Input Tax Credit-1

CHAPTER 6
INPUT TAX CREDIT

For the sake of brevity, input tax credit has been referred to as ITC in this Chapter.
The section numbers referred to in the Chapter pertain to CGST Act, unless otherwise
specified.
LEARNING OUTCOMES
After studying this Chapter, you will be able to:

 describe what are inputs, input services, capital goods and other
relevant terms in relation to ITC.
 explain the various conditions, time-lines, restrictions and processes
for taking ITC on goods and services in general and special
circumstances.
 identify the items on which ITC is available as also the blocked items
on which ITC is not available.
 explain the concept relating to availing of proportionate ITC when
common inputs or input service or capital goods are used or intended
to be used for exempted and taxable supplies or business and non-
business activities.
 comprehend and apply the above provisions as also the provisions
relating to availment and utilization of ITC to compute the GST
liability of a registered person payable in cash.
© The Institute of Chartered Accountants of India

6.2 INDIRECT TAXES
Relevant definitions
Input Tax credit
Eligibility and conditions

for taking ITC
Apportionment of credit
and blocked credits
Availability of credit in
special circumstances
How is ITC availed and

utilised
1. INTRODUCTION
In earlier indirect tax regime, the
credit mechanism for indirect taxes
levied by the Union Government was
governed by the CENVAT Credit Rules,
2004; and the credit mechanism for state-level VAT on sale of goods was governed
by the States under their respective VAT Acts and Rules. The VAT legislations
allowed ITC of VAT on inputs and capital goods in transactions within the state, but
not on inputs and capital goods coming in the State from outside the state, on
which central sales tax was paid. CENVAT Credit Rules, 2004 allowed availing and
utilization of credit of duty/tax paid on both goods (capital goods and inputs) and
services by the manufacturers and the service providers across the country.

INPUT TAX CREDIT 6.3
The credit across goods and services was integrated vide the CENVAT Credit Rules,
2004 in the year 2004 to mitigate the cascading effects of central levies namely,
central excise and service tax. However, the credit chain remained fragmented on
account of State-Level VAT as the credit of central taxes could not be set off against
a State levy and vice versa. The chain further got distorted as ITC was not available
on inter-State purchases. This resulted in cascading of taxes leading to increase in
costs of goods and services.
The GST regime promises seamless credit on goods and services across the entire
supply chain with some exceptions like supplies charged to tax under composition
scheme and supply of exempted goods and/or services. ITC is considered to be
the backbone of the GST regime. In fact, it is the provisions of ITC which essentially
make GST a value added tax i.e., collection of tax at all points of supply chain after
allowing credit of tax paid at earlier points.
Chapter V of the CGST Act [Sections 16 to 21] & Chapter V: Input Tax Credit of the
CGST Rules [Rules 36-45] prescribe the provisions relating to ITC. State GST laws
also prescribe identical provisions in relation to ITC. In this Chapter, provisions of
sections 16, 17 and 18 have been discussed; 1 first the statutory provisions of these
sections together with the relevant rules have been extracted followed by their
analysis.
Provisions of ITC under CGST Act have also been made applicable to IGST
Act vide section 20 of the IGST Act.
Before proceeding to understand the provisions of section 16, 17, 18 and the
relevant rules let us first go through few relevant definitions.
2. RELEVANT DEFINITIONS
Agent means a person, including a factor, broker, commission agent, arhatia,
del credere agent, an auctioneer or any other mercantile agent, by whatever
name called, who carries on the business of supply or receipt of goods or
services or both on behalf of another [Section 2(5)].
Business includes
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager
1
Provisions of ITC relating to job work and input service distributor [Sections 19, 20 and 21]
will be discussed at the Final level.

6.4 INDIRECT TAXES
or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to
sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not
there is volume, frequency, continuity or regularity of such transaction;
(d) supply or acquisition of goods including capital goods and services in
connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a
subscription or any other consideration) of the facilities or benefits to its
members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been
accepted by him in the course or furtherance of his trade, profession or
vocation;
(h) services provided by a race club by way of totalisator or a licence to book
maker in such club; and
(i) any activity or transaction undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
authorities [Section 2(17)].
Conveyance includes a vessel, an aircraft and a vehicle [Section 2(34)].
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)].
Capital goods means goods, the value of which is capitalized in the books of
account of the person claiming the ITC and which are used or intended to be
used in the course or furtherance of business [Section 2(19)].
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 service means any service used or intended to be used by a supplier in
the course or furtherance of business [Section 2(60)].
Input tax in relation to a registered person, means the central tax, State tax,
integrated tax or Union territory tax charged on any supply of goods or services
or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-section (3) and (4) of section
5 of the IGST Act;
(d) the tax payable under the provisions of sub-section (3) and sub-section (4)
of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-section (3) and sub-section (4)
of section 7 of the Union Territory Goods and Services Tax Act,
but does not include the tax paid under the composition levy [Section 2(62)].
Input tax credit means the credit of input tax [Section 2(63)].
Inward supply in relation to a person, shall mean receipt of goods or services
or both whether by purchase, acquisition or any other means with or without
consideration [Section 2(67)].
Motor vehicle shall have the same meaning as assigned to it in clause (28) of
section 2 of the Motor Vehicles Act, 1988 [Section 2(76)].
Motor vehicle or vehicle under the Motor Vehicles Act, 1988 means any
mechanically propelled vehicle adapted for use upon roads whether the power
of propulsion is transmitted thereto from an external or internal source and
includes a chassis to which a body has not been attached and a trailer; but
does not include a vehicle running upon fixed rails or a vehicle of a special type
adapted for use only in a factory or in any other enclosed premises or a vehicle
having less than four wheels fitted with engine capacity of not exceeding thirty-
five cubic centimetres. [Section 2(28) of Motor Vehicles Act, 1988].
Non-resident taxable person means any person who occasionally undertakes
transactions involving supply of goods or services or both, whether as principal
or agent or in any other capacity, but who has no fixed place of business or
residence in India [Section 2(77)].
Principal means a person on whose behalf an agent carries on the business of
supply or receipt of goods or services or both [Section 2(88)].
Recipient of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or services or
both, the person who is liable to pay that consideration;
(b) where no consideration is payable for the supply of goods, the person to
whom the goods are delivered or made available, or to whom possession
or use of the goods is given or made available; and

6.6 INDIRECT TAXES
(c) where no consideration is payable for the supply of a service, the person
to whom the service is rendered,
and any reference to a person to whom a supply is made shall be construed as
a reference to the recipient of the supply and shall include an agent acting as
such on behalf of the recipient in relation to the goods or services or both
supplied [Section 2(93)].
Supplier in relation to any goods or services or both, shall mean the person
supplying the said goods or services or both and shall include an agent acting
as such on behalf of such supplier in relation to the goods or services or both
supplied [Section 2(105)].
Taxable supply means a supply of goods or services or both which is leviable
to tax under CGST Act [Section 2(108)].
Zero-rated supply means any of the following supplies of goods or services
or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone (SEZ)
developer or a Special Economic Zone unit [Section 16(1) of IGST Act].
3. ELIGIBILITY AND CONDITIONS FOR TAKING INPUT

TAX CREDIT [SECTION 16]
STATUTORY PROVISIONS
Section 16 Eligibility and conditions for taking input tax credit
Sub-section Clause Particulars
(1) 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
and the said amount shall be credited to the electronic credit
ledger of such person.
(2) 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) he is in possession of a tax invoice or debit note issued

by a supplier registered under this Act, or such other tax
paying documents as may be prescribed;
(b) he has received the goods or services or both.
Explanation.—For the purposes of this clause, it shall be deemed

that the registered person has received the goods where the goods
are delivered by the supplier to a recipient or any other person on
the direction of such registered person, whether acting as an agent
or otherwise, before or during movement of goods, either by way
of transfer of documents of title to goods or otherwise;
(c) 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 utilisation of
input tax credit admissible in respect of the said supply;
and
(d) he has furnished the return under section 39:
Provided that 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:
Provided further that 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:
Provided also that 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.

6.8 INDIRECT TAXES
(3) 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.
(4) 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.
Chapter V: Input Tax Credit of the CGST Rules
Rule 36 Documentary requirements and conditions for claiming input

tax credit
(1) The input tax credit shall be availed by a registered person,

including the Input Service Distributor, on the basis of any of the
following documents, namely:-
(a) an invoice issued by the supplier of goods or services or

both in accordance with the provisions of section 31;
(b) an invoice issued in accordance with the provisions of

clause (f) of sub-section (3) of section 31, subject to the
payment of tax;
(c) a debit note issued by a supplier in accordance with the

provisions of section 34;
(d) a bill of entry or any similar document prescribed under

the Customs Act, 1962 or rules made thereunder for the
assessment of integrated tax on imports;
(e) an input service distributor invoice or input service

distributor credit note or any document issued by an
input service distributor in accordance with the
provisions of sub-rule (1) of rule 54.
(2) Input tax credit shall be availed by a registered person only if all
the applicable particulars as specified in the provisions of Chapter

VI are contained in the said document, and the relevant

information, as contained in the said document, is furnished in
FORM GSTR-2 by such person.
(3) No input tax credit shall be availed by a registered person in

respect of any tax that has been paid in pursuance of any order
where any demand has been confirmed on account of any fraud,
willful misstatement or suppression of facts.
Rule 37 Reversal of input tax credit in the case of non-payment of

consideration
(1) A registered person, who has availed of input tax credit on any
inward supply of goods or services or both, but fails to pay to the
supplier thereof the value of such supply along with the tax
payable thereon within the time limit specified in the second
proviso to sub-section (2) of section 16, shall furnish the details of
such supply, the amount of value not paid and the amount of input
tax credit availed of proportionate to such amount not paid to the
supplier in FORM GSTR-2 for the month immediately following
the period of one hundred and eighty days from the date of the
issue of the invoice.
Provided that the value of supplies made without consideration as
specified in Schedule I of the said Act shall be deemed to have been
paid for the purposes of the second proviso to sub-section (2) of
section 16.
(2) The amount of input tax credit referred to in sub-rule (1) shall be
added to the output tax liability of the registered person for the
month in which the details are furnished.
(3) The registered person shall be liable to pay interest at the rate notified
under sub-section (1) of section 50 for the period starting from the
date of availing credit on such supplies till the date when the amount
added to the output tax liability, as mentioned in sub-rule (2), is paid.
(4) The time limit specified in sub-section (4) of section 16 shall not
apply to a claim for re- availing of any credit, in accordance with
the provisions of the Act or the provisions of this Chapter, that had
been reversed earlier.

6.10 INDIRECT TAXES
ANALYSIS
(i) Eligibility for taking ITC [Section 16(1)]
(a) Registration under GST
Every registered person shall be entitled to ITC charged on inward supply
of goods and / or services. This is subject to the provisions relating to use
of ITC under section 49 and the conditions and restrictions in the rules.
[Section 49 prescribes provisions relating to payment of tax, interest, penalty
& other amounts. The same has been discussed in detail in Chapter 9:
Payment of Tax.]
(b) Goods/services to be used for business purposes
ITC will be available on goods and/or services which are used in the course
or furtherance of the business [See definition of business]; the “intention
to use” the goods and/or services in the course or furtherance of business
would also lead to availing of credit on such goods and/or services. Thus,
tax paid on goods and or/services which are used or intended to be used
for non-business purposes cannot be availed as credit. ITC will be credited
in Electronic Credit Ledger.
(ii) Conditions for taking ITC [Section 16(2)]
The registered person will be entitled to ITC on a supply only if ALL the
following four conditions are fulfilled:
(a) Possession of tax paying document [Section 16(2)(a) read with rule
36 of the CGST Rules]
ITC can be availed on the basis of any of the following documents:
i) Invoice issued by a supplier of goods and/or services
ii) Invoice issued by recipient (receiving goods and/or services from
unregistered supplier) along with proof of payment of tax (in case of
reverse charge)
iii) A debit note issued by supplier
iv) Bill of entry or similar document prescribed under Customs Act
v) Revised invoice

vi) Document issued by Input Service Distributor 2

The documents basis which ITC is being taken should have all the relevant
particulars as prescribed in rule 46 of the CGST Rules. [Rule 46 relating to
tax invoice has been discussed in detail in Chapter 8: Tax Invoice, Credit and
Debit Notes.]
Note: Section 16 and the CGST Rules do not specify that a particular copy
of the invoice alone will form the basis of taking ITC. However, rule 48 of
the CGST Rules specifies that the original copy is for the recipient of goods.
The original copy may preferably be kept for record to support the credit
entry. [Rule 48 has also been discussed in detail in Chapter 8: Tax Invoice,
Credit and Debit Notes.]
(b) Receipt of the goods and / or services [Section 16(2)(b)]
The person taking the ITC must have received the goods and / or services.
“Bill to Ship to” Model also included: Under this model, the goods are
delivered to a third party on the direction of the registered person who
purchases the goods from the supplier. Receipt of goods u/s 16(2)(b)
includes delivery to another person on the direction of the registered
person by way of transfer of documents of title to goods or otherwise
either before or during the movement of goods. It would be deemed that
the registered person has received the goods in such scenario. So, ITC will
be available to the registered person on whose order the goods are
delivered to third person.
A is a trader who places an order on B for a consignment of
soda ash. A receives a buying order from C for the same
quantity of soda ash. A instructs B to deliver the goods to C,
and in turn he raises an invoice on C. Though the goods are
not physically received at the premises of A, the condition of section
16(2)(b) is satisfied, and A is entitled to ITC on the consignment.
(c) Tax leviable on supply actually paid to Government [Section
16(2)(c)]
Tax should actually have been paid, by cash or through utilization of ITC,
on the goods and / or services for which ITC is being taken. However,
provisional ITC can be taken initially, prior to matching in the common
portal, and used for payment of self-assessed tax on outward supply. (More
2
Concept of Input Service Distributor will be dealt with at the Final level.

