ICAI Notes: Input Tax Credit | Taxation for CA Intermediate PDF Download

 Page 1


    
 
 
CHAPTER 
8 
 
 
 
 
 
LEARNING OUTCOMES 
 
 
INPUT TAX CREDIT 
The section numbers referred to in the Chapter pertain to CGST Act and rule 
numbers referred to in the Chapter pertain to CGST Rules, unless otherwise 
specified.  For the sake of brevity, input tax credit has been referred to as ITC in this 
Chapter.  Examples/Illustrations/Questions and Answers given in the Chapter are 
based on the position of GST law existing as on 30.04.2023. 
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, timelines, 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. 
? comprehend and apply the above provisions as also the provisions 
relating to utilization of ITC to compute the GST liability of a 
registered person.
© The Institute of Chartered Accountants of India
Page 2


    
 
 
CHAPTER 
8 
 
 
 
 
 
LEARNING OUTCOMES 
 
 
INPUT TAX CREDIT 
The section numbers referred to in the Chapter pertain to CGST Act and rule 
numbers referred to in the Chapter pertain to CGST Rules, unless otherwise 
specified.  For the sake of brevity, input tax credit has been referred to as ITC in this 
Chapter.  Examples/Illustrations/Questions and Answers given in the Chapter are 
based on the position of GST law existing as on 30.04.2023. 
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, timelines, 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. 
? comprehend and apply the above provisions as also the provisions 
relating to utilization of ITC to compute the GST liability of a 
registered person.
© The Institute of Chartered Accountants of India
GOODS AND SERVICES TAX 
 
GOODS AND SERVICES TAX
2  
8.2 
 
1. INTRODUCTION 
In earlier indirect tax regime, the 
credit mechanism for indirect taxes 
levied by the Union Government, (central excise duty and service tax) 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 
laws.  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 utilizing 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 
Relevant definitions 
Eligibility and conditions 
for taking ITC 
Blocked cedits 
Availability of credit in 
special circumstances 
How ITC is utilised  
CHAPTER OVERVIEW
 
© The Institute of Chartered Accountants of India
Page 3


    
 
 
CHAPTER 
8 
 
 
 
 
 
LEARNING OUTCOMES 
 
 
INPUT TAX CREDIT 
The section numbers referred to in the Chapter pertain to CGST Act and rule 
numbers referred to in the Chapter pertain to CGST Rules, unless otherwise 
specified.  For the sake of brevity, input tax credit has been referred to as ITC in this 
Chapter.  Examples/Illustrations/Questions and Answers given in the Chapter are 
based on the position of GST law existing as on 30.04.2023. 
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, timelines, 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. 
? comprehend and apply the above provisions as also the provisions 
relating to utilization of ITC to compute the GST liability of a 
registered person.
© The Institute of Chartered Accountants of India
GOODS AND SERVICES TAX 
 
GOODS AND SERVICES TAX
2  
8.2 
 
1. INTRODUCTION 
In earlier indirect tax regime, the 
credit mechanism for indirect taxes 
levied by the Union Government, (central excise duty and service tax) 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 
laws.  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 utilizing 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 
Relevant definitions 
Eligibility and conditions 
for taking ITC 
Blocked cedits 
Availability of credit in 
special circumstances 
How ITC is utilised  
CHAPTER OVERVIEW
 
© The Institute of Chartered Accountants of India
INPUT TAX CREDIT  
 
 
 
8.3
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 duty 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, blocked credits and supply of exempted goods and/or 
services.  ITC is considered to be the lifeline 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.  Further, 
section 41 contains provisions for availment of ITC, sections 49(5), 49A, 49B and 
rule 88A which together prescribe the sequence of utilisation of ITC and rules 86A 
and 86B stipulate the conditions of use of amount available in electronic credit 
ledger and restrictions on use of amount available in electronic credit ledger.  
State GST laws also prescribe identical provisions in relation to ITC.  In this 
Chapter, provisions of sections 16, 17, 18 and 41 have been discussed;
1
 first the 
statutory provisions of these sections together with the relevant rules have been 
extracted followed by their analysis. 
1
Provisions of ITC relating to job work and input service distributor (ISD) [Sections 19, 20 
and 21] and provisions relating to ITC claim by banking companies, distribution of ITC by 
ISD, determination of ITC on inputs, input services and capital goods and reversal thereof 
[Rules 38, 39, 42 and 43] will be discussed at the Final level.  
Provisions of ITC under the CGST Act have also been made applicable to 
the IGST Act vide section 20 of the IGST Act.    
© The Institute of Chartered Accountants of India
Page 4


    
 
 
CHAPTER 
8 
 
 
 
 
 
