Module – III: INPUT TAX CREDIT

Syllabus: Relevant definitions- eligibility and conditions for claiming credit -apportionment
of credits and blocked credit – credit on capital goods- availability of credit in special
circumstances – Transfer of Input tax credit- Claim of input tax credit – Matching, reversal
and reclaim of Input tax credit, Recovery of Input tax credit and interest thereon Taking input
tax credit in respect of inputs sent for job work – Problems on claiming Input Tax Credit and
Assessment of Tax Liability

Introduction
Input Tax Credit (ITC) means claiming the credit of the GST paid on purchase of Goods and Services
which are used for the furtherance of business. In other words, Input Tax Credit means reducing the
taxes paid on inputs from taxes to be paid on output. The Mechanism of Input Tax Credit is the
backbone of GST and is one of the most important reasons for the introduction of GST. As GST is a
single tax levied across India (right from manufacture of goods/ services till it reaches the end
customer), the chain does not get broken and everybody is able to take benefit of the same and
there is seamless flow of credit.

 Relevant Definition
Exempt supply means supply of any goods or services or both which attracts nil rate of tax or which
may be wholly exempt from tax under section 11, or under section 6 of the IGST Act, and includes
non-taxable supply [Section 2(47)].

Input means any goods other than capital goods used or intended to be used by a supplier in the
course or furtherance of business [Section 2(59)].

Input Tax: Input tax is a tax imposed on the person when he/she receives supply of goods & services
which are used for his business. In other words, when any supply of services or goods is supplied to a
taxable person, the GST charged is known as Input Tax

Input credit means at the time of paying tax on output, the trader can reduce the tax that is already
paid on inputs.

Zero-rated supply means any of the following supplies of goods or services or

both, namely: ––

export of goods or services or both; or

supply of goods or services or both to a Special Economic Zone (SEZ) developer or a Special
Economic Zone unit [Section 16(1) of the IGST Act].

17. Apportionment of credit and blocked credits

1. Where the goods and/or services are used by the registered taxable person
partly for the purpose of any business and partly for other purposes, the
amount of credit shall be restricted to so much of the input tax as is
attributable to the purposes of his business.
2. Where the goods and / or services are used by the registered taxable
person partly for effecting taxable supplies including zero-rated supplies
under this Act or under the IGST Act, 2016 and partly for effecting
 exempt supplies under the said Acts, the amount of credit shall be
restricted to so much of the input tax as is attributable to the said taxable
supplies including zero-rated supplies.

Explanation.- For the purposes of this sub-section, exempt supplies shall

include supplies on which recipient is liable to pay tax on reverse charge
basis under subsection (3) of section 8.

3. A banking company or a financial institution including a non-banking

financial company, engaged in supplying services by way of accepting
deposits, extending loans or advances shall have the option to either
comply with the provisions of sub-section (2), or avail of, every month,
an amount equal to fifty per cent of the eligible input tax credit on inputs,
capital goods and input services in that month.

Explanation.- The option once exercised shall not be withdrawn during

the remaining part of the financial year.

4. Notwithstanding anything contained in sub-section (1) of section 16 and

subsection (1), (2), (3) and (4) of section 18, input tax credit shall not be
available in respect of the following:
a. motor vehicles and other conveyances except when they are used
i. for making the following taxable supplies, namely
A. further supply of such vehicles or conveyances ; or
B. transportation of passengers; or
C. imparting training on driving, flying, navigating such
vehicles or conveyances;
ii. for transportation of goods.
b. supply of goods and services, namely,
 i. food and beverages, outdoor catering, beauty treatment,
health services, cosmetic and plastic surgery except where
such inward supply of goods or services of a particular
category is used by a registered taxable person for making an
outward taxable supply of the same category of goods or
services;
ii. membership of a club, health and fitness centre,
iii. rent-a-cab, life insurance, health insurance except where the
Government notifies the services which are obligatory for an
employer to provide to its employees under any law for the
time being in force; and
iv. travel benefits extended to employees on vacation such as
leave or home travel concession.
c. works contract services when supplied for construction of
immovable property, other than plant and machinery, except where
it is an input service for further supply of works contract service;
d. goods or services received by a taxable person for construction of
an immovable property on his own account, other than plant and
machinery, even when used in course or furtherance of business;

