Note on GST – ‘INPUT TAX CREDIT’

Note on GST – ‘INPUT TAX CREDIT’

INTRODUCTION

Input tax credit is the core concept of GST as it removes the cascading effect of taxes. A registered person is entitled to avail of the credit of GST paid on input goods or services and capital goods subject to certain exceptions and fulfilment of certain conditions. The input tax credit can be utilized by the registered person for payment of output tax on goods or services supplied by him.

Meaning of ITC

The Input tax credit means the credit of taxes paid on inputs and input services. The Input tax in relation to a registered person, means the Central-tax (CGST), State-tax (SGST), Integrated-tax (IGST) and Union Territory Tax (UTGST) charged on any supply of goods or services. It also includes the IGST paid on import of goods and the tax payable under the reverse charge mechanism.

Who can claim ITC?

Every registered taxable person is entitled to take the credit of input tax paid on any goods or services purchased by him and which are used or intended to be used in the course or furtherance of business.

What are the conditions to claim ITC?

A registered taxpayer can claim the credit of taxes paid by him on inward supplies if he has a valid invoice and taxes are deposited by the supplier to the Govt. The input tax credit so claim by a recipient shall be reversed if he doesn’t make payment of the amount towards the value of supply of goods or services along with tax payable thereon within a period of 180 days.

Supplies not eligible for ITC

In general, a taxpayer is entitled to avail of the credit of taxes paid by him on inward supplies received by him. However, there are certain goods and services which are not eligible for input tax credit, i.e., motor vehicle, food, personal care services, etc.

When ITC shall be reversed?

There are certain circumstances in which a taxpayer is liable to reverse the ITC claimed by him, inter-alia, a supplier opts for composition scheme, capital goods are sold, registration is cancelled, etc. In these circumstances, the supplier is required to reverse the credit within the specified time period. If he fails to reverse such credit, he shall be liable for payment of interest and penalty in addition to the amount of ITC to be reversed.

Proportional Input tax credit

An organization can’t avail of the credit of the taxes paid in respect of goods or services which are not wholly and exclusively used for making taxable output supplies. If an entity has common inputs for making both taxable and exempt supplies, the tax credit shall be allowed only for that input which has been used for taxable supplies. In other words, if output supplies are both taxable and exempt, the supplier can only take proportionate credit of common inputs. Refund of Input Tax Credit
Any person claiming the refund of the input tax credit should make an application within a period of two years from the relevant date by filing the Form GST RFD-01 electronically. A taxpayer can claim the refund of unutilized input tax credit in the following two situations:
1. If unutilized credit has accumulated because of higher rate of tax on inputs than on output supplies.
2. Supplier makes zero rated supply to any person outside India or to SEZ without payment of tax.

Transfer of Input Tax Credit

A supplier entitled to claim the input tax credit can transfer the un-availed ITC to another person in the following circumstances.

In case of business restructuring
In the event of sale, merger, demerger, amalgamation, lease or transfer or change in the ownership of business, the registered person can transfer the unutilized input tax credit in his electronic credit ledger to the transferee. For this purpose, he is required to prepare and furnish the details in the Form ITC-02.

In case of death of sole proprietor

In the event of death of sole proprietor, the unutilized input tax credit in his electronic credit ledger can be transferred to legal heir of proprietor. For this purpose, legal heir is required to file an application to jurisdiction tax officer to add
legal heir as ‘additional authorized signatory’ with enclosure of death certificate of proprietor and request to issue new user id and password to access the account at GST portal of such proprietor. Further, legal heir is required to take a new GST registration to accept the unutilized credit. Once legal heir gets new user id and password of dead proprietor account issued by jurisdictional tax officer, legal heir can file Form ITC-02 to transfer the unutilized ITC to newly registered firm. After successful transfer of ITC, legal heir is required to cancel the GST registration of dead proprietor.

In case of Input Service Distributor

An Input service distributor or ISD is a centralized business which receives invoices for goods or services used by its branches. It distributes the input tax credit to the branches on proportional basis. The credit can be distributed by the ISD by issuing an ISD invoice or ISD credit note. The ITC available for distribution in a month shall be distributed in the same month itself and the details thereof shall be furnished in Form GSTR-6.

ELIGIBILITY CRITERIA TO CLAIM ITC

A registered taxpayer is entitled to claim input tax credit of taxes paid by him on inward supplies. For the purpose of availing such credit, the taxpayer needs to fulfil certain conditions. If a taxpayer becomes entitled to claim the ITC for the first time, he is required to file GST ITC-01 on GST portal.

