taxes.

It has a total of 11 clauses → (a), (aa), (ab), (b), (c), (d), (e), (f), (g), (h), (i)

Section Particulars Notes

17(5)(a) Motor Vehicles • Tax paid on purchase of ineligible motor vehicles cannot be claimed as ITC.
• “Ineligible motor vehicles” means motor vehicles for transportation of persons
with seating capacity ≤ 13 persons (including the driver).
Exceptions : If the ineligible motor vehicles are used for any of the following
purposes, ITC can be claimed -
→ making further taxable supply of such motor vehicles;
→ making taxable supply of transportation of passengers;
→ making taxable supply of imparting training on driving such motor vehicles.
• Motor vehicle used for transportation of goods, dumpers, tippers etc. used for
any purpose, ITC can be claimed

17(5)(aa) Vessels & Aircrafts • Tax paid on purchase of vessels and aircrafts cannot be claimed as ITC.

Exceptions : If the vessels and aircrafts are used for any of the following purposes,
tax paid on their purchase can be claimed as ITC -
→ making further taxable supply of such vessels or aircraft;
→ making taxable supply of transportation of passengers;
→ making taxable supply of imparting training on flying such aircrafts & vessels;
→ doing transportation of goods.

17(5)(ab) General Insurance, • The Input Tax Credit in respect of general insurance, servicing, repair and
Servicing, Repair and maintenance of the motor vehicle, vessels, or aircrafts which are not entitled for
Maintenance Relating to Input Tax Credit shall not be allowed.
Ineligible Motor
Exceptions : ITC is allowed on -
→ Ineligible motor vehicles, vessels or aircraft when used for
eligible purposes
→Such services when received by:
▪ Manufacturer of ineligible motor vehicles, vessels or aircraft; or
▪ Supplier of general insurance services in respect of ineligible motor vehicles,
vessels or aircraft insured by him

In short, ITC is allowed on services of general insurance, servicing, repair and

maintenance relating to motor vehicles, vessels or aircraft, ITC on which is
allowed.
Section Particulars Notes
17(5)(b) Food & Beverages, Outdoor
Catering, Health Services
and Other Services
→ PART 1: ITC is not allowed on:
▪ Food and beverages
▪ Outdoor catering
▪ Beauty treatment
▪ Health Services Cosmetic and plastic surgery
▪ Life insurance and health insurance
Exceptions :
1) Such goods and/or services when used by a registered person for
making an outward taxable supply of the same category of goods
and/or services or as an element of a taxable composite or mixed
supply. E.g., outdoor catering service availed by another outdoor
caterer.
2) Such goods and/or services when provided by an employer to its
employees under a statutory obligation

→ PART 2: • ITC is not allowed on membership of a club, health and fitness

center or travel benefits extended to employees on vacation such as
leave or home travel concession
Exception : ITC is allowed on such services when provided by an
employer to its employees under a statutory obligation

17(5)(c) Works Contract Services for • Immovable Property Construction - ITC Blocked
Construction of Immovable • Other than Immovable Property - ITC is available (repairs,
Property maintenance, renovation etc. of office and factory building)
Exception : ITC on works contract services for construction of
immovable property is available when -
i) When the works contract service is availed by a works contractor
for being used in providing the works contract service.
ii) For construction of plant and machinery. In this case, ITC is
allowed to all recipients irrespective of their line of business.
iii) When the value of works contract service is not capitalized. In this
case, ITC is allowed to all recipients irrespective of their line of
business.

→ "Plant & Machinery" excludes:

▪ land, building or other civil structures,
▪ telecommunication towers
▪ pipelines laid outside the factory premises*
*Note: Credit on pipelines is blocked only if the pipelines are laid
outside the factory premises, as it is specifically excluded from the
definition of plant and machinery. Therefore, if the pipelines are laid
out inside the factory premises, ITC is available.