Explanation 1.- For the purpose of this clause, the word

“construction” includes re-construction, renovation, additions or
alterations or repairs, to the extent of capitalization, to the said
immovable property.
Explanation 2.- ‘Plant and Machinery’ means apparatus,
equipment, machinery, pipelines, telecommunication tower fixed to
earth by foundation or structural support that are used for making
outward supply and includes such foundation and structural
supports but excludes land, building or any other civil structures.

e. goods and/or services on which tax has been paid under section 9;
f. goods and/or services used for personal consumption;
g. goods lost, stolen, destroyed, written off or disposed of by way of
gift or free samples

and

h. any tax paid in terms of sections 67, 89 or 90.

5. The Central or a State Government may, by notification issued in this
behalf, prescribe the manner in which the credit referred to in sub-
sections (1) and (2) above may be attributed
 Input Tax Credit restricted to taxable supplies
Section 17(2) says that where the goods and/or services are Used by the
registered taxable person partly for effecting Taxable supplies including zero-
rated supplies under this Act Or under the IGST Act, 2016 and partly for
effecting exempt Supplies under the said Acts, the amount of credit shall be
Restricted to so much of the input tax as is attributable to the said taxable
supplies including zero-rated supplies.
Before Moving Further Let’s Understand Rule 42 (Distributing Input Tax Credit
Commonly used Input and Input Service) and Rule 43 for (Distributing Input
Tax Credit for Commonly used Capital Goods)
Rule 42 of CGST Rules, 2017:- Manner of Determination of Input Tax Credit in
respect of Inputs or Input Services Used Commonly for Effect Taxable as Well
as Exempt Supply/ Non Business Supply and Reversal thereof will be as
follows:

(a) The total input tax involved on inputs and input services in a tax period,
be denoted as ‘T’;
(b) The amount of input tax, out of ‘T’, attributable to inputs and input
services intended to be used exclusively for the purposes other than business, be
denoted as ‘T1’;
(c) the amount of input tax, out of ‘T’, attributable to inputs and input
services intended to be used exclusively for effecting exempt supplies, be
denoted as ‘T2’;
(d) The amount of input tax, out of ‘T’, in respect of inputs and input services
on which credit is not available under sub-section (5) of section 17, be denoted
as ‘T3’;
(e) The amount of input tax credit credited to the electronic credit ledger of
registered person, be denoted as ‘C1’ and calculated as
 C1 = T- (T1+T2+T3);
(f) The amount of input tax credit attributable to inputs and input services
intended to be used exclusively for effecting supplies other than exempted but
including zero rated supplies, be denoted as ‘T4’;
(g) Input tax credit left after attribution of input tax credit under clause (f) shall
be called common credit, be denoted as ‘C2’ and calculated as C2 = C1- T4;

Particular Amount

Total Credit Available for all supplies (T) XX

Less: Credit not directly related to business (T1) XX

Less: Credit related directly to exempt supply (T2) XX

Less: Credit Inadmissible u/s 17(5)  (T3) XX

 Credit as per Ledger (A) (C1) XX

Less: Credit related directly to Taxable Supplies (T4) XX

                                Common Credit (B) (C2) XX

Less: Credit attributable to exempt supplies (D1 ) XX

Less: Credit attributable to Non Business Services (D2) XX

Total Credit Available from Common Credits XX

 The amount of input tax credit attributable towards exempt supplies, be
denoted as ‘D1’ and calculated as
D1= (E÷F) × C2
Where,
‘E’ is the aggregate value of exempt supplies during the tax period, and
‘F’ is the total turnover in the State of the registered person during the tax
period
 Determine ITC related to Non-business purpose (say D2)
D2= C2 * 5%
Tax payable = D1+ D2 = Add to output tax liability
Final reconciliation to be made
Aggregate D1+D2 declared and finally computed on annual turnover before
filing of return of September of following year. Make adjustment for Following
 If declared is more than computed, claim credit
 If declared is less than computed, pay tax along with interest.

