Input Tax Credit – Advanced Tax Laws and Practice Important Questions

Question 1.
Explain the mechanism under the CGST Act, 2017 for claiming Input Tax Credit while making payment of Taxes.
Answer:
Eligibility and Conditions for taking Input Tax Credit

1. General Power to take credit:

Every registered person shall, subject to such conditions and restriction as may be prescribed and in the manner specified in section 49, be entitled to take credit or input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

2. Conditions for taking credit:

Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless:

(a) Invoice:
He is in possession of a tax invoice or debit not issued by supplier registered under this Act, or such other tax payment documents as may be prescribed;

(b) Receipt:
He has received the goods or services or both;

(c) Tax actually paid:
Subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and

(d) Return furnished:
He has furnished the return under section 39. The following points may also be taken:

1. Receipt of goods in lots against an Invoice:

Where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment.

2. ITC availed to be paid along with interest if payment not made in 180 days of date of invoice:

Where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.

3. Credit can be availed if Payment is made subsequently:

The recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

4. Section 16(3) – ITC not allowed in respect of tax component of capital goods if depreciation claimed on in under Income-tax Act:

Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

5. Section 16(4) – Time limit for availing of Input Tax Credit:

A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Question 2.
Explain the consequences according to provisions of GST law, if a recipient of goods or services or both does not make payment for the supply within 180 days.
Answer:
Where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon (Proviso to section 16(2) of CGST Act, 2017).

Question 3.
Dinesh Enterprises is a manufacturing company and wants to know the eligibility of Input Credit on fuel (Pet coke/furnace oil) used for the production of finished products.
Answer:
Under section 16(1) of the CGST Act, 2017 every registered person shall, subject to such conditions and restrictions as may be prescribed and, in the manner, specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

Thus, in principle, input tax credit is available on all goods provided they are used or intended to be used in the course of or in furtherance of business.

As such, section 9(2) of CGST Act, 2017 provides that tax on supply of few petroleum products viz. petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.

However, pet coke and furnace oil are not excluded from the scope of GST. In light of Section 16(1) CGST read with section 9(2) of the said Act, input tax credit of GST charged on pet coke and furnace oil shall be available, if such goods are used or intended to be used in the course of or in furtherance of the business of Dinesh Enterprises.

Question 4.
Briefly explain about apportionment of credit and blocked credits under section 17 of the CGST Act.
Answer:
Apportionment of credit and blocked credits

Section 17 of the CGST Act deals with apportionment of credit and blocked credits. Where the goods or services or both are used by the registered person partly for the purpose of 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.

Where the goods or services or both are used by the registered person partly for taxable supplies including zero rated supplies and partly for exempt supplies, 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. The value of exempt supply shall be such amount as may be prescribed and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and subject to clause (b) of paragraph 5 of Schedule II, sale of building.

A banking company or financial institution engaged in supplying services by way of accepting the deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2) viz. proportionate input tax credit or avail of every month 50% of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

Provided that once the option is exercised by a banking company or financial institution, it shall not be withdrawn during the remaining part of the financial year. This restriction of 50% also shall not apply to the tax paid on supplies made by one registered person to another registered person having the same PAN.

Section 17(5) of CGST Act, 2017 deals with blocked credits. Notwithstanding anything contained in section 16(1) & section 18(1) of CGST Act, 2017, ITC is not allowed on goods and/or services mentioned in this sub-section Le. even if such goods/services are used in course or furtherance of business.

Question 5.
Vivitha Chemicals Ltd. is a manufacturing company registered under GST in the State of Tamil Nadu. It manufactures two taxable products “Supreme” and “Maroon”, and one exempt product “Delight”. Alt purchases ate from outside the State from registered suppliers.

On 1st October, 2020, product “Delight” got withdrawn from the exemption notification and product “Maroon” got exempted through fen exemption notification. The supplier furnishes the under mentioned details (Amounts are excluding GST at 12% for raw materials and 18% for Capital goods):

Particulars	Price (₹)
(a) Machinery “D” purchased on 22nd Oct., 2020 for being used in manufacturing products “Supreme” and “De-light”.	4,00,000
(b) Machinery “E” purchased on October 1, three years before 1st Oct., 2020, for being exclusively used in manufacturing product “Delight”. From 1st Oct., 2020, such machinery will also be used for manufacturing product “Maroon”.	5,00,000
(c) Raw Material used for manufacturing “Supreme” purchased on 9th Oct., 2020.	7,00,000
(d) Raw Material used for manufacturing “Maroon” purchased on 27th Oct., 2020.	6,82,000
(e) Raw Material used for manufacturing “Delight” purchased on 25th Oct., 2020.	2,00,000

Compute the amount of input tax credit credited to Electronic Credit Ledger for the month of October, 2020.
Answer:
Computation of amount of Input Tax Credit (ITC) credited to Electronic Credit Ledger for the month of October, 2020:

Particulars	Price (₹)
(a) Machinery “D”	72,000
(b) Machinery “E”	36,000
(c) Raw material used for manufacturing “Supreme”	84,000
(d) Raw material used for manufacturing “Maroon”	–
(e) Raw material used for manufacturing “Delight”	24,000
ITC credited to Electronic Credit Ledger for the month of October, 2020	2,16,000

1. ITC in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero rated supplies shall be credited to the electronic credit ledger [Rule 43(1)(b) of the CGST Rules, 2017].

