Understanding ITC Eligibility in Special GST Situations: A Detailed Overview -

Introduction

The Goods and Services Tax (GST) was implemented in India in July 2017, marking a significant reform in the indirect taxation system. Despite its introduction, numerous questions, complexities, and ambiguities have persisted, leaving certain aspects unresolved. To address these issues, the GST Council plays a pivotal role in deliberating on the concerns raised by taxpayers, trade associations, the GST Department, and other authorities. Based on the recommendations of the GST Council, the Central Board of Indirect Taxes and Customs (CBIC) and the GST Department periodically introduce amendments and clarifications to ensure the effective implementation of GST law.

Among the various provisions under the GST regime, the mechanism for claiming Input Tax Credit (ITC) in special circumstances is particularly significant. Taxpayers may face unique scenarios such as:

- Obtaining a new GST registration (either compulsory or voluntary),
- Business restructuring or changes,
- Transitioning from the Composition Scheme to the Regular Scheme,
- Switching from exempt supplies to taxable supplies.

To address these special situations, Section 18 of the Central Goods and Services Tax (CGST) Act, 2017, along with Rule 40 of the CGST Rules, 2017, lays down the legal framework. These provisions prescribe the eligibility, conditions, and restrictions for availing ITC on inputs, semi-finished goods, finished goods, and capital goods under specified circumstances.

This article aims to comprehensively examine the provisions under Section 18(1) and Section 18(2) of the CGST Act, along with Rule 40 of the CGST Rules. It will focus on key scenarios such as:

1. Claiming ITC during a New GST Registration – whether the registration is mandatory or voluntary.
2. Transitioning from the Composition Scheme to the Regular Scheme – exploring the implications for ITC.
3. Switching from Exempt to Taxable Supplies – understanding the process and conditions for availing ITC.

By delving into these provisions, we aim to provide a clear understanding of the legal framework and practical aspects governing ITC claims in these special circumstances, ensuring compliance with Indian GST laws.

Section 18(1) and 18(2): Provisions for Input Tax Credit Under Special Circumstances

The provisions contained in Section 18 of the Central Goods and Services Tax (CGST) Act, 2017 deal with the entitlement of registered taxpayers to claim Input Tax Credit (ITC) under specific situations. These provisions, along with the applicable rules, outline the conditions and restrictions for availing ITC in cases such as new registrations, changes in the nature of tax liability, or the transition from exempt to taxable supplies.

Sub-Section (1)

Subject to the conditions and restrictions prescribed, the following scenarios are covered:

(a) A person who applies for GST registration within the statutory period of 30 days from the date on which he becomes liable for registration and is subsequently granted such registration shall be entitled to claim ITC. This entitlement extends to:

- Inputs held in stock,
- Inputs contained in semi-finished goods, and
- Inputs contained in finished goods held in stock
  on the day immediately preceding the date from which the person becomes liable to pay tax under the provisions of the Act.

(b) A person voluntarily obtaining registration under Section 25(3) of the CGST Act shall be entitled to claim ITC on:

- Inputs held in stock,
- Inputs contained in semi-finished goods, and
- Inputs contained in finished goods held in stock
  on the day immediately preceding the date on which such registration is granted.

(c) In cases where a registered person opts out of the Composition Scheme under Section 10, and thereby becomes liable to pay tax under Section 9, they shall be entitled to claim ITC on:

- Inputs held in stock,
- Inputs contained in semi-finished goods,
- Inputs contained in finished goods, and
- Capital goods, subject to certain reductions.

The ITC on capital goods shall be reduced by such percentage points as prescribed under the CGST Rules. This eligibility applies to the stock and assets held on the day immediately preceding the date from which the person becomes liable to pay tax as a regular taxpayer.

(d) When an exempt supply of goods or services (or both) becomes taxable, the registered person engaged in such supply shall be entitled to claim ITC on:

- Inputs held in stock,
- Inputs contained in semi-finished goods,
- Inputs contained in finished goods, and
- Capital goods exclusively used for such exempt supply.

This entitlement is effective for the inputs and capital goods held on the day immediately preceding the date from which the supply becomes taxable. For capital goods, ITC shall be reduced by the percentage points as prescribed in the CGST Rules.

Sub-Section (2)

Time Limit for Availing ITC
A registered person is not eligible to claim ITC under sub-section (1) in respect of any supply of goods or services (or both) received after the expiry of one year from the date of issuance of the tax invoice relating to such supply. This restriction emphasizes the importance of timely action in claiming ITC.

Sub-Section (3)

Transfer of ITC in Case of Business Restructuring: In the event of a change in the constitution of a registered person due to:

Sale,
Merger,
Demerger,
Amalgamation,
Lease, or
Transfer of business

where the transfer includes specific provisions for the transfer of liabilities, the registered person shall be allowed to transfer the unutilized ITC available in their electronic credit ledger. This transfer is subject to the prescribed manner and conditions laid out in the CGST Rules.