17(5)(d) Goods/Services Used for Self- ITC is not allowed on goods and/or services received by a taxable
Construction of Immovable person for construction of an immovable property (other than plant
Property and machinery) on his own account.
Exceptions :
o For construction of plant and machinery
o When the value of goods and/or services is not capitalized
o When the construction is not on own account
Section Particulars Notes
17(5)(f) Inward Supplies • Tax paid on goods and/or services received by such non-
Received by a NRTP resident taxable person, is not available as ITC.
• However, tax paid by him on imported goods is allowed

17(5)(g) Inward Supplies Used • Any goods or services which are used for personal
for Personal consumption, ITC is not available.
Consumption
•Where goods and/or services are used partly for the
purpose of any business and partly for other purposes,
the credit will be allowed only for so much of the ITC as is

17(5)(h) Free Samples, Gifts, • ITC shall not be available to the supplier on the inputs,
Goods Lost/Stolen input services and capital goods to the extent they are
etc. used in relation to the gifts or free samples distributed
without any consideration [Unless they fall in the scopy of
"supply" in Schedule 1.

17(5)(i) Evasion, Confiscation, • Tax paid under sections 74, 129 and 130 is not available
etc. as ITC.
[Evasion of taxes, or upon detention of goods or
conveyances in transit, or towards redemption of
 APPORTIONMENT OF CREDITS
Section Particulars Notes
17(1) Goods/Services Used Partly for Supplier shall be allowed to take the ITC of only those goods/services which
Business Partly for Personal were used for business purposes.
Purposes

17(2) Goods/Services Used Partly for Allowed to take ITC of only those goods/services which were used for
Taxable Partly for Exempt taxable supplies (including zero rated supplies).
Supplies • Even though there’s no GST on zero rated supplies, ITC can still be claimed
on the tax paid on procurement of goods/services which are used to provide
zero rated supplies.

17(3) Value of Exempt Supply in • “Value of Exempt Supply” shall include:

Section 17(2) o Supplies under RCM
o Transaction in Securities
o Sale of Land/Building
• It shall not include the value of activities or transactions specified in
Schedule III.

17(4) Optional Method for Banks As bank provides a lot of exempt services, they can use the optional method
u/s 17(4) instead of 17(2)/(3).
• A banking company or a financial institution including a NBFC, which
accepts deposits, or extends loans or advances, has the option to:
o either comply with the provisions of Section 17(2); or
o avail of, every month, an amount equal to 50% of the eligible input tax
credit on inputs, capital goods and input services in that month and the
balance amount of input tax credit shall be reversed in Form GSTR-3B.
• The restriction of availing 50% ITC shall not apply to the tax paid on
supplies procured from another registration within the same entity i.e.,
100% credit of such tax can be availed.
• Credit of tax paid on inputs and input services that are used for non-
business purposes and items mentioned u/s section 17(5) [blocked credits]
cannot be availed.
• The option once exercised cannot be changed during the remaining part

17(6) Government Has the Powers Government may prescribe the manner in which the credit referred to in
sub-sections (1) and (2) may be attributed.
 UTILISATION OF ITC
IGST CGST SGST
ITC:
IGST IGST [1st] IGST[2nd] IGST[3rd]

CGST CGST[2nd] CGST[1st] -

SGST SGST[2nd] - SGST[1st]

 Section 18: Availability of Credit in Special Circumstances
Section Particulars Notes

18(1) / (2) ITC Availment for Newly

readwith Registered Persons and Time CHART
Rule 40 Limit

18(3) read with Transfer of ITC on Account of • In case of sale, merger, demerger, amalgamation, transfer or change
Rule 41 Change in Constitution of in ownership of business etc., the ITC that remains unutilized in the
Registered Person electronic credit ledger of the registered person can be transferred to
the new entity, provided there is a specific provision for transfer of
liabilities in such change of constitution.
• In the case of demerger, ITC will be apportioned in the ratio of the
value of assets of the new units as specified in the demerger scheme.
• Here, “value of assets” means the value of the entire assets of the
business irrespective of
• Furnish the details of change in constitution on the common portal in

18(4) read with Switching from Normal Scheme to • Section 18(4) requires reversal of ITC
Rule 44 Composition Scheme or Exiting o when a registered person who has availed ITC switches to
from GST composition levy or
o when his supplies get wholly exempted from tax.
• ITC involved in the remaining useful life (in months) of the capital
goods should be reversed on pro-rata basis, taking the useful life as 5
years.
Example: Capital goods have been in use for 4 years, 6 months and 15
days.
The remaining useful life in months = 5 months ignoring a part of the
month.
ITC taken on such capital goods = C
• Balance of ITC, if any, lying in the electronic credit ledger lapses.
• Cancellation of registration also requires reversal of ITC
QUESTION 1