Conditions for claiming ITC by Registered Person
A taxable person can claim the credit of tax paid on supply of goods or services if following conditions are satisfied.

Recipient has valid tax invoice

The recipient of ITC can claim the ITC only if he is in possession of a valid tax invoice or debit note issued by a registered supplier. The recipient can take the input tax credit against any invoice or debit note on or before the due date of furnishing of the return for the month of September after the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return (31st December of next financial year), whichever is earlier.
The ITC in relation to invoices issued by the supplier during the financial year 2017- 18 can be availed by the recipient till the due date for furnishing of Form GSTR-3B for the month of March 2019.

Goods or Services are received

The Input tax credit is allowed only if the recipient receives the goods or services. If advance payment has been made by him before receipt of goods or services, then input tax credit shall not be allowed to him as goods or services are not yet received. In case of receipt of goods against an invoice in instalments, the input will be available only on the receipt of last lot or instalment of goods.

Taxes are paid to Govt.

Input tax credit is allowed provided the tax charged in respect of such supply is deposited by the supplier to the credit of the Government. The recipient of goods and services can take provisional credit on basis of return filed by supplier.
However, he will be eligible to take final input tax credit only if taxes are paid by the supplier to the Govt.

Return is furnished by recipient

Filing of GST return is mandatory for the recipient to claim the credit of input tax paid on goods or services supplied to him.

Payment within 180 days
The recipient shall be entitled to avail of the credit of input tax after fulfilling the above-mentioned conditions subject to the condition that he makes the payment of the amount towards the value of supply of goods or services along with tax payable thereon within a period of 180 days. If the amount is not paid, the recipient shall be liable to reverse the credit.

Documents required to claim ITC

Input tax credit can be availed by a registered person or Input Service Distributor on the basis of following documents which should contain the prescribed mandatory information, inter-alia, amount of tax charged, total taxable value, GSTIN
of supplier, GSTIN of recipient, etc.:
1. Tax invoice issued by the supplier of goods or services
2. Invoice of the supply for which tax has been paid on reverse charge basis
3. Debit note issued by a supplier
4. Bill of entry or similar document prescribed under Customs Act for assessment of IGST
5. ISD Invoice or ISD credit note issued by an Input Service Distributor.

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How to claim ITC for the first time?

When a registered person becomes entitled to claim the credit of input tax, he can claim it so by filing a declaration in Form GST ITC-01 within 30 days or within such period as notified by Commissioner. Such person shall not be entitled to take input tax credit in respect of any supply of goods or services after expiry of 1 year from the date of issue of tax invoice relating to eligible supplies. If the amount of credit exceeds Rs. 2 lakhs, this Form shall be verified and supported by a certificate from a Chartered Accountant or a Cost Accountant. A registered person becomes entitled to claim the ITC for the first time in following circumstances:

In case of mandatory registration within 30 days

A supplier is required to apply for GST registration within 30 days from the date on which he becomes liable for registration. When he has been granted such registration, he becomes entitled to take credit of taxes paid in respect of inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax. To avail of such credit, the supplier is required to file ITC-01 through online mode or offline mode.
The input tax credit shall be available from the effective date of registration, which shall be the date on which supplier becomes liable to get the registration if he submits the application within 30 days from such date. Otherwise, the effective date of registration shall be the date of grant of registration certificate.

In case of Voluntary Registration

If a supplier opts for voluntary registration under GST, he becomes entitled to take credit of taxes paid in respect of inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration. To avail of such credit, the supplier is required to file ITC-01 through online mode or offline mode. The effective date of registration shall be the date of grant of registration certificate.

In case composition scheme ceases to apply

If a registered person ceases to pay tax under composition scheme, he becomes entitled to take credit of taxes paid in respect of inputs contained in semi-finished or finished goods held in stock or on capital goods from the date on which he becomes liable to pay tax normally.
Similarly, the registered person becomes entitled to take the credit of taxes paid in respect of capital goods when composition schemes ceases to apply. However, the credit to be claimed on capital goods shall be calculated after reducing the tax paid on such capital goods by 5% per quarter of a year or part thereof from the date of the invoice (or date of such other documents on basis of which the capital goods were received by the taxable person).

In case exempt supply becomes taxable

If an exempt supply of goods or services by a registered person becomes a taxable supply, then such person shall be entitled to take credit of taxes paid in respect of inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply from the date on which such supply becomes taxable. The credit of taxes paid on capital goods shall be claimed after reducing the tax paid on such capital goods by 5% per quarter of a year or part thereof from the date of the invoice or such other documents on basis of which the capital goods were received by the taxable person.

