BATCH 2019-24

SUBJECT: Taxation Law-II

TOPIC- “AN ANALYSIS OF INPUT TAX CREDIT
SYSTEM UNDER GST ”

SUBMITTED TO: SUBMITTED BY:

DR. Rahul Nikam MUDIT BALIA
Assistant professor Roll NO. 92121040003
Faculty of law, Marwadi University B.A. LL.B (Hons) (VIII Sem)

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 DECLARATION

I Mudit Balia guarantee that the work exemplified in this project, titled “ AN ANALYSIS OF INPUT
TAX CREDIT SYSTEM UNDER GST” is my own genuine work completed by me under the direction
Dr. Rahul Nikam, Faculty of Law, Marwadi University. The matter exemplified in this project has
not been submitted for the reward of some other degree/recognition. I assent that I have reliably
recognized, offered credit and alluded to the creators/researchers any place their works have been
referred to in the content and the body of the undertaking. I further guarantee that I have not
maleficently plagiarized some other's work, section, text. information, results, figures and so forth
detailed in the diaries, books, magazines, reports,papers, theories, and so on, or accessible at sites
and encompassed them in this project and neither quoted them as my work.

Signature of the student

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 SUPERVISOR’S CERTIFICATE

This is to affirm that the work encapsulated in the going project named” AN ANALYSIS OF INPUT
TAX CREDIT SYSTEM UNDER GST” has been completed wholly by Mudit Balia under my direction
and assistance and thatthe applicant has satisfied the necessities of the guidelines set down for the
satisfaction of BA.LLB. (Hons.) Degree assessment throughout Taxation law II (Semester VIII),
Faculty of Law, Marwadi University.

Dr. Rahul Nikam

Associate Professor

Faculty of Law, Marwadi University

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 ACKNOWLEDGEMENT

I want to convey my gratitude to individuals, who have helped me most all through my task, be it
straightforwardly or by implication. I'm generally thankful to my professor Dr. Rahul Nikam who really
propelled to do this assignment by giving this chance. Also a thank of mine goes to my companion who
assisted me finishing the assignment, where they all traded their own fascinating thoughts, and caused me
to acknowledge both the points of view to the issue and along these lines madeit conceivable to finish my
task with all exact data. I wish to thank my folks for their own help or consideration who roused me to
head out in a different direction. Last but not the least, I would likewisestretch out my appreciation to the
individuals who couldn't be referenced here yet all around assumed their part to motivate the drape.