6.12 INDIRECT TAXES
details on this are given under the Heading “How ITC is availed and
utilized”.)
(d) Filing of return [Section 16(2)(d)]
The registered person taking the ITC must have filed his return under
section 39.
Note: The details of inward supplies are to be filed in GSTR – 2 by the 15th
of the month succeeding the month in which the supplies were received 3.
With the furnishing of such details, electronic credit ledger gets credited
with the relevant ITC.
(iii) Goods received in lots: ITC available only on receipt of last lot
[First proviso to section 16(2)]
In case the goods covered under an invoice are not received in a single
consignment but are received in lots / instalments, the ITC can be taken only
upon receipt of the last lot / instalment.
XYZ makes an advance payment in August and orders 10 MT of a
particular chemical which is in short supply. The supplier of the
chemical raises a bill for the entire amount in August and collects
GST from XYZ on the advance paid. The chemical is delivered in
lots over a period of three months and the supply is completed in November.
Though XYZ paid some tax in advance as early as August, he can take the ITC
only on receipt of last instalment of the chemical in the month of November.
(iv) Payment for the invoice to be made within 180 days [Second
proviso to section 16(2) read with rule 37 of CGST Rules]
The registered person must pay the supplier, the value of the goods and/or
services along with the tax within 180 days from the date of issue of invoice. In
the event of failure to do so, the details of such supplies and corresponding credits
thereon must be furnished in the GSTR 2 of the month immediately following such
180 days. Such credits availed by the registered person would be added to his
output tax liability of the month in which the details are furnished, with interest.
3
For a detailed understanding of the various kinds of returns/statements and the manner of
filing thereof, students may refer Chapter 10: Returns. GSTR 2 is a statement of inward
supplies received by a registered supplier. The same has been explained in detail in Chapter
10: Returns

Interest will be paid @ 18% from the date of availing credit till the date when
the payment is made to the supplier.
However, once the payment is made, the recipient will be entitled to avail the
credit again without any time limit [see discussion on time limit for availing
credit under point (vi)]. In case part payment has been made, proportionate
credit would be allowed.
Exceptions
This condition of payment of value of supply plus tax within 180 days does not
apply in the following situations:
 Supplies on which tax is payable under reverse charge
 Deemed supplies without consideration
Due to a quality dispute, PZP Ltd withheld payment on a machine
supplied by a vendor till it could be rectified. Over 180 days went
by in this dispute. The credit taken by PZP on the invoice got added
to the output tax liability of PZP and thus, it had to pay back the
credit. Only after the vendor rectified the machine and PZP released the
payment, could PZP take the credit again.
(v) If depreciation claimed on tax component, ITC not allowed
[Section 16(3)]
If the person taking the ITC on capital goods and plant and machinery has
claimed depreciation on the tax component of the cost of the said items under
the Income-tax Act 1961, the ITC on the said tax component shall not be
allowed. Thus, in respect of the tax paid on such items, dual benefit cannot be
claimed under Income-tax Act, 1961 and GST laws simultaneously. In other
words, either depreciation on the tax component can be claimed under Income
Tax Act or ITC of such tax paid can be availed under GST laws.
(vi) Time limit for availing ITC: Due date of filing of return for the
month of September of succeeding financial year or date of filing
of annual return, whichever is earlier [Section 16(4)]
ITC on invoices pertaining to a financial year or debit notes relating to invoices
pertaining to a financial year can be availed any time till the due date of filing
of the return for the month of September of the succeeding financial year or
the date of filing of the relevant annual return, whichever is earlier.
It may be noted that the return for the month of September is to be filed by

6.14 INDIRECT TAXES
20th October and annual return of a financial year is to be filed by 31st

December of the succeeding financial year.
So, the upper time limit for taking ITC is 20th October of the next financial year
or the date of filing of annual return, whichever is earlier. The underlying
reasoning for this restriction is that no change in return is permitted after
September of next financial year. If annual return is filed before the month of
September, then no change can be made after filing of annual return.
Exception
The time limit u/s 16(4) does not apply to claim for re-availing of credit that
had been reversed earlier.
Hercules Machinery delivered a machine to XYZ in January 2018
under Invoice no. 49 dated 28th January, 2018 for ` 4,15,000 plus
GST, and undertook trial runs and calibration of the machine as per
the requirements of XYZ. The amount chargeable for the post-
delivery activities was covered in a debit note raised in April 2018 for ` 50,000
plus GST. Hercules Machinery did not file its annual return till October, 2018.
Though the debit note was received in the next financial year, it relates to an
invoice received in the financial year ending March 2018. Therefore, the time
limit for taking ITC available on ` 50,000 as well as on ` 4,15,000 is 20th October,
2018; earlier of the date of filing the annual return for 2017-18 or the return
for September 2018.
(vii)Restriction of ITC in proportion of (i) taxable supplies (ii)
business purposes [Sub-sections (1) and (2) of section 17]
ITC is restricted in proportion of the use of the goods and/or services (i) in the
taxable and / or zero-rated part of the supply (ii) for business purposes. This
is elaborated in heading (4) below.
(viii)ITC not allowed on certain supplies [Section 17(5)]
ITC has been blocked for specified goods and services. This is elaborated in
heading (4) below.

4. APPORTIONMENT OF CREDIT & BLOCKED CREDITS

[SECTION 17]
Section 17
Sub-section Clause Apportionment of credit and blocked credits
(1) Where the goods or services or both are used by the registered
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 or services or both are used by the registered
person partly for effecting taxable supplies including zero-rated
supplies under this Act or under the Integrated Goods and
Services Tax Act 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.
(3) The value of exempt supply under sub-section (2) shall be such 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.
(4) 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 and the rest shall lapse:
Provided that the option once exercised shall not be withdrawn
during the remaining part of the financial year:

6.16 INDIRECT TAXES
Provided further that the restriction of fifty per cent. shall not apply
to the tax paid on supplies made by one registered person to another
registered person having the same Permanent Account Number.
(5) Notwithstanding anything contained in sub-section (1) of section
16 and sub- section (1) of section 18, input tax credit shall not be
available in respect of the following, namely:—
(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) the following supply of goods or services or both:—
(i) food and beverages, outdoor catering, beauty
treatment, health services, cosmetic and plastic
surgery except where an inward supply of goods
or services or both of a particular category is
used by a registered person for making an
outward taxable supply of the same category of
goods or services or both or as an element of a
taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre;
(iii) rent-a-cab, life insurance and health insurance
except where ––
(A) 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; or

(B) such inward supply of goods or services or

both of a particular category is used by a
registered person for making an outward
taxable supply of the same category of
goods or services or both or as part of a
taxable composite or mixed supply; 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 an 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 or both received by a taxable person
for construction of an immovable property (other than
plant or machinery) on his own account including when
such goods or services or both are used in the course or
furtherance of business
Explanation.––For the purposes of clauses (c) and (d),
the expression “construction” includes re-construction,
renovation, additions or alterations or repairs, to the
extent of capitalisation, to the said immovable property
(e) goods or services or both on which tax has been paid
under section 10;
(f) goods or services or both received by a non-resident
taxable person except on goods imported by him;
(g) goods or services or both used for personal
consumption;
(h) goods lost, stolen, destroyed, written off or disposed of
by way of gift or free samples; and
(i) any tax paid in accordance with the provisions of
sections 74, 129 and 130.
(6) The Government may prescribe the manner in which the credit
referred to in sub-sections (1) and (2) may be attributed.

6.18 INDIRECT TAXES
Explanation.–– For the purposes of this Chapter and Chapter VI,

the expression “plant and machinery” means apparatus,
equipment, and machinery fixed to earth by foundation or
structural support that are used for making outward supply of
goods or services or both and includes such foundation and
structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.
Chapter V: Input Tax Credit of the CGST Rules
Rule 38 Claim of credit by a banking company or a financial
institution
A banking company or a financial institution, including a non-
banking financial company, engaged in the supply of services by
way of accepting deposits or extending loans or advances that
chooses not to comply with the provisions of sub-section (2) of
section 17, in accordance with the option permitted under sub-
section (4) of that section, shall follow the following procedure,
namely,-
(a) the said company or institution shall not avail the
credit of,-
(i) the tax paid on inputs and input services that are
used for non-business purposes; and
(ii) the credit attributable to the supplies specified in
sub-section (5) of section 17, in FORM GSTR-2;
(b) the said company or institution shall avail the credit of
tax paid on inputs and input services referred to in the
second proviso to sub-section (4) of section 17 and not
covered under clause (a);
(c) fifty per cent. of the remaining amount of input tax
shall be the input tax credit admissible to the company
or the institution and shall be furnished in FORM
GSTR-2;

(d) the amount referred to in clauses (b) and (c) shall,

subject to the provisions of sections 41, 42 and 43, be
credited to the electronic credit ledger of the said
company or the institution.
Rule 42 Manner of determination of input tax credit in respect of
inputs or input services and reversal thereof
(1) The input tax credit in respect of inputs or input services, which
attract the provisions of sub-section (1) or sub-section (2) of
section 17, being partly used for the purposes of business and
partly for other purposes, or partly used for effecting taxable
supplies including zero rated supplies and partly for effecting
exempt supplies, shall be attributed to the purposes of business
or for effecting taxable supplies in the following manner, namely,-
(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) ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by
the registered person at the invoice level in FORM GSTR-2;

6.20 INDIRECT TAXES
(h) input tax credit left after attribution of input tax credit
under clause (g) shall be called common credit, be denoted
as ‘C2’ and calculated as-
C2 = C1- T4;
(i) 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:
Provided that where the registered person does not have
any turnover during the said tax period or the aforesaid
information is not available, the value of ‘E/F’ shall be
calculated by taking values of ‘E’ and ‘F’ of the last tax
period for which the details of such turnover are available,
previous to the month during which the said value of ‘E/F’
is to be calculated;
Explanation: For the purposes of this clause, it is hereby
clarified that the aggregate value of exempt supplies and
the total turnover shall exclude the amount of any duty or
tax levied under entry 84 of List I of the Seventh Schedule
to the Constitution and entry 51 and 54 of List II of the said
Schedule;
(j) the amount of credit attributable to non-business purposes
if common inputs and input services are used partly for
business and partly for non-business purposes, be denoted
as ‘D2’, and shall be equal to five per cent. of C2; and
(k) the remainder of the common credit shall be the eligible
input tax credit attributed to the purposes of business and
for effecting supplies other than exempted supplies but
including zero rated supplies and shall be denoted as ‘C 3’,
where,-
C3 = C2 - (D1+D2);

(l) the amount ‘C3’ shall be computed separately for input tax
credit of central tax, State tax, Union territory tax and
integrated tax;
(m) the amount equal to aggregate of ‘D1’ and ‘D2’ shall be
added to the output tax liability of the registered person:
Provided that where the amount of input tax relating to inputs or
input services used partly for the purposes other than business
and partly for effecting exempt supplies has been identified and
segregated at the invoice level by the registered person, the same
shall be included in ‘T1’ and ‘T2’ respectively, and the remaining
amount of credit on such inputs or input services shall be included
in ‘T4’.
(2) The input tax credit determined under sub-rule (1) shall be
calculated finally for the financial year before the due date for
furnishing of the return for the month of September following the
end of the financial year to which such credit relates, in the
manner specified in the said sub-rule and,-
(a) where the aggregate of the amounts calculated finally in
respect of ‘D1’ and ‘D2’ exceeds the aggregate of the
amounts determined under sub-rule (1) in respect of ‘D1’
and ‘D2’, such excess shall be added to the output tax
liability of the registered person in the month not later
than the month of September following the end of the
financial year to which such credit relates and the said
person shall be liable to pay interest on the said excess
amount at the rate specified in sub-section (1) of section
50 for the period starting from the first day of April of the
succeeding financial year till the date of payment; or
(b) where the aggregate of the amounts determined under
sub-rule (1) in respect of ‘D1’ and ‘D2’ exceeds the
aggregate of the amounts calculated finally in respect of
‘D1’ and ‘D2’, such excess amount shall be claimed as credit
by the registered person in his return for a month not later
than the month of September following the end of the
financial year to which such credit relates.