ITC of GST paid on Capital goods

Capital goods shall mean goods, the value of which is capitalised in the books of account of the person claiming the credit and which are used or intended to be used in the course or furtherance of business. As a general rule, the entire amount of GST paid on the capital goods can be claimed as input tax credit in the first year itself.

Exception 1: No ITC if depreciation claimed on tax component

If the registered taxable person recognizes the tax component as part of the cost of capital goods under the provisions of the Income-tax Act, 1961 and claims the depreciation on the aggregate amount, the input tax credit on the said tax
component shall not be allowed.

Exception 2: No ITC on pipelines and telecommunication tower GST paid in respect of pipelines laid outside the factory and telecommunication towers fixed to earth by foundation or structural support are not eligible for input
tax credit.

ITC of GST paid on job work

How to claim input tax credit?
A registered person is entitled to avail of the Input tax credit of the GST paid on the inputs and capital goods sent to the job worker for the job work. The ITC shall be available even if inputs are directly sent for the job work without being first brought to his place of business. To avail of the ITC, the registered person shall be required to file a challan on quarterly basis in Form GST ITC-04 on the 25th day of the month immediately next to the last date of quarter or within such time limit as notified.

When goods should be received back?
In case of Input goods
The registered person should either receive back the inputs after completion of job work or should supply it further from the place of business of the job worker within 1 year. The period of 1 year shall be counted from the date of receipt of inputs by the job worker. If inputs are not received back or further supplied, it shall be deemed that inputs had been supplied to the job worker on the day on which said inputs were sent out. In that case, the registered person shall declare it as taxable supply in GSTR-1 and pay tax along with interest at rate of 18%.

In case of Capital Goods

The capital goods sent for job work should be received back by the principal within 3 years, which shall be counted from the date of receipt of capital goods by the job worker. If such goods are not received back, it shall be deemed that goods have been supplied by the principal to the job worker on the day when the said capital goods were sent out. In that case, the registered person shall declare it as taxable supply in GSTR-1 and pay tax along with interest at rate of 18%.

Exception
The condition of receiving back the goods shall not apply to moulds, dies, jigs, fixtures or tools sent out to a job worker for job work.

BLOCKED INPUT TAX CREDIT

A taxpayer is not entitled to avail of the credit of taxes paid in respect of certain goods or services, even if these goods or services are used in the course or furtherance of business.

List of blocked credit

Input tax credit shall not be available in respect of the following supply of goods or services.

Purchase of Motor Vehicles

Input tax credit shall not be available for the GST paid in respect of passenger motor vehicles, with approved seating capacity upto 13 persons including driver. Exception
However, the input tax credit shall be allowed if motor vehicle is used for following:
1. Further supply of such motor vehicles
2. Transportation of passengers
3. Imparting training on driving such motor vehicles

Purchase of Vessels and Aircrafts

GST paid in respect of Vessels and Aircrafts are not eligible for Input tax credit.
Exception
However, the input tax credit shall be allowed if vessel or aircraft is used for following:
1. Further supply of such vessels or aircraft
2. Transportation of passengers
3. Imparting of training to navigate such vessels
4. Imparting of training to fly such aircrafts
5. For transportation of goods

Repair & maintenance of Motor Vehicles, Vessels or Aircrafts

Input tax credit shall not be available for the GST paid in respect of general insurance, servicing, repair and maintenance of such motor vehicles, vessels or aircraft.
Exception
However, the credit for the tax paid on these services shall be allowed in following cases:
1. If motor vehicles, vessels or aircraft are used for the purposes specified above and ITC is allowed thereon
2. If these services are received by a taxable person engaged in:
a) The manufacturing of such motor vehicles, vessels or aircraft
b) Supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by them

Personal care Services

Following supply of goods and services are not eligible for input tax credit:
1. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic, plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircrafts as mentioned above.
2. Membership of a club, health and fitness centre.
3. Travel benefits extended to employees on vacation such as leave or home travel concession.

The credit of GST paid on services mentioned in point no. 1 above would be allowed if such inward supply of goods or services is used by a registered person for making an outward taxable supply of the same category of goods or services or as an element of taxable composite supply or mixed supply.
The ITC in respect of goods or services mentioned in point 1 to point 3 would be allowed if it is obligatory for an employer to provide the same to its employees under any law.
Example, as per section 46 of Factories Act, if 250 or more workers are employed, the provision of canteen facility is mandatory. Since this is mandatory, input tax credit of canteen services provided to employees should be available.

