Introduction:
GST reform is lauded globally because of its seamless credit feature which negates the cascading effect of taxes to ensure that entire tax burden is on consumer and not on business. This will encourage more number of business to come under tax net and ensures optimum tax compliance. The input tax mechanism under the Indian GST, though far more effective compared to earlier regime, yet some legislative changes are required to be made to achieve further reduction in cascading effect and procedural simplifications. This article aims to highlight various provisions of input tax credit mechanism that requires reconsideration
- Clarity required on time of eligibility of ITC for GST Payment under RCM:
Under service tax law, CENVAT Credit of reverse charge service tax liability would be available only after the date of payment of tax. Coming to GST, Section 41 provides for availment of input tax for a month on provisional basis by filing the corresponding return in GSTR-2 which includes supplies covered under reverse charge.
The impact of the said section is that a registered person, who is required to pay GST under reverse charge for a month say July is entitled to claim input tax credit in the same month though the payment of such tax would be made on or before 20th of August.
Whereas section 16(2) prescribes the conditions to be satisfied for claiming input tax credit. One of them is that the tax charged in respect of input supply has to be actually paid to Government. Further, Rule 36(1)(b) provides that input credit relating to reverse charge supplies can be claimed on the basis of invoice issued by recipient to supplier under section 31(3)(f) subject to payment of tax.
In view of above referred legal provisions, the time of entitlement of ITC on reverse charge supplies is ambiguous. GST Twitter handle account clarified that ITC can be claimed and used for the month for which the reverse charge liability is paid and not after the day of payment of said tax. However, as the said clarification does not have any legal sanctity, it is appropriate to clarify the same suitably.
- GST is payable on advances, but corresponding ITC can be claimed only upon receipt of goods/services:
The liability to pay GST arises upon the time of supply of goods or services as provided under section 12 and 13 respectively. Accordingly, GST is required to be paid upon receipt of advances towards supply of goods or services. However, one of the essential condition prescribed under Section 16(2) for claiming of ITC is that the goods/services must be received by the buyer is will have a bearing on working capital of the tax payers especially in sectors like construction where huge amounts of advances are involved.
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- Ambiguity over eligibility of ITC on certain motor vehicles of the nature of dumpers, tippers:
Section 17(5)(a), ITC in respect of motor vehicles and other conveyances is restricted. ITC can be availed only in cases where they are further supplied or used for transportation of passengers, imparting driving skills or for transportation of goods. Dumpers, tippers are also a species of motor vehicles which requires registration under Motor Vehicles Act, 1988 as motor vehicles. However, these are not used for transportation of goods but are used generally in construction sites and mining areas. In view of this reason, ambiguity exists over the ITC eligibility of dumpers and tippers. An appropriate clarification is required to be issued in this regard to assure ITC availment on these goods.
- Requirement of ITC restriction on non-exempt supplies should be liberalized:
Section 17(1) and (2) provides for restriction of common ITC attributable to non-business and exempt supplies. Sub-section (3) provides that exempt supplies includes transactions relating to sale of securities, land and buildings. Unlike the case of supply of exempt goods or services, these items are nothing but business investments whose supply is occasional and are of huge value. Requirement of reversal of common ITC in view of these supplies would wipe out substantial ITC. Further, it is important to note that common input supplies are procured with an intention to carry out the business of supplying goods or services but not to dispose of any investments. Therefore, such harsh provision will significantly contribute to the cascading effect of taxes. In view of this reason, the requirement of reversal of ITC on sale of securities and buildings should be limited to those cases where they are held as stock-in-trade, but such requirement should be waived of in case where they are held as investments.
- Value of securities for restricting common ITC should be trading margin:
Under the erstwhile Rule 6 of the CENVAT Credit Rules, 2004, the value of securities to be considered for reversal of common CENVAT Credit shall be the higher of the difference between sale price and purchase price or one percent of purchase price of securities traded. A similar provision should have been given under GST law also as securities continue to be outside GST. Absence of such beneficial provision may lead to excess restriction of common ITC.
- Interest should be excluded from the purview of exempted turnover:
Under the erstwhile Rule 6 of the CENVAT Credit Rules, 2004, the value of interest or discount received on deposits, loans, advances are excluded from the value of exempted turnover and total turnover for reversal of common CENVAT Credit. Interest continues to be exempt under GST, but a similar beneficial provision is absent under GST law. Every business entity would be deriving some sought of interest income on their deposits with banks. This will lead to every entity required to make compliance under section 17(1), (2), (3) of CGST Act, 2017 to restrict the common ITC towards interest income. The status quo of earlier tax regime should be maintained by making suitable amendments in the law in order to relieve many taxpayers who otherwise fall outside the requirement to restrict common ITC.
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- ITC in respect of motor vehicles and other conveyances:
Section 17(5) blocks ITC in respect of various inward supplies of goods and services. Clause (a) blocks ITC in respect of motor vehicles and other conveyances. Does this mean that only the ITC with respect to inward supply of motor vehicle alone is restricted or the ITC in respect of all expenditure related to motor vehicle say repairs, maintenance etc. are restricted? Section 17(5)(a), uses the phrase ‘ITC in respect of motor vehicles’. In the case of State of Madras vs. Swastik Tobacco Factory (1966)3SCR79(SC) wherein it was held that the expression “in respect of goods” means only on the goods and cannot take in the raw material out of which the goods were made. In view of restricted meaning to the phrase ‘in respect of’, ambiguity exists over the availment of ITC on repairs and maintenance of motor vehicles. An appropriate clarity is required to be provided on this aspect.