Let’s explore each point in detail with illustrative examples:

Illustration: Entitlement to Input Tax Credit upon Mandatory Registration

Scenario: A

Mr. X becomes liable for GST registration on 1st October. He submits his application within the prescribed period of 30 days and is granted registration effective from 30th September. Entitlement to Input Tax Credit (ITC): Pursuant to Section 18(1)(a) of the Central Goods and Services Tax (CGST) Act, 2017, Mr. X is entitled to claim ITC on:

Inputs held in stock,
Inputs contained in semi-finished goods, and
Inputs contained in finished goods

as of the day immediately preceding the date he becomes liable to pay tax. In this instance, the relevant date is 30th September. Important Considerations:

Exclusion of Capital Goods: Mr. X is not entitled to claim ITC on capital goods under this provision. The entitlement is confined to inputs and goods in process or finished form.
Time Limit for Claiming ITC: In accordance with Section 18(2) of the CGST Act, Mr. X must claim the eligible ITC within one year from the date of the relevant tax invoices. This necessitates that the invoices for the inputs in stock as of 30th September must bear a date not exceeding one year prior to the date of filing Form GST ITC-01.
Filing of Form GST ITC-01: To formalize the claim, Mr. X is required to submit Form GST ITC-01 within 30 days from the date of becoming eligible to avail the ITC. This form serves as a declaration for claiming ITC under Section 18(1)(a).

Illustrative Example:

Date of Liability: 1st October
Effective Date of Registration: 30th September
Stock Date for ITC Eligibility: 30th September
Invoice Date Validity: Invoices dated on or after 1st October of the preceding year
Deadline for Filing GST ITC-01: 30 days from the date of eligibility

Illustration: Entitlement to Input Tax Credit upon Voluntary Registration

Scenario: B

Mr. D, not mandatorily required to register under the Goods and Services Tax (GST) Act, opts for voluntary registration under Section 25(3) of the Central Goods and Services Tax (CGST) Act, 2017. He applies for registration on 15th November and is granted registration effective from 1st December. Entitlement to Input Tax Credit (ITC): In accordance with Section 18(1)(b) of the CGST Act, Mr. D is entitled to claim ITC on:

Inputs held in stock,
Inputs contained in semi-finished goods, and
Inputs contained in finished goods

held on the day immediately preceding the date of registration. Therefore, Mr. D can claim ITC on inputs and goods in process or finished form as of 30th November. Important Considerations:

Exclusion of Capital Goods: Mr. D is not entitled to claim ITC on capital goods under this provision. The entitlement is confined to inputs and goods in process or finished form.
Time Limit for Claiming ITC: As per Section 18(2) of the CGST Act, Mr. D must claim the eligible ITC within one year from the date of the relevant tax invoices. This means that the invoices for the inputs in stock as of 30th November must be dated not exceeding one year prior to the date of filing Form GST ITC-01.
Filing of Form GST ITC-01: To formalize the claim, Mr. D is required to submit Form GST ITC-01 within 30 days from the date of becoming eligible to avail the ITC. This form serves as a declaration for claiming ITC under Section 18(1)(b).

Illustrative Example:

Date of Application for Registration: 15th November
Effective Date of Registration: 1st December
Stock Date for ITC Eligibility: 30th November
Invoice Date Validity: Invoices dated on or after 1st December of the preceding year
Deadline for Filing GST ITC-01: 30 days from the date of eligibility

Illustration: Entitlement to Input Tax Credit upon Transition from Composition Scheme to Regular Scheme

Scenario: C

Mr. Z, a registered taxable person, was previously paying tax under the composition scheme up to 31st March. Effective from 1st April, Mr. Z transitions from the composition scheme to the regular scheme. Entitlement to Input Tax Credit (ITC): In accordance with Section 18(1)(c) of the Central Goods and Services Tax (CGST) Act, 2017, Mr. Z is entitled to claim ITC on:

Inputs held in stock,
Inputs contained in semi-finished goods, and
Inputs contained in finished goods

held on the day immediately preceding the date from which he becomes liable to pay tax under the regular scheme. Therefore, Mr. Z can claim ITC on inputs and goods in process or finished form as of 31st March. Entitlement to ITC on Capital Goods: Unlike the scenarios of compulsory and voluntary registration, where ITC on capital goods is not available, Mr. Z is entitled to claim ITC on capital goods held in stock as of 31st March. Calculation of ITC on Capital Goods: The ITC on capital goods is subject to a reduction of 5% per quarter (or part thereof) from the date of the invoice. This reduction is specified under Rule 40(1)(a) of the CGST Rules, 2017. Example:

Date of Transition: 1st April
Date of Invoice for Capital Goods: 1st October of the previous year
Reduction Period: 6 months (January to March)
Reduction Percentage: 5% per quarter (5% * 2 quarters)
Total Reduction: 10%

Therefore, Mr. Z can claim 90% of the ITC on capital goods purchased on 1st October of the previous year. Important Considerations:

Time Limit for Claiming ITC: As per Section 18(2) of the CGST Act, Mr. Z must claim the eligible ITC within one year from the date of the relevant tax invoices. This means that the invoices for the inputs and capital goods in stock as of 31st March must be dated not exceeding one year prior to the date of filing Form GST ITC-01.
Filing of Form GST ITC-01: To formalize the claim, Mr. Z is required to submit Form GST ITC-01 within 30 days from the date of becoming eligible to avail the ITC. This form serves as a declaration for claiming ITC under Section 18(1)(c).