Works Contract service

GST paid in respect of works contract services, when supplied for construction of an immovable property (other than plant and machinery), is not eligible for input tax credit.
Exception
However, the credit of GST paid on works contract shall be available if input service are used for further supply of works contract service.

Construction service
Goods or services received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account or in the course or furtherance of business shall not be eligible for input tax credit. The expression ‘construction’ shall include re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

GST paid under composition scheme
Goods or services on which tax has been paid under composition scheme are not eligible for input tax credit.

Supply received by non-resident taxable person
Goods or services received by a non-resident taxable person are not eligible for input tax credit. However, the non-resident taxable person can avail of the credit of tax paid on goods imported by him.

Supply for personal consumption
Goods or services used by a taxable for his personal consumption are not eligible for input tax credit.

Loss of goods or free samples
GST paid in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples are not eligible for input tax credit. No credit shall also be available for any tax paid after detection of fraud or suppression or goods removed in contravention of GST Act.

REVERSAL OF ITC

A taxpayer shall reverse the ITC already claimed by him in certain events or circumstances. If he fails to reverse such credit, he shall be liable for payment of interest and penalty in addition to the amount which he is required to reverse.

When ITC to be reversed?

If recipient fails to pay the invoice value
If recipient of goods or services fails to pay the amount towards the value of supply along with tax within a period of 180 days from the date of issue of invoice by the supplier, then an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability along with interest. If invoice value is partially paid by the recipient, then the remaining amount of tax should be reversed. The credit of ITC so reversed can be re-availed by the recipient after making payment to the supplier of goods or services. In this situation, the condition, that the invoice shouldn’t be older than one year, will not apply.

If supplier opts for composition scheme
If a registered person subsequently opts for composition scheme, he shall pay an amount equivalent to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of exercising of such option. Similarly, he shall pay for the input tax in respect of capital goods held by it by reducing its value on pro-rata basis taking useful life of capital goods to be 5 years. Such reversal of ITC can be paid by way of debit in electronic credit ledger or electronic cash ledger. After payment of such amount the balance of input tax credit lying in his electronic credit ledger shall lapse.
Example, if capital goods have been in use for 4 years, 6 month and 15 days. The useful remaining life of such capital goods is 5 months (ignoring a part of the month). If input tax credit taken on such capital goods is Rs. 60,000, the ITC
attributable to remaining useful life of such capital goods to be reversed shall be Rs.
5,000 (Rs. 60,000 * 5/60).

If supply becomes exempt

If goods or services supplied by a registered person become wholly exempt, he shall pay an amount equivalent to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of such exemption. Similarly, he shall pay for the input tax in respect of capital goods held by it by reducing its value on pro rata basis taking useful life of capital goods to be 5 years. Such reversal of ITC can be paid by way of debit in electronic credit ledger or electronic cash ledger. After payment of such amount the balance of input tax credit lying in his electronic credit ledger shall lapse.

If registration is cancelled

If registration of a taxable person is cancelled, he is required to reverse the Input tax credit of inputs held in stock. Similarly, he shall pay for the input tax in respect of capital goods held by it by reducing its value on pro rata basis taking useful life of capital goods to be 5 years.

If capital goods are supplied
In case of supply of capital goods or plant and machinery on which input tax credit has been claimed, the registered person shall be required to pay higher of following:
1. Amount equal to input tax credit claimed on such capital goods as reduced by 5% for every quarter (or part thereof) from the date of issue of invoice till date of supply
2. Tax on transaction value of such capital goods.
If refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods.

Example:
ABC Ltd. purchased a machinery on July 1 (Year 00) for Rs. 10 lakhs after payment of IGST of Rs. 1.8 lakhs (18%). It claimed the credit of such IGST in the same month. In October 2 (Year 01) it sold the machinery for Rs. 7.5 lakhs.
Such machinery has been utilized for 6 quarters (5 complete quarters and 1 part of the quarter). The company shall be liable to pay tax which shall be higher of following:
1. Reversal of ITC: Rs. 1.26 lakhs [Rs. 1.8 lakhs less (6 Quarters * 5% of Rs. 1.8 lakhs)]
2. GST payable on supply: Rs. 1.35 lakhs [Rs. 7.50 lakhs *18%)

Consequence of default

If taxpayer finds the mistake

If taxpayer finds that it has wrongly claimed the ITC, he can rectify the mistake Suo- moto. In this situation, he shall be required to reverse the ITC wrongly claimed or make the payment of tax in immediately next return. He shall also be liable to pay interest at the rate of 18%from the date on which ITC was wrongly claimed or from the date he was required to reverse the ITC, as the case may be, till the date of payment.