LEARNING OUTCOMES 
 
 
INPUT TAX CREDIT 
The section numbers referred to in the Chapter pertain to CGST Act and rule 
numbers referred to in the Chapter pertain to CGST Rules, unless otherwise 
specified.  For the sake of brevity, input tax credit has been referred to as ITC in this 
Chapter.  Examples/Illustrations/Questions and Answers given in the Chapter are 
based on the position of GST law existing as on 30.04.2023. 
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, timelines, 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. 
? comprehend and apply the above provisions as also the provisions 
relating to utilization of ITC to compute the GST liability of a 
registered person.
© The Institute of Chartered Accountants of India
GOODS AND SERVICES TAX 
 
GOODS AND SERVICES TAX
2  
8.2 
 
1. INTRODUCTION 
In earlier indirect tax regime, the 
credit mechanism for indirect taxes 
levied by the Union Government, (central excise duty and service tax) 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 
laws.  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 utilizing 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 
Relevant definitions 
Eligibility and conditions 
for taking ITC 
Blocked cedits 
Availability of credit in 
special circumstances 
How ITC is utilised  
CHAPTER OVERVIEW
 
© The Institute of Chartered Accountants of India
INPUT TAX CREDIT  
 
 
 
8.3
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 duty 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, blocked credits and supply of exempted goods and/or 
services.  ITC is considered to be the lifeline 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.  Further, 
section 41 contains provisions for availment of ITC, sections 49(5), 49A, 49B and 
rule 88A which together prescribe the sequence of utilisation of ITC and rules 86A 
and 86B stipulate the conditions of use of amount available in electronic credit 
ledger and restrictions on use of amount available in electronic credit ledger.  
State GST laws also prescribe identical provisions in relation to ITC.  In this 
Chapter, provisions of sections 16, 17, 18 and 41 have been discussed;
1
 first the 
statutory provisions of these sections together with the relevant rules have been 
extracted followed by their analysis. 
1
Provisions of ITC relating to job work and input service distributor (ISD) [Sections 19, 20 
and 21] and provisions relating to ITC claim by banking companies, distribution of ITC by 
ISD, determination of ITC on inputs, input services and capital goods and reversal thereof 
[Rules 38, 39, 42 and 43] will be discussed at the Final level.  
Provisions of ITC under the CGST Act have also been made applicable to 
the IGST Act vide section 20 of the IGST Act.    
© The Institute of Chartered Accountants of India
GOODS AND SERVICES TAX 
 
GOODS AND SERVICES TAX
4  
8.4 
Scheme of ITC - At a Glance 
Given below are the salient features of the scheme of ITC as contained in the 
provisions of sections 16, 17 and 18 read with the relevant rules.  The scheme has 
been discussed in detail in the ensuing pages of this Chapter.  
? The scheme is designed to avoid cascading effect of taxes and make GST - a 
destination-based tax. 
? Broadly, ITC is available on all inputs, input services and capital goods used 
for purposes of business by a taxable person.  The exception is ‘blocked 
credit’, where ITC is not available even when these goods or services are 
used for the purposes of business. 
? ITC is used for payment of tax on taxable output supply to avoid cascading 
effect of taxes. 
? GST law does not require ‘one to one’ co-relation between inputs/input 
services and final products/services.  Any eligible ITC can be used for 
payment of tax on any taxable output supply. 
? IGST is another core aspect of GST.  It is a transitory tax to enable transfer of 
ITC when goods or services move from one State to another.  This is a 
unique feature of Indian GST. 
? Since ITC can be availed & utilized for payment of tax on taxable output 
supply, as a natural corollary, ITC cannot be availed in respect of exempt 
output supply on which tax is not payable. 
? The exception to the above principle is ‘zero rated supply’
2
, i.e. exports or 
supplies to a special economic zone (SEZ) developer/unit, where ITC is 
available even if no tax is payable on output supply as zero-rated supplies 
are not exempt supplies. Such ITC can be utilized either for making supplies 
by paying tax or refund of the unutilized ITC can be obtained.  This simple 
mechanism is used to make exports and supplies to SEZ completely tax free. 
? If a taxable person is making both taxable and exempt supply, he is entitled to 
avail full credit of ITC in respect of inputs, input services and capital goods 
exclusively used for taxable supply and no credit at all can be availed for inputs, 
input services and capital goods exclusively used for exempt supply. 
2
 The concept of zero- rated supply and the refund of ITC will be dealt in detail at the Final level. 
© The Institute of Chartered Accountants of India
Page 5


    
 
 
CHAPTER 
8 
 
 
 
 
 
