6 Itc

CHAPTER 6
INPUT TAX CREDIT

For the sake of brevity, input tax credit has been referred to as ITC in this Chapter.
Examples/Illustrations/Questions and Answers given in the Chapter are based on the
position of GST law existing as on 31.10.2020.
LEARNING OUTCOMES
After studying this Chapter, you will be able to:
 describe what are inputs, input services, capital goods and other
relevant terms in relation to ITC.
 explain the various conditions, timelines, restrictions and processes
for taking ITC on goods and services in general and special
circumstances.
 identify the items on which ITC is available as also the blocked items
on which ITC is not available.
 explain the concept relating to availing of proportionate ITC when
common inputs or input service or capital goods are used or
intended to be used for exempted and taxable supplies or business
and non-business activities.
 comprehend and apply the above provisions as also the provisions
relating to utilization of ITC to compute the GST liability of a
registered person payable in cash.
© The Institute of Chartered Accountants of India

6.2 INDIRECT TAXES
Relevant definitions
Input Tax credit
Eligibility and conditions

for taking ITC
Apportionment of credit
and blocked credits
Availability of credit in
special circumstances
How ITC is utilised
1. INTRODUCTION
In earlier indirect tax regime, the
credit mechanism for indirect taxes
levied by the Union Government,
(central excise duty and service tax) was governed by the CENVAT Credit Rules,
2004; and the credit mechanism for state-level VAT on sale of goods was governed
by the States under their respective VAT laws. The VAT legislations allowed ITC of
VAT on inputs and capital goods in transactions within the state, but not on inputs
and capital goods coming in the State from outside the state, on which central sales
tax was paid. CENVAT Credit Rules, 2004 allowed availing and utilization of credit
of duty/tax paid on both goods (capital goods and inputs) and services by the
manufacturers and the service providers across the country.

INPUT TAX CREDIT 6.3
The credit across goods and services was integrated vide the CENVAT Credit Rules,
2004 in the year 2004 to mitigate the cascading effects of central levies namely,
central excise duty and service tax. However, the credit chain remained fragmented
on account of State-Level VAT as the credit of central taxes could not be set off
against a State levy and vice versa. The chain further got distorted as ITC was not
available on inter-State purchases. This resulted in cascading of taxes leading to
increase in costs of goods and services.
The GST regime promises seamless credit on goods and services across the entire
supply chain with some exceptions like supplies charged to tax under composition
scheme and supply of exempted goods and/or services. ITC is considered to be
the lifeline of the GST regime. In fact, it is the provisions of ITC, which essentially
make GST a value added tax i.e., collection of tax at all points of supply chain after
allowing credit of tax paid at earlier points.
Chapter V of the CGST Act [Sections 16 to 21] & Chapter V: Input Tax Credit of the
CGST Rules [Rules 36-45] prescribe the provisions relating to ITC. State GST laws also
prescribe identical provisions in relation to ITC. In this Chapter, provisions of sections
16, 17 and 18 have been discussed; 1 first the statutory provisions of these sections
together with the relevant rules have been extracted followed by their analysis.
Provisions of ITC under the CGST Act have also been made applicable to
the IGST Act vide section 20 of the IGST Act.
Scheme of ITC - At a Glance

Given below are the salient features of the scheme of ITC as contained in the
provisions of sections 16, 17 and 18 read with the relevant rules. The scheme has
been discussed in detail in the ensuing pages of this Chapter.
 The scheme is designed to avoid cascading effect of taxes and make GST a
destination-based tax.
 Broadly, ITC is available on all inputs, input services and capital goods used
for purposes of business of a taxable person. The exception is ‘blocked
credit’, where ITC is not available even when these goods or services are used
for purposes of business.
1
Provisions of ITC relating to job work and input service distributor [Sections 19, 20 and 21]
will be discussed at the Final level.

6.4 INDIRECT TAXES
 ITC is used for payment of tax on taxable output supply to avoid cascading
effect of taxes.
 GST law does not require ‘one to one’ co-relation between inputs/input
services and final products/services. Any eligible ITC can be used for payment
of tax on any taxable output supply.
 IGST is another core aspect of GST. It is a transitory tax to enable transfer of
ITC when goods or services move from one State to another. This is a unique
feature of Indian GST.
 Since ITC can be availed for payment of tax on taxable output supply, as a
natural corollary, ITC is not available when tax is not payable on output
supply, i.e. on exempt supply.
 The exception to the above principle is ‘zero rated supply’ 2, i.e. exports or
supplies to a special economic zone (SEZ) developer/unit, where ITC is
available even if no tax is payable on output supply. Such ITC can be used
either for payment of tax on supplies made with tax or refund of the same
can be obtained. This simple mechanism is used to make exports and
supplies to SEZ completely tax free.
 If a taxable person is making both taxable and exempt supply, he is entitled
to full credit of ITC in respect of inputs, input services and capital goods
exclusively used for taxable supply and no credit at all for inputs, input
services and capital goods exclusively used for exempt supply.
 If common inputs, input services and capital goods are used for taxable as
well as exempt supply, only proportionate ITC attributable to the taxable
supply is available. The common ITC is apportioned in the ratio of value of
taxable supply and exempt supply. Elaborate provisions have been made in
the GST law to prescribe the manner of calculation of proportionate ITC.
Before proceeding to understand the provisions of section 16, 17, 18 and the
relevant rules let us first go through few relevant definitions.
2. RELEVANT DEFINITIONS
Agent means a person, including a factor, broker, commission agent, arhatia,
del credere agent, an auctioneer or any other mercantile agent, by whatever
name called, who carries on the business of supply or receipt of goods or
services or both on behalf of another [Section 2(5)].
2
The concept of zero rated supply and the refund of ITC will be dealt in detail at the Final level.

Business includes
(a) any trade, commerce, manufacture, profession, vocation, adventure,
wager or any other similar activity, whether or not it is for a pecuniary
benefit;
(b) any activity or transaction in connection with or incidental or ancillary
to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or
not there is volume, frequency, continuity or regularity of such
transaction;
(d) supply or acquisition of goods including capital goods and services in
connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a
subscription or any other consideration) of the facilities or benefits to
its members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been
accepted by him in the course or furtherance of his trade, profession or
vocation;
(h) activities of a race club including by way of totalisator or a licence to
book maker or activities of a licenced book maker in such club; and
(i) any activity or transaction undertaken by the Central Government, a
State Government or any local authority in which they are engaged as
public authorities [Section 2(17)].
Capital goods means goods, the value of which is capitalized in the books of
account of the person claiming the ITC and which are used or intended to be
used in the course or furtherance of business [Section 2(19)].
Conveyance includes a vessel, an aircraft and a vehicle [Section 2(34)].
Exempt supply means supply of any goods or services or both which attracts
nil rate of tax or which may be wholly exempt from tax under section 11, or
under section 6 of the IGST Act, and includes non-taxable supply [Section
2(47)].
Input means any goods other than capital goods used or intended to be used
by a supplier in the course or furtherance of business [Section 2(59)].

6.6 INDIRECT TAXES
Input service means any service used or intended to be used by a supplier

in the course or furtherance of business [Section 2(60)].
Input tax in relation to a registered person, means the central tax, State tax,
integrated tax or Union territory tax charged on any supply of goods or
services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of
section 9;
(c) the tax payable under the provisions of sub-section (3) and (4) of
section 5 of the IGST Act;
(d) the tax payable under the provisions of sub-section (3) and sub-section
(4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-section (3) and sub-section
(4) of section 7 of the Union Territory Goods and Services Tax Act,
but does not include the tax paid under the composition levy [Section 2(62)].
Input tax credit means the credit of input tax [Section 2(63)].
Inward supply in relation to a person, shall mean receipt of goods or services
or both whether by purchase, acquisition or any other means with or without
consideration [Section 2(67)].
Motor vehicle shall have the same meaning as assigned to it in clause (28)
of section 2 of the Motor Vehicles Act, 1988 [Section 2(76)].
Motor vehicle or vehicle under the Motor Vehicles Act, 1988 means any
mechanically propelled vehicle adapted for use upon roads whether the
power of propulsion is transmitted thereto from an external or internal source
and includes a chassis to which a body has not been attached and a trailer;
but does not include a vehicle running upon fixed rails or a vehicle of a special
type adapted for use only in a factory or in any other enclosed premises or a
vehicle having less than four wheels fitted with engine capacity of not
exceeding twenty five cubic centimetres. [Section 2(28) of Motor Vehicles
Act, 1988].
Non-resident taxable person means any person who occasionally
undertakes transactions involving supply of goods or services or both,
whether as principal or agent or in any other capacity, but who has no fixed
place of business or residence in India [Section 2(77)].

Principal means a person on whose behalf an agent carries on the business

of supply or receipt of goods or services or both [Section 2(88)].
Quarter shall mean a period comprising three consecutive calendar months,
ending on the last day of March, June, September and December of a
calendar year [Section 2(92)].
Recipient of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or services or
both, the person who is liable to pay that consideration;
(b) where no consideration is payable for the supply of goods, the person
to whom the goods are delivered or made available, or to whom
possession or use of the goods is given or made available; and
(c) where no consideration is payable for the supply of a service, the person
to whom the service is rendered,
and any reference to a person to whom a supply is made shall be construed
as a reference to the recipient of the supply and shall include an agent acting
as such on behalf of the recipient in relation to the goods or services or both
supplied [Section 2(93)].
Supplier in relation to any goods or services or both, shall mean the person
supplying the said goods or services or both and shall include an agent acting
as such on behalf of such supplier in relation to the goods or services or both
supplied [Section 2(105)].
Taxable supply means a supply of goods or services or both which is leviable
to tax under CGST Act [Section 2(108)].
Works contract means a contract for building, construction, fabrication,
completion, erection, installation, fitting out, improvement, modification, repair,
maintenance, renovation, alteration or commissioning of any immovable
property wherein transfer of property in goods (whether as goods or in some
other form) is involved in the execution of such contract [Section 2(108)].
Zero-rated supply means any of the following supplies of goods or services
or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone (SEZ)
developer or a Special Economic Zone unit [Section 16(1) of the IGST Act].

6.8 INDIRECT TAXES
3. ELIGIBILITY AND CONDITIONS FOR TAKING INPUT

TAX CREDIT [SECTION 16]
STATUTORY PROVISIONS
Section 16 Eligibility and conditions for taking input tax credit
Sub-section Clause Particulars
(1) Every registered person shall, subject to such conditions and

restrictions as may be prescribed and in the manner specified in
section 49, be entitled to take credit of input tax charged on any supply
of goods or services or both to him which are used or intended to be
used in the course or furtherance of his business and the said amount
shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered

person shall be entitled to the credit of any input tax in respect of
any supply of goods or services or both to him unless,–
(a) he is in possession of a tax invoice or debit note issued by

a supplier registered under this Act, or such other tax
paying documents as may be prescribed;
(b) he has received the goods or services or both.
Explanation.—For the purposes of this clause, it shall be

deemed that the registered person has received the goods
or, as the case may be, services–
(i) where the goods are delivered by the supplier to

a recipient or any other person on the direction
of such registered person, whether acting as an
agent or otherwise, before or during movement
of goods, either by way of transfer of documents
of title to goods or otherwise;

(ii) where the services are provided by the supplier

to any person on the direction of and on account
of such registered person.
(c) subject to the provisions of section 41, the tax charged in

respect of such supply has been actually paid to the
Government, either in cash or through utilisation of input
tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in

lots or instalments, the registered person shall be entitled to take
credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods
or services or both, other than the supplies on which tax is payable on
reverse charge basis, the amount towards the value of supply along with
tax payable thereon within a period of one hundred and eighty days from
the date of issue of invoice by the supplier, an amount equal to the input
tax credit availed by the recipient shall be added to his output tax liability,
along with interest thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit
of input tax on payment made by him of the amount towards the value
of supply of goods or services or both along with tax payable thereon.
(3) Where the registered person has claimed depreciation on the tax
component of the cost of capital goods and plant and machinery
under the provisions of the Income-tax Act, 1961, the input tax
credit on the said tax component shall not be allowed.
(4) A registered person shall not be entitled to take input tax credit in
respect of any invoice or debit note for supply of goods or services
or both after the due date of furnishing of the return under section
39 for the month of September following the end of financial year
to which such invoice or invoice relating to such debit note pertains
or furnishing of the relevant annual return, whichever is earlier.

6.10 INDIRECT TAXES
Chapter V: Input Tax Credit of the CGST Rules
Rule 36 Documentary requirements and conditions for claiming input

tax credit
(1) The input tax credit shall be availed by a registered person,

including the Input Service Distributor, on the basis of any of the
following documents, namely:-
(a) an invoice issued by the supplier of goods or services or

both in accordance with the provisions of section 31;
(b) an invoice issued in accordance with the provisions of

clause (f) of sub-section (3) of section 31, subject to the
payment of tax;
(c) a debit note issued by a supplier in accordance with the

provisions of section 34;
(d) a bill of entry or any similar document prescribed under

the Customs Act, 1962 or rules made thereunder for the
assessment of integrated tax on imports;
(e) an input service distributor invoice or input service

distributor credit note or any document issued by an
input service distributor in accordance with the provisions
of sub-rule (1) of rule 54.
(2) Input tax credit shall be availed by a registered person only if all the
applicable particulars as specified in the provisions of Chapter VI are
contained in the said document, and the relevant information, as
contained in the said document, is furnished in FORM GSTR-2 3 by
such person.
Provided that if the said document does not contain all the specified
particulars but contains the details of the amount of tax charged,
description of goods or services, total value of supply of goods or
3
Filing of GSTR-2 has been deferred by the GST Council.

services or both, GSTIN of the supplier and recipient and place of

supply in case of inter-State supply, input tax credit may be availed
by such registered person.
(3) No input tax credit shall be availed by a registered person in respect

of any tax that has been paid in pursuance of any order where any
demand has been confirmed on account of any fraud, willful
misstatement or suppression of facts.
(4) Input tax credit to be availed by a registered person in respect

of invoices or debit notes, the details of which have not been
uploaded by the suppliers under sub-section (1) of section 37,
shall not exceed 10 per cent. of the eligible credit available in
respect of invoices or debit notes the details of which have
been uploaded by the suppliers under sub-section (1) of
section 37.
Rule 37 Reversal of input tax credit in the case of non-payment of

consideration
(1) A registered person, who has availed of input tax credit on any
inward supply of goods or services or both, but fails to pay to the
supplier thereof the value of such supply along with the tax payable
thereon within the time limit specified in the second proviso to sub-
section (2) of section 16, shall furnish the details of such supply, the
amount of value not paid and the amount of input tax credit availed
of proportionate to such amount not paid to the supplier in FORM
GSTR-2 for the month immediately following the period of one
hundred and eighty days from the date of the issue of the invoice.
Provided that the value of supplies made without consideration as

specified in Schedule I of the said Act shall be deemed to have been paid
for the purposes of the second proviso to sub-section (2) of section 16.
Provided further that the value of supplies on account of any amount

added in accordance with the provisions of clause (b) of sub-section
(2) of section 15 shall be deemed to have been paid for the purposes
of the second proviso to sub-section (2) of section 16.

6.12 INDIRECT TAXES
(2) The amount of input tax credit referred to in sub-rule (1) shall be
added to the output tax liability of the registered person for the
month in which the details are furnished.
(3) The registered person shall be liable to pay interest at the rate
notified under sub-section (1) of section 50 for the period starting
from the date of availing credit on such supplies till the date when
the amount added to the output tax liability, as mentioned in sub-
rule (2), is paid.
(4) The time limit specified in sub-section (4) of section 16 shall not
apply to a claim for re- availing of any credit, in accordance with
the provisions of the Act or the provisions of this Chapter, that had
been reversed earlier.
ANALYSIS
(i) Eligibility for taking ITC [Section 16(1)]
(a) Registration under GST
Every registered person shall be entitled to ITC of GST charged on
inward supply of goods and / or services. This is subject to the
provisions relating to use of ITC under section 49 and the conditions
and restrictions in the rules. [Section 49 prescribes provisions relating to
payment of tax, interest, penalty & other amounts. The same has been
discussed in detail in Chapter 9: Payment of Tax.]
(b) Goods/services to be used for business purposes
ITC of GST will be available on goods and/or services which are used in
the course or furtherance of the business [See definition of business].
The “intention to use” the goods and/or services in the course or
furtherance of business would also suffice for availing ITC on such
goods and/or services. Thus, tax paid on goods and or/services which
are used or intended to be used for non-business purposes cannot be
availed as credit. ITC will be credited in electronic credit ledger.

(ii) Conditions for taking ITC [Section 16(2)]

The registered person will be entitled to ITC on a supply only if ALL the
following four conditions are fulfilled:
(a) Possession of tax paying document [Section 16(2)(a) read with
rule 36 of the CGST Rules]
ITC can be availed on the basis of any of the following documents:
(i) Invoice issued by the supplier of goods and/or services
(ii) Invoice issued by the recipient receiving goods and/or services
from unregistered supplier along with proof of payment of tax, in
case of reverse charge
(iii) Debit note issued by the supplier
(iv) Bill of entry or similar document prescribed under the Customs
Act
(v) Revised invoice
(vi) Document issued by input service distributor 4
The documents basis which ITC is being taken should contain at least
the following details:
(i) Amount of tax charged
(ii) Description of goods or services
(iii) Total value of supply of goods and/or services
(iv) GSTIN of the supplier and recipient
(v) Place of supply in case of inter-State supply
No ITC of tax paid towards demands involving fraud [Rule
36(3)]: Tax paid in pursuance of any order where any demand has
been confirmed on account of any fraud, willful misstatement or
suppression of facts cannot be availed as ITC.
4
Concept of Input Service Distributor will be dealt with at the Final level.

6.14 INDIRECT TAXES
Restricted ITC on invoices/debit notes not uploaded by supplier in

his GSTR-1 5 [Rule 36(4) read with Circular No. 123/42/2019 GST,
dated 11.11.2019]: It is observed that some taxpayers take inflated
or bogus ITC, even if proper tax invoices or debit notes in respect of
inputs or input services are not available. To exercise control over
the malpractice of availing bogus ITC by the taxpayers, certain
restrictions have been placed on availment of ITC.
ITC on all invoices/debit notes which are uploaded by the suppliers
in their GSTR-1s can be availed in full. The recipient gets details of
tax invoices and debit notes uploaded by the suppliers in their
GSTR-1s, in his (recipient’s) GSTR-2A and GSTR-2B.
GSTR-1 is a monthly/quarterly statement containing details of outward

supplies made by a registered supplier. Such details of outward
supplies furnished by the supplier are communicated and made
available electronically (auto populated) to the respective recipient(s) in
GSTR- 2A5. GSTR-2B is an auto-drafted ITC statement generated for
every registered person based on GSTR-1 filed by supplier.
However, in respect of invoices/debit notes the details of which are

not uploaded by the suppliers in their GSTR-1s (and hence cannot
be seen in GSTR-2A and GSTR-2B of the recipient), ITC can be
availed only upto 10% of the eligible credit available in respect of
invoices/debit notes the details of which have been uploaded by the
suppliers in their GSTR-1s under section 37(1).
In other words, the ITC claimed should not exceed 110% of ITC
reflecting in GSTR-2A on the due date of filing of GSTR-1 of the
suppliers for the said tax period. The taxpayer has to avail the ITC
on self-assessment basis as the restriction is not imposed through
the common portal.
The above concept has been illustrated in a diagram given at the
next page.
The balance ITC may be claimed by the taxpayer in any of the
succeeding months provided details of requisite invoices are
uploaded by the suppliers. He can claim proportionate ITC as and
5
The provisions relating to filing of GSTR-1 and GSTR-2A have been discussed in detail in
Chapter 10: Returns.]

when details of some invoices are uploaded by the suppliers

provided that ITC on invoices, the details of which are not uploaded
in GSTR-1 remains under 10% of the eligible ITC, the details of
which are uploaded by the suppliers. In other words, taxpayer may
avail full ITC in respect of a tax period, as and when the invoices
are uploaded by the suppliers to the extent eligible [ITC/ 1.1].
ITC on invoices/debit 100% ITC can be

notes which have claimed on such
been uploaded by the invoices/debit notes, if
suppliers in their all other conditions of
GTSR-1s availing ITC are fulfilled
ITC on invoice/debit 10% of the eligible ITC

note which have not available on
been uploaded by invoices/debit notes
suppliers in their uploaded by suppliers
GTSR-1s in their GSTR-1s can be
claimed on such
invoices/debit notes.
✪ Restricted amount of ITC claimed on invoices/debit

notes not uploaded by suppliers in their GSTR-1s
should not exceed the actual eligible ITC available in
respect of the invoices not uploaded.
✪ Invoices on which ITC is not available under any of the
provisions e.g., under section 17(5), are not to be considered for
calculation of 10% of the eligible credit available.
✪ Full ITC can be availed in respect of IGST paid on imports,
documents issued under reverse charge, credit received from
ISD etc., which are outside the ambit of section 37(1).
✪ Restricted ITC (10%) is calculated on a consolidated basis
on total eligible ITC from all suppliers against all supplies
whose details have been uploaded by the suppliers.