If revenue finds the mistake

If revenue finds that the supplier has wrongly claimed the ITC, it shall require the supplier to reverse the ITC wrongly availed or make the payment of tax in immediately next return. The supplier shall be liable to pay interest at the rate of
18% from the date on which ITC was wrongly claimed or from the date he was required to reverse the ITC, as the case may be, till the date of payment.
The supplier shall also be liable to pay penalty to the extent of following:
1. Higher of Rs. 10,000 or 10% of ITC wrongly claimed, if reason for default is other than fraud or any willful misstatement or suppression of facts.
2. Higher of Rs. 10,000 or ITC wrongly claimed, if reason for default is fraud or any willful misstatement or suppression of facts.

CALCULATION OF PROPORTIONATE ITC

If goods and services are used for business and personal purposes or for making taxable and exempt supplies, the credit of tax paid in respect of common inputs and capital goods shall be allowed on proportionate basis. The common credit
attributable to exempt supplies shall be reversed and added to the output ta liability of relevant period.

Why ITC allowed on proportionate basis?

An organization can’t avail of the credit of the taxes paid in respect of goods or services which are not wholly and exclusively used for making taxable output supplies. If an entity has common inputs for making both taxable and exempt
supplies or if it partially uses the inputs for personal purposes, the tax credit shall be allowed only for that input which has been used for the purpose of business of making taxable supplies. In other words, if output supplies are both taxable and exempt, the supplier can only take proportionate credit of common inputs. This principle applies to input goods, input services and capital goods.

What is exempt supply for calculation of proportionate ITC?
Exempt supply shall include following:
1. Supply that attracts nil rate of tax
2. Supply that is exempted from tax through notification
3. Non-taxable supply
4. Supply on which GST is payable under reverse charge
5. Transactions in securities
6. Sale of land
7. Sale of building (except construction of complex where supply is made before obtaining completion certificate).

Calculation of Proportionate ITC – Inputs & Input Services
Before calculating the amount of proportionate ITC, the first step is to identify the inputs that are used exclusively for taxable and exempt supplies. If an input or capital good is used exclusively for taxable supply, full credit shall be available for the taxes paid in respect of such inputs or capital goods. In the next step, the common input tax shall be calculated, and eligible credit shall be allowed on proportionate basis and non-eligible ITC shall be reversed.
The proportionate input tax credit to be allowed or reversed in respect of input goods or services shall be calculated in following manner.

Step 1: Calculate the figures of eligible and non-eligible ITC in following categories.
‘T’ is total tax on input goods and input services (collectively referred to as ‘Inputs’) in a tax period.
‘T1’ is amount of tax out of total input tax (‘T’) that is attributable to inputs used exclusively for non-business purposes.
‘T2’ is amount of tax out of total input tax (‘T’) that is attributable to inputs used exclusively for making exempt supplies.
‘T3’ is amount of tax out of total input tax (‘T’) which are not eligible for credit, i.e., blocked credit.
‘T4’ is amount of tax out of total input tax (‘T’) that is attributable to inputs used exclusively for making taxable supplies including zero rated supplies.
‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person invoice-wise in Form GSTR-2.
Step 2: Calculate the input tax credit in respect of common inputs used for eligible and non-eligible supplies. Such figure shall be referred to as Common Credit (‘C1’) which shall be as under:
C1 = T – (T1+T2+T3+T4)

Step 3: Calculate the amount of input tax credit attributable to exempt supplies.

ITC attributable to exempt supplies (‘D1’) =
Common Input tax credit

(C1)

X
Aggregate value of exempt supplies (E) Total turnover in the State during the tax period (F)

If registered person does not have any turnover (or information) during the relevant tax period, the value of ‘E’ and ‘F’ shall calculated by taking values of immediately last tax period for which details of such turnover are available.
The aggregate value of exempt supplies and total turnover shall exclude the amount of central excise duty on petroleum products and tobacco products and State VAT on alcoholic liquor and petroleum products.