2. Where any capital goods earlier used exclusively for effecting exempt supplies is subsequently also used for effecting taxable supplies, the value of capital goods being machinery ‘E’ shall be arrived at by reducing the ITC at the rate of 5% for every quarter or part there of and the amount so arrived shall be credited to the electronic credit ledger [Proviso to rule 43(1)(c) of the CGST Rules, 2017).

3. Thus, ITC on “E” shall be computed as under:
= ₹90,000 – ₹54,000 (₹90,000 × 5% × 12 quarters)
= ₹36,000

3. ITC in respect of inputs used for effecting taxable supplies will be credited in Electronic Credit Ledger. ITC in respect of inputs used for effecting exempt supplies will not be credited in Electronic Credit Ledger [Rule 42 of CGST Rules, 2017].

Question 6.
Parthiv Chemicals Pvt. Ltd. is a manufacturing company registered under GST in the State of Maharashtra. It manufactures two taxable products “Sun” and “Moon”, and one exempt product “Jupiter”.

On 1st October, 2020, product “Moon” got exempted through an exemption notification and the exemption available on product “Jupiter” got withdrawn on the same date (1st October, 2020) under the same notification. The above registered supplier has furnished the following details (amounts are excluding GST) chargeable at 18% GST.

Particulars	Price (₹)
(a) Machinery “L” purchased on 22-10-2020 for being used in manufacturing product “Sun” and “Jupiter”	1,20,000
(b) Machinery ‘M’ purchased on 1st October, 2017 used till 30-9-2020 exclusively in manufacturing product “Jupiter”. However, from 1-10-2020, such machinery will also be used for manufacturing product “Moon” besides “Jupiter”	5,00,000
(c) Raw material used for manufacturing “Sun” purchased on 9-10-2020	2,20,000
(d) Raw material used for manufacturing “Moon” purchased on 10-10-2020	4,00,000
(e) Raw material used for manufacturing “Jupiter” purchased on 16-10-2020	1,00,000

All purchases are from outside the State from registered suppliers. Compute the amount of input tax credit (ITC) to be credited to Electronic Credit Ledger for the month of October, 2020.

Notes:

2. Where any capital goods earlier used exclusively for effecting exempt supplies is subsequently also used for effecting taxable supplies, the value of capital goods being machinery “M” shall be arrived at by reducing the ITC at the rate of 5% for every quarter or part thereof and the amount so arrived at shall be credited to the electronic credit ledger [Proviso to Rule 43(1)(c) of the CGST Rules, 2017].

Thus, ITC on “M” shall be computed as under:
= ₹90,000 – ₹54,000 (₹90,000 × 5% × 12 quarters)
= ₹36,000

3. ITC in respect of inputs used for effecting taxable supplies will be credited in electronic credit ledger. ITC in respect of inputs used for effecting exempt supplies will not be credited in electronic credit ledger [Rule 42 of CGST Rules, 2017].

Question 7.
Which are the input goods and services on which a registered dealer cannot claim Input Tax Credit under Section 17(5) of CGST Act, 2017. Give any six points/items.
Answer:
Goods and/or services on which Input Tax Credit (ITC) is blocked as per section 17(5) of the CGST Act, 2017:

(A) Motor vehicle (except few cases)
(B) Goods and/or services provided in relation to:

Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;
Membership of a club, health and fitness center;
Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;
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 & machinery, except where it is an input service for further supply of works contract;
(D) Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;
(E) Goods and/or services on which tax has been paid under composition scheme;
(F) Goods or services or both received by a non-resident taxable person except on goods imported by him;
(G) Goods and/or services used for private or personal consumption, to the extent they are so consumed;
(H) Goods lost, stolen, destroyed, written off, gifted, or free sample;
(I) Any tax paid due to short payment on account of fraud, suppression, misdeclaration, seizure, and detention.

Question 8.
Bharat Ltd., a registered supplier under the regular scheme, is engaged in manufacture of electronic items. The following details for the month of March, 2021 are available:

Item	GST Paid (₹)
Machines acquired for manufacture (capital goods)	10,00,000
Electronic items utilized in manufacture	25,00,000
Trucks used for transporting materials	1,00,000
Food and beverages consumed within the factory	25,000
Advise the ITC eligibility for the company

Answer:
Computation of ITC available to Bharat Ltd. for month of March, 2021

	Amount (₹)
Machineries acquired for manufacture of electronic items is 10,00,000 eligible for ITC. However, depreciation has to be claimed on the net value excluding the GST. It is assumed that the GST amount has not been considered for the purpose of depreciation under section 32 of the Income-tax Act, 1961.	10,00,000
Electronic items utilized in manufacture. The ITC would be 25,00,000 fully available as these are used in the course of business/ furtherance of business. [Section 16 CGST Act]	25,00,000
Trucks used for transporting materials. ITC on motor vehicles 1,00,000 for transportation of goods has not been blocked under Section 17(5) of the CGST Act. Hence, it is eligible for input tax credit.	1,00,000
Under Section 17(5) of the CGST Act, ITC on food and bev-Nil erages is a blocked credit unless they are consumed to make outward taxable supplies in the same category or as part of mixed supply or composite supply or it is obligatory on the part of the employer to provide such service to its employees under any law. However, in the present case, food and beverage have been consumed within the factory. Hence, not eligible.	Nil
Total ITC available	36,00,000