- ITC should be allowed on inward supplies consumed in other States:
GST law does not permit ITC availment of those intra-state inward supplies where supplier and recipient are in different states. For example, a registered person of the State of Telangana visits Delhi on a business purpose and stays in a hotel. The hotel will charge CGST and Delhi State SGST towards these accommodation services. In such scenario, the registered taxable person located in the State of Telangana cannot take ITC though the said service is procured for his business in Telangana. On the other hand, a person who has obtained registration of input service distributor can freely take ITC of any state intra-state service irrespective of the nature of GST paid. Said provisions are discriminating and act as obstacle for seamless flow of input tax credit. Further, our Prime Minister has acclaimed GST as a reform to unite India into a single economic union. If this is the objective of GST, this kind of restriction on ITC would be futile. An appropriate amendment should be made in this regard to ensure that India is really a single economic union.
- Implications for denial of ITC on food, beverages and other supplies:
Section 17(5)(b) denies ITC on supply of food, beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply is used for making an outward supply of similar category. Under erstwhile CENVAT Credit Rules, 2004, CENVAT Credit of these items are restricted only when the expenditure is incurred for personal consumption of employees. However, under GST, ITC is denied even in cases where these expenditure is incurred for business and not for personal consumption of employees. It is required to make suitable amendments to maintain status quo of existing regime.
- Facility of availing ITC in respect of certain procurements:
In most of the companies, certain expenditure would be of the nature of reimbursements to employees who incur business expenditure on behalf of the company due to business expediencies. Say, a marketing manager of a company visits various places to promote sales of the company thereby incurs expenditure towards hotel, traveling etc.If the invoice has not been taken with company’s GSTN number, then the corresponding ITC of GST charged on such bills will not be available to the company in view of the reason that the supplier upload these details as B2C supplies in their GSTR2 whereas GSTN portal facilitates ITC availment only in case of B2B supplies. Due to this
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in their GSTR2 whereas GSTN portal facilitates ITC availment only in case of B2B supplies. Due to this reason, there is a possibility that tax payers may not claim ITC on reimbursements towards B2C invoices though the supplies are in fact B2B. This will contribute to cascading effect. An appropriate mechanism say option to claim ITC on such reimbursements on self-declaration basis along with the support invoice shall be made available to the recipient in order to facilitate credit availment in such situations.
- No ITCon Inputs & Capital Goods used in manufacture of Electricity for use in Production:
Electricity was not excisable goods, yet CENVAT Credit was allowed under the erstwhile CENVAT Credit Rules, 2004 on inputs used in manufacture of electricity that is captively consumed in factory for production of dutiable goods. Electricity is outside the GST tax net as they continue to be subjected to electricity duty by States. There is no corresponding provision under GST to prescribe for availing ITC on inputs and capital goods used in manufacture of electricity for captive consumption to manufacture goods that are subject to GST. In such absence, manufacturers may not be legally entitled to avail ITC on such inputs and capital goods that are used in manufacture of electricity for captive consumption. This will certainly shoot up the cost of the goods and thereby contributes to the cascading effect which is against the objective of GST.
- Reverse charge is an exempted supply:
Section 17(3) of the CGST Act, 2017 provides that for restriction of common ITC attributable to exempt supplies, supplies on which GST is payable by recipient on reverse charge basis shall also be included in exempt supplies. This requirement is not in accordance with the spirit of GST. The tax on these supplies are paid by recipient and therefore they cannot be considered as exempt supplies. By treating these supplies as exempt supplies, there will be a significant cascading effect on these notified reverse supplies and their cost would increase. As full tax is going to be collected from recipient in cash, there must be an appropriate provision in the GST law to allow the corresponding supplier to claim refund of ITC attributable to these supplies in the manner similar to refunds in cases where supplies of goods or services have inverted duty structure.
- Valuation on Inter-unit transfer of Capital Goods should be clarified:
Rule 28 of the CGST Rules, 2017, for the purpose of payment of GST, require valuing goods transferred from one unit to another unit of same entity based on open market value of the said goods. Second proviso to the said rule states that the value adopted shall be deemed to be open market value if the unit receiving the goods are eligible to take ITC of the GST paid by supplying unit and the goods are intended for further supply by recipient unit. With respect to goods normally traded by an entity, the proviso will limit the issue of fairness in valuation that may emanate on inter-unit transfer of goods. However, as the capital goods are not intended for further supply be recipient, the said proviso relating to deemed open market value may not apply, keeping issue of fairness in valuation wide open. Further, selling of capital goods of particular type by a unit is rare and occasional. In such circumstances, reference to similar transaction between un-related parties to arrive at open market value may not be available. Therefore, valuation of inter-unit transfer of capital goods may be subjective and prone to litigation.
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In order to overcome the practical challenges on valuation of inter-unit transfer of capital goods, it is advisable to prescribe a separate valuation rule for capital goods where value can be arrived at by way of reduction in original purchase price based on percentage points depending on the no of quarters for which the asset is put to use.
CONCLUSION:
In view of the above discussion, it is amply clear that the provisions of ITC under the CGST legislation are not completely eliminating cascading effect. Seamless credit is still not within the sight of taxpayer. Certain rational amendments are required to be made to the CGST Act, 2017 in order to move in the direction of seamless credit.