Solve
 Taxable Turnover is Rs. 20,00,000/- Sales
 Exempted Turnover is Rs. 5,00,000/- Sales
 Total available Credit is Rs. 10,00,000/-
 Input Credit attributable to exclusively Non business purpose =
Rs. 1,00,000/-
 Input Credit attributable to exclusively exempted business
purpose = Rs. 1,50,000/-
 Input Credit attributable to exclusively for Blocked Credit = Rs.
50,000/-
 Input Credit attributable to exclusively for Business purposes =
Rs. 5,00,000/-

Sol:
Particular Amount

Total Credit Available for all supplies (T) 10,00,000

Less: Credit not directly related to business (T1) (1,00,000)

Less: Credit related directly to exempt supply (T2) (1,50,000)

Less: Credit Inadmissible u/s 17(5) (T3) (50,000)

 Credit as per Ledger (A) (C1) 7,00,000

Less: Credit related directly to Taxable Supplies (T4) (5,00,000)

                                Common Credit (B) (C2) 2,00,000

Less: Credit attributable to exempt supplies (D1 ) (40,000)

Less: Credit attributable to Non Business Services (D2) (10,000)

C2*5% =200,000*5%

Total Credit Available from Common Credits 1,50,000

D1= E/F*C2 = 5,00,000/25,00,000*2,00,000 = 40,000

E =Exempt Supply /turnover = 5,00,000
F = Overall Supply = Taxable + exempt= 20L+5L = 25,00,000
 2) Solve

 Taxable Turnover is Rs. 10,00,000/

 Exempted Turnover is Rs. 2,00,000/
 Total available Credit is Rs. 5,00,000/-
 Input Credit attributable to exclusively Non business purpose =
Rs. 50,000/-
 Input Credit attributable to exclusively exempted business
purpose = Rs. 25,000/-
 Input Credit attributable to exclusively for Blocked Credit = Rs.
10,000/-
Input Credit attributable to exclusively for Business purposes = Rs.
2,00,000/-

Particular Amount

Total Credit Available for all supplies (T) 5,00,000

Less: Credit not directly related to business (T1) (50,000)

Less: Credit related directly to exempt supply (T2) (25,000)

Less: Credit Inadmissible u/s 17(5) (T3) (10,000)

 Credit as per Ledger (A) (C1) 4,15,000

Less: Credit related directly to Taxable Supplies (T4) (2,00,000)

                                Common Credit (B) (C2) 2,15,000

Less: Credit attributable to exempt supplies (D1) (35,834)

Less: Credit attributable to Non-Business Services (D2) (10,750)