Question 9.
Determine the amount of Input Tax Credit (ITC) admissible to JKL Ltd., in the month of September, 2020 in respect of various inward supplies during the month from the following information. Assume that all the conditions necessary for availing the input tax credit have been fulfilled by JKL Ltd:

Items	GST Paid (₹)
Health Insurance of permanent factory employees, as per policy of company	60,000
Raw materials for which invoice received and GST paid for full amount but only 90% of material received during the month and remaining 10% will be received in next month (October, 2020)	1,13,000
Work contractor’s service used for installation of plant and machinery	1,18,000
Goods purchased against valid invoice from PQR Ltd, although GST has been deposited by PQR Ltd. but JKL Ltd. has made payment to PQR Ltd. for such purchases in the month of November, 2020.	50,000
Purchase of car used by director for the business meetings only	25,000

Answer:
Calculation of Input Tax Credit (ITC) available to JKL Ltd. for the month of September, 2020

Particulars	Amount (₹)
Health Insurance of factory employees. Note: As per section 17(5)(b)(iii) ITC is not available until and unless it is as per compulsory Government policy. Here it is only as per Company policy, therefore, ITC is not available.	NIL
Raw materials for which invoice received and GST paid for full amount but only 90% of material received during the month and remaining 10% will be received in next month. Note: As per proviso to section 16(2), it will be available when last lot will be received, hence entire ITC be available in October, 2020	NIL
Work contractor’s service used for installation of plant and machinery Note: As per section 17(5)(c) ITC will not be available for works contract services when supplied for construction of an immovable property other than plant and machinery. Since it is for plant and machinery, the ITC is available.	1,18,000
Goods purchased against valid invoice from PQR Ltd. Note: ITC shall be admissible in month of September, 2020 even if payment is made by JKL Ltd. in the month of November, 2020.	50,000
Purchase of car used bv director for the business meetings only of ₹25,000 Note: As per section 17(5)(a) input tax credit shall not be available in respect of Motor Vehicle (Car) for director even for business use only.	NIL
Total input tax credit available	1,68,000

Question 10.
Define the term “works contract” under the CGST Act, 2017? Can input tax credit be availed on works contract service?
Answer:
As per Section 2(119) of the CGST Act, 2017, “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property where in transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Section 17(5)(c) of the CGST Act, 2017 states that Input Tax Credit is blocked on works contract service when supplied for construction of an immovable property.

Section 17(5)(d) of the CGST Act, 2017 states that input tax credit is blocked on goods or services received by a taxable person for construction of an immovable property on own account.

In re KSR & Company (GST AAR Andhra Pradesh) (14/02/2019):

In this case it was held that the Applicant is eligible for Input Tax Credit (ITC) in respect of the GST paid on goods and services used as inputs in execution of “Works Contracts”.

Input Tax Credit restriction under section 17(5)(c) and 17(5)(d) of the CGST Act, 2017 will not apply to the applicant as his output is works contracts service.

Thus, if a supplier is engaged in providing further supplies of works contract services, input tax credit can be availed.

Question 11.
Mrs. X has opted for composition scheme at the time of registration and purchased a plant and machinery ₹30,00,000 and paid input tax at a rate of 18% and tax credit was not allowed but after a period of 9 month and 10 days the dealer has opted for payment u/s 9 i.e. normal scheme. Compute amount of tax credit allowed to Mrs. X.
Answer:
As per section 18(1)(c) of CGST Act, Input Tax Credit allowed on Capital goods on transition from paying tax under section 10 to section 9 of CGST Act shall be computed as follows:

Particulars	Amount(₹)
a. Total Input Tax Credit (₹30,00,000 × 18%)	5,40,000
b. Less: Tax credit to be reduced based on 5% points for every quarter or part there of (₹5,40,000 × 5% per quarter × 4 quarters)	(1,08,000)
c. Therefore, Amount of Input Tax Credit allowed	4,32,000

Question 12.
Where a supplier transfers a running business as a whole either due to sale, merger, amalgamation of such business, whether the portion of the unutilized input tax credit by the supplier can be claimed immediately by the recipient?
Answer:
There is no specific provision under the Act prohibiting transfer of such unutilized credit. Rather, Section 18(3) of the CGST Act, 2017 specifically provides that when there is a change in constitution of a registered person on account of sale, merger, or amalgamation of business with specific provision of transfer of liabilities, the registered taxable person shall be allowed to transfer the input tax credit which remains unutilized, provided registered person furnish the details of sale, merger, demerger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee.

Therefore, if the recipient is registered under the Act, he should be eligible to claim such unutilized credits. In a situation, where the recipient is not registered under the Act, he may have to make a fresh application for registration and claim such unutilized credits after making intimation to the department.