Step 4: Out of common credit (‘C1’) calculated in Step 2, the amount of input tax credit attributable to non-business purposes shall be equivalent to 5% of ‘C1’. ITC attributable to non-business purpose (‘D2’) = 5% of ‘C1’.
Step 5: Common Credit (‘C1’) as reduced by the amount of input tax credit attributable to exempt supplies (‘D1’) and non-business purposes (‘D2’) shall be eligible ITC attributable to business purposes and for effecting taxable supplies
including zero rated supplies. Eligible ITC for business purpose and taxable supplies (‘C2’) = C1 – (D1+D2)

The amount ‘C2’ shall be computed separately for input tax credit of CGST, SGST, UTGST and IGST.
The amount equivalent to ‘D1’ and ‘D2’ shall be added to the output tax liability of the registered person.

Step 6: The amount of non-eligible ITC (‘D1’ and ‘D2’) shall be calculated in accordance with above steps on monthly basis and yearly basis. The final calculation for the complete financial year shall be done on or before the due date for filing the return for the month of September of next financial year. In case of any difference, the resultant figure shall be dealt with in accordance with following.

If final liability exceeds monthly aggregate
If yearly figure of non-eligible ITC (‘D1’ and ‘D2’) exceeds the monthly aggregate of ‘D1’ and ‘D2’, such excess shall be added to the output tax liability of the registered person for the month not later than the month of September of next financial year to which such credit relates.
The registered person shall also be liable to pay interest on the said excess amount at the rate 18% for the period starting from first day of April of the succeeding financial year till the date of payment.

If final liability is less than monthly aggregate
If yearly figure of non-eligible ITC (‘D1’ and ‘D2’) is less than the monthly aggregate of ‘D1’ and ‘D2’, such excess shall be claimed as credit by the registered person in the month not later than the month of September following the end of the financial year to which such credit relates.

Calculation of Proportionate ITC – Capital Goods
If capital goods are used for both taxable supplies and exempt supplies, the credit of taxes paid on capital goods shall be available on proportionate basis. The proportionate tax credit attributable towards exempt supplies of capital goods shall
be calculated in following manner.

Step 1: Calculate the figures of eligible and non-eligible ITC in following categories.
‘T’ is total tax on capital goods in a tax period.
‘T1’ is amount of tax out of total input tax (‘T’) that is attributable to capital goods used exclusively for non-business purposes.
‘T2’ is amount of tax out of total input tax (‘T’) that is attributable to capital goods used exclusively for making exempt supplies.
‘T3’ is amount of tax out of total input tax (‘T’) which are not eligible for credit, i.e., blocked credit.
‘T4’ is amount of tax out of total input tax (‘T’) that is attributable to capital goods used exclusively for making taxable supplies including zero rated supplies.

Step 2: Calculate the input tax credit in respect of common capital goods used for eligible and non-eligible supplies. Such figure shall be referred to as Common Credit (‘C1’) which shall be as under: C1 = T – (T1+T2+T3+T4)

Step 3: Immediately avail the ITC of such Common Credit (‘C1’) and subsequently every month, find the ratio between exempted supply and total supply. Monthly ratio of exempt and total supply (‘D1’) = Aggregate value of exempt supplies (E) Total turnover in the State during the tax period (F)
If registered person does not have any turnover (or information) during the relevant tax period, the value of ‘E’ and ‘F’ shall be calculated by taking values of immediately last tax period for which details of such turnover are available.
The aggregate value of exempt supplies and total turnover shall exclude the amount of central excise duty on petroleum products and tobacco products and State VAT on alcoholic liquor and petroleum products.

Step 4: Divide the figure of Common Credit (‘C1’) by 60 months to arrive at monthly credit in respect of common capital goods. Monthly ITC (‘D2’) = ‘C1’/60.

Step 5: Calculate the amount of credit to be reversed by multiplying the ratio calculated in step 3 (‘D1’) with the monthly ITC calculated in step 4 (‘D2’). The amount of ITC to be reversed shall be added to the output tax liability with
applicable interest. Monthly reversal of ITC (‘D3’) = D1 * D2
The amount ‘D3’ shall be computed separately for input tax credit of CGST, SGST, UTGST and IGST.
Unlike, proportional input tax credit in respect of inputs, there is no provision to make final calculations at end of every financial year.

Calculation of ITC on change in use of capital goods
If capital goods are used for making exempted supply of goods and subsequently, used for making taxable goods, then the input tax credit shall be allowed on such capital goods after reducing the tax paid by 5% per quarter of a year or part thereof.
Similarly, if capital goods are used exclusively for taxable goods and are subsequently used for making exempted goods, the input tax credit already availed shall be reversed after reducing the tax paid on such capital goods by 5% per
quarter of a year or part thereof.