6.22 INDIRECT TAXES
Rule 43 Manner of determination of input tax credit in respect of

capital goods and reversal thereof in certain cases
(1) Subject to the provisions of sub-section (3) of section 16, the input
tax credit in respect of capital goods, which attract the provisions
of sub-sections (1) and (2) of section 17, being partly used for the
purposes of business and partly for other purposes, or partly used
for effecting taxable supplies including zero rated supplies and
partly for effecting exempt supplies, shall be attributed to the
purposes of business or for effecting taxable supplies in the
following manner, namely,-
(a) the amount of input tax in respect of capital goods used or
intended to be used exclusively for non-business purposes
or used or intended to be used exclusively for effecting
exempt supplies shall be indicated in FORM GSTR-2 and
shall not be credited to his electronic credit ledger;
(b) the amount of input tax 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 indicated in FORM GSTR-2 and shall be credited
to the electronic credit ledger;
(c) the amount of input tax in respect of capital goods not
covered under clauses (a) and (b), denoted as ‘A’, shall be
credited to the electronic credit ledger and the useful life
of such goods shall be taken as five years from the date of
the invoice for such goods:
Provided that where any capital goods earlier covered
under clause (a) is subsequently covered under this clause,
the value of ‘A’ shall be arrived at by reducing the input
tax at the rate of five percentage points for every quarter
or part thereof and the amount ‘A’ shall be credited to the
electronic credit ledger;
Explanation: An item of capital goods declared under
clause (a) on its receipt shall not attract the provisions of
sub-section (4) of section 18 if it is subsequently covered
under this clause.

(d) the aggregate of the amounts of ‘A’ credited to the

electronic credit ledger under clause (c), to be denoted as
‘Tc’, shall be the common credit in respect of capital goods
for a tax period:
Provided that where any capital goods earlier covered
under clause (b) is subsequently covered under clause (c),
the value of ‘A’ arrived at by reducing the input tax at the
rate of five percentage points for every quarter or part
thereof shall be added to the aggregate value ‘Tc’;
(e) the amount of input tax credit attributable to a tax period
on common capital goods during their useful life, be
denoted as ‘Tm’ and calculated as:-
Tm= Tc÷60
(f) the amount of input tax credit, at the beginning of a tax
period, on all common capital goods whose useful life
remains during the tax period, be denoted as ‘Tr’ and shall
be the aggregate of ‘Tm’ for all such capital goods.
(g) the amount of common credit attributable towards
exempted supplies, be denoted as ‘Te’, and calculated as:
Te= (E÷ F) x Tr
where,
‘E’ is the aggregate value of exempt supplies, made, during
the tax period, and ‘F’ is the total turnover of the registered
person during the tax period:
Provided that where the registered person does not have
any turnover during the said tax period or the aforesaid
information is not available, the value of ‘E/F’ shall be
calculated by taking values of ‘E’ and ‘F’ of the last tax
period for which the details of such turnover are available,
previous to the month during which the said value of ‘E/F’
is to be calculated;
Explanation: For the purposes of this clause, it is hereby
clarified that the aggregate value of exempt supplies and
the total turnover shall exclude the amount of any duty or
tax levied under entry 84 of List I of the Seventh Schedule

6.24 INDIRECT TAXES
to the Constitution and entry 51 and 54 of List II of the said

Schedule;
(h) the amount Te along with the applicable interest shall,
during every tax period of the useful life of the concerned
capital goods, be added to the output tax liability of the
person making such claim of credit.
(2) The amount Te shall be computed separately for central tax, State
tax, Union territory tax and integrated tax.
ANALYSIS
Section 17 requires apportionment and concomitant restriction of ITC in two
situations as also blocking of ITC on specified inward supplies.
A. Apportionment of ITC [Sub-sections (1) and (2) of section 17 read

with rule 42 and rule 43 of CGST Rules]
The situations requiring apportionment are as follows:
(a) when the goods and / or services are used by the registered person partly
for the purpose of business (see the definition of business) and partly for
other purposes [Section 17(1)]; and
(b) when the goods and / or services are used by the registered person partly
for making taxable supplies including zero-rated supplies and partly for
making exempt supplies (see the definition of exempt supplies) [Section
17(2)].
In both the above situations, full ITC on inward supplies cannot be taken; only
proportionate ITC is allowed in such scenarios. Where goods and/or services
are used partly for non-business purposes and partly for business purposes,
ITC attributable only to business purposes can be taken by the registered
person. Similarly, where goods and/or services are partly used for making
exempt supplies including zero rated supplies and partly for taxable supplies,
ITC attributable to taxable supplies and zero rated supplies can be taken by
the registered person.

Section 16(2) of the IGST Act specifies that ITC may be

availed on inward supplies for making zero-rated supply,
notwithstanding the exempt nature of the zero-rated
supply. Zero-rated supply is an expression that covers two
kinds of supplies: (i) exports, and (ii) supplies to a SEZ or SEZ developer.
Therefore, ITC is available on goods and / or services used for supplies
made in the course of export or to an SEZ unit or SEZ developer.
Out of 10 containers purchased by a registered person engaged in

taxable supply of goods, 5 are used for storing non-taxable goods
(exempt supply) such as petroleum (petroleum is out of GST gamut
till the time the GST Council takes a decision in this regard). ITC on
5 containers used for non-taxable goods cannot be availed.
A registered person (partnership firm) purchases 5 laptops but one

of the laptop is being used by the son of one of the partners of the
firm. ITC will not be available on such laptop as it is used for personal
purposes.
(i) Methodology of apportionment of credit on inputs and input
services and reversal thereof [Rule 42 of the CGST Rules]
In many situations, the amount of input tax involved in exempt /non-
business use is not easily discernible, as common goods and/or services
are used for (i) making taxable supplies including zero rated supplies and
exempt supplies and (ii) business and non-business purposes.
Rule 42 of the CGST Rules provides the methodology for apportionment
of ITC on inputs and input services and reversal of ineligible credit as
follows:
Step 1 – Compute common credit
Total input tax involved on inputs & input services in a tax T

period
Less: Input tax on inputs & input services that are intended (T1)
to be used exclusively for non-business purposes

6.26 INDIRECT TAXES
Less: Input tax on inputs & input services that are (T2)
intended to be used exclusively for exempt supplies
Less: Input tax on inputs & input services which are (T3)
ineligible for credit [blocked credits- see discussion under
point (ii)]
ITC credited to Electronic Credit Ledger C1
Less: ITC on inputs & input services that are intended to (T4)
be used exclusively for taxable supplies including zero
rated supplies
Common ITC available for apportionment C2
 T1, T2, T3 and T4 will be determined and declared by the registered

person at the invoice level in GSTR 2.
 Where ITC on inputs and input services used partly for non-business
purposes and exempt supplies can be segregated at invoice level, the
same will be added to T1 and T2 respectively and the balance credit will
be added in T4.
 The portion identified as pertaining to taxable supplies in C2 will be
allowed as ITC.
Example on how to arrive at the amount of common credit C2
Making an assumption that Hawai slippers are exempted, take a case of
Eezee Footwear, manufacturer of two varieties of Hawai slippers and five
varieties of other sandals and shoes. Dyes are used in the manufacture of
all footwear. However, bright pink is used only for one of the Hawai
varieties, and black is used only for the sandals and shoes. Blue and yellow
are used for all the varieties. Brown is used for non-business purposes.
In inward supplies during the month -
Input tax on brown dye: ` 10,000 (This is T1)
Input tax on bright pink dye: ` 90,000. (This is T2)
Input tax on black dye: ` 40,000. (This is T4)
Input tax on blue dye: ` 1,00,000

Input tax on yellow dye: ` 15,000

Total input tax: ` 2,55,000 (This is T)
Total input tax reduced by (T1 + T2 + T4, i.e., by ` 1,40,000) is ` 1,15,000.
Amount of common credit (C2) is ` 1,15,000. This has to be apportioned
as given below in Step 2.
Step 2 – Compute credit attributable to exempt supplies (ineligible
credit) by apportionment of common credit
 Apportion C2 into credit attributable to exempt supplies D1 as under:
D1 = (E/F) x C2
Where
E = Aggregate value of exempt supplies during the tax period
F = Total turnover in the State during the tax period
Notes: (i) If the registered person does not have any turnover during the
said tax period, or the above information is not available, the values for the
last tax period may be used.
(ii) Exempt supplies include supplies charged to tax under reverse charge,
transactions in securities, sale of land and sale of building when entire
consideration is received after completion certificate issued by the
competent authority.
(iii) Aggregate value of exempt supplies and total turnover excludes the
central excise duty, State excise duty and VAT.
Presently, (i) central excise duty is leviable on manufacture/production of

tobacco, petroleum crude, diesel, petrol, ATF and natural gas (ii) State
excise duty is leviable on manufacture/production of alcoholic liquor,
opium, Indian hemp and narcotics, and (iii) VAT is leviable on intra-State
sale of petroleum crude, diesel, petrol, ATF, natural gas and alcoholic
liquor. Petroleum crude, diesel, petrol, ATF, natural gas are presently not
taxable under GST and alcoholic liquor is outside the ambit of GST. Thus,
supply of both these products (petrol/petroleum products and alcoholic
liquor) being non-taxable under GST, will be exempt supplies u/s 2(47) and
taxes/duties leviable thereon will be excluded from the value thereof for
the purpose of apportionment of credit.

6.28 INDIRECT TAXES
Example on how to apportion common credit into credit

attributable to exempt supplies
Ezee Footwear, which manufactures two varieties of exempt Hawai slippers
and five varieties of taxable sandals and shoes, has the following turnover
in October and has ` 1,15,000 common credit that has to be apportioned:
Turnover of Hawai 1 plus Hawai 2: ` 3 crores (This is ‘E’)
Turnover of all varieties of taxable shoes and sandals: ` 2 crore
Total turnover of all footwear during the month: ` 5 crores (This is ‘F’)
No inputs/input services are used for non-business purposes.
(3,00,00,000 /5,00,00,000) x 1,15,000= ` 69,000 is the input tax that
pertains to exempt supply (D1).
 Compute credit attributable to non-business purposes D2 as under
D2 = 5% of C2 (common credit)
Step 3 – Compute eligible credits
Compute C3 attributable to business purposes and taxable supplies
including zero rated supplies as under:
C3 = C2 - (D1 + D2)
Step 4 – Restrict ineligible credits
Add D1 + D2 to the output tax liability.
 Compute C3 separately for ITC of CGST, SGST/ UTGST and IGST.

 Compute ∑ (D1 + D2) for the whole financial year, by taking exempted
turnover and aggregate turnover for the whole financial year, before
the due date for filing the return for September in the following
financial year.
 If ∑ (D1 + D2) > the amount already added to output tax liability every
month, the differential amount has to be added to the output tax
liability of any month till September in the following financial year and
interest @ rate 18% should be paid on such differential amount from
1st April of succeeding year till the date of payment.
 If the amount added to output tax liability every month > ∑ (D1 + D2),
the additional amount paid has to be claimed back as credit in the
return of the month not later than September in the next financial year.