18(6) read with Amount Payable on Supply of • If capital goods or plant and machinery on which ITC has been taken
Rule 40(2) and Capital Goods or Plant and are supplied outward by the registered person, he must pay an amount
Rule 44(6) Machinery on Which ITC Has that is the higher of the following:
Been Taken
a) ITC taken on such goods reduced by 5% per quarter of a year or part
thereof from the date of issue of invoice for such goods (i.e., ITC
pertaining to remaining useful life of the capital goods), or
b) tax on transaction value
• Where the amount so determined exceeds the tax payable on the
transaction value of the capital goods, such amount need to be paid and
thus, should be added to the output tax liability.
• If refractory bricks, moulds and dies, jigs and fixtures are supplied as
scrap, the taxable person.
QUESTION 2
Question 1:

The goods manufactured by Royal Ltd. have been exempted from GST with effect from 01-05-2022. Earlier
these goods were liable to CGST and SGST @ 6% respectively. The inputs used in manufacturing were also
liable to CGST & SGST @ 6% respectively. Following information is provided on 30-04-2022:

1. The inputs costing ₹1,12,000 (inclusive of CGST & SGST) are lying in stock.
2. The inputs costing ₹80,640 (inclusive of CGST & SGST) are held in process.
3. The finished goods valuing ₹5,60,000 are in stock, the input cost (inclusive of CGST and SGST) is 50% of
the value.
4. The input tax credit on capital goods lying in stock is ₹72,000. These goods were purchased on
01-08-2021
5. The balance in electronic credit Ledger is ₹1,52,000.
The department has asked Royal Ltd. to reverse the credit taken on inputs referred above. However,
Royal Ltd. contends that credit once validly taken is indefeasible and not required to be reversed.
Decide.
What would your answer be if the balance in electronic credit Ledger account as on 30-04-2022 is
₹1,00,000?

Answer:

Particulars Amount
Inputs lying in stock (Credit = ₹1,12,000 × 12/112) 12,000
Inputs in process (₹80,640 × 12 ÷ 112) 8640
Inputs contained in finished goods lying in stock
30,000
(₹5,60,000×50%×12÷112)
Input tax on Capital goods used for 9 months taking residual
life as 5 years (₹72,000×51/60) (51 months i.e. remaining life 61,200
of capital goods)
Amount to be paid by Royal Ltd. 1,11,840
Balance in Electronic Credit Ledger 1,52,000
Balance Credit to be lapsed 40,160
Question 2:

XYZ Ltd. a supplier of goods has purchased capital goods under cover of invoice dated 01-10-
2022 for ₹4,13,000 (inclusive of CGST @ 9% and SGST @ 9%). After taking it for business
use, the said capital goods were supplied for ₹2,85,000 on 26-04-2023. Explain Input tax
credit treatment in this case.

Answer:

Particulars Amount
Date of Invoice of purchase of capital goods 01-10-2022
Date of Supply of capital goods after taking into use 26-04-2023
No. of Quarters from the date of issue of invoice for such goods 3
CGST and SGST paid on purchase of Capital Goods [₹4,13,000×18/118] 63,000
Reduced by ₹63,000 × 5% × 3 quarters 9450
Amount of CGST and SGST (A) 53550

Transaction Value on supply of Capital Goods u/s 15 2,85,000

CGST and SGST payable on supply of Capital Goods @ 18% (B) 51,300

Amount to be payable [Higher of (A) and (B)] 53,550

 CHART

Persons entitlted to take Goods entitled to ITC

Sr No. Inputs held in Restriction/Conditions
ITC As on
stock/Capital Goods
1 Person who has applied The day immediately preceding the ITC is to be availed
RM
for registration within 30 date from which he becomes liable to within 1 year from the
days from the date on pay tax date of the issue of the
which he becomes liable WIP tax invoice by the
to registration and has supplier
been granted
registration FG

2 Person who is not The day immediately preceding the

RM
required to register, but date of registration
obtains voluntary
registration WIP

FG

3 Registered person who The day immediately preceding the ITC on capital goods will be
RM
ceases to pay date from which he becomes liable to reduced by 5%
composition tax and pay tax under regular scheme per quarter of a year
switches to regular WIP or part of the year from
the date of
invoice.
FG

Capital Goods ITC claimed shall be

verified with the
4 Registered person The day immediately preceding the corresponding details
RM
whose exempt supplies date from which such supply becomes furnished by the
become taxable supplies taxable corresponding
WIP supplier.