Question 13.
Jayakumar Textiles Ltd., purchased a machinery on 12th August, 2020 for ₹12 lakhs (excluding GST). The company put the machinery to use after the purchase and availed input tax credit for the eligible amount. The machinery was sold as second-hand machinery on 14th May, 2021 for 19 lakhs. During purchase as well as sale of the machinery, the GST rate applicable was 18%. Discuss the steps which Jayakumar Textiles Ltd., is required to take at the time of sale of the second-hand machine. Briefly state the statutory provisions involved.
Answer:
Section 18(6) of the CGST Act, 2017 read with rule 40(2) of the CGST Rules, 2017 provide that if capital goods or plant and machinery on which input tax credit has been taken are supplied outward by the registered person, he must pay an amount that is the higher of the following:

(a) Input tax credit taken on such goods reduced by 5% per quarter of a year or part there of from the date of issue of invoice for such goods, or;

(b) Tax on transaction value

Jayakumar Textiles Ltd. is required to take the steps in the light of above provisions for payment of tax at the time of sale of second-hand machinery. The amount payable on sale of machinery shall be:

Particulars	Amount (₹)	Amount (₹)
Input Tax Credit taken on machine
Less: Input tax credit to be reduced at 5% per quarter or part thereof for the period of use of machine from August 2020 to May, 2021
(i) For year 2020-21 (₹2,16,000 × 5%) × 3 quarters	32,400
(ii) For the year 2021-22 (₹2,16,000 × 5%) × 1 quarter	10,800	(43,200)
Amount required to be paid as per (a) above – A		1,72,800
Tax leviable on Transaction Value as per (b) above – B (₹9,00,000 × 18%)		1,62,000
Amount payable towards sale of machine (Higher of ₹1,72,800 & ₹1,62,00)		1,72,800

Question 14.
On 25th August, 2019, M/s Agarwal & Agarwal Ltd., a registered supplier of textile products located in Bangalore, Karnataka purchased one machine for ₹12,39,000 including IGST, from one supplier of Maharashtra who issued invoice on the same date.

M/s Agarwal & Agarwal Ltd. put the machine to use on the same date and availed Input Tax Credit of the eligible amount. M/s Agarwal & Agarwal Ltd. sold this machine after using the machine in the process of manufacture of taxable goods for ₹7,50,000 excluding IGST to Mr. Suresh Kumar of Andhra Pradesh on 20th August, 2020. During purchase as well as sale of machine, the IGST rate applicable was 18%.

Is M/s Agarwal & Agarwal Ltd. required to pay GST? If yes, calculate the amount of tax payable under GST laws at the time of sale of the machine. Also briefly state the relevant statutory provisions.
Answer:
Section 18(6) of the CGST Act, 2017 read with rule 40(2) of the CGST Rules, 2017 provide that if capital goods or plant and machinery on which input tax credit has been taken are supplied outward by the registered person, he must pay an amount that is the higher of the following:

(a) Input tax credit taken on such goods reduced by 5% per quarter of a year or part thereof from the date of issue of invoice for such goods; or

(b) Tax on transaction value.

Accordingly, the amount payable on supply of machinery by M/s Agarwal & Agarwal Ltd. shall be computed as follows:

Particulars	Amount (₹)
ITC taken on Machine (₹12,39,000 × 18/118)	1,89,000
Less: Input tax credit to be reduced by 5% per quarter for the period of use of machine (i) For the year 2019-20 = ₹1,89,000 × 5% × 3 quarters = ₹28,350
(ii) For the year 2020-21 = ₹1,89,000 × 5% × 2 quarters = ₹18,900	(47,250)
(A)	1,41,750
Tax Leviable on transaction Value (₹7,50,000 × 18%) (B)	1,35,000
Thus, GST payable by M/s Agarwal & Agarwal Ltd on sale of capital goods {Higher of (A) and (B)}	1,41,750

Question 15.
Goyal Manufacturers, a registered person, instructs it’s one of the suppliers to send the input directly to Sumit Enterprises, who is a job worker, outside its factory premises for carrying out certain operations on the goods. The goods were sent by the supplier on 15th July, 2020 and were received by the job worker on 17th July, 2020.

Whether Goyal Manufacturers are eligible to take Input Tax Credit (ITC) on the input goods directly received by the job worker from the supplier. Discuss, what action under the GST law is required to be taken by Goyal Manufacturers.
Answer:
As per Section 19(2) of the CGST Act, 2017, the principal is entitled to take input tax credit of inputs sent for job work even if the said goods are directly sent to a job worker.

Section 19(3) of the CGST Act, 2017 further stipulates that where the inputs are sent directly to a job worker but are not received back by the principal within a period of 1 year of the date of receipt of inputs by the job worker, it shall be deemed that such input had been supplied by the principal to the job worker on the day when the said inputs were received by the job worker.

In view of a fore mentioned provisions, Goyal Manufacturers are eligible to take the input tax credit on the input goods directly received by the job worker from the suppliers.