6.16 INDIRECT TAXES
ILLUSTRATION 1
Vijay Sales, a registered supplier, receives 100 invoices (for inward
supply of goods/ services) involving GST of ` 10 lakh, from various
suppliers during the month of October. Out of 100 invoices, 80
invoices involving GST of ` 6 lakh have been uploaded by the
suppliers in their respective GSTR-1s filed on the prescribed due
date therefor.
Compute the ITC that can be claimed by Vijay Sales in its GSTR-3B
for the month of October to be filed by 20th November assuming
that GST of ` 10 lakh is otherwise eligible for ITC.
ANSWER
ITC to be claimed by Vijay Sales in its GSTR-3B for the month of
October to be filed by 20th November will be computed as under-
Invoices Amount of ITC Amount of ITC

involved in the that can be
invoices (`) availed (`)
80 invoices uploaded in 6 lakh 6 lakh
GSTR-1 [Refer Note 1]
20 invoices not uploaded in 4 lakh 0.6 lakh
Total 10 lakh 6.6 lakh
Notes:
(1) 100% ITC can be availed on invoices uploaded by the suppliers
in their GSTR-1.
(2) As per rule 36(4), the ITC in respect of invoices not uploaded
by the suppliers in their GSTR-1s is restricted to 10% of
eligible ITC in respect of invoices uploaded in GSTR-1s. Thus,
in respect of 20 invoices not uploaded in GSTR-1s, the ITC has
been restricted to ` 0.6 lakh [10% of ` 6 lakh].
ILLUSTRATION 2
Ajay Sales, a registered supplier, receives 100 invoices (for inward
supply of goods/ services) involving GST of ` 10 lakh, from various
suppliers during the month of October. Out of 100 invoices, 85

invoices involving GST of ` 9.5 lakh have been uploaded by the

suppliers in their respective GSTR-1s filed on the prescribed due
date therefor.
Compute the ITC that can be claimed by Ajay Sales in its GSTR-3B
for the month of October to be filed by 20th November assuming
that GST of ` 10 lakh is otherwise eligible for ITC:
ANSWER
ITC to be claimed by Ajay Sales in its GSTR-3B for the month of
October to be filed by 20th November will be computed as under-
Invoices Amount of ITC Amount of ITC

involved in the that can be
invoices (`) availed (`)
85 invoices uploaded in 9.5 lakh 9.5 lakh
15 invoices not uploaded in 0.5 lakh 0.5 lakh
Total 10 lakh 10 lakh
Notes:
(1) 100% ITC can be availed on invoices uploaded by the suppliers
in their GSTR-1.
(2) As per rule 36(4), the ITC in respect of invoices not uploaded
by the suppliers in their GSTR-1s is restricted to 10% of
eligible ITC in respect of invoices uploaded in GSTR-1s.
However, since in this case, 10% of the eligible ITC in respect
of invoices uploaded in GSTR-1s [` 0.95 lakh (10% of ` 9.5
lakh)] exceeds the actual ITC [` 0.5 lakh] in respect of 15
invoices not uploaded in GSTR-1, ITC availed should be
limited to actual amount of ITC.
(b) Receipt of the goods and / or services [Section 16(2)(b)]
The registered person taking the ITC must have received the goods
and / or services.
“Bill to Ship to” Model: Under this model, the goods are delivered to

6.18 INDIRECT TAXES
a third party - ‘Ç’ on the direction of the customer (registered person)

– ‘B’ who purchases the goods from the vendor (supplier) – ‘A’. In other
words, ‘A’ bills to ‘B’ but ships the goods to ‘Ç’ on direction of ‘B’. In
effect, two supplies take place in this scenario viz., from ‘A’ to ‘B’ and
from ‘B’ to ‘Ç’. Thus, under this model, the customer (registered person)
who purchases such goods does not receive the said goods.
For such cases, by virtue of explanation to section 16(2)(b), it is deemed
that the registered person (customer) has received the goods. In other
words, goods delivered to another person on the direction of the
registered person by way of transfer of documents of title or otherwise,
either before or during the movement, are deemed to have been received
by such registered person. So, ITC will be available to the registered
person, on whose order the goods are delivered to a third person.
Similarly, services may also be provided to a third party by the service
provider (supplier) on the direction of the service recipient (registered
person). In this case also, though the service recipient (registered person)
does not receive the service, by virtue of explanation to section 16(2)(b) it
is deemed that the registered person (service recipient) has received the
service. In other words, service provided to any person on the direction of
and on account of the registered person, is deemed to have been received
by such registered person. So, ITC will be available to the registered
person, on whose direction the services are provided to a third person.
Supply by A to B B entitled to avail
A A bills to B
B
ITC basis the
invoice issued by
A as
goods/services
Supply by B to C deemed to be
B bills to C received by B
Goods/services
Goods shipped/Services being received, C
provided by A to C on entitled to avail ITC
directions of B C basis the invoice
issued by B

(1) A is a trader who places an order on B for a consignment

of soda ash. A receives a buying order from C for the same
quantity of soda ash. A instructs B to deliver the goods to C,
and in turn he raises an invoice on C. Though the goods are not
physically received at the premises of A, section 16(2)(b) allows ITC of
such goods to A.
(2) The registered head office (New Delhi) of ABC Pvt. Ltd.
enters into a contract with DEF Pvt. Ltd. of New Delhi for
repair and maintenance of computers systems installed at its
registered branch office in Bengaluru, Karnataka. DEF Pvt. Ltd. issues
an invoice on ABC Pvt. Ltd., New Delhi for the services provided by it.
Though the actual services are received by the branch office and not by
the head office, section 16(2)(b) allows ITC of such repair and
maintenance services to head office.
(c) Tax leviable on supply actually paid to Government [Section
16(2)(c)]
The supplier should have actually paid the tax charged on the goods
and/or services, for which ITC is being taken, either in cash or by
utilizing ITC. However, section 41 allows the taxpayer (recipient) to take
ITC provisionally on self-assessment basis. The self-assessed ITC gets
credited to the taxpayer’s electronic credit ledger on provisional basis
in terms of section 49(2).
Thus, even if the recipient has paid the tax to the supplier his claim for
ITC gets confirmed only when the supplier deposits the tax so collected
by him to the Government.
One of the significant features of the Indian GST is the ‘matching
concept’, i.e. ITC claimed by the recipient of supply is matched with the
tax paid by the supplier in relation to that supply. Matching seeks to
ensure that only legit ITC is claimed by the recipient. This was intended
to be achieved through a sophisticated automated return filing
mechanism. Initially, the GST law provided for an elaborate system of
return filing whereby the outward supplies of a supplier uploaded in
GSTR-1 were to be auto-populated as inward supplies in the recipient’s
GSTR-2 and ITC could be availed only on such matched inward supplies.
Basis GSTR-1 and GSTR-2 of the taxpayer, the consolidated return viz,
GSTR-3 was to be auto-generated (for most part), and tax liability paid.
However, the envisaged system could not be operationalized.

6.20 INDIRECT TAXES
Presently, suppliers are required to file GSTR-1 (Statement of details of

outward supplies), the details of which get auto-populated in GSTR-2A
of the recipient for viewing. Further, GSTR-2B, an auto-drafted ITC
statement, is also generated for the taxpayer based on GSTR-1 filed
by the supplier. Basis the details available in GSTR-2A and GSTR-2B,
the taxpayer takes provisional ITC on self-assessment basis in GSTR-3B
for discharging the tax liability.
(d) Filing of return [Section 16(2)(d)]
The registered person taking the ITC must have filed his return under
section 39. Presently, a summary return in form GSTR-3B is being filed
on monthly basis. Thus, a taxpayer should file GSTR-3B to avail ITC on
eligible inward supplies.
(iii) Goods received in lots: ITC available only on receipt of last lot
[First proviso to section 16(2)]
In case the goods covered under an invoice are not received in a single
consignment but are received in lots / instalments, ITC can be taken only upon
receipt of the last lot / instalment.
(3) XYZ enters into a contract with ABC for supply of 10 MT of a
chemical for ` 1,18,000 (inclusive of GST of ` 18,000) in the month
of August. The chemical is to be delivered in lots over a period of
three months. ABC raises the invoice for the entire amount in August and
XYZ also makes the payment in the same month but the supply is completed
in November. Though XYZ paid the full tax as early as August, it can take the
ITC of the same only on receipt of last instalment of the chemical in the month
of November.
(iv) Payment for the invoice to be made within 180 days [Second
proviso to section 16(2) read with rule 37 of CGST Rules]
The registered person must pay to the supplier, the value of the goods and/or
services along with the tax within 180 days from the date of issue of invoice. In
the event of failure to do so, the corresponding credits availed by the registered
person would be added to his output tax liability, with interest. Interest will be
paid @ 18% from the date of availing credit till the date when the amount
added to the output tax liability is paid.
However, once the recipient makes the payment of value of goods and/or
services along with tax, he will be entitled to avail the credit again without

any time limit [See discussion on time limit for availing credit under point (vi)].
In case part-payment has been made, proportionate credit would be allowed.
Exceptions
This condition of payment of value of supply plus tax within 180 days does
not apply in the following situations:
a. Supplies on which tax is payable under reverse charge
b. Deemed supplies without consideration
c. Additions made to the value of supplies on account of supplier’s liability,
in relation to such supplies, being incurred by the recipient of the supply
Under situations given in points (b) & (c), the value of supply is deemed to
have been paid.
(4) Due to a quality dispute, PZP Ltd withheld payment on a
machine supplied by a vendor till it could be rectified. Over 180
days went by in this dispute. The credit taken by PZP on the
invoice got added to the output tax liability of PZP and thus, it had
to pay back the credit. Only after the vendor rectified the machine and PZP
released the payment, could PZP take the credit again.
(v) If depreciation claimed on tax component, ITC not allowed
[Section 16(3)]
If the person taking the ITC on capital goods and plant and machinery has
claimed depreciation on the tax component of the cost of the said items
under the Income-tax Act 1961, the ITC on the said tax component shall not
be allowed. Thus, in respect of the tax paid on such items, dual benefit cannot
be claimed under Income-tax Act, 1961 and GST laws simultaneously. In other
words, either depreciation on the tax component can be claimed under
Income Tax Act or ITC of such tax paid can be availed under GST laws.
(vi) Time limit for availing ITC: Due date of filing of return for the
month of September of succeeding financial year or date of
filing of annual return, whichever is earlier [Section 16(4)]
ITC on invoices pertaining to a financial year or debit notes relating to
invoices pertaining to a financial year can be availed any time till the due date
of filing of the return for the month of September of the succeeding financial
year or the date of filing of the relevant annual return, whichever is earlier.
It may be noted that the return for the month of September is to be filed by

6.22 INDIRECT TAXES
20th October and annual return of a financial year is to be filed by 31st

December of the succeeding financial year.
So, the upper time limit for taking ITC is 20th October of the next financial
year or the date of filing of annual return, whichever is earlier. The underlying
reasoning for this restriction is that no change in return is permitted after
September of next financial year. If annual return is filed before the month
of September, then no change can be made after filing of annual return.
Exception
The time limit u/s 16(4) does not apply to claim for re-availing of credit that
had been reversed earlier.
(5) Hercules Machinery delivered a machine to XYZ in the month
of January under Invoice no. 49 dated 28th January for ` 4,15,000
plus GST and undertook trial runs and calibration of the machine
as per the requirements of XYZ. The amount chargeable for the
post-delivery activities was covered in a debit note raised in the month of
April for ` 50,000 plus GST. XYZ did not file its annual return till the month
of October.
Though the debit note is received in the next financial year, it relates to an
invoice received in the preceding financial year. Therefore, the time limit for
taking ITC available on ` 50,000 as well as on ` 4,15,000 is 20th October, earlier
of the date of filing the annual return for the preceding financial year or the
return for the month of September.
(vii) Restriction of ITC in proportion of (i) taxable supplies (ii)
business purposes [Sub-sections (1) and (2) of section 17]
ITC is restricted in proportion of the use of the goods and/or services (i) in
the taxable and / or zero-rated part of the supply (ii) for business purposes.
This is elaborated in heading (4) below.
(viii)ITC not allowed on certain supplies [Section 17(5)]
ITC has been blocked for specified goods and services. This is elaborated in
heading (4) below.

4. APPORTIONMENT OF CREDIT & BLOCKED CREDITS

[SECTION 17]
Section 17 Apportionment of credit and blocked credits

Sub-section Clause Apportionment of credit and blocked credits
(1) Where the goods or services or both are used by the registered
person partly for the purpose of any business and partly for other
purposes, the amount of credit shall be restricted to so much of the
input tax as is attributable to the purposes of his business.
(2) Where the goods or services or both are used by the registered
person partly for effecting taxable supplies including zero-rated
supplies under this Act or under the Integrated Goods and Services
Tax Act and partly for effecting exempt supplies under the said Acts,
the amount of credit shall be restricted to so much of the input tax
as is attributable to the said taxable supplies including zero-rated
supplies.
(3) The value of exempt supply under sub-section (2) shall be such as
may be prescribed, and shall include supplies on which the recipient
is liable to pay tax on reverse charge basis, transactions in
securities, sale of land and, subject to clause (b) of paragraph 5 of
Schedule II, sale of building.
Explanation.— For the purposes of this sub-section, the expression
‘‘value of exempt supply’’ shall not include the value of activities or
transactions specified in Schedule III, except those specified in
paragraph 5 of the said Schedule.
(4) A banking company or a financial institution including a non-
banking financial company, engaged in supplying services by way
of accepting deposits, extending loans or advances shall have the
option to either comply with the provisions of sub-section (2), or
avail of, every month, an amount equal to fifty per cent. of the
eligible input tax credit on inputs, capital goods and input services
in that month and the rest shall lapse:

6.24 INDIRECT TAXES
Provided that the option once exercised shall not be withdrawn

during the remaining part of the financial year:
Provided further that the restriction of fifty per cent. shall not apply to
the tax paid on supplies made by one registered person to another
registered person having the same Permanent Account Number.
(5) Notwithstanding anything contained in sub-section (1) of section
16 and sub- section (1) of section 18, input tax credit shall not be
available in respect of the following, namely:—
(a) motor vehicles for transportation of persons having
approved seating capacity of not more than thirteen
persons (including the driver), except when they are used
for making the following taxable supplies, namely:—
(A) further supply of such motor vehicles; or
(B) transportation of passengers; or
(C) imparting training on driving such motor vehicles;
(aa) vessels and aircraft except when they are used––
(i) for making the following taxable supplies,
namely:—
(A) further supply of such vessels or aircraft; or
(B) transportation of passengers; or
(C) imparting training on navigating such vessels;
or
(D) imparting training on flying such aircraft;
(ii) for transportation of goods;
(ab) services of general insurance, servicing, repair and
maintenance in so far as they relate to motor vehicles,
vessels or aircraft referred to in clause (a) or clause (aa):
Provided that the input tax credit in respect of such
services shall be available—
(i) where the motor vehicles, vessels or aircraft referred
to in clause (a) or clause (aa) are used for the
purposes specified therein;

(ii) where received by a taxable person engaged—

(I) in the manufacture of such motor vehicles,
vessels or aircraft; or
(II) in the supply of general insurance services in
respect of such motor vehicles, vessels or
aircraft insured by him;
(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty
treatment, health services, cosmetic and plastic
surgery, leasing, renting or hiring of motor vehicles,
vessels or aircraft referred to in clause (a) or clause
(aa) except when used for the purposes specified
therein, life insurance and health insurance:
goods or services or both shall be available where
an inward supply of such goods or services or both
is used by a registered person for making an
outward taxable supply of the same category of
goods or services or both or as an element of a
taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre;
and
(iii) travel benefits extended to employees on vacation
such as leave or home travel concession:
goods or services or both shall be available, where
it is obligatory for an employer to provide the same
to its employees under any law for the time being
in force.
(c) works contract services when supplied for construction of
an immovable property (other than plant and machinery)
except where it is an input service for further supply of
works contract service;

6.26 INDIRECT TAXES
(d) goods or services or both received by a taxable person for

construction of an immovable property (other than plant
or machinery) on his own account including when such
goods or services or both are used in the course or
furtherance of business
Explanation.––For the purposes of clauses (c) and (d), the
expression “construction” includes re-construction,
renovation, additions or alterations or repairs, to the
extent of capitalisation, to the said immovable property
(e) goods or services or both on which tax has been paid
under section 10;
(f) goods or services or both received by a non-resident
taxable person except on goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by
way of gift or free samples; and
(i) any tax paid in accordance with the provisions of sections
74, 129 and 130.
(6) The Government may prescribe the manner in which the credit
referred to in sub-sections (1) and (2) may be attributed.
Explanation.–– For the purposes of this Chapter and Chapter VI, the
expression “plant and machinery” means apparatus, equipment, and
machinery fixed to earth by foundation or structural support that are
used for making outward supply of goods or services or both and
includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.
Chapter V: Input Tax Credit of the CGST Rules
Rule 38 Claim of credit by a banking company or a financial
institution
A banking company or a financial institution, including a non-
banking financial company, engaged in the supply of services by

way of accepting deposits or extending loans or advances that

chooses not to comply with the provisions of sub-section (2) of
section 17, in accordance with the option permitted under sub-
section (4) of that section, shall follow the following procedure,
namely,-
(a) the said company or institution shall not avail the credit of,-
(i) the tax paid on inputs and input services that are
used for non-business purposes; and
(ii) the credit attributable to the supplies specified in
sub-section (5) of section 17, in FORM GSTR-2;
(b) the said company or institution shall avail the credit of tax
paid on inputs and input services referred to in the second
proviso to sub-section (4) of section 17 and not covered
under clause (a);
(c) fifty per cent. of the remaining amount of input tax shall
be the input tax credit admissible to the company or the
institution and shall be furnished in FORM GSTR-2;
(d) the amount referred to in clauses (b) and (c) shall, subject
to the provisions of sections 41, 42 and 43, be credited to
the electronic credit ledger of the said company or the
institution.
Rule 42 Manner of determination of input tax credit in respect of
inputs or input services and reversal thereof
(1) The input tax credit in respect of inputs or input services, which
attract the provisions of sub-section (1) or sub-section (2) of section
17, being partly used for the purposes of business and partly for
other purposes, or partly used for effecting taxable supplies
including zero rated supplies and partly for effecting exempt
supplies, shall be attributed to the purposes of business or for
effecting taxable supplies in the following manner, namely,-
(a) the total input tax involved on inputs and input services in
a tax period, be denoted as ‘T’;