(ii) Methodology of apportionment of credit of capital goods and

reversal thereof [Rule 43 of the CGST Rules]
Rule 43 of the CGST Rules provides the methodology for apportionment
of ITC on capital goods and reversal of ineligible credit as follows:
Step 1 - Determine common credit ‘Tc’ on capital goods as under:
(i) Identify input tax on capital goods used/ intended to be used
exclusively for non-business purposes or making exempt supplies and
declare the same in GSTR 2. Such amount will not be credited to
Electronic Credit Ledge [ECrL].
(ii) Identify input tax on capital goods used/ intended to be used
exclusively for making taxable supplies including zero rated supplies
and declare the same in GSTR 2. Such amount will be credited to ECrL.
(iii) Identify input tax on capital goods not covered under (i) and (ii) above
(i.e., the capital goods which are used/intended to be used commonly
for making taxable as well as exempt supplies & business & non-
business purposes] and denote the same as ‘A’. Such amount will be
credited to ECrL. The useful life of such capital goods will be taken as
5 years from the date of invoice.
(iv) Change from exclusive use for non-business purpose/exempt supplies to
common use: Where capital goods which were initially covered under
(i) above get subsequently covered under clause (iii), compute ‘A’ by
reducing ITC @ 5% per quarter or part thereof. Such reduced amount
will be credited to ECrL.
(v) Add together the amounts of ‘A’ credited to ECrL to arrive at common
credit ‘Tc’.
(vi) Change from exclusive use for taxable including zero rated supplies to
common use: Where capital goods which were initially covered under
(ii) above get subsequently covered under clause (iii), compute ‘A’ by
reducing ITC @ 5% per quarter or part thereof and add such value to
Tc.
Step 2 - Determine common credit during the useful life of capital
goods for a tax period as under and denote the same as
‘Tm’:
Tm = Tc ÷ 60

6.30 INDIRECT TAXES
Step 3 - Determine common credit at the beginning of a tax period

for all capital goods whose useful life remains during the
tax period as under:
Tr = Tm for such capital goods
Step 4 - Apportion common credit attributable to exempt supplies
as under:
Te = (E ÷ F) x T r
Where
E = Aggregate value of exempt supplies made during the tax period
F = Total turnover during the tax period
Notes: (i) If the registered person does not have any turnover during the
said tax period, or the above information is not available, the values for the
last tax period may be used.
(ii) Aggregate value of exempt supplies and total turnover excludes the
central excise duty, State excise duty and VAT.
(iii) Exempt supplies include supplies charged to tax under reverse charge,
transactions in securities, sale of land and sale of building when entire
consideration is received after completion certificate issued by the
competent authority.
(iv) Amount of Te has to be computed separately for CGST, SGST/UTGST
and IGST.
Step 5: Restrict ineligible credit

Add Te to the output tax liability along with applicable interest during every
tax period of the useful life of the capital goods concerned.
(iii) Optional method for banks etc. [Section 17(4) read with rule 38]
 As an alternative to the above method, a banking company or a
financial institution including a NBFC, which accepts deposits, or
extends loans or advances, has the option to limit its availment of ITC
to 50% of the eligible ITC on inputs, capital goods and input services
each month and the remaining ITC shall lapse.

 Credit of tax paid on inputs and input services that are used for non-
business purposes and items mentioned u/s section 17(5) [blocked
credits] cannot be availed.
 The restriction of availing 50% ITC shall not apply to the tax paid on
supplies procured from another registration within the same entity i.e.,
100% credit of such tax can be availed.
 The option once exercised cannot be changed during the remaining
part of the financial year.
B. Blocked credits [Section 17(5)]
ITC of tax paid on almost every inputs and input services used for supply of
taxable goods or services or both is allowed under GST except a small list of
items provided u/s 17(5). The negative list covers mainly items of personal
consumption, inputs use of which results into formation of an immovable
property (except plant and machinery), telecommunication towers, pipelines
laid outside the factory premises, etc. and taxes paid as a result of detection of
evasion of taxes. The detailed list is given hereunder:
(a) Motor vehicles and conveyances, EXCEPT WHEN USED
 For transportation of goods
 For making the following taxable supplies:
• Further supply of such vehicles of conveyances; or
• Transportation of passengers; or
• Imparting training on driving, flying, navigating such vehicles or
conveyances.
A car dealer is allowed ITC on cars purchased for resale; a cab
service is allowed ITC on cars purchased for use as cabs; a
driving school is allowed ITC on cars purchased for use in
teaching driving.
(b) Foods and beverages, outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery, EXCEPT WHEN
 An inward supply of these is used for making an outward taxable
supply of the same category or as an element of a taxable composite
or mixed supply.

6.32 INDIRECT TAXES
A caterer for a wedding gets the sweet dish course supplied by

a specialist in desserts. He is allowed ITC of the tax paid by him
to the specialist.
(c) Membership of a club, health and fitness centre
(d) Rent-a-cab, life insurance and health insurance, EXCEPT WHERE
 The Government has made it obligatory for an employer to provide any
of these services to its employees; or
 Inward supply of these services is used for making an outward taxable
supply of the same category or as an element of a taxable composite
or mixed supply.
(e) Travel benefits to employees on vacation such as LTC or home travel
concession
(f) Works contract services for construction of an immovable property
EXCEPT WHEN
 It is input service for further supply of works contract service
 Immovable property is plant and machinery
(g) Inward supplies received by a taxable person for construction of an
immovable property (other than plant and machinery) on his own account
even when such supplies are used in the course or furtherance of business
A company buys material and hires a contractor to construct an
office building to house the plant supervisory staff. The input tax
paid on such goods and services is not allowed as credit.
Meaning of construction and plant and machinery

“Construction”, both in this clause and the previous one, includes re-
construction, renovation, additions or alterations or repairs, to the extent
of capitalization, to the said immovable property;
“Plant and machinery” means apparatus, equipment, and machinery
fixed to earth by foundation or structural supports but excludes land,
building or other civil structures, telecommunication towers, and pipelines
laid outside the factory premises.
(h) Inward supplies on which tax has been paid under the composition scheme
(i) Inward supplies received by a non-resident taxable person except goods
imported by him

(j) Goods and / or services used for personal consumption

(k) Goods that are lost, stolen, destroyed, written off or disposed of by way of
gift or free samples
(l) Tax paid under sections 74, 129 and 130 4. (These sections prescribe the
provisions relating to tax paid as a result of evasion of taxes, or upon
detention of goods or conveyances in transit, or towards redemption of
confiscated goods/conveyances.)
5. CREDIT IN SPECIAL CIRCUMSTANCES [SECTION 18]
Section 18 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
4
These provisions will be discussed at Final level.

6.34 INDIRECT TAXES
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.
(3) 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, the said registered person shall be allowed to transfer the
input tax credit which remains unutilised in his electronic credit
ledger to such sold, merged, demerged, amalgamated, leased or
transferred business in such manner as may be prescribed.
(4) Where any registered person who has availed of input tax credit
opts to pay tax under section 10 or, where the goods or services or
both supplied by him become wholly exempt, he shall pay an
amount, by way of debit in the electronic credit ledger or electronic
cash ledger, equivalent to the credit of input tax 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 such
percentage points as may be prescribed, on the day immediately

preceding the date of exercising of such option or, as the case may
be, the date of such exemption:
Provided that after payment of such amount, the balance of input

tax credit, if any, lying in his electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable
under sub-section (4) shall be calculated in such manner as may be
prescribed.
(6) In case of supply of capital goods or plant and machinery, on which

input tax credit has been taken, the registered person shall pay an
amount equal to the input tax credit taken on the said capital goods
or plant and machinery reduced by such percentage points as may
be prescribed or the tax on the transaction value of such capital
goods or plant and machinery determined under section 15,
whichever is higher:
Provided that where refractory bricks, moulds and dies, jigs and
fixtures are supplied as scrap, the taxable person may pay tax on
the transaction value of such goods determined under section 15.
Chapter V: Input Tax Credit of CGST Rules
Rule 40 Manner of claiming credit in special circumstances
(1) The input tax credit claimed in accordance with the provisions of
sub-section (1) of section 18 on the inputs held in stock or inputs
contained in semi-finished or finished goods held in stock, or the
credit claimed on capital goods in accordance with the provisions
of clauses (c) and (d) of the said sub-section, shall be subject to the
following conditions, namely -
(a) the input tax credit on capital goods, in terms of clauses

(c) and (d) of sub-section (1) of section 18, shall be
claimed after reducing the tax paid on such capital goods
by five percentage points per quarter of a year or part
thereof from the date of the invoice or such other
documents on which the capital goods were received by
the taxable person.

6.36 INDIRECT TAXES
(b) the registered person shall within a period of thirty days

from the date of his becoming eligible to avail the input
tax credit under sub-section (1) of section 18 shall make
a declaration, electronically, on the common portal in
FORM GST ITC-01 to the effect that he is eligible to avail
the input tax credit as aforesaid;
(c) the declaration under clause (b) shall clearly specify the
details relating to the inputs held in stock or inputs
contained in semi-finished or finished goods held in stock,
or as the case may be, capital goods–
(i) on the day immediately preceding the date from

which he becomes liable to pay tax under the
provisions of the Act, in the case of a claim under
clause (a) of sub- section (1) of section 18;
(ii) on the day immediately preceding the date of the

grant of registration, in the case of a claim under
clause (b) of sub-section (1) of section 18;
(iii) on the day immediately preceding the date from

which he becomes liable to pay tax under section
9, in the case of a claim under clause (c) of sub-
section (1) of section 18;
(iv) on the day immediately preceding the date from

which the supplies made by the registered person
becomes taxable, in the case of a claim under
clause (d) of sub- section (1) of section 18;
(d) the details furnished in the declaration under clause (b)

shall be duly certified by a practicing chartered
accountant or a cost accountant if the aggregate value of
the claim on account of central tax, State tax, Union
territory tax and integrated tax exceeds two lakh rupees;
(e) the input tax credit claimed in accordance with the

provisions of clauses (c) and (d) of sub-section (1) of
section 18 shall be verified with the corresponding details

furnished by the corresponding supplier in FORM GSTR-

1 or as the case may be, in FORM GSTR- 4, on the
common portal.
(2) The amount of credit in the case of supply of capital goods or plant
and machinery, for the purposes of sub-section (6) of section 18,
shall be calculated by reducing the input tax on the said goods at
the rate of five percentage points for every quarter or part thereof
from the date of the issue of the invoice for such goods.
Rule 41 Transfer of credit on sale, merger, amalgamation, lease or

transfer of a business
(1) A registered person shall, in the event of sale, merger, de-merger,

amalgamation, lease or transfer or change in the ownership of
business for any reason, furnish the details of sale, merger, de-
merger, 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:
Provided that in the case of demerger, the input tax credit shall be
apportioned in the ratio of the value of assets of the new units as
specified in the demerger scheme.
(2) The transferor shall also submit a copy of a certificate issued by a

practicing chartered accountant or cost accountant certifying that
the sale, merger, de-merger, amalgamation, lease or transfer of
business has been done with a specific provision for the transfer of
liabilities.
(3) The transferee shall, on the common portal, accept the details so
furnished by the transferor and, upon such acceptance, the un-
utilized credit specified in FORM GST ITC-02 shall be credited to
his electronic credit ledger.
(4) The inputs and capital goods so transferred shall be duly accounted
for by the transferee in his books of account.