Example:
A Ltd., a registered person, engaged in supply of taxable and exempted goods. The details of transactions done during the year are as follows:

Particulars Amount (In thousands)
a) Value of taxable supply 2,000
b) Value of exempt supply 1,000
c) Value of zero-rated taxable supply 600
d) Value of goods used for non-business purpose 400 Aggregate turnover 4,000

Taxes paid for inward supply of machines (Capital Goods) of A Ltd:
Machine Use of Machinery Taxes Paid (In Thousands)
P Exclusively used for supply of exempted goods. 10
Q Exclusively used for non-business purpose 20
R Exclusively used for supply of taxable goods or zero-rated goods

S Commonly used for supply of taxable and exempted goods (Purchased on March 1 of last financial year) 120

T Commonly used for supply of taxable and exempted goods
(purchased on May 1 of current financial year) 600

Input tax credit for the month of September of current financial year shall be calculated as under.
Machine Whether Credit Available of taxes paid? Amount P No credit shall be allowed because capital good is used exclusively for supply of exempted goods Nil

Q No credit shall be allowed because capital good is exclusively used for non- business purpose

Nil

R Full credit shall be allowed because capital good is exclusively used for supply of taxable goods

40

26
S + T Capital goods commonly used for supplying taxable and exempted goods

9 (refer below)

Calculation of common credit attributable to taxable and exempt supplies. Steps Particulars Denoted as Amount (In
Thousand)
1 Common credit for machine S and T C1 720
2 Common credit for the relevant tax period, i.e., September month of current financial year

D2 = C1/60 12

4 Common credit attributable to exempt supplies (‘D1’)

D1 = D2 *
1,000/4,000

3

5 Common credit attributable to taxable supply D3 = D2 – D1 9
6 Credit Availed in Month of September 760 [40 + 720]
7 Credit to be reversed in month of September 3

Allowability of ITC to Banks or NBFC
Financial Institutions, Banks and NBFC, engaged in the business of accepting deposits, extending loans or advances, shall have two options to avail of the eligible input tax credit every month on inputs, capital goods and input services.

Option I
They can avail of the eligible input tax credit on inputs, capital goods and input services as per the above explained calculation of proportionate ITC. [Where the goods or services or both used by the registered person partly for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies]

Option II
They have an option to avail of 50% of the eligible input tax credit every month on inputs, capital goods and input services. This option once exercised shall not be withdrawn during the remaining part of the financial year.
This restriction of 50% shall not apply in respect of taxes paid on supplies made by one registered person to another registered person having same PAN number.

Calculation of ITC
1. The tax paid on inputs and input services which are used for non-business purposes and blocked ITC shall not be available.
2. The full credit shall be available when such financial institutions renders services or supplies goods from one State to its own branch in another State.
3. 50% of the remaining ITC shall be admissible.

DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR

An Input Service Distributor or ISD can distribute the credit of taxes paid by it for the common input services among its affiliates, branches or other associates. It distributes the common credit on a proportional basis by issuing an ISD invoice. The ISD is required to submit the details of such distribution in Form GSTR-6.

Who is ISD?
Input Service Distributor (ISD) is an office of the supplier which receives tax invoices for the common input services and issues a prescribed document for distributing the credit of tax paid on the said services to its branches having same

PAN as that of the ISD. The branches can have different GSTINs, but they must have same PAN as that of ISD. In other words, the input tax credit on service can be distributed among suppliers which have the same PAN as that of the ISD. The ISD can only distribute the credit of taxes paid on input services, it cannot distribute the credit of taxes paid in respect of input goods and capital goods.

Example:
A Ltd. operates from 4 locations – Delhi (Head office), Mumbai (Branch), Kolkata (Branch) and Chennai (Branch). It awards a computer maintenance contract to B Ltd. Under the contract, B Ltd. shall be responsible for repair and maintenance of all computers located at different locations. The invoice shall be issued in the name of Delhi Office. As service has been received by the head office and branches, the credit for such common input service shall be distributed between them. Here, the head office at Delhi is the Input Service Distributor.

How much credit shall be distributed?
The amount of credit distributed by the ISD cannot exceed the amount of credit available for distribution. If input services are used exclusively by any particular branch, the credit of tax paid on such input services shall be distributed only to that recipient. The credit of tax paid under reverse charge mechanism can’t be distributed by the ISD to the recipients. Thus, the ISD can utilize such credit only as a normal taxpayer.
If input services are used by more than one recipient, the credit of input tax shall be distributed on the basis of the turnover of the last year amongst all such recipients that are operational during the year. If there is no turnover in the last year, then the turnover of the last quarter should be taken.