FG
ITC to be availed within 1
year from the date of the
Capital Goods issue of tax invoice by the
supplier.

• An electronic declaration must be filed within 30 days from the date he becomes liable to avail ITC in
Form GST ITC-01
• If the claim of ITC pertaining to CGST, SGST/UTGST, IGST put together exceeds ₹2,00,000, the declaration needs to be
certified by a practicing Chartered Accountant/Cost Accountant.
 Rule 86A: Restrictions on Utilisation of ITC
• If the Assistant Commissioner/Commissioner, or any officer above this rank feels
that ITC has been fraudulently availed, or that the ITC is ineligible, he can restrict the
utilization of ITC.

• If the ITC has already been availed by the taxable person, then the officer may
restrict its utilization against the liability.

• Period of Restriction = 1 year from date of imposition of restriction

• However, the Commissioner/officer authorized by him, can withdraw such

restriction if he is satisfied that conditions for imposing the restrictions no longer
exist.

• The restrictions can be imposed in the following circumstances:

→ ITC has been availed based on tax invoices/valid documents.
▪ issued by a non-existent supplier or by a person not conducting any business
from the registered place of business; or
▪ without receipt of goods or services or both; or
▪ the tax in relation to which has not been paid to the Government
→ the registered person availing ITC has been found non-existent or not to be
conducting any business from the registered place of business; or
→ the registered person availing ITC is not in possession of tax invoice/valid
document.
 Rule 86B: Restrictions on the Use of Amount Available in Electronic Credit Ledger

Applicabilty • Rule 86B is applicable to the registered person having value of taxable supply (other
than exempt supply and zero-rated supply) in a month exceeding ₹50 lakh.

Nature of restriction • The registered person to whom the said rule is applicable cannot utilize input tax credit
imposed in excess of 99% of the output tax liability.
∴ Input tax liability shall be utilized only to the extent of 99% of the output tax liability
while discharging output tax liability.

E.g.: The total value of inter-State supply of Raman & Sons for the month of
February 2021 is of ₹100 lakh. Said supply is taxable @ 18% IGST. Thus, total output
tax liability of Raman & Sons is ₹18 lakh. Amount available in electronic credit ledger is
₹20 lakh (IGST).
∴ Restriction imposed by rule 86B, Raman & Sons can discharge 99% of its output
tax liability, i.e., ₹17,82,000 (99% of ₹18,00,000) from the amount available in
electronic credit ledger. However, it has to mandatorily discharge.
the balance 1% of the output tax liability i.e., ₹18,000 (1% of ₹18,00,000) through
electronic cash ledger only.

NOTE: This limit is not to be checked with respect to preceding financial year but for
each month for which return is being filed. Therefore, if the turnover in any particular
month does not exceed 50 lakh, then this restriction would not be applicable. If
suppose, in the next month, the turnover exceeds ₹50 lakh, then restriction would
have to be checked.

Exceptions 1) Below mentioned person who have deposited income tax of more than Rs. 1 Lakhs in
each of the last 2 F.Ys for which the time limit to file the return has expired
▪ The registered person or
▪ The karta/proprietor/the managing director of the registered person;
▪ Any of the two partners, whole-time directors, members of Managing
Committee of Associations or Board of Trustees of the registered person, as
the case may be.

2) When registered person has received a refund amount of more than ₹1 lakh on
account of unutilized input tax credit under the following:
▪ zero-rated supplies
▪ inverted tax structure
NOTE: Refund should have been received

3) If the registered person has paid more than 1% of total output tax liability using
electronic cash ledger upto the said month in the current financial year, the restrictions
as specified in Rule 86B shall not apply.
NOTE: This exception will not be applicable in the month of April as this exception in
"Current F.Y."

4) Below mentioned specified registered persons:

• Government Department; or
• a public sector undertaking; or
• a local authority; or
• a statutory body.
Rule 41A: Transfer of ITC on Obtaining Separate Registrations
for Multiple Places of Business Within a State/Union Territory
Ref: Section 25

• The registered person (transferor), having separate registrations for

multiple places of business within a State/Union Territory, can transfer
the unutilized ITC (wholly or partly) lying in his electronic credit ledger
to any or all of the newly registered place(s) of business in the ratio of
the value of assets held by them at the time of registration.

• The registered person should furnish the prescribed details on the

common portal within a period of 30 days from obtaining such