6.38 INDIRECT TAXES
Rule 44 Manner of reversal of credit under special circumstances
(1) The amount of input tax credit relating to inputs held in stock,
inputs contained in semi-finished and finished goods held in stock,
and capital goods held in stock shall, for the purposes of sub-section
(4) of section 18 or sub-section (5) of section 29, be determined in
the following manner, namely,-
(a) for inputs held in stock and inputs contained in semi-

finished and finished goods held in stock, the input tax
credit shall be calculated proportionately on the basis of
the corresponding invoices on which credit had been
availed by the registered taxable person on such inputs;
(b) for capital goods held in stock, the input tax credit
involved in the remaining useful life in months shall be
computed on pro-rata basis, taking the useful life as five
years.
(2) The amount, as specified in sub-rule (1) shall be determined

separately for input tax credit of central tax, State tax, Union
territory tax and integrated tax.
(3) Where the tax invoices related to the inputs held in stock are not
available, the registered person shall estimate the amount under
sub-rule (1) based on the prevailing market price of the goods on
the effective date of the occurrence of any of the events specified in
sub-section (4) of section 18 or, as the case may be, sub-section (5)
of section 29.
(4) The amount determined under sub-rule (1) shall form part of the
output tax liability of the registered person and the details of the
amount shall be furnished in FORM GST ITC-03, where such
amount relates to any event specified in sub-section (4) of section
18 and in FORM GSTR-10, where such amount relates to the
cancellation of registration.
(5) The details furnished in accordance with sub-rule (3) shall be duly
certified by a practicing chartered accountant or cost accountant.

(6) The amount of input tax credit for the purposes of sub-section (6)
of section 18 relating to capital goods shall be determined in the
same manner as specified in clause (b) of sub-rule (1) and the
amount shall be determined separately for input tax credit of
central tax, State tax, Union territory tax and integrated tax:
Provided that where the amount so determined is more than the tax
determined on the transaction value of the capital goods, the
amount determined shall form part of the output tax liability and
the same shall be furnished in FORM GSTR-1.
ANALYSIS
Section 18 provides for
(1) entitlement of ITC on inputs in stock and contained in finished goods or work-
in-progress and capital goods (i) at the time of registration/voluntary
registration, (ii) on coming into regular tax-paying status by exiting
composition levy, (iii) on coming into tax-paying status on account of exempt
supply becoming taxable supply
(2) reversal of ITC on inputs in stock and contained in finished goods or work-in-
progress and capital goods (i) at the time of exit from regular tax-paying status
by opting for composition levy, (ii) at the time of exit from tax-paying status
on account of taxable supply becoming exempt supply
(3) amount payable on supply of capital goods or plant and machinery on which
ITC has been taken
(4) transfer of ITC on account of change in constitution of the registered person
(i) Entitlement of ITC at the time of registration/voluntary
registration or switching to regular tax paying status or coming
into tax-paying status [Sub-sections (1) and (2) of section 18 read
with rule 40 of CGST Rules]
The credit on inputs held in stock and contained in semi-finished goods or
finished goods held in stock and capital goods at the time of
registration/voluntary registration or coming into regular tax/tax-paying status
will be available in the following manner:

6.40 INDIRECT TAXES
S. Persons Goods entitled to ITC Restriction/conditions

No. eligible to
Inputs held As on
take credit
in
stock/capital
goods
(1) (2) (3) (4) (5)
1. Person who Inputs held in The day  ITC to be availed within
has applied stock and immediately 1 year from the date of
for inputs preceding the issue of the tax
registration contained in the date invoice by the supplier.
within 30 semi-finished from which
days from or finished he becomes
the date on goods held in liable to pay
which he stock tax
becomes
liable to
registration
and has been
granted such
registration
2. Person who Inputs held in The day
is not stock and immediately
required to inputs preceding
register, but contained in the date of
obtains semi-finished registration
voluntary or finished
registration goods held in
stock
3. Registered Inputs held in The day  ITC on capital goods
person who stock and immediately will be reduced by 5%
ceases to inputs preceding per quarter of a year or
pay contained in the date part of the year from
composition semi-finished from which the date of invoice.
tax and or finished he becomes  ITC claimed shall be
switches to goods held in liable to pay

regular stock and tax under verified with the

scheme capital goods regular corresponding details
scheme furnished by the
corresponding
4. Registered Inputs held in The day
supplier.
person stock and immediately
 ITC to be availed within
whose inputs preceding
1 year from the date of
exempt contained in the date
the issue of the tax
supplies semi-finished from which
invoice by the supplier.
become or finished such supply
taxable goods held in becomes
supplies stock relatable taxable
to such
exempt supply
and capital
goods
exclusively
used for such
exempt
supply
In all the above cases, the registered person has to make an electronic
declaration in the prescribed form on the common portal, clearly specifying
the details relating to the inputs held in stock, inputs contained in semi-
finished or finished goods held in stock and capital goods on the days
mentioned in column (4) of table above. The declaration is to be filed within
30 days from the date when the registered person becomes eligible to avail
ITC. If the claim of ITC pertaining to CGST, SGST/UTGST, IGST put together
exceeds ` 2,00,000, the declaration needs to be certified by a practicing
Chartered Accountant/Cost Accountant.
Mr. Z becomes liable to pay tax on 1st August and has obtained
registration on 15th August. Mr. 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. Mr. Z cannot take ITC on capital goods.
Mr. A applies for voluntary registration on 5th June and obtains

registration on 22th June. Mr. 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. Mr. A cannot take ITC on capital goods.

6.42 INDIRECT TAXES
Mr. B, a registered taxable person, was paying tax at composition

rate upto 30th July. However, w.e.f. 31st July, Mr. B becomes liable to
pay tax under regular scheme. Mr. 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 from the date of the invoice.
(ii) Reversal of ITC on switching to composition levy or exit from
tax-paying status [Section 18(4) read with rule 44 of CGST Rules]
 Section 18(4) requires reversal of ITC when a registered person who has
availed ITC switches to composition levy or when his supplies get wholly
exempted from tax.
 ITC on inputs will be reversed proportionately on the basis of
corresponding invoices on which credit had been availed on such inputs.
If invoices are not available, the ITC to be reversed will be based on the
prevailing market price of such goods on the date of switch
over/exemption. The details furnished on the basis of prevailing market
value will be duly certified by a practicing Chartered Accountant/ Cost
Accountant.
 ITC involved in the remaining useful life (in months) of the capital goods
will be reversed on pro-rata basis, taking the useful life as 5 years.
Capital goods have been in use for 4 years, 6 month and 15 days.
The useful remaining life in months = 5 months ignoring a part
of the month.
ITC taken on such capital goods = C
ITC attributable to remaining useful life = C x 5/60
 The registered person will have to debit the electronic credit or cash ledger
by the reversal amount in respect of inputs held in stock and inputs contained
in semi-finished or finished goods held in stock and capital goods on the day
immediately preceding the date of switch over/ date of exemption.
 Balance of ITC, if any, lying in the electronic credit ledger shall lapse.
 Cancellation of registration also requires reversal of ITC on inputs held in
stock/ contained in semi-finished goods or finished goods held in stock,
capital goods or plant and machinery on the day immediately preceding
the cancellation date. The amount to be reversed on inputs and capital

goods will be computed in the manner as applicable for sub-sections (4)

and (6) of section 18 (discussed above). Such amount will then be
compared with the output tax payable on such goods, and the higher of
the two amounts will finally be paid by the registered person.
 The ITC to be reversed on inputs and capital goods will be calculated
separately for ITC of CGST, SGST/UTGST and IGST.
 The reversal amount will be added to the output tax liability of the
registered person.
(iii)Amount payable on supply of capital goods or plant and
machinery on which ITC has been taken [Section 18(6) read with
rule 40(2) & rule 44(6) of CGST Rules]
 If capital goods or plant and machinery on which ITC has been taken are
supplied outward by the registered person, he must pay an amount that is
the higher of the following:
 ITC 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 (i.e., ITC
pertaining to remaining useful life of the capital goods), or
 tax on transaction value
 ITC pertaining to remaining useful life of the capital goods will be
computed separately for ITC of CGST, SGST/UTGST and IGST.
 Where the amount so determined exceeds the tax payable on the
transaction value of the capital goods, such amount will have to be paid
and thus, will be added to the output tax liability.
 If refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap,
the taxable person may pay tax on the transaction value.
(iv)Transfer of ITC on account of change in constitution of
registered person [Section 18(3) read with rule 41 of CGST Rules]
In case of change in constitution of a registered person like sale, demerger,
transfer of business, amalgamation, merger etc., the ITC that remains unutilized
in the electronic credit ledger of the registered person can be transferred to
the new entity, provided there is a specific provision for transfer of liabilities in
such change of constitution.
The provisions have been explained with the help of the following diagram:

6.44 INDIRECT TAXES
ITC remaining unutilized in the

3 electronic credit ledger will be
transferred to the newly
constituted entity
2 Provision for
transfer of liabilities
•Sale
1 •Merger
Change in constitution •Demerger
of registered person •Amalgamtion
•Lease
•Transfer of business
In the case of demerger, ITC will be apportioned in the ratio of the value of
assets of the new units as specified in the demerger scheme.
The registered person will have to furnish the details of change in constitution
on the common portal and submit a certificate from practicing Chartered
Account/Cost Accountant certifying that the change in constitution has been
done with a specific provision for transfer of liabilities. Upon acceptance of
such details by the transferee on the common portal, the unutilized ITC will be
credited to his electronic credit ledger. The transferee will record the inputs
and capital goods so transferred in his books of account.
6. HOW ITC IS AVAILED & UTILISED
Section 41 Claim of input tax credit and provisional acceptance

thereof
(1) Every registered person shall, subject to such conditions and

restrictions as may be prescribed, be entitled to take the credit of
eligible input tax, as self-assessed, in his return and such amount
shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilised only for
payment of self-assessed output tax as per the return referred to
in the said sub-section.
Section 42 Matching, reversal and reclaim of input tax credit
(1) The details of every inward supply furnished by a registered

person (hereafter in this section referred to as the “recipient”) for
a tax period shall, in such manner and within such time as may
be prescribed, be matched––
(a) with the corresponding details of outward supply

furnished by the corresponding registered person
(hereafter in this section referred to as the “supplier”) in
his valid return for the same tax period or any preceding
tax period;
(b) with the integrated goods and services tax paid under
section 3 of the Customs Tariff Act, 1975 in respect of
goods imported by him; and
(c) for duplication of claims of input tax credit.
(2) The claim of input tax credit in respect of invoices or debit notes
relating to inward supply that match with the details of
corresponding outward supply or with the integrated goods and
services tax paid under section 3 of the Customs Tariff Act, 1975
in respect of goods imported by him shall be finally accepted and
such acceptance shall be communicated, in such manner as may
be prescribed, to the recipient.
(3) Where the input tax credit claimed by a recipient in respect of an

inward supply is in excess of the tax declared by the supplier for
the same supply or the outward supply is not declared by the
supplier in his valid returns, the discrepancy shall be
communicated to both such persons in such manner as may be
prescribed.
(4) The duplication of claims of input tax credit shall be

6.46 INDIRECT TAXES
communicated to the recipient in such manner as may be

prescribed.
(5) The amount in respect of which any discrepancy is communicated

under sub-section (3) and which is not rectified by the supplier in
his valid return for the month in which discrepancy is
communicated shall be added to the output tax liability of the
recipient, in such manner as may be prescribed, in his return for
the month succeeding the month in which the discrepancy is
communicated.
(6) The amount claimed as input tax credit that is found to be in

excess on account of duplication of claims shall be added to the
output tax liability of the recipient in his return for the month in
which the duplication is communicated.
(7) The recipient shall be eligible to reduce, from his output tax
liability, the amount added under sub-section (5), if the supplier
declares the details of the invoice or debit note in his valid return
within the time specified in sub-section (9) of section 39.
(8) A recipient in whose output tax liability any amount has been
added under sub-section (5) or sub-section (6), shall be liable to
pay interest at the rate specified under sub-section (1) of section
50 on the amount so added from the date of availing of credit till
the corresponding additions are made under the said sub-
sections.
(9) Where any reduction in output tax liability is accepted under sub-
section (7), the interest paid under sub-section (8) shall be
refunded to the recipient by crediting the amount in the
corresponding head of his electronic cash ledger in such manner
as may be prescribed:
Provided that the amount of interest to be credited in any case

shall not exceed the amount of interest paid by the supplier.
(10) The amount reduced from the output tax liability in contravention
of the provisions of sub-section (7) shall be added to the output
tax liability of the recipient in his return for the month in which
such contravention takes place and such recipient shall be liable

to pay interest on the amount so added at the rate specified in

sub-section (3) of section 50.
Section 49 Payment of tax, interest, penalty and other amounts
(2) The input tax credit as self-assessed in the return of a registered

person shall be credited to his electronic credit ledger, in accordance
with section 41, to be maintained in such manner as may be
prescribed.
(4) The amount available in the electronic credit ledger may be used for
making any payment towards output tax under this Act or under the
Integrated Goods and Services Tax Act in such manner and subject
to such conditions and within such time as may be prescribed.
(5) The amount of input tax credit available in the electronic credit
ledger of the registered person on account of––
(a) integrated tax shall first be utilised towards payment of

integrated tax and the amount remaining, if any, may
be utilised towards the payment of central tax and State
tax, or as the case may be, Union territory tax, in that
order;
(b) the central tax shall first be utilised towards payment of

central tax and the amount remaining, if any, may be
utilised towards the payment of integrated tax;
(c) the State tax shall first be utilised towards payment of