C2*5% =2,15,000*5%

Total Credit Available from Common Credits

D1= E/F*C2 = 2,00,000/12,00,000*2,15,000 =

E =Exempt Supply /turnover = 2,00,000
F = Overall Supply = Taxable + exempt= 10+2 = 12,00,000
Credit Under Special Circumstance
Section 18 of the CGST Act provides for credit of input tax in respect of
transitional stock. Transitional stock for this purpose would mean inputs held in
stock and inputs contained in semi-finished or finished goods held in stock on
the specified day. Transitional credit has been allowed in case of a new
registrant under four different circumstances as follows:
RM – WIP- SEMI FG- FG
Jan – March -wip sfg
i) New Registration: A person who has applied for registration under the Act
within thirty days from the date on which he becomes liable to registration and
has been granted such registration. Transitional stock in this case would refer to
the stock as on the day immediately preceding the date from which he becomes
liable to pay tax under the provisions of this Act.
31/12/2019- I became liable 1/01/2020
1/01/2020- Applied for registration
30/01/2020- Grant of Registration
ii) Voluntary Registration: A person, who takes a voluntary registration under
sub-section (3) of section 25. Transitional stock in this case would refer to the
stock as on the day immediately preceding the date of grant of registration.
he is eligible to take input tax credit of –
1. Inputs held in stock 1,00,000 – 70,000
2. Inputs contained in semi-finished and finished goods held in stock- 20,000
on the day immediately preceding the date of grant of registration.
Example: XYZ applies for registration on 15/06/2018 – 1,00,000(1000)and is
granted registration on 01/07/2018- 50,000 (500), it can take input tax credit of
inputs held in stock/semi-finished/finished goods held in stock as on
30/06/2018- 75,000.(750)
iii) Person Exceeding the Turnover Limit for Composition Levy: Any
registered taxable person who ceases to pay tax under composition levy as
provided in section 10. Transitional stock in this case would refer to the stock as
on the day immediately preceding the date from which he becomes liable to pay
tax under section 9. In this case, even the capital goods are eligible for
transitional credit as reduced by such percentage points as may be prescribed in
this behalf.
1. Inputs held in stock
2. Inputs contained in semi-finished and finished goods held in stock
3. Capital goods
on the day immediately preceding the date from which he becomes liable to pay
tax as regular taxpayer under section 9
Example: EFG, a composition tax payer ceases to pay tax under section 10 on
01/04/2018, it can take input tax credit of inputs held in stock/semi-
finished/finished goods held in stock and input tax credit on capital goods
available as on 31/03/2018
iv) Withdrawal of Exemption: An exempt supply of goods or services by a
registered taxable person becoming a taxable supply, may be due to withdrawal
of the exemption. Transitional stock in this case would refer to the stock
relatable to such exempt supply and capital goods exclusively used for such
exempt supply, on the day immediately preceding the date from which such
supply becomes taxable. The credit on capital goods shall be reduced by such
percentage points as may be prescribed in this behalf.
Mr A – beauty treatment -1/04/2019 withdrawal of exemption 31/3/2019
The transitional credit as above would be allowed subject to such conditions and
restrictions as may be prescribed. In any case, the input tax credit as above in
respect of any supply forming part of the transitional stock shall be restricted to
tax invoices issued not more than one year prior to the transitional stock date.-
1/4/2018
Where any goods or services or both supplied by a registered person become
taxable supply, such person can take input tax credit in respect of –
1. Inputs held in stock – related to such exempt supply
2. Inputs contained in semi-finished and finished goods held in stock – related
to such exempt supply
3. Capital goods – used exclusively for effecting exempt supply
on the day immediately preceding the date from which such supply becomes
taxable.

Change in Constitution
Where there is a change in the constitution of a registered taxable person on
account of sale, merger, demerger, amalgamation, lease or transfer of the
business with the specific provision for transfer of liabilities, the said registered
taxable person shall be allowed to transfer the input tax credit that remains
unutilized in its books of accounts.
A registered person can transfer the remaining balance of input tax credit
available in his electronic credit ledger, where there is a change in the
constitution of a registered person on account of sale, merger, demerger,
amalgamation, lease or transfer of the business with the specific provisions for
transfer of liabilities to such sold, merged, demerged, amalgamated, leased or
transferred business.

Reversal of Input tax credit in special circumstances

1. Where any registered person who is availing input tax credit and later opts for composition
scheme under section 10 or where the goods or services or both supplied by him become
wholly exempt supply, he shall pay an amount equal to the input tax credit in respect of
inputs held in stock and inputs contained in semi-finished or finished goods held in stock and
on capital goods reduced by 5% per quarter from the date of invoice, on the day immediately
preceding the date of exercising of such option, by way of debit in his electronic credit ledger
or electronic cash ledger. Any remaining credit, after payment, in the electronic ledger will
lapse.
2. Where the capital goods or plant and machinery is supplied, the registered person has to
pay an amount equal to input tax credit taken on such capital goods or plant and machinery,
reduced by 5% per quarter from the date of invoice or the tax on the transaction value
determined under section 15, whichever is higher. The taxable person may pay tax on the
transaction value of refractory bricks, moulds, dies, jigs and fixtures when supplied as scrap.
  Utilization of Input Tax Credit
Utilization of CGST’s Input Tax Credit under GST
The Input Tax Credit under GST of CGST shall be
 first utilized towards the payment of output CGST
 and then towards the payment of output IGST
 However, Input Tax Credit under GST of CGST can’t be used to adjust SGST.
Utilization of SGST’s Input Tax Credit under GST
 The Input Tax Credit under GST of SGST shall be
 first utilized towards the payment of output SGST;
 and then towards the payment of output IGST
 However, Input Tax Credit under GST of CGST can’t be used to adjust CGST.
Utilization of IGST’s Input Tax Credit under GST
 The Input Tax Credit under GST of IGST shall be
 first utilized towards payment of IGST;
 then towards the payment of output CGST.
 and then towards the payment of output SGST
Order of Utilization

