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Note On GST Input Tax Credit CA Yashwant Kasar PDF
Note On GST Input Tax Credit CA Yashwant Kasar PDF
Note On GST Input Tax Credit CA Yashwant Kasar PDF
CA Yashwant J. Kasar
B.Com, FCA, CISA, DISA, PMP, FAIA
Email: yashwant@ykc.co.in
Cell: +91 98224 88777
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Works Contract service..................................................................................................................................................14
Construction service .......................................................................................................................................................15
GST paid under composition scheme......................................................................................................................15
Supply received by non-resident taxable person ..............................................................................................15
Supply for personal consumption.............................................................................................................................15
Loss of goods or free samples.....................................................................................................................................15
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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.
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.
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.
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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.
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.
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.
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.
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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 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.
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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.
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.
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.
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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.
Filing of GST return is mandatory for the recipient to claim the credit of input tax
paid on goods or services supplied to him.
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.
2. Invoice of the supply for which tax has been paid on reverse charge basis
4. Bill of entry or similar document prescribed under Customs Act for assessment of
IGST
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5. ISD Invoice or ISD credit note issued by an Input Service Distributor.
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.
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
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offline mode. The effective date of registration shall be the date of grant of
registration certificate.
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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.
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.
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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.
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.
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
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3. Imparting training on driving such motor
vehicles
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
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
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b) Supply of general insurance services in respect of such motor vehicles, vessels or
aircraft insured by them
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.
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.
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.
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Construction service
Goods or services on which tax has been paid under composition scheme are not
eligible for input tax credit.
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.
Goods or services used by a taxable for his personal consumption are not eligible
for input tax credit.
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.
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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.
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.
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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 registration is cancelled
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
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:
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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 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 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, ifreason for default is fraud or any
willful misstatement or suppression of facts.
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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 tax
liability of relevant period.
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.
3. Non-taxable supply
5. Transactions in securities
6. Sale of land
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7. Sale of building (except construction of complex where supply is made before
obtaining completion certificate).
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.
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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.
Aggregate value of
exempt supplies (E)
ITC attributable to exempt Common Input tax credit
= X Total turnover in the
supplies ('D1') (C1)
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'.
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)
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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.
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Step 1: Calculate the figures of eligible and non-eligible ITC in following categories.
'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.
Aggregate value of exempt supplies (E)
Monthly ratio of exempt and total
= Total turnover in the State during the tax
supply ('D1')
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.
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Step 4: Divide the figure of Common Credit ('C1') by 60 months to arrive at monthly
credit in respect of common capital goods.
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.
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)
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b) Value of exempt supply 1,000
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
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S+T Capital goods commonly used for supplying taxable and exempted 9 (refer
goods below)
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]
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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.
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
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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.
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.
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.
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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.
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.
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 'R 1'.
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Step 2: Calculate the input tax credit to be distributed among recipients using
following formula:
Turnover of Person R1 during the
ITC to be distributed Total ITC to be relevant period
= X
to recipients distributed 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
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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.
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How to transfer the credit?
Intimation to Dept.
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 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.
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