State tax and the amount remaining, if any, may be
utilised towards payment of integrated tax;
(d) the Union territory tax shall first be utilised towards

payment of Union territory tax and the amount
remaining, if any, may be utilised towards payment of
integrated tax;
(e) the central tax shall not be utilised towards payment of

State tax or Union territory tax; and

6.48 INDIRECT TAXES
(f) the State tax or Union territory tax shall not be utilised
towards payment of central tax.
ANALYSIS
(i) Availing ITC
(a) Provisional credit
The Electronic Credit Ledger [ECrL] maintains the tax credits separately for IGST
(on imports and inter-state inward supplies), CGST and STGST/ UTGST. Such
details are fetched from the invoice-level data entered by the registered person
in his GSTR 2 filed by the 15th of the month following the month in which
supplies are received.
As seen earlier in this chapter, one of the conditions for taking ITC by the
recipient of the supply is that “the tax charged in respect of such supply has
actually been paid to the Government, either in cash or through utilization of
ITC admissible in respect of the said supply” [Section 16(2)]. For this reason, the
statute provides that the ITC will first be taken provisionally in the electronic
credit ledger (Section 41), then after filing of GSTR 3 (consolidated monthly
return) be matched with the available information of tax payment in respect of
that supply (Section 42) 5.
(b) Matching of credit
Matching of ITC would be done only after the due date of furnishing of GSTR
3. ITC taken provisionally by the recipient on the basis of GSTR-2 will be
matched by the system-
⇒ with the details of outward supplies furnished by the supplier in GSTR 3
(filed by 20th of the month following the relevant month);
⇒ with the IGST paid on the goods imported by him;
⇒ for any duplication of claims of ITC.
Any discrepancy arising out of the verification (“matching”) against a supplier’s
return of outward supplies will be communicated to the supplier, who will get
a chance to rectify it while filing GSTR 3 for the month in which discrepancy
5
Refer Chapter 10 : Returns for a detailed understanding of the provisions relating to different
types of returns and matching concept [Sections 41, 42 & 43].

has been communicated. If he does not do this, then under section 42(5), the
amount of credit taken will be added to the output tax liability of the recipient
in his return for the month succeeding the month in which the discrepancy has
been communicated, and he has to pay the same with interest @ 18% from the
date of taking the credit. Thus, in effect, the ITC can be taken provisionally for
2 months.
A’s GSTR 2 for October includes an Invoice no. 47 from supplier ‘B’
on which ‘A’ has taken ` 3,600 as ITC, but B’s GSTR 1 for October
does not show this invoice. On matching of credit after filing of
GSTR 3 (for the month of October) on 20th November, this discrepancy is
communicated by the system to ‘B’, who rectifies his omission and includes
Invoice no. 47 in his GSTR 3 for November and pays tax on it. This confirms
the credit taken by ‘A’.
In an alternate scenario, B does not add the Invoice in his GSTR 3

for November due to his accountant being on leave. ‘A’ finds `
3,600 added to his output tax liability in GSTR 3 for the month of
December, and pays it with interest @ 18% as required on 20th January (next
year). He communicates the problem to ‘B’, who looks into the issue and
rectifies the discrepancy and includes Invoice no. 47 in his GSTR-3 for January
next year and pays tax on it. Under section 42(7), ‘A’ can reduce the amount
from his output tax liability, and the interest paid will be refunded to his
electronic cash ledger under section 42(9).
(ii) Utilisation of ITC
ITC is credited to a registered person’s electronic credit ledger. The person
may use this to pay his output tax liability. The use of ITC for payment of tax
on inter-state supplies is the point in which GST differs sharply from the
previous system of central and state taxation. In GST, inter-state supplies are
levied to IGST, which is the sum of the applicable CGST and SGST / UTGST.
In terms of section 49(5),
 ITC of IGST can be used to pay IGST, CGST and SGST/UTGST in that order.
 ITC of CGST can be used to pay CGST and IGST in that order.
 ITC of SGST/UTGST can be used to pay SGST/UTGST and IGST in that order.
 ITC of CGST cannot be utilized towards payment of SGST/UTGST and vice
versa.

6.50 INDIRECT TAXES
Hence cross-utilization of credit is available only between CGST and IGST and
SGST/UTGST and IGST. The main restriction is that the CGST credit cannot be
utilized for payment of SGST/UTGST and SGST/UTGST credit cannot be utilized
for payment of CGST.
To illustrate, a supplier making intra-State, inter-State and imported purchases
will be eligible for ITC as under:
Intra-State Inter-State Imported

purchases purchases purchases
Taxes paid Taxes paid Taxes paid
CGST BCD
IGST
SGST IGST
ITC ITC ITC

CGST IGST
IGST
SGST
The supplier will use the ITC to pay tax as under:
ITC of ITC of ITC of

IGST CGST SGST/
CGST UTGST SGST/UTGST
IGST
CGST IGST IGST
SGST/UTGST
ITC of ITC of
CGST SGST/
SGST/ UTGST CGST
UTGST

ILLUSTRATION 1
ABC Co. Ltd. is engaged in the manufacture of heavy machinery. It procured the
following items during the month of July.
S. No. Items GST paid (`)
(i) Electrical transformers to be used in the 5,20,000

manufacturing process
(ii) Trucks used for the transport of raw material 1,00,000
(iii) Raw material 2,00,000
(iv) Confectionery items for consumption of employees 25,000

working in the factory
Determine the amount of ITC available with ABC Co. Ltd., for the month of July by
giving necessary explanations for treatment of various items.
Note:
(i) All the conditions necessary for availing the ITC have been fulfilled.
(ii) ABC Co. Ltd. is not eligible for any threshold exemption.
ANSWER
Computation of ITC available with ABC Co. Ltd. for the month of July
S. No. Items ITC (`)
(i) Electrical transformers 5,20,000

[Being goods used in the course or furtherance of
business, ITC thereon is available in terms of section
16(1)]
(ii) Trucks used for the transport of raw material 1,00,000

[Though ITC on motor vehicles has been specifically
disallowed under section 17(5)(a), ITC on motor
vehicles used for transportation of goods is allowed
under section 17(5)(a)(ii)]

6.52 INDIRECT TAXES
(iii) Raw material 2,00,000

[Being goods used in the course or furtherance of
business, ITC thereon is available in terms of section
16(1)]
(iv) Confectionery items for consumption of employees Nil

working in the factory
[ITC on food or beverages is specifically disallowed
unless the same is used for making outward taxable
supply of the same category or as an element of the
taxable composite or mixed supply-Section 17(5)(b)(i)]
Total ITC 8,20,000
ILLUSTRATION 2
XYZ Ltd., is engaged in manufacture of taxable goods. Compute the ITC available
with XYZ Ltd. for the month of October, 2018 from the following particulars:-
S. No. Inward supplies GST (`) Remarks
(i) Inputs ‘A’ 1,00,000 One invoice on which GST payable

was ` 10,000, is missing
(ii) Inputs ‘B’ 50,000 Inputs are to be received in two

instalments. First instalment has
been received in October, 2018.
(iii) Capital goods 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.
(iv) Input services 2,25,000 One invoice dated 20.01.2018 on

which GST payable was ` 50,000
has been received in October, 2018.
Note:
(i) All the conditions necessary for availing the ITC have been fulfilled.
(ii) ABC Co. Ltd. is not eligible for any threshold exemption.
(iii) The annual return for the financial year 2017-18 was filed on 15th September, 2018.

ANSWER
Computation of ITC available with XYZ Ltd. for the month of October, 2018
S. Inward supplies GST (`)

No.
(i) Inputs ‘A’ 90,000

[ITC cannot be taken on missing invoice. The registered
person should have the invoice in its possession to claim
ITC-Section 16(2)(a)]
(ii) Inputs ‘B’ Nil

[When inputs are received in instalments, ITC can be availed
only on receipt of last instalment-First proviso to section
16(2)]
(iii) Capital goods Nil

[Input tax paid on capital goods cannot be availed as ITC,
if depreciation has been claimed on such tax component
– Section 16(3)]
(iv) Input services 1,75,000

[As per section 16(4), ITC on an invoice cannot be availed
after the due date of furnishing of the return for the
month of September following the end of financial year
to which such invoice pertains or the date of filing annual
return, whichever is earlier.
Since the annual return for the FY 2017-18 has been filed
on 15th September, 2018 (prior to due date of filing the
return for September, 2018 i.e., 20th October, 2018), ITC
on the invoice pertaining to FY 2017-18 cannot be availed
after 15th September, 2018.
Total 2,65,000

6.54 INDIRECT TAXES
ILLUSTRATION 3
Mr. X, a supplier of goods, pays GST under regular scheme. Mr. X is not eligible for
any threshold exemption. He has made the following outward taxable supplies in a
tax period:
Particulars (` )
Intra-State supply of goods 8,00,000
Inter-State supply of goods 3,00,000
He has also furnished the following information in respect of purchases made by him
in that tax period:
Particulars (` )
Intra-State purchases of goods 3,00,000
Inter-State purchases of goods 50,000
Mr. X has following ITCs with him at the beginning of the tax period:
Particulars (` )
CGST 30,000
SGST 30,000
IGST 70,000
Note:
(i) Rate of CGST, SGST and IGST to be 9%, 9% and 18% respectively.
(ii) Both inward and outward supplies are exclusive of taxes, wherever applicable.
(iii) All the conditions necessary for availing the ITC have been fulfilled.
Compute the net GST payable by Mr. X during the tax period. Make suitable
assumptions as required.

ANSWER
Computation of GST payable by Mr. X on outward supplies
S.No. Particulars (`) GST (`)
(i) Intra-State supply of goods
CGST @ 9% on ` 8,00,000 72,000
SGST @ 9% on ` 8,00,000 72,000 1,44,000
(ii) Inter-State supply of goods
IGST @ 18% on ` 3,00,000 54,000
Total GST payable 1,98,000
Computation of total ITC
Particulars CGST @ SGST @ IGST @

9% (`) 9% (`) 18%(`)
Opening ITC 30,000 30,000 70,000
Add: ITC on Intra-State purchases of goods 27,000 27,000 Nil

valuing ` 3,00,000
Add: ITC on Inter-State purchases of goods Nil Nil 9,000

valuing ` 50,000
Total ITC 57,000 57,000 79,000
Computation of GST payable from cash ledger
Particulars CGST @ 9% (`) SGST @ 9% (`) IGST @ 18% (`)
GST payable 72,000 72,000 54,000
Less: ITC (57,000)-CGST (57,000)-SGST (54,000)-IGST
(15,000)-IGST (10,000) – IGST
Net GST payable Nil 5,000 Nil
Note : ITC of IGST has been used to pay IGST, CGST and SGST in that order.