Illustration: Entitlement to Input Tax Credit upon Transition from Exempt to Taxable Supplies

Scenario: D

MAS Enterprise, a registered taxable person, has been dealing in Product X, which was exempt from Goods and Services Tax (GST). Effective from 1st April 2023, Product X becomes a taxable supply due to a notification issued by the Government. Entitlement to Input Tax Credit (ITC): In accordance with Section 18(1)(d) of the Central Goods and Services Tax (CGST) Act, 2017, MAS Enterprise is entitled to claim ITC on:

Inputs held in stock,
Inputs contained in semi-finished goods, and
Inputs contained in finished goods

held on the day immediately preceding the date from which the supply becomes taxable. Therefore, MAS Enterprise can claim ITC on inputs and goods in process or finished form as of 31st March 2023. Entitlement to ITC on Capital Goods: MAS Enterprise is also entitled to claim ITC on capital goods exclusively used for the exempt supply of Product X. This entitlement arises because the supply of Product X has transitioned from exempt to taxable. Calculation of ITC on Capital Goods: The ITC on capital goods is subject to a reduction of 5% per quarter (or part thereof) from the date of the invoice. This reduction is specified under Rule 40(1)(a) of the CGST Rules, 2017. Example:

Date of Transition: 1st April 2023
Date of Invoice for Capital Goods: 1st January 2022
Reduction Period: 9 quarters (January 2022 to March 2023)
Reduction Percentage: 5% per quarter
Total Reduction: 25% (5% × 5 quarters)

Therefore, MAS Enterprise can claim 75% of the ITC on capital goods purchased on 1st January 2022. Important Considerations:

Time Limit for Claiming ITC: As per Section 18(2) of the CGST Act, MAS Enterprise must claim the eligible ITC within one year from the date of the relevant tax invoices. This means that the invoices for the inputs and capital goods in stock as of 31st March 2023 must be dated not exceeding one year prior to the date of filing Form GST ITC-01.
Filing of Form GST ITC-01: To formalize the claim, MAS Enterprise is required to submit Form GST ITC-01 within 30 days from the date of becoming eligible to avail the ITC. This form serves as a declaration for claiming ITC under Section 18(1)(d).

Certification Requirement for Input Tax Credit Claims Exceeding ₹2,00,000

In accordance with Rule 40(1)(d) of the Central Goods and Services Tax (CGST) Rules, 2017, when a registered person claims Input Tax Credit (ITC) exceeding ₹2,00,000, the details provided in Form GST ITC-01 must be duly certified by a practicing Chartered Accountant or Cost Accountant.

This stipulation ensures that substantial ITC claims are thoroughly verified, thereby enhancing the credibility and accuracy of the claims. The certification process involves a comprehensive examination of the taxpayer’s records and supporting documents to confirm the legitimacy of the ITC claim.

Failure to adhere to this certification requirement may result in the rejection of the ITC claim, leading to potential tax liabilities and penalties. Therefore, it is imperative for taxpayers to ensure compliance with this provision to maintain the integrity of their tax filings.

Conclusion: Key Takeaways on ITC Claims in Special GST Circumstances

In conclusion, understanding the provisions of Section 18 and Rule 40 of the CGST Act is crucial for taxpayers in India who are navigating the complexities of claiming Input Tax Credit (ITC) under special circumstances. Whether it’s a new GST registration, transitioning from the Composition Scheme to the Regular Scheme, or shifting from exempt supplies to taxable supplies, taxpayers must be aware of the specific conditions, restrictions, and time limits that govern ITC claims. By adhering to these legal frameworks and ensuring compliance with prescribed timelines and certification requirements, businesses can optimize their GST benefits and maintain smooth operations.

Taxpayers should ensure timely filing of Form GST ITC-01, carefully assess eligibility for ITC on stock, capital goods, and goods in process, and avoid the pitfalls of delayed claims to maximize their tax efficiency. Staying informed about these provisions and their practical applications will help businesses take full advantage of the opportunities available under the GST regime. With ongoing updates and clarifications from the GST Council, remaining proactive in adapting to changes will be essential for achieving compliance and financial growth in an ever-evolving tax environment.

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