LEARNING OUTCOMES 
 
 
INPUT TAX CREDIT 
The section numbers referred to in the Chapter pertain to CGST Act and rule 
numbers referred to in the Chapter pertain to CGST Rules, unless otherwise 
specified.  For the sake of brevity, input tax credit has been referred to as ITC in this 
Chapter.  Examples/Illustrations/Questions and Answers given in the Chapter are 
based on the position of GST law existing as on 30.04.2023. 
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, timelines, 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. 
? comprehend and apply the above provisions as also the provisions 
relating to utilization of ITC to compute the GST liability of a 
registered person.
© The Institute of Chartered Accountants of India
GOODS AND SERVICES TAX 
 
GOODS AND SERVICES TAX
2  
8.2 
 
1. INTRODUCTION 
In earlier indirect tax regime, the 
credit mechanism for indirect taxes 
levied by the Union Government, (central excise duty and service tax) 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 
laws.  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 utilizing 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 
Relevant definitions 
Eligibility and conditions 
for taking ITC 
Blocked cedits 
Availability of credit in 
special circumstances 
How ITC is utilised  
CHAPTER OVERVIEW
 
© The Institute of Chartered Accountants of India
INPUT TAX CREDIT  
 
 
 
8.3
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 duty 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, blocked credits and supply of exempted goods and/or 
services.  ITC is considered to be the lifeline 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.  Further, 
section 41 contains provisions for availment of ITC, sections 49(5), 49A, 49B and 
rule 88A which together prescribe the sequence of utilisation of ITC and rules 86A 
and 86B stipulate the conditions of use of amount available in electronic credit 
ledger and restrictions on use of amount available in electronic credit ledger.  
State GST laws also prescribe identical provisions in relation to ITC.  In this 
Chapter, provisions of sections 16, 17, 18 and 41 have been discussed;
1
 first the 
statutory provisions of these sections together with the relevant rules have been 
extracted followed by their analysis. 
1
Provisions of ITC relating to job work and input service distributor (ISD) [Sections 19, 20 
and 21] and provisions relating to ITC claim by banking companies, distribution of ITC by 
ISD, determination of ITC on inputs, input services and capital goods and reversal thereof 
[Rules 38, 39, 42 and 43] will be discussed at the Final level.  
Provisions of ITC under the CGST Act have also been made applicable to 
the IGST Act vide section 20 of the IGST Act.    
© The Institute of Chartered Accountants of India
GOODS AND SERVICES TAX 
 
GOODS AND SERVICES TAX
4  
8.4 
Scheme of ITC - At a Glance 
Given below are the salient features of the scheme of ITC as contained in the 
provisions of sections 16, 17 and 18 read with the relevant rules.  The scheme has 
been discussed in detail in the ensuing pages of this Chapter.  
? The scheme is designed to avoid cascading effect of taxes and make GST - a 
destination-based tax. 
? Broadly, ITC is available on all inputs, input services and capital goods used 
for purposes of business by a taxable person.  The exception is ‘blocked 
credit’, where ITC is not available even when these goods or services are 
used for the purposes of business. 
? ITC is used for payment of tax on taxable output supply to avoid cascading 
effect of taxes. 
? GST law does not require ‘one to one’ co-relation between inputs/input 
services and final products/services.  Any eligible ITC can be used for 
payment of tax on any taxable output supply. 
? IGST is another core aspect of GST.  It is a transitory tax to enable transfer of 
ITC when goods or services move from one State to another.  This is a 
unique feature of Indian GST. 
? Since ITC can be availed & utilized for payment of tax on taxable output 
supply, as a natural corollary, ITC cannot be availed in respect of exempt 
output supply on which tax is not payable. 
? The exception to the above principle is ‘zero rated supply’
2
, i.e. exports or 
supplies to a special economic zone (SEZ) developer/unit, where ITC is 
available even if no tax is payable on output supply as zero-rated supplies 
are not exempt supplies. Such ITC can be utilized either for making supplies 
by paying tax or refund of the unutilized ITC can be obtained.  This simple 
mechanism is used to make exports and supplies to SEZ completely tax free. 
? If a taxable person is making both taxable and exempt supply, he is entitled to 
avail full credit of ITC in respect of inputs, input services and capital goods 
exclusively used for taxable supply and no credit at all can be availed for inputs, 
input services and capital goods exclusively used for exempt supply. 
2
 The concept of zero- rated supply and the refund of ITC will be dealt in detail at the Final level. 
© The Institute of Chartered Accountants of India
INPUT TAX CREDIT  
 
 
 
8.5
? If common inputs, input services and capital goods are used for taxable as 
well as exempt supply, only proportionate ITC attributable to the taxable 
supply is available.  The common ITC is apportioned in the ratio of value of 
taxable supply and exempt supply.  Elaborate provisions have been made in 
the GST law to prescribe the manner of calculation of proportionate ITC.    
Before proceeding to understand the provisions of sections 16, 17, 18, 41 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 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; 
 
© The Institute of Chartered Accountants of India