However, if the inputs are not returned by Sumit Enterprises within 1 year from 17.07.2020 (date of receipt of input goods by job worker), it shall be deemed that such input had been supplied by Goyal Manufacturers to Sumit Enterprises on 17.07.2020 and Goyal Manufacturers shall be liable to pay the tax along with applicable interest.

Question 16.
Amit Ltd., a registered supplier, is engaged in manufacturing activity. It also gives job work to other units. It purchased raw materials on 5th June, 2020 for ₹2 lakhs (+GST @ 12%). It dispatched 50% of the raw material to job worker on 10th July, 2020. How much can the company claim as input tax credit in respect of those goods?

What is the time limit for receiving the goods after completion of job work by the job worker? What would be your answer in case 50% of the raw material is directly sent to job worker by the original seller of goods? Will your answer be different in case it is capital good, instead of raw material?
Answer:
ITC on raw materials/capital goods sent to job worker:

Amit Ltd. paid GST @ 12% on the goods which works out to ₹24,000. As per Section 19(1) of the CGST Act, 2017, it can claim input tax credit in entirety regardless of the fact that it has wholly or partially sent such goods to a job worker. It dispatched 50% of the raw materials on 10.07.2020 to the job worker.

The time limit is that the job worker must return the raw material as such or as processed goods within 1 year from the date of dispatch by Amit Ltd. In the case of delay, the raw material so sent to job worker would be treated as supply from the date when the goods where originally sent out Amit Ltd would be required to pay tax along with interest.

Where the raw material is dispatched directly to the job worker i.e. on 05.06.2020, the time limit of one year would be counted from that date of receipt of raw material by the job worker. Thus, in case 50% of the raw material is directly sent to the job worker, the time limit for return of such raw material as such or as processed goods would be one year from the date of receipt of such raw material by the job worker.

In the case of capital goods, the time limit for return is 3 years instead of 1 year. If the goods are not returned by the job worker within 3 years then such capital goods would be deemed to have been supplied to the job worker on the date when the same were originally sent and therefore Amit Limit would be required to pay tax on such capital goods along with interest.

Question 17.
Explain: Input Service Distributor (ISD)
Answer:
“Input Service Distributor” means

(a) an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipts of input services and;

(b) issue a prescribed document for the purposes of distributing the credit of Central tax, State tax, Integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.

Question 18.
What are the conditions applicable to Input Service Distributor to distribute the credit?
Answer:
The following conditions are applicable to Input Service Distributor to distribute the Input Tax Credit (ITC):

The credit can be distributed to the recipients of credit against an ISD invoice containing prescribed details.
The amount of credit distributed shall not exceed the amount of credit available for distribution.
The credit connected to an input service must be distributed only to the particular recipient to whom the input service is attributable.
If the input service is attributable to more than one recipient, the relevant ITC is distributed pro rata to such recipients in the ratio of turnover of the recipient in a state/Union Territory to the aggregate turnover of all recipients to whom the input service is attributable and which are operational during the current year.
ITC pertaining to input services which are common for all units, is distributed to all the recipients in the ratio of turnover in the prescribed manner.
ITC available for distribution in a month shall be distributed in the same month and the details there of shall be furnished in the prescribed form.
Both ineligible and eligible ITC are to be distributed separately.
ITC on CGST, SGST/ UTGST and IGST are to be distributed separately.
ITC of CGST, SGST/UTGST in respect of recipient located in the same state/UT is distributed as CGST and SGST/UTGST respectively.
ITC of CGST and SGST/UTGST, in respect of a recipient located in a different State/UT, is distributed as IGST (total of CGST and SGST/UTGST which were to be distributed to such recipient.)
ITC on account of IGST is distributed as IGST.

Question 19.
XYZ Ltd., having its head office at Mumbai, is registered as Input Service Distributor (ISD). It has three units in different cities situated in ‘Mumbai’, ‘Jabalpur’ and ‘Delhi’ which are operational in the current year. XYZ Ltd. furnishes the following information for the month of July 2020:

CGST paid on services used only for Mumbai Unit: ₹3,00,000
IGST, CGST & SGST paid on services used for all units: ₹12,00,000
Total turnover of the units for the previous financial year is as follows:

Unit Turnover	(₹)
Total Turnover of three units	10,00,00,000
Turnover of Mumbai unit	5,00,00,000
Turnover of Jabalpur unit	3,00,00,000

Answer:
Input tax credit to be distributed by XYZ Ltd., a registered Input Service Distributor (ISD) on different units for July, 2020 (Figures in ₹)

Particulars	Total Credit	Mumbai	Jabalpur	Delhi
CGST paid on services used for Mumbai Office only	3,00,000	3,00,000	–	–
IGST, CGST & SGST paid on the services used for all units in operation during the year (Note)	12,00,000	6,00,000	3,60,000	2,40,000
Total	15,00,000	9,00,000	3,60,000	2,40,000

Note: The Input Tax credit has been distributed on all the units on the pro rata basis of the turnover of each of the units in the ratio of 5:3:2.