6.28 INDIRECT TAXES
(b) the amount of input tax, out of ‘T’, attributable to inputs

and input services intended to be used exclusively for the
purposes other than business, be denoted as ‘T1’;
(c) the amount of input tax, out of ‘T’, attributable to inputs
and input services intended to be used exclusively for
effecting exempt supplies, be denoted as ‘T2’;
(d) the amount of input tax, out of ‘T’, in respect of inputs and
input services on which credit is not available under sub-
section (5) of section 17, be denoted as ‘T3’;
(e) the amount of input tax credit credited to the electronic
credit ledger of registered person, be denoted as ‘C1’ and
calculated as-
C1 = T- (T1+T2+T3);
(f) the amount of input tax credit attributable to inputs and
input services intended to be used exclusively for effecting
supplies other than exempted but including zero rated
supplies, be denoted as ‘T4’;
(g) ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by
the registered person at the invoice level in FORM GSTR-2
and at summary level in FORM GSTR-3B;
(h) input tax credit left after attribution of input tax credit
under clause (f) shall be called common credit, be denoted
as ‘C2’ and calculated as-
C2 = C 1- T4;
(i) the amount of input tax credit attributable towards exempt
supplies, be denoted as ‘D1’ and calculated as-
D1= (E ÷ F) × C2
where,
‘E’ is the aggregate value of exempt supplies during the tax
period, and
‘F’ is the total turnover in the State of the registered person
during the tax period:
Provided that where the registered person does not have
any turnover during the said tax period or the aforesaid
information is not available, the value of ‘E/F’ shall be

calculated by taking values of ‘E’ and ‘F’ of the last tax

period for which the details of such turnover are available,
previous to the month during which the said value of ‘E/F’
is to be calculated;
Explanation: For the purposes of this clause, it is hereby
clarified that the aggregate value of exempt supplies and
the total turnover shall exclude the amount of any duty or
tax levied under entry 84 and entry 92A of List I of the
Seventh Schedule to the Constitution and entry 51 and 54
of List II of the said Schedule;
(j) the amount of credit attributable to non-business purposes
if common inputs and input services are used partly for
business and partly for non-business purposes, be denoted
as ‘D2’, and shall be equal to five per cent. of C2; and
(k) the remainder of the common credit shall be the eligible
input tax credit attributed to the purposes of business and
for effecting supplies other than exempted supplies but
including zero rated supplies and shall be denoted as ‘C3’,
where,-
C3 = C2 - (D1+D2);
(l) the amount ‘C3’, ‘D1’ and ‘D2’ shall be computed separately
for input tax credit of central tax, State tax, Union territory
tax and integrated tax and declared in FORM GSTR-3B or
through FORM GST DRC-03;
(m) the amount equal to aggregate of ‘D1’ and ‘D2’ shall be
reversed by the registered person in FORM GSTR-3B or
through FORM GST DRC-03:
Provided that where the amount of input tax relating to inputs or
input services used partly for the purposes other than business and
partly for effecting exempt supplies has been identified and
segregated at the invoice level by the registered person, the same shall
be included in ‘T1’ and ‘T2’ respectively, and the remaining amount of
credit on such inputs or input services shall be included in ‘T4’.
(2) The input tax credit determined under sub-rule (1) shall be
calculated finally for the financial year before the due date for

6.30 INDIRECT TAXES
furnishing of the return for the month of September following the

end of the financial year to which such credit relates, in the manner
specified in the said sub-rule and,-
(a) where the aggregate of the amounts calculated finally in
respect of ‘D1’ and ‘D2’ exceeds the aggregate of the
amounts determined under sub-rule (1) in respect of ‘D1’
and ‘D2’, such excess shall be reversed by the registered
person in FORM GSTR-3B or through FORM GST DRC-03
in the month not later than the month of September
following the end of the financial year to which such credit
relates and the said person shall be liable to pay interest on
the said excess amount at the rate specified in sub-section
(1) of section 50 for the period starting from the first day of
April of the succeeding financial year till the date of
payment; or
(b) where the aggregate of the amounts determined under sub-
rule (1) in respect of ‘D1’ and ‘D2’ exceeds the aggregate of
the amounts calculated finally in respect of ‘D1’ and ‘D2’,
such excess amount shall be claimed as credit by the
registered person in his return for a month not later than
the month of September following the end of the financial
year to which such credit relates.
Rule 43 Manner of determination of input tax credit in respect of
capital goods and reversal thereof in certain cases
(1) Subject to the provisions of sub-section (3) of section 16, the input
tax credit in respect of capital goods, which attract the provisions
of sub-sections (1) and (2) of section 17, being partly used for the
purposes of business and partly for other purposes, or partly used
for effecting taxable supplies including zero rated supplies and
partly for effecting exempt supplies, shall be attributed to the
purposes of business or for effecting taxable supplies in the
following manner, namely,-
(a) the amount of input tax in respect of capital goods used or
intended to be used exclusively for non-business purposes
or used or intended to be used exclusively for effecting
exempt supplies shall be indicated in FORM GSTR-2 and

FORM GSTR-3B and shall not be credited to his electronic

credit ledger;
(b) the amount of input tax in respect of capital goods used or
intended to be used exclusively for effecting supplies other
than exempted supplies but including zero-rated supplies
shall be indicated in FORM GSTR-2 and FORM GSTR-3B
and shall be credited to the electronic credit ledger;
(c) the amount of input tax in respect of capital goods not
covered under clauses (a) and (b), denoted as ‘A’, being
the amount of tax as reflected on the invoice, shall credit
directly to the electronic credit ledger and the validity of
the useful life of such goods shall extend upto five years
from the date of the invoice for such goods:
Provided that where any capital goods earlier covered
under clause (a) is subsequently covered under this
clause, input tax in respect of such capital goods denoted
as ‘A’ shall be credited to the electronic credit ledger
subject to the condition that the ineligible credit
attributable to the period during which such capital
goods were covered by clause (a), denoted as ‘Tie’, shall
be calculated at the rate of five percentage points for
every quarter or part thereof and added to the output tax
liability of the tax period in which such credit is claimed;
Provided further that the amount ‘Tie’ shall be
computed separately for input tax credit of central tax,
State tax, Union territory tax and integrated tax and
declared in FORM GSTR-3B.
Explanation.- An item of capital goods declared under
clause (a) on its receipt shall not attract the provisions of
sub-section (4) of section 18, if it is subsequently covered
under this clause.
(d) the aggregate of the amounts of ‘A’ credited to the
electronic credit ledger under clause (c) in respect of
common capital goods whose useful life remains

6.32 INDIRECT TAXES
during the tax period, to be denoted as ‘Tc’, shall be the

common credit in respect of such capital goods:
Provided that where any capital goods earlier covered
under clause (b) are subsequently covered under clause
(c), the input tax credit claimed in respect of such
capital good(s) shall be added to arrive at the
aggregate value ‘Tc’;
(e) the amount of input tax credit attributable to a tax period
on common capital goods during their useful life, be
denoted as ‘Tm’ and calculated as:-
Tm= Tc÷60
Explanation.- For the removal of doubt, it is clarified
that useful life of any capital goods shall be considered
as five years from the date of invoice and the said
formula shall be applicable during the useful life of the
said capital goods.
(g) the amount of common credit attributable towards
exempted supplies, be denoted as ‘Te’, and calculated as:
Te= (E÷ F) x Tr 6
where,
‘E’ is the aggregate value of exempt supplies, made, during
the tax period, and
‘F’ is the total turnover in the State of the registered person
during the tax period:
Provided further that where the registered person does not
have any turnover during the said tax period or the
aforesaid information is not available, the value of ‘E/F’
shall be calculated by taking values of ‘E’ and ‘F’ of the last
tax period for which the details of such turnover are
available, previous to the month during which the said
value of ‘E/F’ is to be calculated;
6
Clause (f) of the rule which contained the provisions for computation of ‘Tr’ has been omitted
vide Notification No. 16/2020 CT dated 23.03.2020. This has rendered the formula given in
clause (g) otiose as the term ‘Tr’ is now nowhere defined in the amended rule.

Explanation: For the purposes of this clause, it is hereby

clarified that the aggregate value of exempt supplies and
the total turnover shall exclude the amount of any duty or
tax levied under entry 84 and entry 92A of List I of the
Seventh Schedule to the Constitution and entry 51 and 54
of List II of the said Schedule;
(h) the amount Te along with the applicable interest shall,
during every tax period of the useful life of the concerned
capital goods, be added to the output tax liability of the
person making such claim of credit.
(i) The amount Te shall be computed separately for central tax,
State tax, Union territory tax and integrated tax and declared
in FORM GSTR-3B.
Explanation:-For the purposes of rule 42 and this rule, it is hereby clarified that the
aggregate value of exempt supplies shall exclude:-
(b) the value of services by way of accepting deposits, extending loans
or advances in so far as the consideration is represented by way of
interest or discount, except in case of a banking company or a
financial institution including a non-banking financial company,
engaged in supplying services by way of accepting deposits,
extending loans or advances; and
(c) the value of supply of services by way of transportation of goods by
a vessel from the customs station of clearance in India to a place
outside India.
Explanation.- For the purposes of this Chapter,-
(1) the expressions “capital goods” shall include “plant and machinery”
as defined in the Explanation to section 17;
(2) for determining the value of an exempt supply as referred to in sub-
section (3) of section 17-
(a) the value of land and building shall be taken as the same
as adopted for the purpose of paying stamp duty; and
(b) the value of security shall be taken as one per cent. of the
sale value of such security.

6.34 INDIRECT TAXES
ANALYSIS
Section 17 requires apportionment and concomitant restriction of ITC in two
situations as also blocking of ITC on specified inward supplies.
A. Apportionment of ITC [Sub-sections (1) and (2) of section 17

read with rule 42 and rule 43 of CGST Rules]
The fundamental principle of credit scheme under value added tax is that tax
paid on inputs, input services and capital goods can be availed as credit only
when the output is taxable. Thus, when tax is not payable on output, credit
cannot be availed.
Accordingly, ITC under GST can be availed and utilised for payment of tax on
output supply. Consequently, ITC cannot be availed when tax is not payable
on output supply, i.e. on exempt supply. The only exception to the above
principle is ‘zero rated supply, where ITC is available even if no tax is payable
on output supply.
If a taxable person is making both taxable and exempt supply, he is entitled
to full credit of ITC in respect of inputs, input services and capital goods
exclusively used for taxable supply and no credit at all for inputs, input
services and capital goods exclusively used for exempt supply. If common
inputs, input services and capital goods are used for taxable as well as exempt
supply, only proportionate ITC attributable to the taxable supply is available.
The common ITC is apportioned in the ratio of value of taxable supply and
exempt supply. Elaborate provisions have been made in sub-sections (1) and
(2) of section 17 and rules 42 and 43 for calculation of such proportionate
ITC. Such provisions are discussed in detail in the ensuing pages.
The situations requiring apportionment are as follows:
(a) when the goods and / or services are used by the registered person
partly for the purpose of business (see the definition of business) and
partly for other purposes [Section 17(1)]; and
(b) when the goods and / or services are used by the registered person
partly for making taxable supplies including zero-rated supplies and
partly for making exempt supplies (see the definition of exempt
supplies) [Section 17(2)].

In both the above situations, full ITC on inward supplies cannot be taken; only
proportionate ITC is allowed in such scenarios. Where goods and/or services
are used partly for non-business purposes and partly for business purposes,
ITC attributable only to business purposes can be taken by the registered
person. Similarly, where goods and/or services are partly used for making
exempt supplies including zero rated supplies and partly for taxable supplies,
ITC attributable to taxable supplies and zero rated supplies can be taken by
the registered person.
Section 16(2) of the IGST Act specifies that ITC may be

availed on inward supplies for making zero-rated supply,
notwithstanding the exempt nature of the zero-rated
supply. Zero-rated supply is an expression that covers two
kinds of supplies: (i) exports, and (ii) supplies to a SEZ unit or SEZ
developer. Therefore, ITC is available on goods and / or services used
for supplies made in the course of export or to an SEZ unit or SEZ
developer.
(6) A registered person is in the business of manufacturing shoes.

He gave 50 pairs of shoes to his friends free of cost. ITC on inputs
and input services attributable to such 50 pair of shoes being used
for non-business purposes will not be available.
(7) A registered person manufactures a product ‘X’ chargeable to

18% GST, a product ‘Y’ chargeable to NIL rate of tax and a product ‘Z’
which is exported without payment of tax under bond. All the three
products are manufactured from common inputs and input services. ITC on
inputs and input services attributable to product ‘Y’ being an exempt supply, will
not be available.
(i) Methodology of apportionment of credit on inputs and input
services and reversal thereof [Rule 42 of the CGST Rules]
In many situations, the amount of input tax involved in exempt /non-
business use is not easily discernible, as common goods and/or services
are used for (i) making taxable supplies including zero rated supplies
and exempt supplies and (ii) business and non-business purposes.

6.36 INDIRECT TAXES
Rule 42 of the CGST Rules provides the methodology for apportionment

of ITC on inputs and input services and reversal of ineligible credit as
follows:
Step 1 – Compute common credit
Total input tax involved on inputs & input services in a T

tax period
Less: Input tax on inputs & input services that are (T1)
intended to be used exclusively for non-business
purposes
Less: Input tax on inputs & input services that are (T2)
intended to be used exclusively for exempt supplies
Less: Input tax on inputs & input services which are (T3)
ineligible for credit [blocked credits- see discussion
under point (B)]
ITC credited to Electronic Credit Ledger C1
Less: ITC on inputs & input services that are intended (T4)
to be used exclusively for taxable supplies including
zero rated supplies
Common ITC available for apportionment C2
 T1, T2, T3 and T4 will be determined and declared by the registered

person at the invoice level in GSTR 2 and summary level in GSTR-
3B.
 Where ITC on inputs and input services used partly for non-
business purposes and exempt supplies can be segregated at
invoice level, the same will be added to T1 and T2 respectively and
the balance credit will be added in T4.
 The portion identified as pertaining to taxable supplies in C2 will
be allowed as ITC.
Example on how to arrive at the amount of common credit C2
Making an assumption that Hawai slippers are exempted, take a case of
Eezee Footwear, manufacturer of two varieties of Hawai slippers and

five varieties of other sandals and shoes. Dyes are used in the
manufacture of all footwear. However, bright pink is used only for one
of the Hawai varieties, and black is used only for the sandals and shoes.
Blue and yellow are used for all the varieties. Brown is used for non-
business purposes.
In inward supplies during the month -
Input tax on brown dye: ` 10,000 (This is T1)
Input tax on bright pink dye: ` 90,000. (This is T2)
Input tax on black dye: ` 40,000. (This is T4)
Input tax on blue dye: ` 1,00,000
Input tax on yellow dye: ` 15,000
Total input tax: ` 2,55,000 (This is T)
Total input tax reduced by (T1 + T2 + T4, i.e., by ` 1,40,000) is ` 1,15,000.
Amount of common credit (C2) is ` 1,15,000. This has to be apportioned
as given below in Step 2.
Step 2 – Compute credit attributable to exempt supplies
(ineligible credit) by apportionment of common credit
 Apportion C2 into credit attributable to exempt supplies D1 as under:
D1 = (E/F) x C2
Where
E = Aggregate value of exempt supplies during the tax period
F = Total turnover in the State during the tax period
Notes:
(i) If the registered person does not have any turnover during the said
tax period, or the above information is not available, the values for
the last tax period may be used.
(ii) Here, exempt supplies include reverse charge supplies, transactions
in securities, sale of land and sale of building when entire
consideration is received either after issuance of completion
certificate by the competent authority or its first occupation,
whichever is earlier. Thus, ITC attributable to such supplies will need
to be reversed.

6.38 INDIRECT TAXES
(iii) Here, exempt supplies exclude-

(a) transactions/activities specified in Schedule III except
sale of land and sale of building as specified in point (ii)
above.
(b) supply of services by way of accepting deposits,
extending loans or advances where the consideration is
either interest or discount. However, value of such
services is included in the exempt supply when the same
are provided by a banking company or a financial
institution including a NBFC.
(c) transportation of goods by a vessel from the customs
station of clearance in India to a place outside India.
Thus, ITC attributable to such supplies need not be reversed.
(iv) Aggregate value of exempt supplies and total turnover excludes
the central excise duty, State excise duty, central sales tax and
VAT.
(v) The value of exempt supply in respect of land and building is the
value adopted for paying stamp duty and for security is 1% of the
Presently, (i) central excise duty is leviable on manufacture/production

of tobacco, petroleum crude, diesel, petrol, ATF and natural gas (ii) State
excise duty is leviable on manufacture/production of alcoholic liquor,
opium, Indian hemp and narcotics, and (iii) VAT/CST is leviable on intra-
State/inter-State sale of petroleum crude, diesel, petrol, ATF, natural
gas and alcoholic liquor. Petroleum crude, diesel, petrol, ATF, natural
gas are presently not taxable under GST and alcoholic liquor is outside
the ambit of GST. Thus, supply of both these products
(petrol/petroleum products and alcoholic liquor) being non-taxable
under GST, will be exempt supplies u/s 2(47) and taxes/duties (as
mentioned above) leviable thereon will be excluded from the value
thereof for the purpose of apportionment of credit.
Example on how to apportion common credit into credit
attributable to exempt supplies
Ezee Footwear, which manufactures two varieties of exempt Hawai
slippers and five varieties of taxable sandals and shoes, has the

following turnover in October and has ` 1,15,000 common credit that

has to be apportioned:
Turnover of Hawai 1 plus Hawai 2: ` 3 crores (This is ‘E’)
Turnover of all varieties of taxable shoes and sandals: ` 2 crore
Total turnover of all footwear during the month: ` 5 crores (This is ‘F’)
No inputs/input services are used for non-business purposes.
(3,00,00,000 /5,00,00,000) x 1,15,000= ` 69,000 is the input tax that
pertains to exempt supply (D1).
 Compute credit attributable to non-business purposes D2 as under
D2 = 5% of C2 (common credit)
Step 3 – Compute eligible credits
Compute C3 attributable to business purposes and taxable supplies
including zero rated supplies as under:
C3 = C2 - (D1 + D2)
Step 4 – Restrict ineligible credits
Reverse D1 + D2
 Compute C3 separately for ITC of CGST, SGST/ UTGST and IGST.

 Compute ∑ (D1 + D2) for the whole financial year, by taking
exempted turnover and aggregate turnover for the whole
financial year, before the due date for filing the return for
September in the following financial year.
 If ∑ (D1 + D2) > the amount already reversed every month, the
differential amount has to be reversed in any month till
September in the following financial year and interest @ rate 18%
should be paid on such differential amount from 1st April of
succeeding year till the date of payment.
 If the amount reversed every month > ∑ (D1 + D2), the additional
amount paid has to be claimed back as credit in the return of the
month not later than September in the next financial year.

6.40 INDIRECT TAXES
(ii) Methodology of apportionment of credit of capital goods and

reversal thereof [Rule 43 of the CGST Rules]
Rule 43 of the CGST Rules provides the methodology for apportionment
of ITC on capital goods and reversal of ineligible credit as follows:
Step 1 - Determine common credit ‘Tc’ on capital goods as under:
(i) Identify input tax on capital goods used/ intended to be used

exclusively for non-business purposes or making exempt supplies
and declare the same in GSTR 2. Such amount will not be credited
to electronic credit ledger [ECrL].
(ii) Identify input tax on capital goods used/ intended to be used
exclusively for making taxable supplies including zero rated
supplies and declare the same in GSTR 2 and GSTR-3B. Such
amount will be credited to ECrL.
(iii) Identify input tax on capital goods not covered under (i) and
(ii) above [i.e., the capital goods which are used/intended to
be used commonly for making taxable and/or zero rated
supplies as well as exempt supplies and/or non-business
purposes] and denote the same as ‘A’. Such amount (as
reflected on the invoice) will be credited to ECrL. The useful
life of such capital goods will be taken as 5 years from the
date of invoice.
(iv) Change from exclusive use for non-business purpose/exempt
supplies to common use: Where capital goods which were
initially covered under (i) above get subsequently covered
under (iii), credit input tax in respect of the same, denoted as
‘A’, in the ECrL.
Simultaneously, compute the ineligible credit attributable to
the period during which such capital goods were used for non-
business purpose/making exempt supplies @ 5% per quarter
or part thereof and denote the same as ‘Tie’. Add such ‘Tie’ to
the output tax liability of the tax period in which credit on
such capital goods is claimed.
(v) Add together the amounts of ‘A’ credited to ECrL in respect of
common capital goods whose useful life remains during the
tax period to arrive at common credit ‘Tc’.

(vi) Change from exclusive use for taxable including zero rated
supplies to common use: Where capital goods which were
initially covered under (ii) above get subsequently covered
under (iii), add input tax claimed in respect of the same to
aggregate value of ‘Tc’.
Step 2 - Determine common credit during the useful life of capital

goods for a tax period as under and denote the same as ‘Tm’:
Tm = Tc ÷ 60
Step 3 - Apportion common credit attributable to exempt

supplies as under:
Te = (E ÷ F) x Tr
Where
E = Aggregate value of exempt supplies made during the tax period
F = Total turnover in the State during the tax period
Notes:
(i) Tm is to be computed during the useful life of capital goods
which is five years from the date of invoice.
(ii) If the registered person does not have any turnover during the said
tax period, or the above information is not available, the values for
the last tax period may be used.
(iii) Here, exempt supplies include reverse charge supplies, transactions
in securities, sale of land and sale of building when entire
consideration is received either after issuance of completion
certificate by the competent authority or its first occupation,
whichever is earlier. Thus, ITC attributable to such supplies will need
to be reversed.
(iv) Here, exempt supplies exclude-
(a) transactions/activities specified in Schedule III except
sale of land and sale of building as specified in point (ii)
above.

