INPUT TAX CREDIT
Input tax credit is the most important feature of Goods and Services tax. Just like the VAT, Service tax and Central Excise law, GST is also a value added tax system. A value added tax system allows availment of credit (or rebate or refund or set off) of tax paid on purchase / expense side to ensure that the tax is practically collected only on the value addition at each stage of transaction. The pre-GST regimes were imperfect value added tax systems as there were quite a lot of tax inefficiencies which led to taxes becoming a cost in transactions. GST quite successfully and to a large extent removes these inefficiencies to allow free flow of credit and trade.
Eligibility of input tax credit
The starring feature of GST is that it allows credit of GST paid on input, capital goods and input services. Further, as against the CENVAT credit rules, full credit on capital goods can be availed as soon as we receive the capital goods. Capital goods have been defined as goods which are capitalized in books of accounts and inputs have been defined as goods other than capital goods. Thus GST paid on any goods or services, which is used in course or furtherance of business for making a taxable supply is available as input tax credit. However, if a person is engaged in making exempt supplies, he will not be eligible to avail input tax credit.
Conditions to avail input tax credit
The GST law prescribes certain conditions to be eligible to avail input tax credit. These enumerated below:
- The person willing to take credit should be registered
- He should be in possession of a tax invoice or such other document as is prescribed (e.g. bill of entry in of case of imported goods)
- He has received goods or services
- The supplier pays the GST to the Government – if the supplier defaults in payment of his GST liability, the recipient will not be able to avail input tax credit
- The person availing credit files a valid return – valid return means that GST return is filed and due tax is paid
- Any missed credit can be availed by due date of filing of GST return for the month of September of the next financial year or date of filing of annual return, whichever is earlier
- Credit will be required to be reversed along with interest where the consideration is not paid within 180 days of the date of invoice.
Negative list for credits
GST has also provides a negative list of goods and services on which input tax credit cannot be availed. The list is somewhat similar to the list under CENVAT credit rules. The key list of goods and services on which credit is not allowed are:
- Credit in respect of motor vehicles
- food and beverages, outdoor catering, beauty treatment, health services
- rent-a-cab, life insurance and health insurance
- Expenditure in relation to construction of immovable property
- Goods lost, destroyed, stolen, given as free samples, etc.
Utilsation of credits
Indian GST has three components namely CGST, SGST (or UTGST) and IGST. Cross utilization is allowed with a restriction that CGST cannot be used for payment of SGST and vice versa. Further, it is apposite to note that credit under GST is a state wise pool. Thus input tax credit available in State A cannot be used for payment of GST liability in State B. The following chart explains the procedure of utilizing these credits.
Input tax credits GST vis a vis the Pre-GST regime
Input tax credit scheme under GST is much liberal than the pre-GST regime. It allows credit of almost all expenditure made in course of business. Many tax costs such as Swachh Bharat Cess, Local Body Tax, Octroi, etc. will be abolished after GST. Further, certain taxes were available as a credit to a specific category of persons. Example would be credit of VAT was not available to a service provider. KKC was a cost for manufacturers and traders. Service tax and excise duty was a cost for traders. Such restrictions will be removed to a large extent under GST.