How to distribute the credit?

ISD Registration
A supplier can distribute the credit among its branches only if it is registered as ‘ISD’. The supplier can opt to be registered as ISD by specifying the required details in form REG-01.

Issue of Invoice
The credit for common input services can be distributed by the Input Service Distributor by issuing an ISD invoice. The ISD shall issue an invoice which should clearly indicate that it is issued only for distribution of input tax credit.

Filing of monthly return
The input tax credit available for distribution in a month shall be distributed in the same month itself and the details thereof shall be furnished in Form GSTR-6. For due date of filing of GSTR-6, refer GST Compliance Calendar.

Tax-wise distribution
The input tax credit to be distributed by the ISD shall be distributed separately on account of Central tax, State tax, Union Territory tax and integrated tax. The credit of integrated tax shall be distributed as credit of integrated tax to every recipient. If recipient and ISD are located in same State, the credit of CGST and SGST will be distributed as input tax credit of CGST or SGST respectively. However, if recipient and ISD are located in different State, the input tax credit will be distributed as input tax credit of integrated tax.

How to divide credit among recipients?
The input tax credit to be distributed among the recipients shall be calculated in following steps:

Step 1: Identify the recipients among whom the credit shall be distributed by the ISD. These recipients are denoted as ‘R1’.
Step 2: Calculate the input tax credit to be distributed among recipients using following formula:

ITC to be distributed to recipients
= Total ITC to be distributed
X Turnover of Person R1 during the relevant period

Aggregate Turnover of all recipients to who the input service is attributable

Example, XYZ Ltd. is registered as ISD. It has head Office in Mumbai and three operational units in Mumbai, Jabalpur and Delhi. For the month of July, the head office gets following input tax credit (all figures in thousands):
1. Tax paid in respect of services used for Mumbai Unit: Rs. 300
2. Tax paid in respect of services used for all units: Rs. 1,200
3. Aggregate turnover of all units: Rs. 1,00,000
4. Turnover of Mumbai unit: Rs. 50,000
5. Turnover of Jabalpur unit: Rs. 30,000
6. Turnover of Delhi unit: Rs. 20,000

The input tax credit shall be distributed by ISD in following proportion:

Particulars Total credit available

Mumbai Jabalpur Delhi

Tax paid on services used for Mumbai Unit

300 300 – –

Tax paid on services used for all units

1,200 600
(1,200 * 50%)

360
(1,200 * 30%)

240
(1,200 * 20%)
Total 1,500 900 360 240

How to reverse the credit distributed by ISD?

If Input Service Distributor distributes excess input tax credit, the excess credit so distributed shall be recovered from the recipients along with interest. In that situation, the Input Service Distributor shall issue an ISD credit note for reduction of credit.
If any input tax credit required to be reduced on account of issuance of a credit note to the Input Service Distributor by the supplier, it shall be apportioned to each recipient in the same ratio in which it was distributed and the amount so
apportioned shall be:
1. Reduced from the amount to be distributed in the month in which the credit note is included in return Form GSTR-6.
2. Added to the output tax liability of the recipient if the amount to be distributed is less than the amount to be adjusted.

TRANSFER OF CREDIT IN CASE OF BUSINESS RESTRUCTURING

In case of change in the constitution of business of a registered person on account of sale, merger, demerger, amalgamation, etc., the registered person can transfer the unutilized ITC to the successor. To transfer the credit, the registered person has to obtain a certificate from a Chartered Accountant or Cost Accountant and furnish Form ITC-02 on the GST portal.

How to transfer the credit?

Intimation to Dept.
If constitution of business of a registered person changes due to sale, merger, demerger, amalgamation, lease, transfer or any change in the ownership of business, he shall furnish the details of such change on GST portal in Form GST ITC- 02 along with a request to transfer the unutilized Input Tax Credit lying in his electronic credit ledger to the account of transferee.

Apportionment in case of demerger
In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

Submission of certificate
The transferor shall also be required to submit a copy of a certificate issued by a practicing Chartered Accountant or Cost Accountant certifying that the sale, merger, demerger, amalgamation, lease or transfer of business has been done with a specific provision for transfer of liabilities.

Acceptance of credit by transferee
The transferee shall accept the details furnished by the transferor on the common portal and upon such acceptance the unutilized credit specified in Form GST ITC-02 shall be credited to the electronic credit ledger of transferee. The inputs and capital goods so transferred shall be duly recorded by the transferee in his books of account.