6.42 INDIRECT TAXES
(b) supply of services by way of accepting deposits,

extending loans or advances where the consideration is
either interest or discount. However, value of such
services is included in the exempt supply when the same
are provided by a banking company or a financial
institution including a NBFC.
(c) transportation of goods by a vessel from the customs
station of clearance in India to a place outside India.
Thus, ITC attributable to such supplies need not be reversed.
(v) Aggregate value of exempt supplies and total turnover excludes the
central excise duty, State excise duty, central sales tax and VAT.
(vi) Amount of Tie and Te are to be computed separately for CGST,
SGST/UTGST and IGST and declared in GSTR 3B.
(vii) The value of exempt supply in respect of land and building is the
value adopted for paying stamp duty and for security is 1% of the
Step 4: Restrict ineligible credit

Add Te to the output tax liability along with applicable interest during
every tax period of the useful life of the capital goods concerned.
(iii) Optional method for banks etc. [Section 17(4) read with rule 38]
 As an alternative to the above method, a banking company or a
financial institution including a NBFC, which accepts deposits, or
extends loans or advances, has the option to limit its availment of
ITC to 50% of the eligible ITC on inputs, capital goods and input
services each month and the remaining ITC shall lapse.
 Credit of tax paid on inputs and input services that are used for
non-business purposes and items mentioned u/s section 17(5)
[blocked credits] cannot be availed.
 The restriction of availing 50% ITC shall not apply to the tax paid
on supplies procured from another registration within the same
entity i.e., 100% credit of such tax can be availed.
 The option once exercised cannot be changed during the
remaining part of the financial year.

B. Blocked credits [Section 17(5)]

ITC of tax paid on almost every inputs and input services used for supply of
taxable goods and/or services is allowed under GST except a small list of items
provided u/s 17(5). Thus, ITC on such items is not allowed even though the same
may qualify as inputs, input services or capital goods and are used in the course
or furtherance of business.
The negative list covers mainly items of personal consumption, inputs and input
services use of which results into formation of an immovable property (except
plant and machinery), telecommunication towers, pipelines laid outside the
factory premises, etc. and taxes paid as a result of detection of evasion of taxes.
The various goods and/or services on which credit is blocked are discussed
hereunder:
(i) Motor vehicles and other conveyances and related services
(insurance, servicing and repair and maintenance)
Motor vehicles and conveyances have been defined in the CGST Act [See
definition under the heading Relevant Definitions]. Motor vehicles exclude –
 vehicle running upon fixed rails
 special purpose vehicles for being used in a factory or any
enclosed premises
 vehicle with less than 4 wheels fitted with engine capacity of upto
25cc – (Thus, railways, two/three wheelers with engine capacity of
upto 25cc, bicycle etc. do not fall in the definition of motor
vehicle.)
Broadly, ITC is blocked on motor vehicles, vessels and aircrafts used for
passenger transportation with certain exceptions. Further, ITC is also
blocked on certain services relating to motor vehicles, vessels and
aircrafts namely, insurance, servicing and repair and maintenance. The
basic principle here is that the motor vehicles, aircrafts and vessels on
which ITC is blocked, the ITC on services of insurance, servicing and
repair and maintenance pertaining to such motor vehicles, vessels and
aircrafts is also blocked.
The blocked credits relating to motor vehicles, vessels, aircrafts and
related services are discussed hereunder:

6.44 INDIRECT TAXES
S. Goods and/or Exceptions to goods Remarks

No. services on and/or services
which credit is mentioned in
blocked column (2) on which
credit is allowed
(1) (2) (3) (4)
(i) Motor vehicles Ineligible motor  ITC on ineligible

for vehicles when used motor vehicles
transportation for any of the used for any
of persons with following eligible purpose other
seating purposes - than the eligible
capacity ≤ 13  making further purposes is not
persons taxable supply of allowed.
(including the such motor  ITC on motor
driver) – vehicles; vehicles for
Referred to as transportation of
 making taxable
ineligible persons with
supply of
motor vehicle seating capacity >
transportation of
in this table 13 persons
passengers;
(including the
 making taxable
driver) used for
supply of
any purpose is
imparting training
allowed.
on driving such
motor vehicles.  ITC on motor
vehicles other
than ineligible
motor vehicles
(e.g. motor vehicle
used for
transportation of
goods, dumpers,
tippers etc.) used
for any purpose is
allowed.
(ii) Vessels and Vessels and aircraft ITC on vessels and

aircrafts when used for any of aircrafts used for any

the following eligible purpose other than

purposes- the eligible purposes
 making further
taxable supply of
such vessels or
aircraft;
 making taxable
supply of
transportation of
passengers;
 making taxable
supply of
imparting training
on navigating
such vessels;
 making taxable
supply of
imparting training
on flying such
aircrafts;
 transportation of
goods.
(iii) General  Such services  ITC is not allowed

insurance, relating to on services of
servicing, ineligible motor general insurance,
repair and vehicles, vessels servicing, repair
maintenance or aircraft when and maintenance
relating to: used for eligible relating to motor
 Ineligible purposes vehicles, vessels or
motor  Such services aircraft, ITC on
vehicles when received by- which is not
allowed.
 Vessels o Manufacturer
of ineligible  ITC is allowed on
 Aircraft services of general
motor vehicles,
insurance,

6.46 INDIRECT TAXES
vessels or servicing, repair

aircraft; or and maintenance
o Supplier of relating to motor
general vehicles, vessels or
insurance aircraft, ITC on
services in which is allowed.
respect of
ineligible
motor vehicles,
vessels or
aircraft insured
by him
(iv) Leasing,  Such services  ITC on leasing,

renting or when used for renting or hiring
hiring of motor making an of motor vehicles,
vehicles, outward taxable vessels or aircraft
vessels or supply of the on which ITC is
aircraft on same category of allowed, is also
which ITC is not services or as an allowed.
allowed element of a  ITC on such
taxable composite services is allowed
or mixed supply in the case of sub-
 Such services contracting, i.e.
when provided by when such
an employer to its services are used
employees under by the taxpayer
a statutory who is in the same
obligation line of business.
(8) ITC on cars purchased by a manufacturing company for

official use of its employees is blocked.
(9) ITC on cars purchased by a car dealer for sale to
customers is allowed.
(10) ITC on cars purchased by a company engaged in renting out cars
for transportation of passengers, is allowed.
(11) ITC on cars purchased by a car driving school is allowed.

(12) ITC on buses (seating capacity for 24 persons) purchased by a

company for transportation of its employees from their residence to
office and back, is allowed.
(13) ITC on trucks purchased by a company for transportation of its
finished goods is allowed.
(14) ITC on aircraft purchased by a manufacturing company for official
use of its CEO is blocked.
(15) ITC on aircraft purchased by an Aviation School providing training
on non-flying aircrafts, is allowed.
(16) ITC on general insurance taken on a car used by employees of a
manufacturing company for official purposes, is blocked.
(17) ITC on maintenance & repair services availed by a company for a
truck used for transporting its finished goods, is allowed.
(18) ITC on general insurance services taken on cars manufactured by
a car manufacturing company is allowed.
(ii) Food & beverages, outdoor catering, health services and other
services
S. Goods and/or Exceptions to Remarks

No. services on goods and/or
which credit is services
blocked mentioned in
column (2) on
which credit is
allowed
(1) (2) (3) (4)
(i)  Food and  Such goods  ITC on such goods
beverages and/or services and/or services is
 Outdoor when used by a allowed in the case
catering registered of sub-contracting,
 Beauty person for i.e. when such
treatment making an goods and/or
 Health outward taxable services are used by
services supply of the the taxpayer who is
same category in the same line of

6.48 INDIRECT TAXES
 Cosmetic of goods and/or business, e.g.

and plastic services or as an outdoor catering
surgery element of a service availed by
 Life taxable another outdoor
insurance composite or caterer.
and health mixed supply  When such goods
insurance  Such goods and/or services are
and/or services provided by the
when provided employer to its
by an employer employees without
to its employees any statutory
under a statutory obligation, ITC
obligation thereon is blocked.
(ii) Membership of Such services when When such goods

a club, health provided by an and/or services are
and fitness employer to its provided by the
centre employees under a employer to its
statutory employees without
obligation any statutory
obligation, ITC
thereon is blocked.
(iii) Travel benefits Such services when When such goods
extended to provided by an and/or services are
employees on employer to its provided by the
vacation such employees under a employer to its
as leave or statutory employees without
home travel obligation any statutory
concession obligation, ITC
thereon is blocked.
(19) A manufacturing company purchases food items for

being served to its customers, free of cost. ITC on such
goods is blocked.
(20) AB & Co., a caterer of Amritsar, has been awarded a contract for
catering in a marriage to be held at Ludhiana. The firm has given the
contract for supply of snacks, to be served in the marriage, to CD &
Sons, a local caterer of Ludhiana. ITC on such outdoor catering services
availed by AB & Co., is allowed.

(21) ITC on outdoor catering services availed by a garment exporter for a

marketing event organised for its prospective customers, is blocked.
(22) Outdoor catering service is availed by a company to run a free
canteen in its factory. The Factories Act, 1948 requires the company to
set up a canteen in its factory. ITC on such outdoor catering is allowed.
(23) The Managing Director of a company has taken membership of a club,
the fees for which is paid by the company. ITC on such service is blocked.
(24) A company avails services of a travel agency for organizing a free
vacation for its top performing employees. ITC on such services is blocked.
(iii) Works contract services for construction of immovable property
[Clause (c) of section 17(5)]
One major input service ITC on which is blocked is input service relating
to construction activity like office building, factory building etc. (except
in case of persons like builders, developers and contractors who are
undertaking construction for others). However, ITC is available for
routine construction related services like repairs, maintenance,
renovation etc. of office and factory building. Thus, broadly, ITC in
respect of construction services is not available when the expenses are
capitalised in books of account. Here, it needs to be noted that
capitalisation of an expense does not depend on whether the taxpayer
intends to avail ITC, but on the basis of Accounting Standards and GAAP.
Works contract has been defined in the CGST Act [See definition under
the heading Relevant Definitions]. Essentially works contract is a
composite supply involving both goods and services. Under the
erstwhile laws, definition of works contract included work in relation to
both movable and immovable properties. However, under GST law, the
ambit of works contract has been confined only to immovable
property.
Meaning of immovable property

Immovable property has not been defined under the GST law. Therefore,
we will have to look for the definition of immovable property in other
laws. Section 3(26) of the General Clauses Act, 1897, defines the term
immovable property to include land, benefits to arise out of land, and
things attached to the earth, or permanently fastened to anything
attached to the earth.

6.50 INDIRECT TAXES
The term “attached to the earth” is defined in section 3 of the Transfer of

Property Act, 1882 to mean:
(a) rooted in the earth, as in the case of trees and shrubs; [However,
the term "immovable property" under the Transfer of Property Act
does not cover standing timber, growing crops or grass.]
(b) embedded in the earth, as in the case of walls or buildings.
(c) attached to what is so embedded for the permanent beneficial
enjoyment of that to which it is attached.
Under GST law, a composite supply of works contract is treated as

supply of services in terms of para 6(a) of Schedule II to the CGST Act.
ITC on works contract services for construction of an immovable
property is blocked EXCEPT WHEN
 It is an input service for further supply of works contract service
(sub-contracting);
[ITC on works contract services can be availed only by that taxpayer
who is in the same line of business, i.e. only a works contractor can
avail ITC on works contract services received by him.]
 Immovable property is plant and machinery
[Plant and machinery affixed permanently to the earth constitutes
an immovable property. However, ITC on works contract services
used for construction of such plant and machinery is allowed as an
exception.]
Meaning of construction
“Construction” includes re-construction, renovation, additions or
alterations or repairs, to the extent of capitalization, to the said
immovable property.
Thus, if re-construction, renovation, additions or alterations or repairs
are not capitalized, it would not tantamount to construction under GST
law. Consequently, ITC on works contract services availed for such
construction (which is not capitalized) whether for any immovable
property or for any plant and machinery, would be allowed to all the
recipients irrespective of their line of business.

Meaning of plant and machinery

“Plant and machinery” means apparatus, equipment, and machinery
fixed to earth by foundation or structural supports that are used for
making outward supply of goods and/or services and includes such
foundation or structural support
but excludes
land, building or other civil structures, telecommunication towers, and
pipelines laid outside the factory premises.
Thus, ITC on works contract services availed for construction of eligible
plant and machinery is allowed to the recipient irrespective of the line
of business of such recipient.
For instance, ITC on works contract services for construction of
machinery fixed to earth by a foundation, would be allowed. However,
ITC on works contract services for construction of telecommunication
towers, would be blocked.
(25) ITC on works contracts services availed by a software

company for construction of its office, is blocked.
(26) CD & Co., a works contractor of Noida, has been awarded
a contract for construction of a commercial complex in Lucknow. The
firm avails services of EF & Co., a local works contractor of Lucknow, for
the construction of complex. ITC on such works contract services
availed by CD & Co., is allowed.
(27) ITC on works contract services availed by an automobile company
for construction of a foundation on which a machinery (to be used in
the production process) is to be mounted permanently, is allowed.
(28) ITC on works contract services availed by a manufacturing
company for construction of pipelines to be laid outside its factory, is
blocked.
(29) A consulting firm has availed services of a works contractor for
repair of its office building. The company has booked such expenditure
in its profit and loss account. ITC on such services is allowed.
(30) A telecommunication company has availed services of a works
contractor for repair of its office building. The company has capitalized
such expenditure. ITC on such services is blocked.

6.52 INDIRECT TAXES
ITC on works contract services for construction of

immovable property is available only in the following
three situations:
(i) When the works contract service is availed by a works
contractor for being used in providing the works contract
service.
(ii) For construction of plant and machinery. In this case, ITC is
allowed to all recipients irrespective of their line of business.
(iii) When the value of works contract service is not capitalized.
In this case, ITC is allowed to all recipients irrespective of their
line of business.
(iv) Self-construction of immovable property [Clause (d) of

section 17(5)]
So now we know that ITC on works contract services availed by a
taxpayer, other than a works contractor, for construction of immovable
property (other than plant and machinery) is not available. But what
happens if a taxpayer procures goods and services and constructs an
immovable property, for being used in the course or furtherance of
business, without availing services of a works contractor? Will ITC be
allowed in such a case?
The answer is No. ITC is not allowed on goods and/or services received
by a taxable person for construction of an immovable property (other
than plant and machinery) on his own account even though such
goods and/or services are used in the course or furtherance of business.
Thus, ITC on goods and/or services used in the construction of an
immovable property is blocked only in those cases where the taxable
person constructs the immovable property for his own use even if the
immovable property being constructed is used in the course or
furtherance of his business.
The discussion on terms, ‘construction’ and ‘plant and machinery’

for works contract services [Elaborated in point (iii) above] applies
to construction on own account also.

ITC on goods and/or services used in construction of

immovable property is available only in the following
three situations:
(i) For construction of plant and machinery
(ii) When the value of goods and/or services is not capitalized
(iii) When the construction is not on own account
(31) A company buys cement, tiles etc. and avails the services
of an architect for construction of its office building. ITC on
such goods and services is blocked.
(32) MN & Constructions procures cement, paint, iron rods and
services of architects and interior designers for construction of a
commercial complex for one of its clients. ITC on such goods and
services is allowed to MN & Co.
(33) A company buys cement, tiles etc. and avails the services of an
architect for renovation of its office building. The company has booked
such expenditure in its profit and loss account. ITC on such goods and
services is allowed.
(34) ITC on goods and/or services used by an automobile company for
construction of a foundation on which a machinery (to be used in the
production process) is to be mounted permanently, is allowed.
(v) Inward supplies charged to tax under composition levy [Clause
(e) of section 17(5)]
A supplier registered under composition scheme cannot collect tax
from its customers. Thus, such supplier issues bill of supply and not a
tax invoice. A composition supplier pays a lumpsum tax at a specified
rate on its quarterly turnover.
Tax paid on goods and/or services under composition scheme is not
available as ITC.
Since a composition supplier cannot collect any tax on its supplies, from
the recipient of its supplies, it is obvious that no ITC can be availed in
respect of such supplies by the recipients. Nevertheless, section

6.54 INDIRECT TAXES
17(5)(e) specifically blocks the ITC on inward supplies received by a

taxable person from a composition supplier.
(vi) Inward supplies received by a non-resident taxable person
[Clause (f) of section 17(5)]
Non-resident taxable person has been defined in the CGST Act [See the
definition under the heading Relevant Definitions]. Essentially, a non-
resident taxable person has no fixed place of business in India but he
sporadically supplies goods or services in India.
Tax paid on goods and/or services received by such non-resident
taxable person, is not available as ITC. However, tax paid by him on
imported goods is allowed as ITC.
Whereas ITC on goods imported by a non-resident

taxable person is allowed, ITC on services imported
by him is blocked.
(vii) Inward supplies used for personal consumption [Clause (g) of

section 17(5)]
One of the foremost conditions laid down in section 16 for availing ITC
on goods and/or services is that such goods and/or services should be
used in the course or furtherance of business. Further, where goods
and/or services are used partly for the purpose of any business and
partly for other purposes, section 17(1) restricts the credit to so much
of the ITC as is attributable to business purposes.
Furthermore, section 17(5)(g) also specifically blocks the ITC on goods
and/or service used for personal consumption.
The term ‘personal consumption’ has not been defined in the GST law.
Thus, it may be understood in the general sense which would mean
non-business use.
(35) Mr. X owns a grocery store. He procures rice, wheat and
biscuits for being sold in its store. Out of the inventory so
purchased, he gives 10 kgs each of rice and wheat to his wife
for household use. Being used for personal consumption, ITC on 10 kg
of rice and 10 kg of wheat is blocked.

(viii) Free samples, gifts, goods lost/stolen etc. [Clause (h) of

section 17(5)]
Goods that are disposed

of by way of gift
Goods that are disposed
Clause (h) of section 17(5)

of by way of free samples
blocks ITC on
Lost goods
Stolen goods
Destroyed goods
Goods that are written off
ITC in respect of goods that are disposed of by way of gift or free

samples is not available. Also, ITC is blocked on lost goods, stolen
goods, destroyed goods and goods that are written off. This is because
principally, ITC is available only for payment of tax on output supply. If
no tax is payable on output supply, ITC on inputs/input services/capital
goods relating to such output supply is not eligible. Hence, ITC on gifts
and free samples is blocked as no tax is payable on its outward supply.
In case of lost/destroyed/stolen written off goods also, ITC is not
available as these goods cannot be said to have been used for making
a taxable supply.
Meaning of ‘gift’
The terms gift has not been defined in the GST law. Therefore, we will
have to look for the definition of gift in other laws. Section 122 of the
Transfer of Property Act, 1882, defines gift as transfer of certain existing
moveable or immoveable property made voluntarily and without

6.56 INDIRECT TAXES
consideration, by one person, called the donor, to another, called the

donee, and accepted by or on behalf of the donee.
In common parlance, gift is made without consideration, is voluntary in
nature and is made occasionally. It cannot be demanded as a matter of
right.
Meaning of ‘sample’
Sample is also not defined in the GST law. The dictionary meaning of
sample is “a small part or quantity intended to show what the whole is
like”. In commercial parlance, samples are given to prospective
customers to enable them to test the quality of the item before making a
decision to buy the same.
ITC in the hands of the supplier in respect of sales promotional

schemes
Circular No. 92/11/2019 GST dated 28.03.2019 has clarified the
entitlement of ITC in the hands of supplier in respect of various sales
promotional schemes as under [Taxability of such schemes has been
discussed at relevant places in Chapter 2: Supply Under GST and
Unit II : Value of Supply of Chapter 5 : Time and Value of Supply]:
A. Samples and free gifts
Samples which are supplied free of cost, without any
consideration, do not qualify as “supply” under GST, except where
the activity falls within the ambit of Schedule I of the CGST Act.
ITC shall not be available to the supplier on the inputs, input
services and capital goods to the extent they are used in relation
to the gifts or free samples distributed without any consideration.
However, where the activity of distribution of gifts or free samples
falls within the scope of “supply” on account of the provisions
contained in Schedule I of the said Act, the supplier would be
eligible to avail the ITC.
B. Buy one get one free offer
This is not an individual supply of free goods, but a case of two or
more individual supplies where a single price is being charged for
the entire supply. It can at best be treated as supplying two goods
for the price of one.