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 INDEX

CHAPTER 1- INTRODUCTION ........................................................................................... 6

CHAPTER 2- WHAT IS INPUT TAX CREDIT .................................................................. .9

CHAPTER 3- CONDITIONS FOR CREDIT ALLOW ABILITY ..................................... .10

CHAPTER 4- TIME LIMITS FOR CLAIMING ITC ..................................................... .12

CHAPTER 5- IMPACT OF ITC ON BUSINESSES ...................................................... .14

CHAPTER 6- JUDICIAL PRONOUNCEMENTS ON ITC…………………………………….15

CHAPTER 7- CONCLUSION………………………………………………………………………..17

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 CHAPTER 1: INTRODUCTION

ITC Forms the basis of Input Tax structure. It simply means the tax paid for buying some Goods /Services
can be used to set-off the Indirect Tax Liability at the time of selling of the produces/ services. This
Paper highlights the concept of ITC & also availment of ITC in GST. ITC is one of the key features of
GOODS and SERVICES TAX. This article deals with the concept of Input Tax Credit(ITC) ,how it can
be claimed, what is the maximum time limit and other related question regarding ITC,I have tried to
explain the Concept in simple language for better understanding. ITC is an effective mechanism which
avoids Cascading of Tax. Cascading of Taxes Simply Means ‘Tax on Tax’. Under the earlier system of
taxation, credit of taxes imposed by Central Government is not available for payment of taxes imposed
by State Governments and vice versa, But it is possible in present GST system. Input Tax Credit under
GST is a credit which is available to suppliers to set off the tax, he has paid on purchase of goods from
output tax on sale of such goods. However, ITC avoid double taxation. ITC should be claimed while
filling GSTR-3B of the relevant period. Section 16(1) & 16(2) defined eligibility and conditions for
taking Input Tax Credit.
ITC is one of the key features of Goods & Services Tax. ITC is a Mechanism to avoid Cascading of
Taxes .Cascading of Taxes , in simple Language, is ‘Tax on Tax’ under the present system of taxation,
credit of taxes being Levied by Central Government is not available as set-off for payment of taxes
levied by State Governments, and Vice Versa. One of the most important features of the GST system
is that the entire Supply chain would be subject to GST to be levied by Central and State Government
Concurrently. As the tax charged by the Central or the State Government would be part of the same tax
regime, credit of tax paid at every stage would be available as set-off for payment of tax at every
Subsequent stage. Goods & Services Tax (GST) would mitigate such Cascading of taxes, which existed
under exercise, VAT & Service Tax. Under this new system most of the Indirect taxes levied by Central
&the State Governments on supply of goods or services or both would be combined together under
single levy .The major taxes/levies which are going to be clubbed together or subsumed in the GST

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 REVIEW OF LITERATURE

 Meenakshi Bindal., Bhuwan Gupta and Sweety Dubey under their Research Paper1 “A STUDY ON
CUSTOMER PERCEPTION TOWARDS INPUT TAX CREDIT IN GST WITH SPECIAL REFERENCE OF
ALWAR REGION”1 talks about GST is the major tax reform in Indian economy and Input Tax Credit (ITC)
is the backbone of the GST regime. Input Tax Credit that make GST a value added tax i.e., collection of tax
at all points after allowing credit for the inputs. The procedures and restrictions laid down in these provisions
are important to make sure that there is seamless flow of credit in the whole scheme of transition without any
misuse. Thus, the clarity of rules of an ailment and utilization have significant impact on making GST a
taxpayer-friendly tax. Input credit allows a seller to reduce the tax burden being paid by claiming offset for
the taxes already paid on inputs. So ITC will play an important role in growth of Indian economy & it is one
of the most important reasons for the introduction of GST

1
Meenakshi Bindal., Bhuwan Gupta and Sweety Dubey A study on customer perception towards input tax creditin gst
with special reference of alwar region, 9, International Journal of Recent Scientific Research, 29650-29654, 2018

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 STATEMENT OF PROBLEM
There is a need to study the concept Input tax Credit under system under Goods and
Service tax..

AIMS AND OBJECTIVES

 To Study about the concept of Input tax Credit.

 To study the procedure for claiming Input tax credit.

 To analysis the impact of ITC on Indian economy.

RESEARCH METHODOLOGY

The proposed methodology for the proposed comparative study is doctrinal methodology, which
will be carried out in a descriptive manner and will comprise consulting numerous books,journals,
websites, and publications to obtain information on the issue. The majority of the study will be
done through various internet sources. Throughout my assignment, I will do a thorough
examination of the readings of numerous articles and case laws, and only the most appropriate
and relevant material will be described. The researcher will also look through Literature and
current news, and all pertinent material will be written down.

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 CHAPTER-2 WHAT IS INPUT TAX CREDIT?