6.56 INDIRECT TAXES
7. LET US RECAPITULATE
I. Definitions of certain key terms have been summarized by way
of diagrams as under:
BUSINESS
includes Any activity incidental/ancillary

Any trade/commerce, manufacture, to it
profession, vocation etc. even if Any activity of same nature even if
there is no monetary benefit no volume/continuity/frequency
Supply/acquisition of goods in connection with commencement/
including capital goods & services closure of business
Provision of facilities by
to its members for consideration
club/association/society etc.
Admission to any premises for a consideration
accepted in course/ furtherance

Services as holder of an office
of trade, profession/vocation
Services by race club by way of totalisator or a licence to book

maker in such club
Any activity by Government /local
authority as public authorities Government includes both Central
and State Governments
EXEMPT SUPPLY
means includes
Non-taxable
supply
Supply attracting NIL rate of Supply wholly exempt
tax from
CGST IGST

Goods Services
CAPITAL GOODS INPUTS INPUT SERVICES
means means means
goods value of which is capitalized

goods other than services
in the books of account of person
capital goods
claiming ITC
used/intended to be used in
the course/ furtherance of
business
INPUT TAX
Means Includes Excludes
IGST
Tax payable Tax payable Composition
leviable on
under forward under reverse tax
import of
charge charge
goods
CGST SGST UTGST IGST

6.58 INDIRECT TAXES
NON-RESIDENT TAXABLE PERSON
Principal
means
Agent
any person supplying goods and/or as
services occasionally In any other
capacity
having NO fixed place of

business/residence in India
INWARD SUPPLY
means
receipt of goods and/or services by
purchase acquisition any other means
with/without consideration
ZERO-RATED SUPPLY
Supply of goods and /or services to

Export of goods and/or services
SEZ developer/ SEZ unit

II. Provisions of section 16 relating to eligibility and

conditions for taking ITC read with relevant rules are
summarized below:
Registered person to take used/ intended to be used in

credit of tax paid on inward if the following four
the course or furtherance of
supplies of goods and/or conditions are fulfilled:
business
services
He has valid tax

invoice/debit
He has furnished Tax on such supply He has received note/prescribed
GSTR 3 has been paid either goods and/or
tax paying
in services document
Cash Utilisation of
Goods delivered to Time limit for
ITC
third person on the availing ITC - ITC
Goods received direction of the pertaining to a
in lots – ITC registered person particular FY can
allowed upon If depreciation deemed to be be availed by 20th
receipt of last lot claimed on tax received by the October of next FY
component, ITC not registered person or filing of annual
allowed ⇒ ITC available to return, whichever
registered person is earlier.
[Bill to Ship to Exception: Re-
Model] availment of ITC
reversed earlier
 ITC to be reversed with interest @ 18% if

value + tax of goods and /or services is not
paid within 180 days of the issuance of
invoice. • Supplies under
 Such supplies will be specified in GSTR -2 of reverse charge
the month immediately following 180 days
EXCEPTION • Deemed supplies
and ITC added in the output tax liability of without
the said month. consideration
 On payment, the ITC could be re-availed
without any time limit.

6.60 INDIRECT TAXES
III. The provisions of section 17 relating to apportionment

of credit and blocked credits read with relevant rules
are summarized as under:
A. Apportionment of credit
Attributable to
Used partly for business
business purposes
and partly for non-
business purposes
Goods and/or
services ITC available
only as
Used partly for making
taxable (including zero
rated supplies) supplies Attributable to taxable
& partly for exempt supplies including zero
supplies rated supplies
Exempt supplies include supplies charged to tax under reverse charge, transactions in
securities, sale of land and sale of building when entire consideration is received post
completion certificate.
B. Special provisions for banking companies and NBFCs
• Remaining 50% ITC

will lapse.
• Restriction of 50%
shall not apply to the
Option 1: Avail Option 2: Avail tax paid on supplies
proportionate 50% of eligible made to another
registration within
ITC ITC the same entity.
• Option once
exercised cannot be
withdrawn during
remaining part of the
year.

C. Apportionment of common credit in case of inputs and input

services T
Total IT on I + IS
T1 T2 T3 C1
IT on I+IS used IT on I+IS used Remaining ITC

exclusively for exclusively for Blocked credits u/s credited to ECrL
non-business exempt supplies 17(5) = T- (T1 + T2 + T3)
purposes
(i) Exempt supplies include reverse

charge supplies, transactions in T4 C2
securities, sale of land and sale of
building when entire consideration is
received after CC. Credit attributable to I + IS
(ii) Aggregate value of exempt Common credit
used exclusively in taxable = C1 – T 4
supplies and total turnover exclude supplies including ZRS
the CED, SED & VAT.
D1 D2 C3
Credit attributable to exempt supplies- Remaining

Credit attributable to non- common credit
D1 = x C2
business purpose if common I + = C2 – (D1 + D2 )
E = Value of ES during tax period IS used partly for business + non

F = Total turnover during tax period -business purposes
If no turnover during the tax period/values D2 = 5% x C2
not available, values for last period may be
Eligible ITC
used.
attributable to
business & taxable
supplies including
Ineligible credits ZRS
To be added to output
tax liability

6.62 INDIRECT TAXES
• C3 will be computed separately for ITC of CGST, SGST/ UTGST and IGST.
• ∑ (D1 + D2) will be computed for the whole financial year, by taking
exempted turnover and aggregate turnover for the whole financial year.
If this amount is more than the amount already added to output tax
liability every month, the differential amount will be added to the output
tax liability in any of the month till September of succeeding year along
with interest @ 18% from 1st April of succeeding year till the date of
payment.
• If this amount is less than the amount added to output tax liability every
month, the additional amount paid has to be claimed back as credit in
GSTR 3 of any month till September of the succeeding year.
IT = Input tax
I = Inputs
IS = Input services
ECrl = Electronic Credit Ledger
CC = Completion Certificate
CED = Central Excise Duty
SED = State Excise Duty
ZRS = Zero rated supply
ES = Exempt supplies

D. Apportionment of common credit on capital goods
Total input tax (IT) on capital goods (CG)
(a) (b) ‘A’
IT on CG used exclusively for non- IT on CG used exclusively IT on CG not covered under (a) & (b).
business/exempt supplies for taxable supplies Useful life of CG → 5 years from date of
including zero rated invoice
supply (ZRS)
Not to be credited to Credited to EcrL

Electronic Credit Ledger
Credited to ECrL
(ECrL)
Tc
Common credit on CG ⇒ Tc = ∑ (A)

If CG under (a)/(b) subsequently get covered
Tm under ‘A’, then ‘A’ = (a)/(b) – 5% of IT for a
quarter or part thereof
Common credit of CG for a tax
period during their useful life Tr
Tm = Tc/60
Common credit at the beginning of a tax period

for all CG having useful life in that tax period
Tr = Tm of such CG
Te
Common credit towards exempted supplies

Te = x Tr
Added to output tax liability E → Aggregate value of exempt supplies during the
along with interest tax period; F → Total turnover during the tax period.
If no turnover during the tax period/values not
available, values for last tax period may be used.
• Te will be computed separately for ITC of CGST, SGST/ UTGST and IGST.
• Exempt supplies include reverse charge supplies, transactions in securities, sale of land and sale
of building when entire consideration is received after completion certificate.
• Aggregate value of exempt supplies and total turnover excludes the central excise duty, State
excise duty & VAT.

6.64 INDIRECT TAXES
BLOCKED CREDITS PART-A
Rent a cab, life

F & B, Out cat, BT, Inward supplies
MV & OC insurance and health
HS, C & PS received by NRTP
insurance
EXCEPTIONS EXCEPTION EXCEPTIONS EXCEPTION
(A) MV & OC used for Where a particular (A) Services notified by the Goods
transportation of goods category of such Government as being imported
(B) MV & OC used for inward supplies is obligatory for an employer by him
making taxable supplies used for making an to provide to its employees
of- outward taxable under any law
(i) such MV & OC supply of the same (B) Where a particular
(ii) transportation of category - [Sub- category of such inward
passengers contracting] or as an supplies is used for making
(iii) imparting training on element of a taxable an outward taxable supply
driving/ flying/ navigating composite or mixed of the same category [Sub-
such MV & OC supply contracting] or as part of a
taxable composite or mixed
supply
Credit available on the above exceptions
Tax paid u/s 74 (Tax short / not paid or

erroneously refunded due to fraud etc.,)
129 (Amount paid for release of goods Goods lost/ stolen/ destroyed/ Inward supplies used
and conveyances in transit which are written off or disposed of by way of for personal
detained) and 130 (Fine paid in lieu of gift or free samples consumption
confiscation)

BLOCKED CREDITS PART-B
Inward supplies received by taxable person for

WCS for construction of construction of immovable property on his own account
immovable property including when such supplies are used in the course or
furtherance of business
EXCEPTIONS
EXCEPTIONS
Credit available on
such exceptions
(A) WCS for P & M (A) Construction of P & M
(B) Where WCS for immovable (B) Construction of
property is input service for further immovable property for
supply of WCS [Sub-contracting] others
Travel benefits to Membership of a club/

Inward supplies charged to
employees on vacation health & fitness centre
composition levy
[LTC/HT]
MV&OC-Motor vehicle & other conveyance; (A) Construction includes re-construction/

F&B-Food & beverages; Out cat-Outdoor renovation/ addition/ alterations/ repairs to
catering; BT-Beauty treatment the extent of capitalisation to said immovable
HS-Health services; C&PS-Cosmetic & property.
plastic surgery; NRTP-Non-resident taxable (B) P & M means apparatus, equipment, &
person; WCS-Works contract service; LTC- machinery fixed to earth by foundation or
Leave Travel Concession; HT-Home town structural supports but excludes land,
building/ other civil structures,
telecommunication towers, and pipelines laid
outside the factory premises.

6.66 INDIRECT TAXES
III. The provisions of section 18 read with relevant rules have

been summarized as under:
A. Special circumstances enabling availing of credit
Special circumstances enabling availing of credit
Registered person
switching from Registered person's Person applying for Person obtaining
composition levy to exempt supplies registration within 30 voluntary
regular scheme of becoming taxable days of becoming liable registration
payment of taxes for registration
Credit entitled on
Credit entitled on
• Inputs as such held in stock
• Inputs as such held in stock
• Inputs contained in semi-finished goods held in
• Inputs contained in semi-
stock
finished goods held in stock
• Inputs contained in finished goods held in stock
• Inputs contained in finished
• Capital goods [In case of exempt supply
goods held in stock
becoming taxable Capital Goods used
exclusively for such exempt supply] reduced
by 5% per quarter or part thereof from the
date of invoice
Note: ITC claimed shall be verified with the
corresponding details furnished by the corresponding
supplier.
On the day On the day On the day

On the day immediately
immediately immediately immediately
preceding the date
preceding the date preceding the preceding the
from which such
from which he date from which date of
supply becomes
becomes liable to pay he becomes registration
taxable
tax under regular liable to pay tax
ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice
by the supplier.

Conditions for availing above credit:

(i) Filing of electronic declaration giving details of inputs held in stock/contained in
semi-finished goods and finished goods held in stock and capital goods on the days
immediately preceding the day on which credit becomes eligible.
(ii) Declaration has to be filed within 30 days from becoming eligible to avail credit.
(iii) Details in (i) above to be certified by a CA/ Cost Accountant if aggregate claim of
CGST, SGST/ IGST credit is more than ` 2,00,000.
B. Special circumstances leading to reversal of credit/payment of amount
Special circumstances leading to reversal

of credit /payment of amount
Registered person (who has Supplies of registered Cancellation of Supply of capital goods
availed ITC) switching from person getting wholly registration (CG)/ plant and machinery
regular scheme of payment exempted from tax (P& M) on which ITC has
of tax to composition levy been taken
Amount to be paid is
Amount to be reversed is equivalent to ITC on : equivalent to higher of
• Inputs held in stock/ inputs contained in semi-finished or finished goods the following:
held in stock (i) ITC on CG or P&M
• Capital goods less 5% per quarter or
on the day immediately preceding the date of switch over/ date of part thereof from the
exemption/date of cancellation of registration date of invoice
(ii) Tax on transaction
value of such CG or P &
M
• If amount at (i)
Manner of reversal of credit on inputs and capital goods & other exceeds (ii), then
conditions reversal amount will
(i) Inputs ⇒ Proportionate reversal based on corresponding invoices. If such be added to output
invoices not available, prevailing market price on the effective date of switch tax liability.
over/ exemption/cancellation of registration should be used with due • Separate ITC reversal
certification by a practicing CA/ Cost Accountant is to be done for
(ii) Capital goods ⇒ Reversal on pro rata basis pertaining to remaining useful CGST, SGST/UTGST
life (in months), taking useful life as 5 years. and IGST
(iii) ITC to be reversed will be calculated separately for ITC of CGST, • Tax to be paid on
SGST/UTGST and IGST. transaction value
(iv) Reversal amount will be added to output tax liability of the registered when refractory
person. bricks, moulds, dies,
(v) Electronic credit/cash ledger will be debited with such amount. Balance jigs & fixtures are
ITC if any will lapse. supplied as scrap.