Taxability of such supply will be dependent upon as to whether

the supply is a composite supply or a mixed supply and the rate
of tax shall be determined as per the provisions of section 8.
ITC shall be available to the supplier for the inputs, input services
and capital goods used in relation to supply of goods or services
or both as part of such offers.
C. Discounts including ‘Buy more, save more’ offers
Discounts offered by the suppliers to customers (including
staggered discount under “Buy more, save more” scheme and
post supply / volume discounts established before or at the time
of supply) shall be excluded to determine the value of supply
provided they satisfy the parameters laid down in section 15(3),
including the reversal of ITC by the recipient of the supply as is
attributable to the discount on the basis of document (s) issued
by the supplier.
However, the supplier shall be entitled to avail the ITC for such
inputs, input services and capital goods used in relation to the
supply of goods or services or both on such discounts.
D. Secondary discounts
These are the discounts which are not known at the time of supply
or are offered after the supply is already over. Such discounts shall
not be excluded while determining the value of supply. There is no
impact on availability or otherwise of ITC in the hands of supplier in
this case.
ITC reversal when return of time expired medicines/drugs are
treated as fresh supply
The common trade practice in the pharmaceutical sector is that the
drugs or medicines (hereinafter referred to as “goods”) are sold by the
manufacturer to the wholesaler and by the wholesaler to the retailer on
the basis of an invoice/bill of supply as case may be. Such goods have
a defined life term which is normally referred to as the date of expiry.
Such goods which have crossed their date of expiry are colloquially
referred to as time expired goods and are returned to the manufacturer,
on account of expiry, through the supply chain.
Circular No. 72/46/2018 GST dated 26.10.2018 has clarified that the

6.58 INDIRECT TAXES
retailer/ wholesaler can return the time expired goods, either by

treating the same as fresh supply or by issuing credit notes 7.
Return of time-expired goods by treating the same as fresh supply
In case the person returning the time expired goods is a registered
person (other than a composition taxpayer), he may, at his option,
return the said goods by treating it is as a fresh supply and thereby
issuing an invoice for the same (hereinafter referred to as the, “return
supply”). The value of the said goods as shown in the invoice on the
basis of which the goods were supplied earlier may be taken as the
value of such return supply. The wholesaler or manufacturer, as the
case may be, who is the recipient of such return supply, shall be eligible
to avail ITC of the tax levied on the said return supply subject to the
fulfillment of the conditions specified in section 16.
In case the person returning the time-expired goods is a composition
taxpayer, he may return the said goods by issuing a bill of supply and
pay tax at the rate applicable to a composition taxpayer. In this scenario
there will not be any availability of ITC to the recipient of return supply.
In case the person returning the time-expired goods is an unregistered
person, he may return the said goods by issuing any commercial
document without charging any tax on the same.
Where the goods returned by the retailer/wholesaler as a fresh supply,
are destroyed by the manufacturer, he/she is required to reverse the
ITC availed on the return supply in terms of section 17(5)(h). It is
pertinent to mention here that the ITC which is required to be reversed
in such scenario is the ITC availed on the return supply and not the ITC
that is attributable to the manufacture of such time expired goods.
The clarification may also be applicable to return of goods for reasons
other than being time expired.
(36) If a manufacturer has availed ITC of ` 10/- at the time of
manufacture of medicines valued at ` 100/-. At the time of
return of such medicine on the account of expiry, the ITC
available to the manufacturer on the basis of fresh invoice issued by
wholesaler is ` 15/-. So, when the time expired goods are destroyed by
7
The procedure for return of time expired drugs or medicines by issuing credit note is covered
in Chapter 8: Tax Invoice; Credit and Debit Notes; E-Way Bill.

the manufacturer, he would be required to reverse ITC of ` 15/- and not

of ` 10/.
(ix) Tax paid in fraud cases, detention, confiscation etc. [Clause (i)
of section 17(5)]
Tax paid under sections 74, 129 and 130 8 is not available as ITC. These
sections prescribe the provisions relating to tax paid as a result of
evasion of taxes, or upon detention of goods or conveyances in transit,
or towards redemption of confiscated goods/conveyances.
5. CREDIT IN SPECIAL CIRCUMSTANCES [SECTION 18]
Section 18 Availability of credit in special circumstances
(1) Subject to such conditions and restrictions as may be prescribed—
(a) a person who has applied for registration under this Act
within thirty days from the date on which he becomes
liable to registration and has been granted such
registration shall be entitled to take credit of input tax in
respect of inputs held in stock and inputs contained in
semi-finished or finished goods held in stock on the day
immediately preceding the date from which he becomes
liable to pay tax under the provisions of this Act;
(b) a person who takes registration under sub-section (3) of

section 25 shall be entitled to take credit of input tax in
respect of inputs held in stock and inputs contained in
semi-finished or finished goods held in stock on the day
immediately preceding the date of grant of registration;
(c) where any registered person ceases to pay tax under

section 10, he shall be entitled to take credit of input tax
8
These provisions will be discussed at the Final level.

6.60 INDIRECT TAXES
in respect of inputs held in stock, inputs contained in

semi-finished or finished goods held in stock and on
capital goods on the day immediately preceding the date
from which he becomes liable to pay tax under section 9:
Provided that the credit on capital goods shall be reduced

by such percentage points as may be prescribed;
(d) where an exempt supply of goods or services or both by a

registered person becomes a taxable supply, such person
shall be entitled to take credit of input tax in respect of
inputs held in stock and inputs contained in semi-finished
or finished goods held in stock relatable to such exempt
supply and on capital goods exclusively used for such
exempt supply on the day immediately preceding the
date from which such supply becomes taxable:
Provided that the credit on capital goods shall be reduced

by such percentage points as may be prescribed.
(2) A registered person shall not be entitled to take input tax credit
under sub-section (1) in respect of any supply of goods or services
or both to him after the expiry of one year from the date of issue of
tax invoice relating to such supply.
(3) Where there is a change in the constitution of a registered person

on account of sale, merger, demerger, amalgamation, lease or
transfer of the business with the specific provisions for transfer of
liabilities, the said registered person shall be allowed to transfer the
input tax credit which remains unutilised in his electronic credit
ledger to such sold, merged, demerged, amalgamated, leased or
transferred business in such manner as may be prescribed.
(4) Where any registered person who has availed of input tax credit
opts to pay tax under section 10 or, where the goods or services or
both supplied by him become wholly exempt, he shall pay an
amount, by way of debit in the electronic credit ledger or electronic
cash ledger, equivalent to the credit of input tax in respect of inputs
held in stock and inputs contained in semi-finished or finished
goods held in stock and on capital goods, reduced by such
percentage points as may be prescribed, on the day immediately

preceding the date of exercising of such option or, as the case may
be, the date of such exemption:
Provided that after payment of such amount, the balance of input

tax credit, if any, lying in his electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable
under sub-section (4) shall be calculated in such manner as may be
prescribed.
(6) In case of supply of capital goods or plant and machinery, on which

input tax credit has been taken, the registered person shall pay an
amount equal to the input tax credit taken on the said capital goods
or plant and machinery reduced by such percentage points as may
be prescribed or the tax on the transaction value of such capital
goods or plant and machinery determined under section 15,
whichever is higher:
Provided that where refractory bricks, moulds and dies, jigs and
fixtures are supplied as scrap, the taxable person may pay tax on
the transaction value of such goods determined under section 15.
Chapter V: Input Tax Credit of CGST Rules
Rule 40 Manner of claiming credit in special circumstances
(1) The input tax credit claimed in accordance with the provisions of
sub-section (1) of section 18 on the inputs held in stock or inputs
contained in semi-finished or finished goods held in stock, or the
credit claimed on capital goods in accordance with the provisions
of clauses (c) and (d) of the said sub-section, shall be subject to the
following conditions, namely -
(a) the input tax credit on capital goods, in terms of clauses

(c) and (d) of sub-section (1) of section 18, shall be
claimed after reducing the tax paid on such capital goods
by five percentage points per quarter of a year or part
thereof from the date of the invoice or such other
documents on which the capital goods were received by
the taxable person.

6.62 INDIRECT TAXES
(b) the registered person shall within a period of thirty days

from the date of becoming eligible to avail the input tax
credit under sub-section (1) of section 18, or within such
further period as may be extended by the Commissioner
by a notification in this behalf, shall make a declaration,
electronically, on the common portal in FORM GST ITC-
01 to the effect that he is eligible to avail the input tax
credit as aforesaid:
Provided that any extension of the time limit notified by

the Commissioner of State tax or the Commissioner of
Union territory tax shall be deemed to be notified by the
Commissioner.
(c) the declaration under clause (b) shall clearly specify the
details relating to the inputs held in stock or inputs
contained in semi-finished or finished goods held in stock,
or as the case may be, capital goods–
(i) on the day immediately preceding the date from

which he becomes liable to pay tax under the
provisions of the Act, in the case of a claim under
clause (a) of sub- section (1) of section 18;
(ii) on the day immediately preceding the date of the

grant of registration, in the case of a claim under
clause (b) of sub-section (1) of section 18;
(iii) on the day immediately preceding the date from

which he becomes liable to pay tax under section
9, in the case of a claim under clause (c) of sub-
section (1) of section 18;
(iv) on the day immediately preceding the date from

which the supplies made by the registered person
becomes taxable, in the case of a claim under
clause (d) of sub- section (1) of section 18;
(d) the details furnished in the declaration under clause (b)

shall be duly certified by a practicing chartered
accountant or a cost accountant if the aggregate value of

the claim on account of central tax, State tax, Union

territory tax and integrated tax exceeds two lakh rupees;
(e) the input tax credit claimed in accordance with the

provisions of clauses (c) and (d) of sub-section (1) of section
18 shall be verified with the corresponding details furnished
by the corresponding supplier in FORM GSTR-1 or as the
case may be, in FORM GSTR- 4, on the common portal.
(2) The amount of credit in the case of supply of capital goods or plant
and machinery, for the purposes of sub-section (6) of section 18,
shall be calculated by reducing the input tax on the said goods at
the rate of five percentage points for every quarter or part thereof
from the date of the issue of the invoice for such goods.
Rule 41 Transfer of credit on sale, merger, amalgamation, lease or

transfer of a business
(1) A registered person shall, in the event of sale, merger, de-merger,

amalgamation, lease or transfer or change in the ownership of
business for any reason, furnish the details of sale, merger, de-
merger, amalgamation, lease or transfer of business, in FORM GST
ITC-02, electronically on the common portal along with a request
for transfer of unutilized input tax credit lying in his electronic credit
ledger to the transferee:
Provided that in the case of demerger, the input tax credit shall be
apportioned in the ratio of the value of assets of the new units as
specified in the demerger scheme.
Explanation: - For the purpose of this sub-rule, it is hereby clarified

that the “value of assets” means the value of the entire assets of the
business, whether or not input tax credit has been availed thereon.
(2) The transferor shall also submit a copy of a certificate issued by a

practicing chartered accountant or cost accountant certifying that the
sale, merger, de-merger, amalgamation, lease or transfer of business
has been done with a specific provision for the transfer of liabilities.
(3) The transferee shall, on the common portal, accept the details so
furnished by the transferor and, upon such acceptance, the un-

6.64 INDIRECT TAXES
utilized credit specified in FORM GST ITC-02 shall be credited to

his electronic credit ledger.
(4) The inputs and capital goods so transferred shall be duly accounted
for by the transferee in his books of account.
Rule 41A Transfer of credit on obtaining separate registration for

multiple places of business within a State or Union territory
(1) A registered person who has obtained separate registration for

multiple places of business in accordance with the provisions of rule
11 and who intends to transfer, either wholly or partly, the
unutilised input tax credit lying in his electronic credit ledger to any
or all of the newly registered place of business, shall furnish within
a period of thirty days from obtaining such separate registrations,
the details in FORM GST ITC-02A electronically on the common
portal, either directly or through a Facilitation Centre notified in
this behalf by the Commissioner:
Provided that the input tax credit shall be transferred to the newly
registered entities in the ratio of the value of assets held by them at
the time of registration.
Explanation.- For the purposes of this sub-rule, it is hereby clarified

that the ‘value of assets’ means the value of the entire assets of the
business whether or not input tax credit has been availed thereon.
(2) The newly registered person (transferee) shall, on the common

portal, accept the details so furnished by the registered person
(transferor) and, upon such acceptance, the unutilised input tax
credit specified in FORM GST ITC-02A shall be credited to his
electronic credit ledger.
Rule 44 Manner of reversal of credit under special circumstances
(1) The amount of input tax credit relating to inputs held in stock,
inputs contained in semi-finished and finished goods held in stock,
and capital goods held in stock shall, for the purposes of sub-section
(4) of section 18 or sub-section (5) of section 29, be determined in
the following manner, namely,-

(a) for inputs held in stock and inputs contained in semi-

finished and finished goods held in stock, the input tax
credit shall be calculated proportionately on the basis of
the corresponding invoices on which credit had been
availed by the registered taxable person on such inputs;
(b) for capital goods held in stock, the input tax credit involved
in the remaining useful life in months shall be computed
on pro-rata basis, taking the useful life as five years.
(2) The amount, as specified in sub-rule (1) shall be determined

separately for input tax credit of central tax, State tax, Union
territory tax and integrated tax.
(3) Where the tax invoices related to the inputs held in stock are not
available, the registered person shall estimate the amount under sub-
rule (1) based on the prevailing market price of the goods on the effective
date of the occurrence of any of the events specified in sub-section (4) of
section 18 or, as the case may be, sub-section (5) of section 29.
(4) The amount determined under sub-rule (1) shall form part of the
output tax liability of the registered person and the details of the
amount shall be furnished in FORM GST ITC-03, where such
amount relates to any event specified in sub-section (4) of section
18 and in FORM GSTR-10, where such amount relates to the
cancellation of registration.
(5) The details furnished in accordance with sub-rule (3) shall be duly
certified by a practicing chartered accountant or cost accountant.
(6) The amount of input tax credit for the purposes of sub-section (6)
of section 18 relating to capital goods shall be determined in the
same manner as specified in clause (b) of sub-rule (1) and the
amount shall be determined separately for input tax credit of
central tax, State tax, Union territory tax and integrated tax:
Provided that where the amount so determined is more than the tax
determined on the transaction value of the capital goods, the
amount determined shall form part of the output tax liability and
the same shall be furnished in FORM GSTR-1.

6.66 INDIRECT TAXES
ANALYSIS
Section 18 provides for
(1) entitlement of ITC on inputs in stock and contained in finished goods or work-
in-progress and capital goods (i) at the time of registration/voluntary
registration, (ii) on coming into regular tax-paying status by exiting
composition levy, (iii) on coming into tax-paying status on account of exempt
supply becoming taxable supply
(2) reversal of ITC on inputs in stock and contained in finished goods or work-
in-progress and capital goods (i) at the time of exit from regular tax-paying
status by opting for composition levy, (ii) at the time of exit from tax-paying
status on account of taxable supply becoming exempt supply
(3) amount payable on supply of capital goods or plant and machinery on which
ITC has been taken
(4) transfer of ITC on account of change in constitution of the registered person
(i) Entitlement of ITC at the time of registration/voluntary registration
or switching to regular tax paying status or coming into tax-paying
status [Sub-sections (1) and (2) of section 18 read with rule 40 of
CGST Rules]
The credit on inputs held in stock and contained in semi-finished goods or
finished goods held in stock and capital goods at the time of
registration/voluntary registration or coming into regular tax/tax-paying
status is available in the following manner:
S. Persons Goods entitled to ITC Restriction/condit

No eligible to ions
take credit Inputs held As on
in
stock/capital
goods
(1) (2) (3) (4) (5)
1. Person who Inputs held in The day  ITC to be availed

has applied stock and immediately within 1 year from

for inputs preceding the date of the

registration contained in the date issue of the tax
within 30 semi-finished from which invoice by the
days from or finished he becomes supplier.
the date on goods held in liable to pay
which he stock tax
becomes
liable to
registration
and has been
granted such
registration
2. Person who Inputs held in The day

is not stock and immediately
required to inputs preceding
register, but contained in the date of
obtains semi-finished registration
voluntary or finished
registration goods held in
stock
3. Registered Inputs held in The day  ITC on capital

person who stock and immediately goods will be
ceases to inputs preceding reduced by 5%
pay contained in the date per quarter of a
compositio semi-finished from which year or part of the
n tax and or finished he becomes year from the
switches to goods held in liable to pay date of invoice.
regular stock and tax under  ITC claimed shall
scheme capital goods regular be verified with
scheme the
corresponding
4. Registered Inputs held in The day details furnished
person stock and immediately by the
whose inputs preceding corresponding
exempt contained in the date supplier.
supplies semi-finished from which

6.68 INDIRECT TAXES
become or finished such supply  ITC to be availed

taxable goods held in becomes within 1 year from
supplies stock relatable taxable the date of the
to such issue of the tax
exempt supply invoice by the
and capital supplier.
goods
exclusively
used for such
exempt
supply
In all the above cases, the registered person has to make an electronic
declaration in the prescribed form on the common portal, clearly specifying
the details relating to the inputs held in stock, inputs contained in semi-
finished or finished goods held in stock and capital goods on the days
mentioned in column (4) of table above. The declaration is to be filed within
30 days (extendable by Commissioner/Commissioner of State
GST/Commissioner of UTGST) from the date when the registered person
becomes eligible to avail ITC. If the claim of ITC pertaining to CGST,
SGST/UTGST, IGST put together exceeds ` 2,00,000, the declaration needs to
be certified by a practicing Chartered Accountant/Cost Accountant.
(37) ‘Z’ becomes liable to pay tax on 1st August and has obtained
registration on 15th August. ‘Z’ is eligible for ITC on inputs held in
stock and as part of semi-finished goods or finished goods held in
stock as on 31st July. ‘Z’ cannot take ITC on capital goods.
(38) ‘A’ applies for voluntary registration on 5th June and obtains
registration on 22nd June. ‘A’ is eligible for ITC on inputs held in
stock and as part of semi-finished goods or finished goods held in
stock as on 21st June. ‘A’ cannot take ITC on capital goods.
(39) ‘B’, a registered taxable person, was paying tax under

composition scheme upto 30th July. However, w.e.f. 31st July, ‘B’
becomes liable to pay tax under regular scheme. ‘B’ will be eligible
for ITC on inputs held in stock and inputs contained in semi-finished or
finished goods held in stock and on capital goods as on 30th July. ITC on
capital goods will be reduced by 5% per quarter from the date of the invoice.

(ii) Reversal of ITC on switching to composition levy or exit from tax-

paying status [Section 18(4) read with rule 44 of CGST Rules]
 Section 18(4) requires reversal of ITC when a registered person who has
availed ITC switches to composition levy or when his supplies get wholly
exempted from tax.
 ITC on inputs should be reversed proportionately on the basis of
corresponding invoices on which credit had been availed on such
inputs. If invoices are not available, ITC can be reversed on the basis of
the prevailing market price of such goods on the date of switch
over/exemption. The details furnished on the basis of prevailing market
value need to be duly certified by a practicing Chartered Accountant/
Cost Accountant.
 ITC involved in the remaining useful life (in months) of the capital goods
should be reversed on pro-rata basis, taking the useful life as 5 years.
(40) Capital goods have been in use for 4 years, 6 month and
15 days. The useful remaining life in months = 5 months
ignoring a part of the month.
ITC taken on such capital goods = C
ITC attributable to remaining useful life = C x 5/60
 The registered person has to debit the electronic credit or cash ledger
by the reversal amount in respect of inputs held in stock and inputs
contained in semi-finished or finished goods held in stock and capital
goods on the day immediately preceding the date of switch over/ date
of exemption.
 Balance of ITC, if any, lying in the electronic credit ledger lapses.
 Cancellation of registration also requires reversal of ITC on inputs held
in stock/ contained in semi-finished goods or finished goods held in
stock, capital goods or plant and machinery on the day immediately
preceding the cancellation date. The amount to be reversed on inputs
and capital goods is computed in the manner as applicable for sub-
sections (4) and (6) of section 18 (discussed above). Such amount is
then compared with the output tax payable on such goods, and the
higher of the two amounts is finally paid by the registered person.