‘Input Tax’ has been defined in section 2(57) of the Model GST LAW. The meaning of ITC includes
two word ‘input’ and ‘tax credit’. Inputs are material or Services, that a supplier acquires in order to
manufacture or provide his product or services which is his output. Tax Credit refers to the amount of
tax a supplier or taxable person is able to reduce while paying his Output Tax.
Input Tax Credit (ITC) is a mechanism that allows businesses to claim a credit for the tax paid on purchases
made for their business activities. The concept of ITC is based on the principle that tax should be levied
only on the value added at each stage of the supply chain and not on the total value of the product or
service. The ITC system is designed to avoid the cascading effect of taxes, also known as double taxation,
where tax is levied on tax, leading to a higher tax burden on businesses and consumers.2
Under the Goods and Services Tax (GST) regime, which is implemented in many countries including
India, ITC has become a crucial component of the tax system. The ITC system under GST works on a
self-policing mechanism, where businesses need to maintain accurate records of their purchases and sales
to claim a credit for the tax paid on inputs. This credit can be used to offset their tax liability on the output,
which is the final product or service that is sold to the end consumer.
For example, let us consider a manufacturer who buys raw materials worth Rs. 10,000 and pays a GST
of Rs. 1,800 on it, at a rate of 18%. The manufacturer then processes the raw materials and produces
finished goods, which are sold for Rs. 20,000, attracting a GST of Rs. 3,600, also at a rate of 18%. In this
case, the manufacturer can claim a credit of Rs. 1,800 for the GST paid on the raw materials, which can
be used to offset the GST liability of Rs. 3,600 on the finished goods. Therefore, the net tax liability for
the manufacturer will be Rs. 1,800, instead of Rs. 3,600.
The ITC system under GST has several advantages for businesses, including a reduction in the tax burden,
removal of cascading effect, increase in compliance, and a boost to the economy. However, there are also
several challenges associated with the ITC system, such as complexity, technology, and reconciliation,
which need to be addressed to ensure its effective implementation.3

2
Jhunjhunwala, A. (2021). Input Tax Credit under GST, https://cleartax.in/s/input-tax-credit-gst (last visited on 2nd
may,2023)

3 Singh, M. (2018). GST Input Tax Credit: Meaning, Eligibility, and Calculation, https://www.bankbazaar.com/tax/gst-input-
tax-credit-meaning-eligibility-calculation.html

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 CHAPTER-3: CONDITIONS FOR CREDIT ALLOW ABILITY

Under the GST regime, there are certain conditions that need to be fulfilled for a business to claim Input
Tax Credit (ITC) on the taxes paid on its purchases. These conditions are:

1. The taxpayer must be a registered person under GST: Only businesses that are registered under GST
can claim ITC. Unregistered businesses cannot claim ITC on the tax paid on their purchases.
2. The goods or services must be used for business purposes: The ITC can only be claimed for goods or
services that are used or intended to be used for business purposes. Any purchases made for personal
use or for non-business purposes are not eligible for ITC.
3. The supplier must have paid the tax to the government: ITC can only be claimed on the tax paid by
the supplier to the government. If the supplier has not paid the tax to the government, the recipient of
the goods or services will not be able to claim ITC on such purchases.
4. The taxpayer must possess a valid tax invoice or other prescribed documents: To claim ITC, the
taxpayer must possess a valid tax invoice or other prescribed documents such as debit notes, credit
notes, or bill of entry, as proof of the tax paid on the purchases. For example, Mr Manoj wants to
claim an ITC of Rs.5,600 as he found the ITC entry in GSTR-2B of January 2022 as of 10th February
2022 but he has not received the invoice till 20th February 2022, being the date of filing the returns.
He cannot claim Rs.5,600 as ITC while filing GSTR-3B of January 2022 due to the absence of the
invoice.
5. The tax charged on the invoice must be paid to the government: The tax charged on the invoice must
be paid to the government by the supplier. If the supplier has not paid the tax, the recipient will not be
able to claim ITC on such purchases. For example, Mr Manoj received a tax invoice dated 13th
January 2022 for purchases and wants to claim an ITC of Rs.5,600 but has not found the ITC entry in
GSTR-2B of January 2022 as of 20th February 2022. He cannot claim Rs.5,600 as ITC while filing
GSTR-3B of January 2022.
6. The taxpayer must file their GST returns: The taxpayer must file their GST returns within the
prescribed time limit to claim ITC. Failure to do so will result in the denial of ITC.
7. The taxpayer must not be engaged in certain restricted activities: ITC cannot be claimed on certain
goods or services such as motor vehicles, food and beverages, membership of clubs, and certain types
of insurance. Additionally, businesses engaged in certain activities such as composition scheme,

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 exempt supplies, and non-business activities are also restricted from claiming ITC.
8. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good
purchased.
9. From 1st January 2022, the benefit of provisional ITC claims is no longer available as per Section
16(2)(aa). It means the amount of ITC reported in GSTR-3B will be a total of actual ITC in GSTR-
2B. The provisional ITC of 5% of actual ITC in GSTR-2B will no longer be allowed. Hence, a regular
matching of the purchase register or expense ledger with GSTR-2B is crucial. Until 31st December
2021, a regular taxpayer could have claimed provisional ITC in GSTR-3B to the extent of 5% of the
ITC available in GSTR-2B, in addition to ITC in GSTR-2B.

