Understanding Input Tax Credit (ITC) in the GST Regime: A Comprehensive Guide

The Goods and Services Tax (GST) regime has introduced Input Tax Credit (ITC) as a crucial component, playing a role analogous to tax deducted at source in the Income Tax system. Despite its significance, there exists ambiguity surrounding its terms and conditions. This article delves into the intricacies of ITC, covering its foundational principles, the controversies it has sparked, and the practical implications for taxpayers.

Contents:

1. What is ITC?
2. The Controversies Surrounding ITC:
3. Legal Battles Over ITC:
4. Safeguarding the ITC:
5. Proving Eligibility for ITC Claim in GSTR-3B:

1. What is ITC?

In simple terms, ITC is a tax paid by the recipient to the supplier at the time of purchasing goods and services. These prepaid taxes are available as ITC to the recipient, which can be utilized to offset the payment of output taxes. This process is akin to the deduction of taxes at source under the Income Tax Law, where the deducted amount is deductible from the total tax payable for the assessment year. It’s important to note that ITC claims are not an absolute right but are subject to certain conditions and restrictions.

2. The Controversies Surrounding ITC:

In addition to classification and the rate of tax, ITC has become one of the most debated matters between taxpayers and revenue authorities. Some of the key issues surrounding ITC include:

• Is it a vested right or a conditional right?
• Is it a rebate or a concession?
• The time limit prescribed in section 16(4), which is seen as a machinery provision and is in direct conflict with section 16(2).
• Denying ITC on the grounds of limitation under section 16(4), which could potentially defeat the objective of the 122nd Constitutional Amendment Bill, 2017, aimed at avoiding the cascading effect of taxes.

3. Legal Battles Over ITC:

The legal battle over ITC is ongoing, and a recent case in Andhra Pradesh sets a precedent. In the case of Re. Thirumalakonda Plywoods v. The Assistant Commissioner of State Tax, Ananthapur Circle [W.P.No. 24235 of 2022], the High Court held that:

• ITC could be regarded at best as a rebate or concession and not a statutory or constitutional right.
• Entitlement to ITC is granted by section 16(1) of the Act.
• Section 16(4) is not in direct conflict with section 16(2) of the Act, and both provisions should be given effect by reading them harmoniously.
• Accepting returns with late fees doesn’t mean that substantial provisions relating to section 16(4) are ignored.

Legal experts are contesting similar matters in various high courts nationwide, and until the Supreme Court decides on this matter, disputes are expected to persist.

4. Safeguarding the ITC:

To secure and fortify their ITC, taxpayers should consider implementing the following measures:

• Secure tax invoices, debit notes, ISD invoices, and self-invoices for RCM, and Bill of Entry (BOE) for imports.
• Ensure the reflection of ITC in GSTR-2B.
• Verify the receipt of goods and services.
• Confirm payment of tax by the supplier.
• Avail ITC within the time limit prescribed under section 16(4) in GSTR-3B.
• Recognize that ITC is not specifically blocked under section 17(5).
• Make payments to suppliers within 180 days from the date of the invoice.
• Restrict ITC attributable to exempt supplies.
• Apply rules 42 and 43 to limit common ITC attributable to exempt supplies.

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

Recipients need to bear in mind that section 155 places the burden on them to prove eligibility for their ITC claim in GSTR-3B. To discharge this burden effectively, recipients should consider the following:

• Possession of tax invoices, debit notes, ISD invoices, and self-invoices for RCM, and BOE for imports.
• Evidence of the receipt of goods and services, with an e-way bill in the case of goods.
• Payments to suppliers made through normal banking channels.
• Ensuring transactions are not bogus.
• Confirming the supplier is not deregistered on the date of supply.
• If the supplier is deregistered post making the supply, ensure they have remitted their tax dues.

Conclusion:

ITC is not an absolute right but a conditional one, subject to various pre- and post-availment conditions. Recipients must remain vigilant, monitoring their ITC claim at every stage, from availment to utilization, and even thereafter, especially concerning suppliers’ GST compliance and associated risks. Building robust guardrails around ITC and effective vendor management is imperative to mitigate risks in this complex landscape.