6.70 INDIRECT TAXES
 ITC to be reversed on inputs and capital goods is calculated separately

for ITC of CGST, SGST/UTGST and IGST.
 The reversal amount is added to the output tax liability of the registered
person.
(iii) Amount payable on supply of capital goods or plant and machinery
on which ITC has been taken [Section 18(6) read with rule 40(2) & rule
44(6) of CGST Rules]
 If capital goods or plant and machinery on which ITC has been taken
are supplied outward by the registered person, he must pay an amount
that is the higher of the following:
 ITC taken on such goods reduced by 5% per quarter of a year or
part thereof from the date of issue of invoice for such goods (i.e.,
ITC pertaining to remaining useful life of the capital goods), or
 tax on transaction value
 ITC pertaining to remaining useful life of the capital goods should be
computed separately for ITC of CGST, SGST/UTGST and IGST.
 Where the amount so determined exceeds the tax payable on the
transaction value of the capital goods, such amount need to be paid
and thus, should be added to the output tax liability.
 If refractory bricks, moulds and dies, jigs and fixtures are supplied as
scrap, the taxable person may pay tax on the transaction value.
*Note: Under rule 44(6), ITC involved in the remaining useful life (in months) of
the capital goods is reversed on pro rata basis, taking the useful life as 5 years.
(iv) Transfer of ITC on account of change in constitution of registered
person [Section 18(3) read with rule 41 of CGST Rules]
In case of sale, merger, demerger, amalgamation, transfer or change in
ownership of business etc., the ITC that remains unutilized in the electronic
credit ledger of the registered person can be transferred to the new entity,
provided there is a specific provision for transfer of liabilities in such change
of constitution. Circular No. 96/15/2019 GST dated 28.03.2019 has clarified
that transfer or change in the ownership of business includes transfer or
change in the ownership due to death of the sole proprietor.

The above provisions have been explained with the help of the following diagram:
3 ITC remaining unutilized in the

electronic credit ledger is transferred to
the newly constituted entity
2 Provision for transfer

of liabilities
1 •Sale
Change in constitution of •Merger
registered person •Demerger
•Amalgamtion
•Lease
•Transfer or change in ownership of
business
In the case of demerger, ITC will be apportioned in the ratio of the value of
assets of the new units as specified in the demerger scheme. Here, “value of
assets” means the value of the entire assets of the business irrespective of
whether ITC has been availed thereon or not.
The registered person should furnish the details of change in constitution on

the common portal and submit a certificate from practicing Chartered
Account/Cost Accountant certifying that the change in constitution has been
done with a specific provision for transfer of liabilities. Upon acceptance of
such details by the transferee on the common portal, the unutilized ITC gets
credited to his electronic credit ledger. The transferee should record the
inputs and capital goods so transferred in his books of account.
(v) Transfer of ITC on obtaining separate registrations for multiple

places of business within a State/ Union Territory [Rule 41A of CGST
Rules]
Section 25 enables a taxpayer to obtain separate registrations for multiple

places of business in a State/ Union territory [Provisions of section 25 are
discussed under Chapter 7: Registration]. The registered person (transferor),
having separate registrations for multiple places of business within a

6.72 INDIRECT TAXES
State/Union Territory, can transfer the unutilised ITC (wholly or partly) lying
in his electronic credit ledger to any or all of the newly registered place(s) of
business in the ratio of the value of assets held by them at the time of
registration. Here, the ‘value of assets’ means the value of the entire assets
of the business irrespective of whether ITC has been availed thereon or not.
The registered person should furnish the prescribed details on the common
portal within a period of 30 days from obtaining such separate registrations.
Upon acceptance of such details by the newly registered person (transferee)
on the common portal, the unutilised ITC gets credited to his electronic credit
ledger.
6. HOW ITC IS UTILISED
Section 49 Payment of tax, interest, penalty and other amounts

(Relevant extract)
(5) The amount of input tax credit available in the electronic credit
ledger of the registered person on account of––
(a) integrated tax shall first be utilised towards payment of

integrated tax and the amount remaining, if any, may be
utilised towards the payment of central tax and State tax,
or as the case may be, Union territory tax, in that order;
(b) the central tax shall first be utilised towards payment of

central tax and the amount remaining, if any, may be
utilised towards the payment of integrated tax;
(c) the State tax shall first be utilised towards payment of

State tax and the amount remaining, if any, may be
utilised towards payment of integrated tax;
Provided that the input tax credit on account of State

tax shall be utilised towards payment of integrated tax

only where the balance of the input tax credit on

account of central tax is not available for payment of
integrated tax;
(d) the Union territory tax shall first be utilised towards

payment of Union territory tax and the amount
remaining, if any, may be utilised towards payment of
integrated tax;
Provided that the input tax credit on account of Union

territory tax shall be utilised towards payment of
integrated tax only where the balance of the input tax
credit on account of central tax is not available for
payment of integrated tax;
(e) the central tax shall not be utilised towards payment of

State tax or Union territory tax; and
(f) the State tax or Union territory tax shall not be utilised
towards payment of central tax.
Section 49A Utilisation of input tax credit subject to certain conditions
Notwithstanding anything contained in section 49, the input tax

credit on account of central tax, State tax or Union territory tax shall
be utilised towards payment of integrated tax, central tax, State tax or
Union territory tax, as the case may be, only after the input tax credit
available on account of integrated tax has first been utilised fully
towards such payment.
Section 49B Order of utilisation of input tax credit
Notwithstanding anything contained in this Chapter and subject to

the provisions of clause (e) and clause (f) of sub-section (5) of
section 49, the Government may, on the recommendations of the
Council, prescribe the order and manner of utilisation of the input
tax credit on account of integrated tax, central tax, State tax or
Union territory tax, as the case may be, towards payment of any
such tax.

6.74 INDIRECT TAXES
Chapter IX: Payment of Tax of the CGST Rules
Rule 88A Order of utilization of input tax credit
Input tax credit on account of integrated tax shall first be utilised

towards payment of integrated tax, and the amount remaining, if
any, may be utilised towards the payment of central tax and State
tax or Union territory tax, as the case may be, in any order.
Provided that the input tax credit on account of central tax, State
tax or Union territory tax shall be utilised towards payment of
integrated tax, central tax, State tax or Union territory tax, as the
case may be, only after the input tax credit available on account of
integrated tax has first been utilised fully.
ANALYSIS
ITC is credited to a registered person’s electronic credit ledger. A taxable person
is entitled for ITC of CGST, SGST/UTGST and IGST depending upon the nature of
supplies received by him.
To illustrate, a supplier making intra-State, inter-State and imported purchases (of
goods) is eligible for ITC as under:
Intra-State purchases Inter-State purchases Import of goods
Taxes paid Taxes paid Taxes paid
CGST BCD
IGST
SGST IGST
ITC ITC ITC

CGST
IGST IGST
SGST
The person may use the ITC to pay his output tax liability. As we know that Indian
GST is a dual GST wherein two taxes viz, CGST and SGST/UTGST are levied
concurrently on a supply transaction. While the CGST revenue accrues to Central
Government, SGST and UTGST revenue accrue to respective State Government and

Union Territory respectively. Hence, ITC of CGST and SGST/UTGST is not inter-
changeable and thus, cross utilisation of CGST and SGST/UTGST is not permissible.
IGST is a transitory tax. IGST paid by taxpayer initially goes to the Central Clearing
Authority. ITC of IGST can be utilised for payment of CGST or SGST/UTGST (or vice
versa). Thus, cross utilization of IGST and CGST, SGST/UTGST is permissible.
Flexibility has been provided to the taxpayer to utilise ITC of IGST for payment of
CGST and/or SGST/UTGST in any proportion and in any order. If ITC of IGST is used
for payment of SGST/UTGST (or vice versa), corresponding debit/credit is made to
respective State Government/Union Territory.
Sections 49(5), 49A, 49B, rule 88A and Circular No. 98/17/2019 GST dated
23.04.2019 together prescribe the sequence of utilisation of ITC. A combined
reading of such provisions shows that the order of utilization of ITC is as per the
order (of numerals) given below:
ITC of Output IGST Output CGST Output SGST/ UTGST

liability liability liability
IGST (I) (II) – In any order and in any proportion
(III) ITC of IGST to be completely exhausted mandatorily
CGST (V) (IV) Not permitted
SGST/UTGST (VII) Not permitted (VI)

Only after ITC
of CGST has
been utilized
fully
The numerals given above can be further explained in the following manner:
(I) IGST credit should first be utilized towards payment of IGST.
(II) Remaining IGST credit, if any, can be utilized towards payment

of CGST and SGST/UTGST in any order and in any proportion,
i.e. remaining ITC of IGST can be utilized –
• first towards payment of CGST and then towards payment
of SGST; or

6.76 INDIRECT TAXES
• first towards payment of SGST and then towards payment

of CGST; or
• towards payment of CGST and SGST simultaneously in any
proportion e.g. 50: 50, 30: 70, 40: 60 and so on.
(III) Entire ITC of IGST should be fully utilized before utilizing the ITC
of CGST or SGST/UTGST.
(IV) & (V) ITC of CGST should be utilized for payment of CGST and IGST in
that order. ITC of CGST cannot be utilized for payment of
SGST/UTGST
(VI) & (VII) ITC of SGST /UTGST should be utilized for payment of
SGST/UTGST and IGST in that order. However, ITC of
SGST/UTGST should be utilized for payment of IGST, only after
ITC of CGST has been utilized fully. ITC of SGST/UTGST cannot
be utilized for payment of CGST.
• Cross-utilization of credit is available only between CGST - IGST and

SGST/UTGST - IGST.
• CGST credit cannot be utilized for payment of SGST/UTGST and
SGST/UTGST credit cannot be utilized for payment of CGST.
• ITC of IGST need to be exhausted fully before proceeding to utilize
the ITC of CGST and SGST in that order.
(41) Amount of ITC available and output tax liability under different
tax heads
Head Output tax liability (`) ITC (`)

IGST 1000 1300
CGST 300 200
SGST/UTGST 300 200
Total 1600 1700

Option 1
ITC of Discharge of Discharge of Discharge of output Balance
output IGST output CGST SGST/UTGST of ITC
liability (`) liability (`) liability (`) (`)
IGST 1000 200 100 0
ITC of IGST has been completely exhausted
CGST 0 100 - 100
SGST/UTGST 0 - 200 0
Total 1000 300 300 100
Option 2
ITC of Discharge of Discharge Discharge of Balance
output IGST of output output of
liability (`) CGST SGST/UTGST ITC (`)
liability (`) liability (`)
IGST 1000 100 200 0
ITC of IGST has been completely exhausted
CGST 0 200 - 0
SGST/UTGST 0 - 100 100
Total 1000 300 300 100
There can be other options also for utilization of ITC of IGST against CGST and SGST
liabilities. In this example, two options for utilizing ITC of IGST against CGST and
SGST liabilities are shown.
Restrictions on utilisation of ITC [Rule 86A]

The Commissioner/ an officer (not below the rank of an Assistant
Commissioner) authorised by him is empowered to impose restrictions on
utilization of ITC available in the electronic credit ledger if he has reasons to
believe that such ITC has been fraudulently availed or is ineligible.
The restrictions can be imposed in the following circumstances:
(i) ITC has been availed on the basis of tax invoices/valid documents -
● issued by a non-existent supplier or by a person not conducting any
business from the registered place of business; or

6.78 INDIRECT TAXES
● without receipt of goods or services or both; or

● the tax in relation to which has not been paid to the Government
(ii) the registered person availing ITC has been found non-existent or not to
be conducting any business from the registered place of business; or
(iii) the registered person availing ITC is not in possession of tax
invoice/valid document.
If the ITC is so availed, the restrictions can be imposed by not allowing such
ITC to be used for discharging any liability under section 49 or not allowing
refund of any unutilised amount of such ITC. Such restrictions can be imposed
for a period up to 1 year from the date of imposing such restrictions. However,
the Commissioner/officer authorised by him, can withdraw such restriction if
he is satisfied that conditions for imposing the restrictions no longer exist.
ILLUSTRATION 3
ABC Co. Ltd., registered under GST, is engaged in the manufacture of heavy
machinery. It procured the following items during the month of July.
S. No. Items GST (`)

(i) Electrical transformers to be used in the 5,20,000
manufacturing process
(ii) Trucks used for the transport of raw material 1,00,000
(iii) Raw material 2,00,000
(iv) Confectionery items. These items were supplied free 25,000
of cost to the customers in a customer meet organized
by the company
Determine the amount of ITC available with ABC Co. Ltd., for the month of July by
giving necessary explanations for treatment of various items. Subject to the
information given above, assume that all the other conditions necessary for availing
ITC have been fulfilled.

ANSWER
Computation of ITC available with ABC Co. Ltd. for the month of July
S. No. Items ITC (`)
(i) Electrical transformers 5,20,000

[Being goods used in the course or furtherance of
business, ITC thereon is available in terms of section
16(1)]
(ii) Trucks used for the transport of raw material 1,00,000

[ITC on motor vehicles used for transportation of goods
is not blocked under section 17(5)(a)]
(iii) Raw material 2,00,000

[Being goods used in the course or furtherance of
business, ITC thereon is available in terms of section
16(1)]
(iv) Confectionery items for consumption of customers at Nil

customers meet
[ITC on food or beverages is specifically disallowed unless
the same is used for making outward taxable supply of
the same category or as an element of the taxable
composite or mixed supply-Section 17(5)(b)(i)]
Total ITC 8,20,000
ILLUSTRATION 4
XYZ Ltd., registered under GST, is engaged in manufacture of taxable goods.

Compute the ITC available with XYZ Ltd. for the month of October from the following
particulars:-
S. No. Inward supplies GST (`) Remarks
(i) Inputs ‘A’ 1,00,000 One invoice on which GST payable

was ` 10,000, is missing

6.80 INDIRECT TAXES
(ii) Inputs ‘B’ 50,000 Inputs are to be received in two

instalments. First instalment has been
received in October
(iii) Capital goods 1,20,000 XYZ Ltd. has capitalised the capital
goods at full invoice value inclusive of
GST as it will avail depreciation on the
full invoice value.
(iv) Input services 2,25,000 One invoice dated 20th January on

which GST payable was ` 50,000 has
been received in October
Note:
(i) Subject to the information given above, assume that all the other conditions
necessary for availing ITC have been fulfilled.
(ii) The annual return for the previous financial year was filed on 15th September.
ANSWER
Computation of ITC available with XYZ Ltd. for the month of October
S. No. Inward supplies ITC (`)
(i) Inputs ‘A’ 90,000

[ITC cannot be taken on missing invoice. The registered
person should have the invoice in its possession to claim
ITC-Section 16(2)(a)]
(ii) Inputs ‘B’ Nil

[When inputs are received in instalments, ITC can be
availed only on receipt of last instalment-First proviso to
section 16(2)]
(iii) Capital goods Nil

[Input tax paid on capital goods cannot be availed as ITC,
if depreciation has been claimed on such tax component
– Section 16(3)]

(iv) Input services 1,75,000

[As per section 16(4), ITC on an invoice cannot be availed
after the due date of furnishing of the return for the
month of September following the end of financial year
to which such invoice pertains or the date of filing
annual return, whichever is earlier.
Since the annual return for the previous financial year
has been filed on 15th September (prior to due date of
filing the return for the month of September, i.e. 20th
October), ITC on the invoice pertaining to previous
financial year cannot be availed after 15th September.
Total ITC 2,65,000
ILLUSTRATION 5
XT Pvt. Ltd., a supplier of goods, pays GST under regular scheme. It has made the
following outward taxable supplies in a tax period:
Particulars Amount (`)
Intra-State supply of goods 8,00,000
Inter-State supply of goods 3,00,000
It has also furnished the following information in respect of purchases made by it in

that tax period:
Intra-State purchases of goods 2,00,000
Inter-State purchases of goods 50,000
The company has following ITCs with it at the beginning of the tax period:
CGST 57,000

6.82 INDIRECT TAXES
SGST Nil
IGST 70,000
Note:
(i) Rates of CGST, SGST and IGST are 9%, 9% and 18% respectively.
(ii) Both inward and outward supplies are exclusive of taxes, wherever applicable.
(iii) All the conditions necessary for availing the ITC have been fulfilled.
Compute the minimum GST, payable in cash, by XT Pvt. Ltd. for the tax period. Make
suitable assumptions as required.
ANSWER
Computation of GST payable on outward supplies
S. Particulars CGST @ SGST @ IGST @ Total (`)

No. 9% (`) 9% (`) 18% (`)
(i) Intra-State supply of goods 72,000 72,000 1,44,000

for ` 8,00,000
(ii) Inter-State supply of 54,000 54,000

goods for ` 3,00,000
Total GST payable 1,98,000
Computation of total ITC
Particulars CGST @ SGST @ IGST @

9% (`) 9% (`) 18% (`)
Opening ITC 57,000 Nil 70,000
Add: ITC on Intra-State purchases of 18,000 18,000 Nil

goods valuing ` 2,00,000

Add: ITC on Inter-State purchases of Nil Nil 9,000

goods valuing ` 50,000
Total ITC 75,000 18,000 79,000
Computation of minimum GST payable from electronic cash ledger
Particulars CGST @ SGST @ IGST @ Total

9% (`) 9% (`) 18% (`) (`)
GST payable 72,000 72,000 54,000 1,98,000
Less: ITC [First ITC of IGST (Nil) (25,000) (54,000) 79,000

should be utilized in full - first IGST IGST IGST
against IGST liability and then
against CGST and SGST liabilities
in a manner to minimize cash
outflow]
(72,000) (18,000) 90,000

CGST SGST
Minimum GST payable in cash Nil 29,000 Nil 29,000
Note : Since sufficient balance of ITC of CGST is available for paying CGST liability
and cross utilization of ITC of CGST and SGST is not allowed, ITC of IGST has been
used to pay SGST (after paying IGST liability) to minimize cash outflow.

6.84 INDIRECT TAXES
7. LET US RECAPITULATE
I. Definitions of certain key terms are summarized by way of
diagrams as under:
BUSINESS
includes
Any activity incidental/ancillary
to it
Any trade/commerce, manufacture,
profession, vocation etc. even if
there is no monetary benefit Any activity of same nature even if
no volume/continuity/frequency
Supply/acquisition of goods
in connection with commencement/
including capital goods & services
closure of business
Provision of facilities by
to its members for consideration
club/association/society etc.
for a consideration
Admission to any premises
accepted in course/ furtherance

Services as holder of an office of trade, profession/vocation
Activities of a race club including totalisator or a licence to book

by way of maker or activities of a licensed
book maker in such club
Any activity by Government /local

authority as public authorities Government includes both Central
and State Governments

EXEMPT SUPPLY
means includes
Non-taxable
supply
Supply attracting NIL rate of Supply wholly exempt
tax from
CGST IGST
Goods Services
CAPITAL GOODS INPUTS INPUT SERVICES
means means means
goods value of which is capitalized

goods other than services
in the books of account of person
capital goods
claiming ITC
used/intended to be used in
the course/ furtherance of
business

6.86 INDIRECT TAXES
INPUT TAX
Means Includes Excludes
IGST
Tax payable Tax payable
leviable on Composition
under forward under reverse
import of tax
charge charge
goods
CGST SGST UTGST IGST
NON-RESIDENT TAXABLE PERSON
Principal
means
Agent
any person supplying goods and/or as

services occasionally
In any other
capacity
having NO fixed place of

business/residence in India

INWARD SUPPLY
means
receipt of goods and/or services by
purchase acquisition any other means
with/without consideration
ZERO-RATED SUPPLY
Supply of goods and /or services to

Export of goods and/or services
SEZ developer/ SEZ unit

6.88 INDIRECT TAXES
II. Provisions of section 16 relating to eligibility and

conditions for taking ITC read with relevant rules are
summarized below:
Registered person to take used/ intended to be used in if the following four

credit of tax paid on inward the course or furtherance of conditions are fulfilled:
supplies of goods and/or business
services
He has valid tax

Tax on such supply He has invoice/debit
He has furnished
has been paid either received goods note/prescribed
return u/s 39
in/by and/or services tax paying
document
Time limit for

Goods delivered / availing ITC - ITC
Utilisation of services provided to pertaining to a
Cash
ITC third person on the particular FY can
direction of the be availed by 20th
registered person October of next FY
Goods received deemed to be received or filing of annual
If depreciation
in lots – ITC by the registered return, whichever
claimed on tax
allowed upon person ⇒ ITC available is earlier.
component, ITC not
receipt of last lot to registered person Exception: Re-
allowed
[Bill to Ship to Model] availment of ITC
reversed earlier
• Reverse charge supplies

 ITC to be added to the output tax liability
• Deemed supplies
with interest @ 18% if value + tax of goods
without consideration
and /or services is not paid within 180 days
of the issuance of invoice.
EXCEPTIONS • Additions made to value
of supplies on account
 On payment, the ITC could be re-availed
of supplier’s liability
without any time limit.
being incurred by the
recipient of the supply
Restriction on availment of credit

ITC to be availed in respect of invoices or debit notes, the details of which have not been uploaded by
the suppliers in GSTR-1, cannot exceed 10% of eligible ITC available in respect of invoices or debit notes
the details of which have been uploaded by the suppliers in GSTR-1.