It is important for businesses to comply with the above conditions to claim ITC on their purchases. Any
non-compliance or incorrect claims can lead to penalties and interest under GST laws. Therefore,
businesses should ensure that they maintain accurate records of their purchases and sales and follow the
relevant GST laws and regulations.

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 CHAPTER-4: TIME LIMITS FOR CLAIMING ITC

The Input Tax Credit (ITC) is a crucial mechanism in the Goods and Services Tax (GST) regime that
helps taxpayers reduce the tax liability on their supplies by allowing them to claim credit for the tax paid
on their purchases of goods and services. However, the law also imposes certain time limits for claiming
ITC, which taxpayers must comply with to avoid any penalties or loss of credit.
Under the GST law, the time limit for claiming ITC is the earlier of the following two:
1. The due date of furnishing of the relevant annual return i.e. GSTR-9, for the financial year to which
the ITC relates.
2. The date of filing of the monthly return for September of the following financial year or furnishing of
the relevant annual return i.e. GSTR-9, whichever is earlier.
Let's understand this with an example. Suppose you have ITC for the financial year 2021-22. In that case,
the last date for claiming the same would be the due date of furnishing of GSTR-9 for the said financial
year i.e. 31st December 2022 or the date of filing of GSTR-3B for September 2023, whichever is earlier.
In other words, you must claim the ITC before the due date of filing the annual return or the monthly
return for September of the following year, whichever is earlier.
It is crucial to note that the time limit for claiming ITC depends on the date of the invoice or debit note
and not on the date of the actual payment. For example, suppose you have purchased goods in June 2022
and received the invoice in July 2022, but you made the payment in August 2022. In that case, the ITC
will be available to you in the financial year 2022-23, and you must claim it before the due date of filing
the annual return or monthly return for September 2023, whichever is earlier.
However, there are certain exceptions to the above rule, depending on the circumstances. For instance, the
time limit for claiming ITC related to invoices issued in FY 2017-18 is extended till the due date of
furnishing GSTR-3B for the month of March 2019. This provision is beneficial for taxpayers who have
not claimed ITC for the FY 2017-18 and can now do so by filing their returns for the month of March
2019.
Furthermore, the law also allows taxpayers to claim ITC within two years from the date of the invoice.
However, this provision is subject to certain conditions, such as the supplier must have filed their GST
returns, and the recipient must have received the goods or services.
In addition, there are certain scenarios where the time limit for claiming ITC can be different from the
general rule. For instance, in case of a reversal of ITC due to non-payment of the supplier, the recipient

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must pay back the credit availed along with interest within 30 days of the expiry of the payment due date
to the supplier. Similarly, in case of a mismatch between the auto-populated GSTR-2A and the actual ITC
claimed by the recipient, the recipient must rectify the same in their GSTR-3B within the time limit for
claiming ITC. Failure to comply with these provisions can result in the loss of credit or penalties.
Moreover, it is crucial to maintain proper records and documents of the ITC claimed, such as invoices,
debit notes, and other documents, to avoid any disputes or challenges from the tax authorities.