Question 20.
Loyal Company Ltd. of Mysore is a manufacturer and registered supplier of machine. It has provided the following details for the month of November, 2019. Details of GST paid on inward supplies during the month:

Particulars	GST paid amount (₹)
Health insurance of factory employees as required by Factory Act	20,000
Raw materials for which invoice has been received and GST has also been paid for full amount but only 50% of material has been received, remaining 50% will be received in next month	18,000
Work contractor’s service used for installation of plant and machinery	12,000
Purchase of manufacturing machine directly sent to job worker’s premises under challan	50,000
Purchase of car used by director for the business meetings only	35,000
Outdoor catering service availed for business meetings	18,000

Loyal Company Ltd. also provides service of hiring of machines along with man power for operation. As per trade practice machines are always hired out along with operators and also operators are supplied only when machines are hired out. Receipts on outward supply (exclusive of GST) for the month of November, 2019 are as follows:

Items	Outward Supply (₹)
Hiring receipts for machine	5,25,000
Service charges for supply of man power operator	2,35,000

Assume all the transactions are inter-State and the rates of IGST to be as under:

1. Sale of machine: 5%
2. Service of hiring of machine: 12%
3. Supply of man power operator service: 18%

Compute the amount of Input Tax Credit available and also the net GST payable for the month of November 2020 by giving necessary explanations for treatment of various items, if opening balance of input tax credit is Nil.

Answer:
Computation of Input Tax Credit available:

Particulars	Amount (₹)
Health insurance of factory employees (W.N.1)	20,000
Raw material received in factory (W.N.2)	–
Work’s contractor’s service used for installation of plant and machinery (W.N.3)	12,000
Manufacturing machinery directly sent to job worker’s premises under challan (W.N.4)	50,000
Purchase of car used by director for business meetings only (W.N.5)	–
Outdoor Catering Service available for business meetings (W.N.6)	–
Total Input Tax Credit available	82,000

Working Notes:

1. Health Insurance is obligatory under Factories Act. Hence ITC is allowed.

2. Inputs or capital goods received in instalments – Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to the credit upon receipt of the last lot or instalment – first proviso to section 16(2) of CGST Act.

3. As per section 17(5)(c)of the CGST Act, 2017, ITC shall not be available in respect of the works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract ser¬vice. In this case ITC will be allowed because here, such services are being used for installation of Plant and Machinery.

4. Section 19 of the CGST Act, 2017 provides that the principal (a person supplying taxable goods to the job worker) shall be entitled to take the credit of input tax paid on inputs sent to the job-worker for the job work.

5. Under section 17(5) of CGST Act, there are certain supplies on which input tax credit under GST is not available. These supplies can also be said as blocked credit. Section 17(5)(a) of the CGST Act, 2017. Motor Vehicle for transportation of person having approved seating capacity of not more than 13 persons except when used for: 1. Further Supply of vehicles 2. Transportation of passenger (transport Agency) 3. For Training Classes

6. Section 17(5)(b)(i) of CGST Act, 2017 provides that ITC on outdoor catering is under blocked category.

Computation of net GST payable by Loyal Company Limited

Particulars	IGST Amount (₹)
a. Output Tax
On Hiring receipts for machine (₹5,25,00 × 12%)	63,000
Service charges for supply of manpower operators (₹2,35,000 × 12%)	28,200
Total Output Tax payable	91,200
b. Less: Input Tax Credit w.r.t. IGST	(82,000)
c. Net GST payable	9,200

Since the machine is always hired out along with operators and operators are supplied only when the machines are hired out, it is a case of composite supply, wherein the principal supply is the hiring out of machines [Section 3(30) of the CGST Act, 2017 read with section 2(90) of that Act]. Therefore, the service of supply of manpower operators will also be taxed at the rate applicable for hiring out of machines (principal supply), which is 12%, in terms of section 8(a) of the CGST Act, 2017.

Input Tax Credit Notes

♦ Sections involved: 16 to 21 of CGST Act
♦ 16: Eligibility and conditions for taking Input Tax Credit

Only registered Persons under GST can take Input Tax Credit. Input Tax Credit can be taken only with respect to input tax on goods and/or services which are used or intended to be used in course or furtherance of business.

Conditions for taking Input Tax Credit:

a. Person taking Input Tax Credit should be in possession of Tax Invoice/Debit Note/ Other tax paying document.
b. He has received goods or services or both.
c. Tax on such supply has been actually paid to the Government.
d. He has furnished a Return of GST under section 39.

Goods received in lots or in instalments against an Invoice: ITC can be claimed only on receipt of last lot or instalment. Recipient fails to make payment towards value of supply and GST thereon to supplier within 180 days from date of invoice: Amount equal to input tax credit availed by recipient should be added to his output tax liability along with interest thereon.

Further, recipient will again be entitled to claim ITC on payment made by him of value and GST to the supplier. (This is not applicable in a case where GST is payable on Reverse Charge Mechanism) If Depreciation under Income Tax Act is claimed on GST component of cost of capital goods – ITC on the said tax component shall not be the Last date for claiming Input Tax Credit:

Earlier of the following:

a. Due date-of furnishing of GST returns for the month of September following the end of the financial year to which such invoice or invoice relating to such debit note pertains; or;
b. Furnishing of Annual Return for the relevant financial year.