III. Provisions of section 17 relating to apportionment of

credit and blocked credits read with relevant rules are
summarized as under:
A. Apportionment of credit
Attributable to
Used partly for business
business purposes
and partly for non-
business purposes
Goods and/or
services ITC available
only as
Used partly for making
taxable (including zero
rated supplies) supplies Attributable to taxable
& partly for exempt supplies including
supplies zero rated supplies
Exempt supplies include reverse charge supplies & transactions in securities and exclude
activities specified in Schedule III except sale of land and sale of building when entire
consideration is received post completion certificate/first occupation, whichever is earlier.
B. Special provisions for banking companies and NBFCs
• Remaining 50% ITC

will lapse.
• Restriction of 50%
shall not apply to the
Option 1: Avail Option 2: Avail tax paid on supplies
proportionate 50% of eligible received from
another registration
ITC ITC within the same
entity.
• Option once
exercised cannot be
withdrawn during
remaining part of the
year.

6.90 INDIRECT TAXES
C. Apportionment of common credit in case of inputs and input

services T
Total IT on I + IS
T1 T2 T3 C1
IT on I+IS used IT on I+IS used Remaining ITC

exclusively for exclusively for Blocked credits u/s credited to ECrL
non-business exempt supplies 17(5) = T- (T1 + T2 + T3)
purposes
C2 T4
Common credit Credit attributable to I + IS

= C1 – T4 used exclusively in taxable
supplies including ZRS
D1 D2 C3
Credit attributable to exempt supplies- Remaining

Credit attributable to non- common credit
D1 = x C2
business purpose if common I + = C2 – (D1 + D2)
E = Value of ES during tax period IS used partly for business + non
F = Total turnover in the State during tax -business purposes
period D2 = 5% x C 2
If no turnover during the tax period/values
Eligible ITC
not available, values for last period may be
attributable to
used.
business &
taxable supplies
Ineligible ITC including ZRS
Total eligible ITC

To be reversed = T4 + C3

• C3 will be computed separately for ITC of CGST, SGST/ UTGST and IGST.
• ∑ (D1 + D2) will be computed for the whole financial year, by taking
exempted turnover and aggregate turnover for the whole financial year.
If this amount is more than the amount already reversed every month,
the differential amount will be reversed in any of the month till
September of succeeding year along with interest @ 18% from 1st April
of succeeding year till the date of payment.
• If this amount is less than the amount reversed every month, the
additional amount paid has to be claimed back as credit in the return of
any month till September of the succeeding year.
• Exempt supplies include reverse charge supplies & transactions in

securities.
• Exempt supplies exclude (i) activities specified in Schedule III except sale
of land and sale of building when entire consideration is received post
completion certificate/first occupation, whichever is earlier, (ii) services
of accepting deposits, extending loans/advances where the
consideration is interest/discount and the same are provided by persons
other than banking company/financial institution including NBFC, and
(iii) outbound (overseas) transportation of goods by a vessel.
• Aggregate value of exempt supplies and total turnover exclude central
excise duty, state excise duty, central sales tax and VAT.
• Value of exempt supply in respect of land and building is the stamp duty
value and for security is 1% of the sale value of such security.
IT = Input tax
I = Inputs
IS = Input services
ECrl = Electronic Credit Ledger
ZRS = Zero rated supply
ES = Exempt supplies

6.92 INDIRECT TAXES
D. Apportionment of common credit on capital goods
Total input tax (IT) on capital goods (CG)
(a) (b) (c)
IT on CG used exclusively for IT on CG used IT on CG not covered under (a) & (b)
non-business/exempt supplies exclusively for taxable denoted as ‘A’ and useful life of such
supplies including zero CG → 5 years from date of invoice
rated supply (ZRS)
Not credited in Electronic Credited to EcrL

Credit Ledger (ECrL) Credited to ECrL
Tc
Common credit on CG ⇒ T c = ∑ (A of
common CG whose useful life remains
Tm
during the tax period)
⇒ If CG under (a) subsequently gets covered
under (c), then ‘A’ = IT on CG under (a), and ‘A’ to
be credited to ECrL. T ie = 5% of ‘A’ for every
quarter or part thereof when CG was under (a)
and T ie to be added to output tax liability of the
Common credit of CG for a tax
tax period when ‘A’ is claimed.
period during their useful life ⇒ If CG under (b) subsequently gets covered
Tm = Tc/60 under (c), then IT claimed on CG under (b) to be
added to Tc
Te
Common credit towards exempted supplies

Te = x Tr
E → Aggregate value of exempt supplies during the

Added to output tax liability tax period; F → Total turnover in State during the tax
along with interest period. If no turnover during the tax period/values
not available, values for last tax period may be used.

• Tm is to be computed during the useful life of capital goods which

is five years from the date of invoice.
• Tie and Te are to be computed separately for ITC of CGST, SGST/
UTGST and IGST and declared in GSTR-3B
• Exempt supplies include reverse charge supplies & transactions in
securities.
• Exempt supplies exclude (i) activities specified in Schedule III
except sale of land and sale of building when entire consideration
is received post completion certificate/first occupation, whichever
is earlier, (ii) services of accepting deposits, extending
loans/advances where the consideration is interest/discount and
the same are provided by persons other than banking
company/financial institution including NBFC, and (iii) outbound
(overseas) transportation of goods by a vessel.
• Aggregate value of exempt supplies and total turnover exclude
central excise duty, state excise duty, central sales tax and VAT.
• Value of exempt supply in respect of land and building is the stamp
duty value and for security is 1% of the sale value of such security.

6.94 INDIRECT TAXES
BLOCKED CREDITS PART-A
GI, Servicing, R&M Leasing/renting/hiring F&B, Outcat,

Ineligible Ves & AC relating to ineligible of MV, Ves or AC on BT, HS, C&PS,
MV
MV, Ves, AC which ITC is disallowed LI & HI
EXCEPTIONS EXCEPTIONS EXCEPTIONS EXCEPTIONS EXCEPTIONS
When used for When used for- (i) When used for (i) Where a
(i) When ineligible
making (i) making further making an particular category
MV, Ves or AC are
taxable taxable supply of outward taxable of such inward
used for eligible
supplies of- such Ves or AC supply of the supplies is used for
purposes
(i) such MV (ii) passenger same category making an outward
(ii) When received
(ii) trptn of trptn service (sub- taxable supply of
by manufacturer of
passengers (iii) imparting contracting) or the same category
ineligible MV, Ves
(iii) imparting training on as an element of - [Sub-contracting]
or AC
training on navigating/flying a taxable or as an element of
(iii) When received
driving such such Ves/AC composite or a taxable
by a GI service
ineligible MV (iv) trptn of mixed supply. composite or
provider in respect
goods (ii) When mixed supply
of such ineligible
provided by an (ii) When provided
MV, Ves or AC
employer to its by an employer to
insured by it
employees its employees
under statutory under a statutory
obligation obligation
Credit available on the above exceptions
Travel benefits to Inward supplies Tax paid u/s 74 (Tax

Membership of club & short / not paid or
employees on vacation received by NRTP
health & fitness Centre erroneously refunded
(LTC/HT)
due to fraud etc.,) 129
EXCEPTION (Amount paid for release
EXCEPTION EXCEPTION
of goods and
conveyances in transit
Goods which are detained) and
When provided by an When provided by an
imported 130 (Fine paid in lieu of
employer to its employer to its
by him confiscation)
employees under a employees under a
statutory obligation statutory obligation

BLOCKED CREDITS PART-B
WCS for construction of Inward supplies received by taxable person for

immovable property construction of immovable property on his own
account including when such supplies are used in the
course or furtherance of business
EXCEPTIONS
EXCEPTIONS
Credit available on
such exceptions
(A) WCS for P & M
(B) WCS availed by a works (A) Construction of P & M
contractor for further supply of (B) Construction of
WCS [Sub-contracting] immovable property for
(C) Where value of WCS is not others
capitalized (C) Value of construction
is not capitalised
Inward supplies charged to Goods lost/ stolen/ destroyed/ Inward supplies

composition levy written off or disposed of by used for personal
way of gift or free samples consumption
Ineligible MV-Motor vehicle for transportation of (A) Construction includes re-construction/

persons with seating capacity of ≤ 13 persons renovation/ addition/ alterations/ repairs to
(including driver); Ves & AC-Vessel & Aircraft;
the extent of capitalisation to said immovable
GI-General insurance; R&M-Repairs &
maintenance; F&B-Food & beverages; Outcat-
property.
Outdoor catering; BT-Beauty treatment; HS- (B) P & M means apparatus, equipment, &
Health services; C&PS-Cosmetic & plastic machinery fixed to earth by foundation or
surgery; LI-Life insurance; HI-Health insurance; structural supports but excludes land,
NRTP-Non-resident taxable person; WCS-Works
building/ other civil structures,
contract service; LTC-Leave Travel Concession;
HT-Home town; trptn-transportation; P & M-
telecommunication towers, and pipelines laid
Plant & machinery outside the factory premises.

6.96 INDIRECT TAXES
III. Provisions of section 18 read with relevant rules are

A. Special circumstances enabling availing of credit
Special circumstances enabling availing of credit
Registered person
switching from Registered person's Person applying for Person obtaining
composition levy to exempt supplies registration within 30 voluntary
regular scheme of becoming taxable days of becoming registration
payment of taxes liable for registration
Credit entitled on
Credit entitled on
• Inputs as such held in stock
• Inputs as such held in stock
• Inputs contained in semi-finished goods held in
• Inputs contained in semi-
stock
finished goods held in stock
• Inputs contained in finished goods held in stock
• Inputs contained in finished
• Capital goods [In case of exempt supply
goods held in stock
becoming taxable Capital goods used
exclusively for such exempt supply] reduced
by 5% per quarter or part thereof from the
date of invoice
Note: ITC claimed shall be verified with the
corresponding details furnished by the corresponding
supplier.
On the day On the day On the day

immediately preceding On the day immediately immediately immediately
the date from which he preceding the date preceding the preceding the
becomes liable to pay from which such supply date from which date of
tax under regular becomes taxable he becomes registration
scheme liable to pay tax
ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice
by the supplier.

Conditions for availing above credit:

(i) Filing of electronic declaration giving details of inputs held in stock/contained in
semi-finished goods and finished goods held in stock and capital goods on the
days immediately preceding the day on which credit becomes eligible.
(ii) Declaration has to be filed within 30 days from becoming eligible to avail credit.
(iii) Details in (i) above to be certified by a CA/ Cost Accountant if aggregate claim
of CGST, SGST/ IGST credit is more than ` 2,00,000.
B. Special circumstances leading to reversal of credit/payment of amount

Special circumstances leading to reversal
of credit /payment of amount
Registered person (who has Supplies of registered Cancellation of Supply of capital goods
availed ITC) switching from person getting wholly registration (CG)/ plant and machinery
regular scheme of payment exempted from tax (P& M) on which ITC has
of tax to composition levy been taken
Amount to be paid is
Amount to be reversed is equivalent to ITC on : equivalent to higher of
• Inputs held in stock/ inputs contained in semi-finished or finished goods the following:
held in stock (i) ITC on CG or P&M
• Capital goods less 5% per quarter or
on the day immediately preceding the date of switch over/ date of part thereof from the
exemption/date of cancellation of registration date of invoice
(ii) Tax on transaction
value of such CG or P &
M
• If amount at (i)
Manner of reversal of credit on inputs and capital goods & other exceeds (ii), then
conditions reversal amount will
(i) Inputs ⇒ Proportionate reversal based on corresponding invoices. If such be added to output
invoices not available, prevailing market price on the effective date of switch tax liability.
over/ exemption/cancellation of registration should be used with due • Separate ITC reversal
certification by a practicing CA/ Cost Accountant is to be done for
(ii) Capital goods ⇒ Reversal on pro rata basis pertaining to remaining useful CGST, SGST/UTGST
life (in months), taking useful life as 5 years. and IGST
(iii) ITC to be reversed will be calculated separately for ITC of CGST, • Tax to be paid on
SGST/UTGST and IGST. transaction value
(iv) Reversal amount will be added to output tax liability of the registered when refractory
person. bricks, moulds, dies,
(v) Electronic credit/cash ledger will be debited with such amount. Balance jigs & fixtures are
ITC, if any, will lapse. supplied as scrap.

6.98 INDIRECT TAXES
Transfer of unutilised ITC on account of change in

In case of sale, merger, amalgamation, lease or transfer of business,
unutilised ITC can be transferred to the new entity if there is a specific
provision for transfer of liabilities to the new entity. The inputs and
capital goods so transferred should be duly accounted for by the
transferee in his books of accounts.
In case of demerger, ITC is apportioned in the ratio of value of entire

assets (including assets on which ITC has not been taken) of the new
constitution of registered person
units as per the demerger scheme.
Details of change in constitution are to be furnished on common

portal along with request to transfer unutilised ITC. CA/Cost
Accountant certificate is to be submitted certifying that change in
constitution has been done with specific provision for transfer of
liabilities.
Upon acceptance of such details by the transferee on the common

portal, the unutilized ITC is credited to his Electronic Credit Ledger.
registrations for multiple places of business
Transfer of unutilised ITC on obtaining separate
Registered person having separate registrations for multiple places of

business can transfer the unutilised ITC to any or all of the newly
registered place(s) of business in the ratio of the value of assets held
by them at the time of registration.
Value of assets means the value of the entire assets of the business
irrespective of whether ITC has been availed thereon or not.
The resgistered person should furnish the prescribed details on the

common portal within a period of 30 days from obtaining such
separate registrations.
within a State/UT
Upon acceptance of such details by the newly registered person

(transferee) on the common portal, the unutilised ITC is credited to
his electronic credit ledger.

IV. Provisions relating to utilization of ITC are

I. II.
III.
ITC of ITC of
IGST ITC of
CGST
IGST CGST SGST
SGST
CGST/SGST in
any order & in IGST
IGST, only
any proportion when ITC of
CGST = NIL
ITC of IGST =
NIL
ITC of ITC of
CGST SGST/
SGST/ UTGST
CGST
UTGST
8. TEST YOUR KNOWLEDGE

1. What is input tax?
2. What are the conditions necessary for availing ITC?
3. Can a person take ITC without payment of consideration for the supply along
with tax?
4. What is the time limit for taking ITC and reasons therefor?
5. What is the ITC entitlement of a newly registered person?
6. What is the tax implication of supply of capital goods by a registered person
who had taken ITC on such capital goods?

6.100 INDIRECT TAXES
7. A registered person transfers its business to another person.

Is such registered person allowed to transfer the unutilized ITC lying in its
electronic credit ledger to such transferred business? Discuss.
8. Swastik Pvt. Ltd. is a manufacturer of taxable goods. It purchased a machinery
for ` 8,00,000 on which IGST of ` 14,400 is paid. The company has claimed
depreciation under the Income-tax Act, 1961 on the full value of the machine,
i.e. including the IGST component as also availed ITC of ` 14,400 paid by it as
IGST.
Examine if the stand taken by the company is correct in law.
9. Sigma Consultants, an LLP of finance professionals, provides financial
consultancy services. It made an advance payment of ` 1,18,000 (inclusive of
IGST @ 18%) in the month of October to Azuro Computer Services for
developing a software. The software would be used by the LLP to enhance the
precision of the financial advice given by it to various clients. The balance
payment is to be made after the successful test run of the software in the month
of December. Sigma Consultants has availed ITC of IGST of ` 18,000 in the
month of October.
Do you think Sigma Consultants can avail such ITC? Examine the scenario with
reference to the relevant legal provisions.
10. A taxable person is in the business of information technology. He buys a car
(maximum seating capacity – 5 persons) for use of his Executive Directors.
Can he avail the ITC in respect of GST paid on purchase of such car?
11. A technical testing agency tests and certifies each batch of machine tools before
dispatch by BMT Ltd. Some of these tools are dispatched to a unit in a SEZ
without payment of GST as these supplies are not taxable.
The finance personnel of BMT Ltd. want to know whether they need to carry out
reversal of ITC on the testing agency’s services to the extent attributable to the
SEZ supplies. Give your comments.
12. ‘AB’, a registered person, was paying tax under composition scheme up to
30th July. However, w.e.f. 31st July, ‘AB’ becomes liable to pay tax under regular
scheme.
Is ‘AB’ eligible for any ITC?

13. Babla Enterprises is exclusively engaged in making exempt supply of goods and
is thus, not registered under GST. On 1st October, the exemption available on
its goods gets withdrawn. On that day, the turnover of Babla Enterprises was
` 50 lakh.
Examine the eligibility of Babla Enterprises for availing ITC, if any.
14. Mamta Trade Links trades in exempt goods and provides taxable services. It is
registered under GST. On 1st October, the exemption available on its goods
gets withdrawn.
Analyze the scenario and determine the eligibility of Mamta Trade Links for
availing ITC, if any, on inputs and/or capital goods used in the supply of exempt
goods.
15. Harshgeet Pvt. Ltd., a registered supplier, is engaged in the manufacture of
taxable goods. The company provides the following information pertaining to
purchases made/services availed by it during the month of July:
S. No Particulars GST (`)
(1) Raw material (to be received in the month of 2,50,000

September)
(2) Membership of a club availed for employees working in 1,45,000

the factory
(3) Inputs to be received in 5 lots, out of which 3rd lot was 80,000
received during the month
(4) Trucks used for transport of raw material 40,000
(5) Capital goods (out of 3 items, invoice for 2 items is 1,50,000

missing and GST paid on those items is ` 80,000)
Determine the amount of ITC available with Harshgeet Pvt. Ltd. for the month
of July by giving the necessary explanation for treatment of various items.
Subject to the information given above, all the other conditions necessary for
availing ITC have been fulfilled.
16. Jamku Ltd., a registered person, is engaged in the business of spices. It provides
following details in relation to GST paid on inward supplies procured by it
during the month of October.