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 CHAPTER 5: IMPACT OF ITC ON BUSINESSES

The Input Tax Credit (ITC) system under Goods and Services Tax (GST) has significant implications for
businesses. Here are some of the impacts of ITC on businesses:
1. Reduced Tax Liability: One of the primary benefits of ITC is that it helps businesses reduce their
tax burden. Prior to the introduction of ITC, businesses had to pay taxes on both the inputs and the
final products, which resulted in a higher tax liability. With ITC, businesses can claim a credit for
the taxes paid on inputs, which reduces the overall tax liability. This helps to reduce the cost of
production and allows businesses to offer products at a lower cost, which can improve their
competitiveness.4
2. Improved Cash Flow: ITC helps to improve cash flow for businesses. By allowing businesses to
claim a credit for the taxes paid on inputs, ITC helps to reduce the amount of tax that businesses
have to pay. This, in turn, helps to improve cash flow, as businesses can use the credit to offset
their tax liability. This helps to improve liquidity and provides businesses with more flexibility in
managing their finances.
3. Increased Compliance: Claiming ITC requires businesses to comply with certain rules and
regulations. Businesses must maintain proper records of their inputs, and these records must be
available for audit by tax authorities. This can be a challenge for businesses, particularly smaller
businesses that may not have the resources to devote to compliance. However, compliance is
important, as failure to comply can result in penalties and fines.
4. Impact on Supply Chain: ITC has a significant impact on the supply chain of businesses.
Businesses can claim credit for the tax paid on their purchases, which incentivizes them to source
inputs from registered suppliers. This leads to a more organized and compliant supply chain.
5. Reduced cascading effect: Prior to the introduction of GST and ITC, there was a cascading effect
of taxes where taxes were paid on taxes. With ITC, the cascading effect is reduced as businesses
can claim a credit for the tax paid on inputs.
6. Impact on Pricing: ITC has an impact on the pricing of goods and services. Businesses can offer
their products at competitive prices due to the reduced tax liability, which benefits consumers.
However, the pricing may also be impacted by the availability and utilization of ITC by businesses.

4 The Economic Times. (2020). Input Tax Credit,https://economictimes.indiatimes.com/definition/input-tax-credit

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 CHAPTER-5: JUDICIAL PRONOUNCEMENT ON INPUT TAX CREDIT

1. Bharti Airtel Ltd. v. Union of India5: In this case, the tax department had denied ITC to Bharti Airtel
Ltd. on the ground that some of its suppliers had not filed their GST returns. However, the court held
that as long as the recipient has complied with the provisions of the GST law, including filing its own
returns and paying the tax due, it cannot be denied the benefit of ITC on account of the non-compliance
of the supplier. The court also observed that the objective of the GST law is to ensure that there is no
cascading effect of taxes, and denial of ITC in such cases would defeat that objective. Therefore, it
directed the tax department to allow the ITC claimed by Bharti Airtel Ltd.
2. Ultratech Cement Ltd. v. Union of India6: In this case, Ultratech Cement Ltd., a cement manufacturer,
had claimed ITC on goods and services used for construction of a captive thermal power plant, which
was used to generate electricity for its cement manufacturing unit. The tax authorities had denied the
claim, stating that the goods and services were used for construction of an immovable property and
hence were not eligible for ITC under Section 17(5)(d) of the CGST Act.
The Supreme Court, in its judgment, held that the denial of ITC on goods and services used for
construction of a captive power plant was not justified. The Court also observed that the restriction on
ITC under Section 17(5)(d) of the CGST Act was intended to apply to goods and services used for
construction of an immovable property that was used for further supply of goods or services. Since
the captive power plant was not used for further supply of goods or services, the restriction on ITC did
not apply.
3. Honda Cars India Ltd. v. Union of India7 : In this case, Honda Cars India Ltd. had constructed a
corporate office and claimed ITC on the goods and services used for the construction. The tax
authorities had denied the claim, stating that the corporate office was not used for the furtherance of
business and hence the ITC was not admissible under the provisions of the Central Goods and Services
Tax Act, 2017. The Gujarat High Court, in its judgment, held that ITC is admissible on the goods and
services used for the construction of a corporate office, which is used for business purposes. The Court
observed that the corporate office was an essential requirement for the business and its construction
was necessary for the smooth functioning of the business. Therefore, the goods and services used for