17(1), (2), (3) and (4): Apportionment of Input Tax Credit
Goods/Services used partly for purpose of business and partly for other purposes – Input Tax credit shall be restricted to so much of ITC as is attributable to the purposes of business.
Goods/Services used partly for effecting taxable supplies including Zero Rated supplies and partly for effecting exempt supplies – ITC shall be restricted to so much of input tax as is attributable to taxable supplies including zero-rated supplies.
In the case of Banking companies/Financial institutions including NBFC:
OPTION to avail of every month 50% of eligible ITC on Inputs, Capital Goods and input services in that month and rest shall lapse.

{Note: If option not exercised, follow general provisions for apportionment as given in section 17(2)}

Such option once exercised shall not be withdrawn during the remaining part of the financial year.

Above Restriction of 50% shall not apply to tax paid on supplies made by one registered person to another registered person having same PAN. (ie. w.r.t. services availed from Head Office or Branch.)

17(5): Input Tax Credit – Blocked Credits
No ITC in respect of following goods/services even though used in the course or furtherance of business:

(a) Motor Vehicles for transportation of persons having approved seating capacity not exceeding 13 persons (including driver) {there are some exceptions}.
(ad) Vessels and Aircraft {there are some exceptions}.
(ab) Services of General insurance, servicing, repair and maintenance relating to vehicles, vessels or aircraft {there are some exceptions}.
(b) Food and beverages, Outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of – motor vehicles, vessels or aircraft.
Membership of a club, health and fitness center.
Travel benefits extended to employees on vacation, {there are some exceptions}
(c) and (d): Works contract services, goods or services or both used in construction of an immovable property (other than Plant and machinery). Here, construction means any expenses capitalized to said immovable property.
(e) Goods/Services on which tax has been paid under section 10.
(f) Goods/Services received by Non- Resident Taxable person except on goods imported by him.
(g) Goods/Services used for personal consumption.
(h) Goods lost, stolen, destroyed, written off or disposed off by way of gift or free samples.
(i) Tax paid in accordance with provisions of sections 74, 129, and 130.

18: Availability of Input Tax Credit in special circumstances

(1) Eligibility to claim ITC on stock on transition date when transition from earlier not eligible to claim Input Tax Credit to now eligible to claim ITC. (4 Cases: Unregistered to Registration becoming mandatory, unregistered to the person obtaining registration voluntarily, Registered person paying tax under composition scheme to now paying tax as per normal levy, the earlier registered person supplying exempted goods/services now supply has become taxable supply)
(2) Invoice should be within 1 year if registered person wants to claim ITC as given in (1).
(3) Transfer of Input Tax Credit from one person to other is possible when there is change in constitution of business. Condition: There should be a specific provision for the transfer of liabilities.
(4) Pay Output Tax/Reverse ITC on stock on transition date when the transition from earlier eligible to claim ITC to now not eligible for ITC (Cases: Normal levy to composition levy, Taxable outwards supplies of registered person now becoming exempt)
(5) Follow Rules for computations involved in (1) and (4)
(6) Where capital goods on which Input Tax Credit has been taken are sold subsequently, the amount of Output tax payable shall be –

Higher of the following:
CL Input Tax Credit availed on such capital goods as reduced by an amount equal to 5% points for every quarter or part thereof from the date of claiming ITC till its sale; or;
b. Transaction Value of Capital goods X Rate of GST
Proviso: For Refractory bricks, moulds and dies, jigs and fixtures supplied as scrap, output tax payable shall be “Transaction Value X Rate of GST”.
19: Taking Input Tax Credit in respect of Inputs and Capital Goods sent for Job Work (1), (2), (3): Inputs sent to Job Worker:

TC is allowed of inputs sent to job worker.
Further, ITC is allowed even if inputs are directly sent to Job workers.
If above inputs not received by Principal within 1 year from date of being sent/not supplied from place of business of Job Worker, then it shall be deemed that such

inputs are supplied by principal to job worker on the day said inputs were sent out. (Consequently, pay Output Tax along with interest for 1 year).
It should be noted that where inputs are sent directly to a job worker, period of 1 year shall be counted from date of receipt of inputs by the job worker.

(4), (5), (6): Capital Goods sent to Job Worker:
All points as in (1), (2), and (3) apply as it is except the time limit. It is 3 years in case of capital goods instead of 1 year which is for inputs.
(7) Time limits of 1 year/3 year – Not applicable to moulds and dies, Jigs and fixtures or tools sent out to a job worker for job work (i.e. Principal can continue to claim ITC even if such moulds and dies, etc. are not received back in their premises.)
20: Manner of Distribution of Credit by Input Service Distributor 21: Manner of recovery of credit distributed in excess (in connection with section 20)

Input Tax Credit Notes

Sections involved: 16 to 21 of CGST Act
16: Eligibility and conditions for taking Input Tax Credit

Only registered Persons under GST can take Input Tax Credit. Input Tax Credit can be taken only with respect to input tax on goods and/or services that are used or intended to be used in the course or furtherance of business.

Conditions for taking Input Tax Credit:

Goods received in lots or in installments against an Invoice: ITC can be claimed only on receipt of the last lot or installment. Recipient fails to make a payment towards the value of supply and GST thereon to the supplier within 180 days from date of the invoice: Amount equal to input tax credit availed by the recipient should be added to his output tax liability along with interest thereon.