S. No. Particulars GST (`)
(1) Raw spices purchase

- Raw spices sold to customers 50,000
- Raw spices used for personal use of directors 20,000
(2) Electric machinery purchased for being used in the 25,000

(3) Motor vehicle used for transportation of the employee 55,000
(4) Payment made to contractor for construction of staff 1,25,000

quarter
Determine the amount of ITC available with Jamku Ltd. for the month October
by giving the necessary explanation for treatment of various items. Subject to
the information given above, all the other conditions necessary for availing ITC
have been fulfilled.
17. Dina Ltd., a registered supplier from Maharashtra, is engaged in the
manufacture of passenger autos. The company provides the following details
of purchases made/services availed by it during the month of March:
S. No. Particulars GST (`)
(1) Purchase of iron which is used as a raw material 2,50,000

[Goods were received in two instalments - first in
March and the second in April]
(2) Purchase of accessories which were delivered 90,000

directly to the dealers of the company on the
direction of Dina Ltd.
[Only invoice was received by Dina Ltd.]
(3) Purchase of bus (seating capacity 15) for the 1,97,000

transportation of employees from their residence to
company and back
(4) General insurance taken on a car used by executives 5,200

of the company for official purposes

You are required to determine the ITC available with Dina Ltd. for the month
of March, by giving brief explanations for treatment of various items. Subject
to the information given above, all the other conditions necessary for availing
ITC have been fulfilled.
18. Comfortable (P) Ltd. is registered under GST in the State of Odisha. It is
engaged in the business of manufacturing of iron and steel products. It has
received IT engineering services from High-Fi Infotech (P) Ltd. for
` 11,00,000/- (excluding GST @ 18%) on 28th October. Invoice for service
rendered was issued on 5th November.
Comfortable (P) Ltd. made part payment of ` 4,20,000/- on 30th November.
Being unhappy with service provided by High-fi Infotech (P) Ltd., it did not make
the balance payment. Deficiency in service rendered was made good by High-
Fi Infotech (P) Ltd. by 15th April of next year. Comfortable (P) Ltd. made the
balance payment on 6th July of next year.
Examine the availability of ITC with Comfortable (P) Ltd. in respect of IT
engineering services received by it from High-Fi Infotech (P) Ltd.
19. M/s. Diwan & Sons of New Delhi, has placed an order for 250 kg of plastic
granules @ ` 50 per kg (exclusive of GST) on M/s. Karim & Bros. of Noida, U.P.
M/s. Karim & Bros. has agreed to deliver the goods at the warehouse of M/s.
Diwan & Sons at New Delhi.
While the order was getting packed at the factory of M/s. Karim & Bros., M/s.
Diwan & Sons got an order from Shubhkamna Sales of Hapur, U.P. for 250 kg
of plastic granules @ ` 60 per kg (exclusive of GST). In order to save on
transportation cost, M/s. Diwan & Sons asks M/s. Karim & Bros. to directly
deliver the plastic granules to Shubhkamna Sales at its godown located in
Hapur. Accordingly, M/s. Karim & Bros. has delivered the plastic granules at
the godown of Shubhkamna Sales at Hapur.
Examine the availability of ITC with M/s. Diwan & Sons & M/s. Karim & Bros.
Note: All the parties are registered under GST and rate of GST is 18%.
20. Paritosh & Co., a supplier of goods, pays GST under regular scheme. It has made
the following outward taxable supplies in a tax period:
Intra-State supply of goods 10,00,000

Inter-State supply of goods 8,00,000
It has also furnished the following information in respect of purchases made by

it in that tax period:
Intra-State purchases of goods 3,00,000
Inter-State purchases of goods 2,50,000
Paritosh & Co. has following ITCs with it at the beginning of the tax period:
CGST 57,000
SGST 60,000
IGST 1,40,000
Note:
(i) Rates of CGST, SGST and IGST are 9%, 9% and 18% respectively.
(ii) Both inward and outward supplies are exclusive of taxes, wherever
applicable.
(iii) All the conditions necessary for availing ITC have been fulfilled.
Compute the minimum GST, payable in cash, by Paritosh & Co. for the tax
period and the ITC to be carried forward to the next month. Make suitable
assumptions as required.
9. ANSWERS/HINTS
1. Input tax means the central tax (CGST), State tax (SGST), integrated tax (IGST)
or Union territory tax (UTGST) charged on supply of goods or services or both
made to a registered person. It also includes tax paid on reverse charge basis
and integrated goods and services tax charged on import of goods. It does
not include tax paid under composition levy.

2. Following four conditions are to be satisfied by the registered taxable person

for obtaining ITC:
(a) he is in possession of tax invoice or debit note or such other tax paying
documents as may be prescribed;
(b) he has received the goods or services or both;
(c) subject to section 41, the supplier has actually paid the tax charged in
respect of the supply to the Government; and
(d) he has furnished the return under section 39.
3. Yes, the recipient can take ITC. However, he is required to pay the
consideration along with tax within 180 days from the date of issue of invoice.
This condition is not applicable where tax is payable on reverse charge basis.
4. Refer point (vi) “Time limit for availing ITC: Due date of filing return for the
month of September of succeeding financial year or date of filing of annual
return, whichever is earlier” under Heading No. 3 “Eligibility and Conditions
for Taking Input Tax Credit [Section 16]”.
5. A person applying for registration can take input tax credit of inputs held in
stock and inputs contained in semi- finished or finished goods held in stock
on the day immediately preceding the date of grant of registration. If the
person was liable to take registration and he has applied for registration
within thirty days from the date on which he became liable to registration,
then ITC of inputs held in stock and inputs contained in semi- finished or
finished goods held in stock on the day immediately preceding the date on
which he became liable to pay tax can be taken.
In case of voluntary registration, ITC of such goods held in stock on the day
immediately preceding the date of registration can be taken.
6. In case of supply of capital goods or plant and machinery on which ITC has
been taken, the registered person shall pay an amount equal to the ITC taken
on the said capital goods or plant and machinery reduced by 5% per quarter
or part thereof from the date of invoice or the tax on the transaction value of
such capital goods, whichever is higher.
However, in case of refractory bricks, moulds and dies, jigs and fixtures when
these are supplied as scrap, the person can pay tax on the transaction value.
7. As per section 18(3), in case of sale, merger, demerger, amalgamation,
transfer or change in ownership of business etc., the ITC that remains

unutilized in the electronic credit ledger of the registered person can be

transferred to the new entity, provided there is a specific provision for transfer
of liabilities in such change of constitution.
The registered person should furnish the details of change in constitution on
the common portal and submit a certificate from practicing Chartered
Account/Cost Accountant certifying that the change in constitution has been
done with a specific provision for transfer of liabilities. Upon acceptance of
such details by the transferee on the common portal, the unutilized ITC gets
credited to his electronic credit ledger. The transferee should record the
inputs and capital goods so transferred in his books of account.
8. As per section 16(3), if the person taking the ITC on capital goods and plant
and machinery has claimed depreciation on the tax component of the cost of
the said items under the Income-tax Act 1961, the ITC on the said tax
component shall not be allowed.
Since in the given case, Swastik Pvt. Ltd. has claimed depreciation on the tax
component of the cost of the machine, it cannot claim ITC of IGST of ` 14,400
paid by it on the machine. It can either claim depreciation on the tax
component or avail ITC of such tax but cannot avail both the benefits
simultaneously.
9. As per section 16(2)(b), tax paid on supply of goods and/or services can be
availed as ITC only if such goods and/or services are received by the
registered person.
In the given case, Sigma Consultants has paid IGST of ` 18,000, in the month
of October, on advance for IT services intended to be used in the course or
furtherance of business. However, it cannot avail ITC of such tax in the month
of October as the services in relation to which the advance payment has been
made have not been received in that month.
10. No. ITC on motor vehicles for transportation of persons with seating capacity
of up to 13 persons (including driver), can be availed only if the taxable person
is in the business of transport of passengers or is providing the services of
imparting training on driving such motor vehicles or is in the business of
supply of such motor vehicles.
11. ITC is disallowed only to the extent it pertains to supplies used for non-
business purposes or supplies other than taxable and zero-rated supplies.
Supplies to SEZ units are zero rated supplies in terms of section 16(1) of the

IGST Act. Thus, full ITC is allowed on inward supplies of BMT Ltd. used for
effecting supplies to the unit in the SEZ.
12. ‘AB’ is eligible for ITC on inputs held in stock and inputs contained in semi-
finished or finished goods held in stock and capital goods as on 30th July. ITC
on capital goods will be reduced by 5% per quarter or part thereof from the
date of invoice.
13. Since the exemption available on goods being supplied by Babla Enterprises
gets withdrawn, it becomes liable to registration as its turnover has crossed
the threshold limit on the day when the exemption is withdrawn.
Assuming that Babla Enterprises applies for registration within 30 days of
1st October and it obtains such registration, it will be entitled to take credit
of input tax in respect of inputs held in stock and inputs contained in semi-
finished or finished goods held in stock on the day immediately preceding
the date from which it becomes liable to pay tax, i.e. 30th September [Section
18(1)(a)]. Input tax paid on capital goods will not be available as ITC in this
case.
14. If the exempt supply made by a registered person becomes a taxable supply,
provisions of section 18(1)(d) become applicable. In the given case, since
Mamta Trade Links is a registered person, section 18(1)(d) will be applicable.
As per section 18(1)(d), Mamta Trade Links will be entitled to take credit of
input tax in respect of inputs held in stock and inputs contained in semi-
finished or finished goods held in stock relatable to such exempt supply and
on capital goods exclusively used for such exempt supply on the day
immediately preceding the date from which such supply becomes taxable, i.e.
30th September. ITC on capital goods will be reduced by 5% per quarter or
part thereof from the date of invoice.
15. Computation of ITC available with Harshgeet Pvt. Ltd. for the month of
July
Particulars ITC (`)
Raw Material Nil

[ITC not available as raw material is not received in July]
Membership of a club availed for employees working in Nil

the factory

[Blocked credit in terms of section 17(5)]
Inputs to be received in 5 lots, out of which 3rd lot was Nil

received during the month
[In case of goods received in lots, ITC can be taken only
upon receipt of the last lot]
Trucks used for transport of raw material 40,000

[ITC of GST paid on motor vehicles used for transportation
of goods is allowed unconditionally]
Capital goods 70,000

[ITC can be availed only on the basis of a valid document
(invoice). Thus, GST paid on items for which invoice is
missing, i.e. ` 80,000, is not available.]
Total ITC 1,10,000
16. Computation of ITC available with Jamku Ltd. for the month of October
Particulars ITC (`)
Purchase of raw spices which are sold to customers 50,000

[Every registered person is entitled to take credit of input tax
charged on any supply of goods to him which are used or
intended to be used in the course or furtherance of his
business.]
Purchase of raw spices for personal use of directors Nil

[ITC is not available on goods used for personal consumption.]
Electric machinery purchased for being used in the 25,000

[Every registered person is entitled to take credit of input tax
charged on any supply of goods to him which are used or
intended to be used in the course or furtherance of his
business.]
Motor vehicle used for transportation of employee Nil

[ITC on motor vehicles for transportation of persons with

seating capacity ≤ 13 persons (including the driver) is blocked
except when the same are used for (i) making further taxable
supply of such motor vehicles (ii) making taxable supply of
transportation of passengers (iii) making taxable supply of
imparting training on driving such motor vehicles.
In the given case, since the supplier is in the business of spices,
ITC on motor vehicle used for transportation of the employee
is blocked credit. ]
Payment made to contractor for construction of staff quarter Nil

[ITC is not available on goods or services or both received by
a taxable person for construction of an immovable property
(other than plant or machinery) on his own account including
when such goods or services or both are used in the course or
furtherance of business.]
Total ITC 75,000
17. Computation of ITC available with Dina Ltd. for the month of
March
Particulars ITC (`)
Purchase of iron used as a raw material Nil

[When inputs are received in instalments, ITC can be availed
only on the receipt of last instalment. Hence, since last
instalment is received in April, ITC cannot be availed in March.]
Purchase of accessories delivered directly to the dealers of the 90,000

company
[Goods delivered to another person on the direction of the
registered person by way of transfer of documents of title or
otherwise, either before or during the movement, are deemed
to have been received by such registered person. Thus, ITC is
available to the registered person, on whose order/direction
the goods are delivered to a third person.]

Bus for the transportation of employees 1,97,000

seating capacity > 13 persons (including the driver) used for
any purpose is allowed.
General insurance taken on car used by executives of the Nil

company for official purpose
seating capacity ≤ 13 persons (including the driver) is blocked
except when the same are used for (i) making further taxable
supply of such motor vehicles (ii) making taxable supply of
transportation of passengers (iii) making taxable supply of
imparting training on driving such motor vehicles. Further,
ITC is not allowed on services of general insurance relating to
such ineligible motor vehicles.
Since, the car is not used for any of the eligible purposes, ITC
thereon is blocked and thus, ITC on general insurance taken
on such car is also blocked.]
Total ITC 2,87,000
18. Every registered person is entitled to take credit of input tax charged on any
supply of goods and/or services which are used or intended to be used in the
course or furtherance of his business if, inter alia, he is in possession of a tax
invoice issued by a supplier and he has received the goods and/or services.
The registered person must pay to the supplier, the value of the goods and/or
services along with the tax within 180 days from the date of issue of invoice.
In the event of failure to do so, the corresponding credits availed by the
registered person would be added to his output tax liability, with interest.
However, once the recipient makes the payment of value of goods and/or
services along with tax, he will be entitled to avail the credit again without
any time limit. In case part-payment has been made, proportionate credit
would be allowed.
In the given case, High-fi Infotech (P) Ltd. provides the service in the month
of October and Comfortable (P) Ltd. receives the invoice in the month of
November. Therefore, in view of the above provisions and assuming all other

conditions required for availing ITC having been fulfilled, ITC of ` 1,98,000
(` 11,00,000 x 18%) will be availed by Comfortable (P) Ltd. in the month of
November when it receives the invoice issued by High-fi Infotech (P) Ltd.
However, proportionate ITC amounting to ` 1,33,932 ⇒ [(` 12,98,000 -
` 4,20,000)/118] x 18] will be added to the output tax liability of Comfortable
(P) Ltd. as full payment has not been made within 180 days of issuance of the
invoice, i.e. by 4th May of next year. ITC of ` 1,33,932 can, however, be availed
again by Comfortable (P) Ltd. in the month of July next year when it makes
the balance payment.
19. One of the conditions for availing ITC is that the registered person taking the ITC
must have received the goods and / or services. However, goods delivered to a
third person on the direction of the registered person by way of transfer of
documents of title or otherwise, either before or during the movement, are
deemed to have been received by such registered person. So, ITC is available to
the registered person, on whose order the goods are delivered to a third person
even though the registered person does not receive the goods.
In the given case, goods have been delivered by M/s. Karim & Bros. (supplier)
to Shubhkamna Sales (third person) on the direction of M/s. Diwan & Sons
(registered person). Therefore, in view of the above provisions, ITC of ` 2,250
(` 50 x 250 x 18%) will be available to M/s. Diwan & Sons (registered person)
on the purchase of 250 kg of plastic granules @ 50 per kg.
Further, in this case there is another supply between Diwan & Sons (supplier)
and Shubhkamna Sales (recipient). Therefore, Shubhkamna Sales can avail
ITC of ` 2,700 (` 60 x 250 x 18%) on the purchase of 250 kg of plastic granules
@ 60 per kg.
20. Computation of GST payable on outward supplies
S.No. Particulars CGST @ SGST @ IGST @ Total (`)

9% (`) 9% (`) 18% (`)
(i) Intra-State supply 90,000 90,000 1,80,000

of goods for
` 10,00,000

(ii) Inter-State supply 1,44,000 1,44,000

of goods for
` 8,00,000
Total GST payable 3,24,000
Computation of total ITC
Particulars CGST @ SGST @ IGST @

9% (`) 9% (`) 18% (`)
Opening ITC 57,000 60,000 1,40,000
Add: ITC on Intra-State purchases of 27,000 27,000 Nil

Add: ITC on Inter-State purchases of Nil Nil 45,000

Total ITC 84,000 87,000 1,85,000
Computation of minimum GST payable from electronic cash ledger
Particulars CGST @ SGST @ IGST @ Total (`)

9% (`) 9% (`) 18% (`)
GST payable 90,000 90,000 1,44,000 3,24,000
Less: ITC [First ITC of IGST (38,000) (3,000) (1,44,000) 1,85,000

should be utilized in full - IGST IGST IGST
first against IGST liability
and then against CGST
and SGST liabilities in a
manner to minimize cash
outflow]
(52,000) (87,000) 1,39,000

CGST SGST

Nil Nil Nil Nil

Minimum GST payable
in cash
ITC balance to be 32,000 Nil Nil 32,000

carried forward next
month
Note : The above computation is one of the many ways to set off the ITC of
IGST (` 41,000-after set off against IGST liability) against CGST and SGST
liability to compute minimum GST payable in cash. To illustrate, IGST of
` 10,000 can be set off against SGST payable and IGST of ` 31,000 can be set
off against CGST payable. In this situation also, the net GST payable will be
nil but the ITC of CGST and SGST to be carried forward will be ` 25,000 and
` 7,000 (totaling to ` 32,000) respectively. However, if the entire ITC of `
41,000 is set off against CGST payable, then SGST of ` 3,000 will be payable
in cash thus, increasing the cash outflow. Therefore, such a set off would not
be advisable for computing the minimum GST payable.

AMENDMENTS MADE VIDE THE FINANCE ACT, 2020

The Finance Act, 2020 has become effective from 27.03.2020. However, most of the
amendments made in the CGST Act and the IGST Act vide the Finance Act, 2020 would
become effective only from a date to be notified by the Central Government in the
Official Gazette. Such a notification has not been issued till the time this Study Material
is being released for printing. Therefore, the applicability or otherwise of such
amendments for May 2021 and/or November 2021 examinations shall be announced
by the ICAI only after such notification is issued by the Central Government.
In the table given below, the existing provisions 9 relating to section 16 are
compared with the provisions as amended by the Finance Act, 2020.
Once the announcement for applicability of such amendments for examination(s)
is made by the ICAI, students should read the provisions given hereunder in place
of the related provisions discussed in the Chapter.
Existing provisions Provisions as amended by Remarks

the Finance Act, 2020
Sub-section (4) Sub-section (4) Date of issuance of
A registered person shall A registered person shall debit note and date
not be entitled to take not be entitled to take of issue of underlying
input tax credit in respect input tax credit in respect invoice is being de-
of any invoice or debit of any invoice or debit note linked for the purpose
note for supply of goods or for supply of goods or of availing input tax
services or both after the services or both after the credit. Therefore,
due date of furnishing of due date of furnishing of under the amended
the return under section 39 the return under section 39 position, ITC can be
for the month of for the month of availed on a debit
September following the September following the note raised after 30th
end of financial year to end of financial year to September following
which such invoice or which such invoice or debit the end of the
invoice relating to such note pertains or furnishing financial year to
debit note pertains or of the relevant annual which the invoice
furnishing of the relevant return, whichever is earlier. linked to such debit
annual return, whichever is note pertains.
earlier.
9
Provisions existing as on the date when the Study Material was released for printing

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CHAPTER 6

INPUT TAX CREDIT

© The Institute of Chartered Accountants of India

Eligibility and conditions

How ITC is utilised

© The Institute of Chartered Accountants of India

Scheme of ITC - At a Glance

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Input service means any service used or intended to be used by a supplier

© The Institute of Chartered Accountants of India

Principal means a person on whose behalf an agent carries on the business

© The Institute of Chartered Accountants of India

3. ELIGIBILITY AND CONDITIONS FOR TAKING INPUT

Section 16 Eligibility and conditions for taking input tax credit

Sub-section Clause Particulars

(1) Every registered person shall, subject to such conditions and

(2) Notwithstanding anything contained in this section, no registered

(a) he is in possession of a tax invoice or debit note issued by

(b) he has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be

(i) where the goods are delivered by the supplier to

© The Institute of Chartered Accountants of India

(ii) where the services are provided by the supplier

(c) subject to the provisions of section 41, the tax charged in

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in

© The Institute of Chartered Accountants of India

Chapter V: Input Tax Credit of the CGST Rules

Rule 36 Documentary requirements and conditions for claiming input

(1) The input tax credit shall be availed by a registered person,

(a) an invoice issued by the supplier of goods or services or

(b) an invoice issued in accordance with the provisions of

(c) a debit note issued by a supplier in accordance with the

(d) a bill of entry or any similar document prescribed under

(e) an input service distributor invoice or input service

© The Institute of Chartered Accountants of India

services or both, GSTIN of the supplier and recipient and place of

(3) No input tax credit shall be availed by a registered person in respect

(4) Input tax credit to be availed by a registered person in respect

Rule 37 Reversal of input tax credit in the case of non-payment of

Provided that the value of supplies made without consideration as

Provided further that the value of supplies on account of any amount

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Conditions for taking ITC [Section 16(2)]

© The Institute of Chartered Accountants of India

Restricted ITC on invoices/debit notes not uploaded by supplier in

GSTR-1 is a monthly/quarterly statement containing details of outward

However, in respect of invoices/debit notes the details of which are

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when details of some invoices are uploaded by the suppliers

ITC on invoices/debit 100% ITC can be

ITC on invoice/debit 10% of the eligible ITC

✪ Restricted amount of ITC claimed on invoices/debit

© The Institute of Chartered Accountants of India

Invoices Amount of ITC Amount of ITC