Understanding Input Tax Credit in Special Circumstances under the GST Act

Introduction:

The Goods and Services Tax (GST) Act in India lays down intricate provisions to govern the claiming of Input Tax Credit (ITC) under unique scenarios. Section 18 of the Act delineates specific circumstances, such as registration, business changes, and shifts from exempt to taxable supplies, where taxpayers are entitled to claim ITC. This article aims to unravel the complexities surrounding input tax credit entitlements in special situations, exploring the conditions, restrictions, and procedural intricacies outlined in Section 18 and Rule 40 of the GST Act. Let`s delve into the detailed provisions that dictate the claiming of input tax credit on inputs, capital goods, and other crucial aspects within the ambit of these special circumstances.

In this article we are going to discuss Section 18(1) and Section 18(2) along with Rule 40 of CGST Rules 2017, which states the provisions for entitlement of ITC at the time of registration or voluntary registration or switching to regular tax paying status or coming into tax-paying status.

So let us first see what Section 18(1) and 18(2) says:

Section 18(1) & (2):

Availability of credit in special circumstances.-

(1) Subject to such conditions and restrictions as may be prescribed-

(a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act;

(b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration;

(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed;

(d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.

(2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.

So, we are going to discuss all 4 points over here:

1. Person who has applied for registration within 30 days from the date on which he becomes liable to registration and has been granted such registration:

A person applying for GST registration within thirty days of becoming liable is entitled to claim input tax credit on inputs, as well as semi-finished or finished goods, held in stock on the day immediately preceding the date of liability.

For example, ‘Z’ becomes liable to pay tax on 1st August and has obtained registration on 15th August w.e.f. 1st August. ‘Z’ is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 31st July. ‘Z’ cannot take ITC on capital goods.

Although, ITC can be availed within 1 year from the date of the issue of the tax invoice by the supplier. That means Mr. Z (from the above example), can avail ITC of goods purchased whose invoice date is not older than 1 year from the date on which he files form GST ITC-01.

For those registering under Section 25(3) of the GST Act, i.e., voluntary registration, the entitlement extends to claiming input tax credit on inputs, semi-finished, or finished goods held in stock on the day immediately preceding the date of registration.

For example, A applies for voluntary registration on 5th June and obtains registration w.e.f. 22nd June. A is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 21st June. ‘A’ cannot take ITC on capital goods

Similarly, as point 1, ITC can be availed within 1 year from the date of the issue of the tax invoice by the supplier.

3. Registered person who ceases to pay composition tax and switches to the regular scheme:

In the event a registered person ceases to pay tax under the composition scheme, they are entitled to claim input tax credit on inputs, semi-finished, or finished goods, and on capital goods. The credit is available on the day immediately preceding the date from which the person becomes liable to pay tax under regular scheme. It is noteworthy that in this point, unlike point 1 & 2, ITC on capital goods can also be availed. Although ITC on capital goods will be reduced by 5% per quarter of a year or part of the quarter from date of invoice.

For example, ‘B’, a registered taxable person, was paying tax under composition scheme upto 30th July. However, w.e.f. 31st July, ‘B’ becomes liable to pay tax under regular scheme. ‘B’ will be eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as on 30th July. ITC on capital goods will be reduced by 5% per quarter or part thereof from the date of the invoice.

ITC to be availed within 1 year from the date of the issue of the tax invoice by the supplier.

4. Registered person whose exempt supplies become taxable supplies:

When an exempt supply of goods or services becomes taxable, the registered person is entitled to claim input tax credit on related inputs and on capital goods exclusively used for the exempt supply.

For example, ABC Limited is dealing in product X which is exempted from GST. However, it became taxable w.e.f. 1st April 2024 vide a notification. ABC Limited will be eligible for ITC on product X held in stock in semi-finished or finished form held in stock. Also ABC limited will become eligible for ITC on capital good specifically used for producing Product B.

ITC to be availed within 1 year from the date of the issue of the tax invoice by the supplier.

Rule 40 manner of claiming ITC:

In all the previously outlined scenarios, it`s imperative for the registered individual to submit an electronic declaration via the Form GST ITC-01 on the common portal. This declaration should explicitly outline details concerning the inputs in stock, inputs within semi-finished or finished goods, and capital goods, corresponding to the respective dates mentioned in column (4) of the applicable table. The deadline for filing this declaration is within 30 days from the date when the registered person becomes eligible for availing Input Tax Credit (ITC). It`s noteworthy that this timeframe is extendable under the discretion of the Commissioner/Commissioner of State GST/Commissioner of UTGST.

Furthermore, if the cumulative claim for ITC, encompassing CGST, SGST/UTGST, and IGST, surpasses the threshold of Rs. 2,00,000, the declaration necessitates certification by a practicing Chartered Accountant or Cost Accountant. This stringent process ensures the accuracy and reliability of the ITC claim when it involves substantial amounts across different tax categories.