CGST -ITC SGST-ITC IGST-ITC

SGST-
CGST IGST
OUtput tax

IGST IGST CGST

SGST

Problems on Input Tax Credit

1) Amount of ITC available and Output tax liability under different tax
head
Head Output Tax Input Tax Credit
IGST 1000 1300
CGST 300 200
SGST/UTGST 300 200
Total 1600 1700

Sol:
Head Output tax ITC Utilisation Balance of Output
Tax
SGST /UTGST 300 200 100
CGST 300 200 100
IGST 1000 1000 0

IGST Unutilized ITC = 1300-1000 = 300

Utilization Of IGST Credit
CGST -100
SGST – 100
Balance of IGST ITC = 100
Problems on Input tax Credit
1) ABC Co Ltd registered under GST is engaged in the manufacturing of Heavy
machinery. It procured the following items during the month of July
Sl.NO Items GST
i Electrical transformers manufacturing 5,20,000
process
ii Trucks used for the transport of raw 1,00,000
material
iii Raw material 2,00,000
iv Confectionery items. These items were 25,000
supplied free of cost to the customers in a
customer meet organized by the company
Determine the amount of ITC available with ABC Co. Ltd., for the month of July by
giving necessary explanations for treatment of various items. Subject to the information
given above, assume that all the other conditions necessary for availing ITC have been
fulfilled
Sol:
Computation of Input tax credit available for ABC Co
SL.NO Particulars ITC
1 Electrical Transformers 5,20,000
(These are for the business purpose)
2 Trucks used for transportation of Raw Materials 1,00,000
3 Raw Materials 2,00,000
4 Confectionery Items -
Total ITC 8,20,000

Note : As the Confectionary items are distributed free of cost in the gathering of the
customers it is not possible to avail the input tax credit for that element.

2) XYZ Ltd., registered under GST, is engaged in manufacture of taxable goods.

Compute the ITC available with XYZ Ltd. for the month of October from the
following particulars: -
Sl. No Inward
1 Inputs A
2 Inputs ‘B’
3 Capital goods
4 Input services
GST Remarks
1,00,000 One invoice on which GST
payable was ` 10,000, is missing
50,000 Inputs are to be received in two
instalments. First instalment has
been received in October
1,20,000 XYZ Ltd. has capitalised the
capital goods at full invoice value
inclusive of GST as it will avail
depreciation on the full invoice
value
2,25,000 One invoice dated 20th January on
which GST payable was ` 50,000
has been received in October
Note:
(i) Subject to the information given above, assume that all the other condition
necessary for availing ITC have been fulfilled.
(ii) The annual return for the previous financial year was filed on 15th September

3) XT Pvt Ltd., a supplier of goods, pays GST under regular scheme. It has made
the following outward taxable supplies in a tax period:
Particulars Amnt
Intra-State Supply of goods CGST, SGST 8,00,000
Inter-State Supply of Goods 3,00,000
It has also furnished the following information in respect of purchases made by it in
that tax period- Input tax Credit
Particulars Amnt
Intra-State Supply of goods 2,00,000
CGST,SGST
Inter-State Supply of Goods IGST 50,000
The Company has following ITC with it at the beginning of the tax period
Particulars Amnt
CGST 57,000
SGST NIL
IGST 70,000
Note:
a) Rates of CGST, SGST and IGST are 9%, 9% and 18% respectively
b) Both inward and Outward supplies are exclusive of taxes wherever applicable
c) Compute minimum GST payable in CASH by XT Ltd for the tax period make
suitable assumption
SOL:
Computation of GST PAYABLE On Outward Supplies
Particulars CGST SGST IGST Total
a) Intra