6.68 INDIRECT TAXES
Transfer of unutilised ITC on account of

In case of sale, merger, amalgamation, lease or transfer of business,
unutilised ITC can be transferred to the new entity if there is a specific
change in constitution of registered person
provision for transfer of liabilities to the new entity. The inputs and
capital goods so transferred shall be duly accounted for by the
transferee in his books of accounts.
In case of demerger, ITC will be apportioned in the ratio of value of

assets of new unit as per the demerger scheme.
Details of change in constitution will have to be furnished on

common portal along with request to transfer unutilised ITC.
CA/Cost Accountant certificate will have to be submitted certifying
that change in constitution has been done with specific provision for
transfer of liabilities.
Upon acceptance of such details by the transferee on the common
portal, the unutilized ITC will be credited to his Electronic Credit
Ledger.
IV. Provisions relating to availing and utilizing the ITC are

summarized as under:
A registered person is entitled to credits as under:
Transaction Credit
Intra-State supply CGST & SGST/UTGST
Inter-State-supply IGST
Imports of goods and services IGST
The protocol to avail and utilize the credit of CGST, SGST/UTGST and IGST is
as follows:
Credit of To be utilized first May be utilized further

for payment of for payment of
CGST CGST IGST
SGST/UTGST SGST/UTGST IGST
IGST IGST CGST, then SGST/UTGST

Credit of CGST cannot be used for payment of SGST/UTGST and credit of

SGST/UTGST cannot be utilised for payment of CGST.
Initially ITC will be

credited to the Electronic
Credit Ledger (EcrL) of a
recipient provisionally for
a period of two months.
ITC matching of a month will

be done after filing of the
GSTR 3 of that month and
discrepancy (claiming of excess
credit by the recipient), if any,
will be communicated to both
the supplier and the recipient.
If the supplier rectifies such discrepancy in his

return of the month in which discrepancy has
been communicated, credit will be confirmed
for the recipient else such excess credit will be
added to the recipient’s output tax liability
along with interest @ 18% in the return of the
month succeeding the month in which
discrepancy has been communicated.
8. TEST YOUR KNOWLEDGE

1. In which of the following situations, taxpayer needs to reverse the credit already
taken?
(a) If payment is not made to the supplier within 45 days from the date of
invoice
(b) If payment is not made to the supplier within 90 days from the date of
invoice
(c) If payment is not made to the supplier within 180 days from the date of
invoice
(d) None of the above
2. What is the time limit for taking ITC?
(a) 180 days
(b) 1 year

6.70 INDIRECT TAXES
(c) 20th October of the next financial year or the date of filing annual return
whichever is earlier
(d) No limit
3. If the goods are received in lots/installment, ------------------------------
(a) 50% ITC can be taken on receipt of 1st installment and balance 50% on
receipt of last installment.
(b) ITC can be availed upon receipt of last installment.
(c) 100% ITC can be taken on receipt of 1st installment.
(d) Proportionate ITC can be availed on receipt of each lot/installment.
4. For banking companies using inputs and input services partly for taxable supplies
and partly for exempt supplies, which of the statement is true?
(a) ITC shall be compulsorily restricted to credit attributable to taxable supplies
including zero rated supplies
(b) 50% of eligible ITC on inputs, capital goods, and input service shall be
mandatorily taken in a month and the rest shall lapse.
(c) Banking company can choose to exercise either option (a) or option (b)
(d) None of the above
5. A supplier takes deduction of depreciation on the GST component of the cost of
capital goods as per Income- tax Act, 1961. The supplier can-
(a) avail only 50% of the said tax component as ITC
(b) not avail ITC on the said tax component
(c) avail 100% ITC of the said tax component
(d) avail only 25% of the said tax component as ITC
6. Which of the following inward supplies are not eligible for ITC in case of a
company manufacturing shoes?
(a) Food and beverages
(b) Outdoor catering
(c) Health services
(d) All of the above

7. If there is a mis-match of supplier’s outward supply and recipient’s claim for ITC
on the same transaction (tax paid is claimed to be more by the recipient than
the tax shown as payable in the invoice of the supplier)-
(a) The disputed amount shall be added as output tax liability in the return of
the recipient
(b) The disputed amount shall be reduced from the ITC of the recipient
(c) The disputed amount shall be increased in the outward supply of the supplier
(d) A demand notice will be issued on the recipient for the disputed amount
8. Which of the following statement is true for a composition tax payer?
(a) A composition tax payer can avail only 50% of ITC on capital goods.
(b) A composition tax payer can avail 100% ITC on inputs.
(c) ITC is not available on inward supplies made by a composition tax payer.
(d) Composition tax will be available as ITC to the recipient only if the tax is
mentioned separately in the invoice raised by the composition tax payer.
9. What is input tax?
10. What are the conditions necessary for obtaining ITC?
11. Can a person take ITC without payment of consideration for the supply along
with tax to the supplier?
12. What is the time limit for taking ITC and reasons therefor?
13. What is the ITC entitlement of a newly registered person?
14. What is the tax implication of supply of capital goods by a registered person who
had taken ITC on such capital goods?
15. What happens where the details of inward supplies furnished by the recipient do
not match with the outward supply details furnished by the supplier in his valid
return?
16. A flying school imports an aircraft for use in its training activity, and takes ITC
of the IGST paid on the import. The departmental audit raises an objection that
aircrafts fall within the definition of “conveyance” in section 2(34) of the Act and
that ITC is not allowed on conveyances. Offer your comments.

6.72 INDIRECT TAXES
17. A taxable person is in the business of information technology. He buys a motor

vehicle for use of his Executive Directors. Can he avail the ITC in respect of GST
paid on purchase of such motor vehicle?
18. A technical testing agency tests and certifies each batch of machine tools before
dispatch by BMT Ltd. Some of these tools are dispatched to a unit in a SEZ
without payment of GST as these supplies are not taxable. The finance personnel
of BMT Ltd. want to know whether they need to carry out reversal of ITC on the
testing agency’s services to the extent attributable to the SEZ supplies. Give your
comments.
19. A garment factory receives a Government order for making uniforms for a
commando unit. This supply is exempt from tax under a special notification. The
fabric is separately procured for the supply, but thread and lining material for
the collars are the ones which are used for other taxable products of the factory.
The turnover of the other products of the factory and exempted uniforms in July
is ` 4 crore and ` 1 crore respectively, the ITC on thread and lining material
procured in July is ` 5000 and ` 15000 respectively.
Calculate the eligible ITC on thread and lining material.
20. Mr. A, a registered person was paying tax under Composition Scheme up to 30th
July. However, w.e.f. 31st July, Mr. A becomes liable to pay tax under regular
scheme. Is he eligible for ITC?
9. ANSWERS/HINTS
1. (c) 2. (c) 3. (b) 4. (c) 5. (b) 6. (d) 7. (a) 8. (c)
9. Input tax means the central tax (CGST), State tax (SGST), integrated tax (IGST)
or Union territory tax (UTGST) charged on supply of goods or services or both
made to a registered person. It also includes tax paid on reverse charge basis
and integrated goods and services tax charged on import of goods. It does not
include tax paid under composition levy.
10. Following four conditions are to be satisfied by the registered taxable person
for obtaining ITC:
(a) he is in possession of tax invoice or debit note or such other tax paying
documents as may be prescribed;
(b) he has received the goods or services or both;

(c) the supplier has actually paid the tax charged in respect of the supply to
the Government; and
(d) he has furnished the return under section 39.
11. Yes, the recipient can take ITC. However, he is required to pay the
consideration along with tax within 180 days from the date of issue of invoice.
This condition is not applicable where tax is payable on reverse charge basis.
12. Refer point (vi) “Time limit for availing ITC: Due date of filing return for the
month of September of succeeding financial year or date of filing of annual
return, whichever is earlier” under Heading No. 3 “Eligibility and Conditions for
Taking Input Tax Credit [Section 16]”.
13. A person applying for registration can take input tax credit 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. If the person
was liable to take registration and he has applied for registration within thirty
days from the date on which he became liable to registration, then ITC of inputs
held in stock and inputs contained in semi- finished or finished goods held in
stock on the day immediately preceding the date on which he became liable
to pay tax can be taken.
14. In case of supply of capital goods or plant and machinery on which ITC has
been taken, the registered person shall pay an amount equal to the ITC taken
on the said capital goods or plant and machinery reduced by 5% per quarter
or part thereof from the date of invoice or the tax on the transaction value of
such capital goods, whichever is higher.
However, in case of refractory bricks, moulds and dies, jigs and fixtures when
these are supplied as scrap, the person can pay tax on the transaction value.
15. In case of mismatch, the communication is made to the both the parties. If the
mismatch is not rectified, then the amount will be added to the output tax
liability of recipient in the return for the month succeeding the month in which
discrepancy is communicated.
16. Under section 17(5)(a)(i)(C) of the CGST Act, ITC is allowed on aircraft if they
are used to make the taxable supply of imparting training on flying an aircraft.
Therefore, the credit is correctly taken.
17. No. As per section 17(5)(a), ITC on motor vehicles can be availed only if the
taxable person is in the business of transport of passengers or is providing the

6.74 INDIRECT TAXES
services of imparting training on driving/flying/navigating motor vehicles or is

in the business of supply of motor vehicles.
18. Under section 16(2) of the IGST Act, credit of input tax is allowed to be taken
for inward supplies used to make zero rated supplies. Under section 17 of the
CGST Act also, ITC is disallowed only to the extent it pertains to supplies used
for non-business purposes or supplies other than taxable and zero-rated
supplies. Supplies to SEZ units are zero rated supplies in terms of section 16(1)
of IGST Act. Thus, full ITC is allowed on inward supplies of BMT Ltd. used for
effecting supplies to the unit in the SEZ.
19. Thread and lining material are inputs which are used for making taxable as well
as exempt supplies. Therefore, credit on such items will be apportioned and
credit attributable to exempt supplies will be added to the output tax liability
in terms of rule 42 of the CGST Rules, 2017.
Credit attributable to exempt supplies = Common credit x (Exempt turnover/
Total turnover)
Common credit = ` 15,000 + ` 5,000 = ` 20,000
Exempt turnover = ` 1 crore
Total turnover = ` 5 crore [` 1 crore + ` 4 crore]
Credit attributable to exempt supplies = (` 1 crore /` 5 crore) x ` 20,000 =
` 4,000.
Ineligible credit of ` 4,000 will be added to the output tax liability for the month
of July. Credit of ` 16,000 will be eligible credit for the month of July.
20. Mr. A is eligible for ITC on inputs held in stock and inputs contained in semi-
finished or finished goods held in stock and capital goods as on 30th July. ITC
on capital goods will be reduced by 5% per quarter or part thereof from the
date of invoice [Section 18(1)(c)].

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CHAPTER 6

INPUT TAX CREDIT

After studying this Chapter, you will be able to:

© The Institute of Chartered Accountants of India

Eligibility and conditions

How is ITC availed and

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

or any other similar activity, whether or not it is for a pecuniary benefit;

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

3. ELIGIBILITY AND CONDITIONS FOR TAKING INPUT

Section 16 Eligibility and conditions for taking input tax credit

Sub-section Clause Particulars

(1) Every registered person shall, subject to such conditions and

(2) Notwithstanding anything contained in this section, no registered

© The Institute of Chartered Accountants of India

person shall be entitled to the credit of any input tax in respect of

(a) he is in possession of a tax invoice or debit note issued

(b) he has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemed

(c) subject to the provisions of section 41, the tax charged

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in

Provided further that where a recipient fails to pay to the supplier

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Chapter V: Input Tax Credit of the CGST Rules

Rule 36 Documentary requirements and conditions for claiming input

(1) The input tax credit shall be availed by a registered person,

(a) an invoice issued by the supplier of goods or services or

(b) an invoice issued in accordance with the provisions of

(c) a debit note issued by a supplier in accordance with the

(d) a bill of entry or any similar document prescribed under

(e) an input service distributor invoice or input service

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VI are contained in the said document, and the relevant

(3) No input tax credit shall be availed by a registered person in

Rule 37 Reversal of input tax credit in the case of non-payment of

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vi) Document issued by Input Service Distributor 2

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20th October and annual return of a financial year is to be filed by 31st

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4. APPORTIONMENT OF CREDIT & BLOCKED CREDITS

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(B) such inward supply of goods or services or

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Explanation.–– For the purposes of this Chapter and Chapter VI,

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(d) the amount referred to in clauses (b) and (c) shall,

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Rule 43 Manner of determination of input tax credit in respect of

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