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Input Tax Credit- a magic potion or magic potion kept on leaky crucible?

Vishwanath was quite eager to understand the Input Tax Credit in GST and so he went to the home of Prasanna. Prasanna greeted him warmly and offered a bowl of payasam, the quintessential concoction for happiness.

Having understood the purpose of his visit, Prasanna started by saying that provisions of Input Tax were like amrith– a magic potion that nourishes the value added tax system called GST. Mastering the norms for availing Input Tax credit (ITC) would help a business to function efficiently and profitably.

Input Tax Credit FAQs

He proceeded further. ITC provisions in GST law is a bundle of conditions and restrictions. Compliance is a matter of sustained adherence to discipline.

It is, therefore, essential to understand them fully.

Procedural Restrictions:-

Receipt of goods and input services, retention of tax invoice or debit note containing details prescribed, and payment for the supply within 180 days of invoice date are the procedural requirements directly under the control of the recipient.

Besides, the supplier has to file the monthly return and pay the tax due on the supply for the recipient to claim Input tax credit.Duty is cast not only on the recipient but also he has also to ensure that suppliers also adhere to GST compliance calendar. Every taxpayer must incorporate adequate checks and balances in the contract with the supplier for this purpose.

Services & goods prohibited for Input Tax credit

Prasanna added that second set of restrictions are that input tax credit (ITC) on certain services are either prohibited fully or available subject to certain conditions.

Membership of club, health and fitness center; travel benefits extended to employees on vacation such as leave or home travel concession are examples of services that are completely barred for input tax credit.

The word club has not been defined in the law. A club is normally construed as an association dedicated to a particular interest or activity. So if a businessman contributes to a trade association to further his business interest, will it be considered as a contribution to the club and therefore, applicable GST being ineligible for Input tax credit, Prasanna posed this question and answered that may be the letter of the law does not convey what was intended to be prohibited.

Vishwanath interjected with his own view. Will a professional sports trainer providing training services be barred from claiming ITC on membership of gym?

Goods And Services Tax FAQs

Then there are input tax credit on certain services and goods that are allowed only if the outward supply of goods or service is primarily dependent on such goods or services. For example, input tax credit on motor vehicles and other modes of conveyances is available only if they are used for making taxable supplies such as the supply of such vehicles or transportation of passengers or imparting driving or for transportation of goods. Similar restrictions are imposed on the supply of foods and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery and works contract service.

In all these cases, a company availing any of these services or using these goods for a genuine business requirement or for the benefit of employees will not be eligible for input tax credit if it is not providing the prescribed outward taxable supplies. This directly adds up to the cost of operation.

Blanket prohibitions

ITC relating to goods or services used for personal consumption, goods lost, stolen goods, destroyed goods or written off goods or goods given by way of gift or free samples are prohibited.

Where outward supply includes both of exempt and taxable supplies or where the goods or services are used for both purpose of business and non-business purposes then ITC is allowed only to the extent it can be attributed to taxable supplies or business purpose. Calculating amounts attributable to taxable supplies or business purpose is another onerous task that requires discipline and diligence.

Having explained the input tax credit, Prasanna said that a taxpayer who wants to avail input tax credit must be highly disciplined in terms of documentation and compliances. Or else, it will add up to a cost. As Benjamin Franklin famously said, “A small leak can sink a great ship”.

To put it very tersely- ITC is a magic potion in the hands of a wise taxpayer but for a careless taxpayer, it is a magic potion kept on the leaky crucible.

GST Services

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