Further, the recipient will again be entitled to claim ITC on payment made by him of value and GST to the supplier. (This is not applicable in a case where GST is payable on Reverse Charge Mechanism) If Depreciation under Income Tax Act is claimed on GST component of cost of capital goods – ITC on the said tax component shall not be the Last date for claiming Input Tax Credit:

Earlier of the following:

♦ 17(1), (2), (3) and (4): Apportionment of Input Tax Credit
♦ Goods/Services used partly for purpose of business and partly for other purposes – Input Tax credit shall be restricted to so much of ITC as is attributable to the purposes of business.
♦ Goods/Services used partly for effecting taxable supplies including Zero Rated supplies and partly for effecting exempt supplies – ITC shall be restricted to so much of input tax as is attributable to taxable supplies including zero-rated supplies.
♦ In the case of Banking company/Financial institution including NBFC:
OPTION to avail of every month 50% of eligible ITC on Inputs, Capital Goods, and input services in that month, and rest shall lapse.

{Note: If option not exercised, follow general provisions for apportionment as given in section 17(2)}

Such option once exercised shall not be withdrawn during the remaining part of the financial year.

Above Restriction of 50% shall not apply to the tax paid on supplies made by one registered person to another registered person having the same PAN. (ie. w.r.t. services availed from Head Office or Branch.)

17(5): Input Tax Credit – Blocked Credits
No ITC in respect of following goods/services even though used in the course or furtherance of business:

(a) Motor Vehicles for transportation of persons having approved seating capacity not exceeding 13 persons (including driver) {there are some exceptions}.
(ad) Vessels and Aircraft {there are some exceptions}.
(ab) Services of General insurance, servicing, repair, and maintenance relating to vehicles, vessels, or aircraft {there are some exceptions}.
(b) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting, or hiring of – motor vehicles, vessels, or aircraft.
Membership of a club, health and fitness center.
Travel benefits extended to employees on vacation, {there are some exceptions}
(c) and (d): Works contract services, goods or services or both used in the construction of an immovable property (other than Plant and machinery). Here, construction means any expenses capitalized to said immovable property.
(e) Goods/Services on which tax has been paid under section 10.
(f) Goods/Services received by Non- Resident Taxable person except on goods imported by him.
(g) Goods/Services used for personal consumption.
(h) Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
(i) Tax paid in accordance with provisions of sections 74, 129, and 130.

18: Availability of Input Tax Credit in special circumstances

(1) Eligibility to claim ITC on stock on transition date when transitioning from earlier not eligible to claim Input Tax Credit to now eligible to claim ITC. (4 Cases: Unregistered to Registration becoming mandatory, unregistered to a person obtaining registration voluntarily, Registered person paying tax under composition scheme to now paying tax as per normal levy, earlier registered person supplying exempted goods/services now supply has become taxable supply)
(2) Invoice should be within 1 year if the registered person wants to claim ITC as given in (1).
(3) Transfer of Input Tax Credit from one person to another is possible when there is a change in the constitution of business. Condition: There should be a specific provision for the transfer of liabilities.
(4) Pay Output Tax/Reverse ITC on stock on transition date when the transition from earlier eligible to claim ITC to now not eligible for ITC (Cases: Normal levy to composition levy, Taxable outwards supplies of registered person now becoming exempt)
(5) Follow Rules for computations involved in (1) and (4)
(6) Where capital goods on which Input Tax Credit has been taken are sold subsequently, the amount of Output tax payable shall be –

Higher of the following:
CL Input Tax Credit availed on such capital goods as reduced by an amount equal to 5% points for every quarter or part thereof from the date of claiming ITC till its sale; or;
b. Transaction Value of Capital goods X Rate of GST
Proviso: For Refractory bricks, molds and dies, jigs, and fixtures supplied as scrap, output tax payable shall be “Transaction Value X Rate of GST”.
19: Taking Input Tax Credit in respect of Inputs and Capital Goods sent for Job Work (1), (2), (3): Inputs sent to Job Worker:

TC is allowed of inputs sent to job workers.
Further, ITC is allowed even if inputs are directly sent to Job workers.
If the above inputs are not received by the Principal within 1 year from the date of being sent/not supplied from the place of business of Job Worker, then it shall be deemed that such

(4), (5), (6): Capital Goods sent to Job Worker:
All points as in (1), (2) and (3) apply as it is except the time limit. It is 3 years in case of capital goods instead of 1 year which is for inputs.
(7) Time limits of 1 year/3 years – Not applicable to moulds and dies, Jigs and fixtures or tools sent out to a job worker for job work (i.e. Principal can continue to claim ITC even if such moulds and dies, etc. are not received back in their premises.)
20: Manner of Distribution of Credit by Input Service Distributor 21: Manner of recovery of credit distributed in excess (in connection with section 20)

Input Tax Credit – Advanced Tax Laws and Practice Important Questions

Input Tax Credit – Advanced Tax Laws and Practice Important Questions

CS Professional Advance Tax Law Notes