5
SCC OnLine Del 9134.
6
(2018) 9 SCC 657.
7
SCC Online Guj 1087

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 the construction of the corporate office were eligible for ITC under Section 16 of the CGST Act.
4. In re: Kerala State Bamboo Corporation Ltd8: In this case, Kerala State Bamboo Corporation Ltd. had
leased a building for its business operations and claimed ITC on the GST paid on the lease rent. The
tax authorities had denied the claim, stating that ITC is not available on the GST paid on the lease rent
of a building, as lease rent is exempt from GST. The Kerala Authority for Advance Rulings, in its
judgment, held that ITC is not available on the GST paid on the lease rent of a building, which is used
for business purposes. The Authority observed that as per the GST laws, lease rent is exempt from
GST and ITC is not available on the exempt supplies. Therefore, ITC cannot be claimed on the GST
paid on the lease rent of the building.

8
2019 (20) G.S.T.L. 230 (A.A.R. - GST)

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 CHAPTER 6: CONCLUSION

The Goods and Services Tax (GST) regime was introduced in India on July 1, 2017, as a major tax reform
to simplify the indirect taxation system in the country. One of the essential components of the GST system
is the Input Tax Credit (ITC) system, which allows businesses to claim a credit for the taxes paid on their
inputs, such as goods and services used for business purposes. The ITC system aims to eliminate the
cascading effect of taxes and make the taxation system more efficient and transparent.
The ITC system under GST allows registered businesses to claim a credit for the taxes paid on their inputs,
which can be set off against their output tax liability. This means that businesses can reduce their tax
liability on their outputs by claiming a credit for the taxes paid on their inputs. The ITC system applies to
both goods and services, and businesses can claim ITC on various inputs, such as raw materials, capital
goods, and input services. However, the ITC system under GST is complex and has various compliance
requirements. Businesses need to maintain proper records of their input tax credits and ensure that their
suppliers have filed their GST returns correctly. If any discrepancy is found in the GST returns, the ITC
claimed by businesses can be disallowed, leading to an increase in their tax liability.
The implementation of the ITC system under GST has also resulted in various legal disputes and court
cases. These cases have provided guidance on the interpretation of the GST laws and have helped to clarify
the admissibility of ITC on various goods and services used by businesses.
Despite the benefits of the ITC system under GST, there have been some challenges in the implementation
of the system. One of the major challenges is the complexity of the system, which has resulted in various
compliance requirements for businesses. Another challenge is the issue of fraudulent ITC claims, which
can lead to a loss of revenue for the government. To address these challenges, the government has taken
various measures, such as introducing anti-profiteering provisions and increasing the compliance
requirements for businesses. The government has also introduced various measures to prevent fraudulent
ITC claims, such as the e-way bill system and the GST audit system.
The Input Tax Credit (ITC) system under the Goods and Services Tax (GST) regime is an essential
component of the GST system. While the system is complex and has various compliance requirements, it
has also provided benefits to businesses, such as the reduction of tax liability, increased cash flow, and
the elimination of the cascading effect of taxes. The implementation of the ITC system under GST has
also resulted in various legal disputes and court cases, which have provided guidance on the interpretation
of the GST laws.

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 REFERENCES

1. Taxguru.in
2. ICAI.org
3. Jhunjhunwala, A. (2021). Input Tax Credit under GST. https://cleartax.in/s/input-tax-credit-gst.
4. Khanna, A. (2019). Understanding Input Tax Credit Under GST. https://taxguru.in/goods-and-
service-tax/understanding-input-tax-credit-gst.html
5. Times of India. (2019). Input Tax Credit Under GST: How to Claim It and How It Works.
6. https://indianexpress.com/article/business/gst-input-tax-credit-5665517/
7. Meenakshi Bindal., Bhuwan Gupta and Sweety Dubey A study on customer perception towards
input tax creditin gst with special reference of alwar region, 9, International Journal of Recent
Scientific Research, 29650-29654, 2018.
8. Central Goods and Service tax Act, 2017
9. State Goods and Service tax Act, 2017

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