INPUT TAX CREDIT (ITC): CONDITIONS, CHALLENGES & COMPLIANCE IN GST

Input Tax Credit (ITC) serves as a crucial component within the Goods and Services Tax (GST) regime, playing a role similar to the tax deducted at source in Income Tax. Despite its significance, there exists ambiguity around its terms and conditions.

1. What is ITC?

Simply put ITC is a tax paid by the recipient to the supplier at the time of purchase of goods and services. Such prepaid taxes are available as ITC to the recipient which can be utilised towards payment of output taxes. It is therefore somewhat akin to taxes deducted at source under the Income Tax Law which is deductible from the total tax payable for the assessment year. ITC claim is not an absolute right but is subject to certain conditions and restrictions.

2. The Controversies Surrounding ITC

Alongside classification and rate of tax, ITC is also one of the most vexed matters between taxpayers and the revenue. Some of the pertinent issues regarding ITC are

 

  • Is it a vested right or a conditional right
  • Is it a rebate or a concession
  • Time limit prescribed in section 16(4) is a machinery provision and is in direct conflict with section 16(2)
  • Denying ITC on the grounds of limitation under section 16(4) would defeat the very objective of 122nd Constitutional Amendment Bill, 2017, that is to avoid cascading effect of taxes.

3. Legal Battles Over ITC

It’s a long drawn legal battle and the Revenue has drawn the first blood. In Re. Thirumalakonda Plywoods v. The Assistant Commissioner of State Tax, Ananthapur Circle [W.P.No. 24235 of 2022], Hon. High Court of Andhra Pradesh held that –

  • At best ITC be regarded as a rebate or concession and not a statutory or a constitutional right.
  • Entitlement to ITC is given by section 16(1) of the Act
  • Section 16(4) is not in direct conflict with section 16(2) of the Act and hence effect should be given to both the provisions by reading them harmoniously
  • Accepting returns with late fees doesn’t mean that substantial provisions relating to section 16(4) are given a go by.
  • Legal luminaries are battling it out in various high courts across the country. Until the dust settles down and the Apex court decides this vexatious matter, for sure disputes will galore.

4. Safeguarding the ITC

Be that as may, how do taxpayers secure and fortify their ITC is the moot question to answer. What guardrails should taxpayers put in place to keep their ITC intact. Some of my thoughts in this regard are listed below

  • Secure tax invoice, debit note, ISD invoice, Self invoice in case of RCM and BOE in case of imports.
  • Reflection of ITC in GSTR-2B
  • Receipt of goods and services
  • Payment of tax by the supplier.
  • Availment of ITC by the recipient in its GSTR-3B within the time limit prescribed under section 16(4)
  • ITC is not specifically blocked under section 17(5)
  • Make payment to suppliers within 180 days from the date of invoice
  • Restrict ITC attributable to exempt supplies
  • Restrict common ITC attributable to exempt supplies – Application of rule 42 & 43.

5. Proving Eligibility for ITC Claim in GSTR-3B:

Please remember section 155 casts burden on the recipient to prove eligibility to its ITC claim in GSTR-3B. How far recipient can go to discharge this burden needs to be understood. Based on the jurisprudence available in this regard, here are some of my thoughts.

  • In possession of tax invoice, debit note, ISD invoice, Self invoice in case of RCM and BOE in case of imports.
  • Receipt of goods and services. E-way bill in case of goods.
  • Payment to supplier through normal banking channels.
  • Not a bogus transaction
  • Supplier is not deregistered on the date of supply.
  • Supplier deregistered post making supply but has remitted its tax dues.

Read More: DECODING INCOME TAX AUDITS: SECTION 44AB

ITC is not an absolute right but a conditional one. Some of these conditions are pre-availment conditions and some are post-availment conditions. Recipients need to be highly vigilant and monitor its ITC claim at every stage, right from availment to utilisation, and even thereafter especially suppliers’ compliance to GST and the risks associated with ITC on their supplies. Therefore, the need of the hour is build enough guardrails around ITC and vendor management to mitigate risks.

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