Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 18] Mode of Availability of Input Tax Credit (ITC) in Special Circumstances

The provisions of section 18 are given below –

[Section 18] Mode of Availability of Input Tax Credit (ITC) in Special Circumstances under
[Section 18] Mode of Availability of Input Tax Credit (ITC) in Special Circumstances under

1.   Fresh GST Registration–

The case of fresh registration, covered by section 18(1)(a), is as follows –

1.    A person has applied for GST registration within 30 days from the date on which he becomes liable to GST Registration.

2.   On his uploading registration request, registration has been granted.

3.   If the above two conditions are satisfied, he is entitled to take credit of input tax in respect of –

a.   inputs held in stock;

b.   inputs contained in semi-finished goods, and

c.   inputs contained in finished goods.

Input tax credit is available in respect of these held in stock on the day immediately preceding the date from  which he becomes liable to pay tax. However, a registered person shall not be entitled to take input tax credit  in respect of any supply of goods/services to him after the expiry of 1 year from the date of issue of tax invoice  relating to such supply.

Example :

X deals in manufacture and sale of readymade garments in Hyderabad. He becomes liable to pay GST on September 3, 2020  (prior to this his aggregate turnover was less than Rs. 20,00,000). He submits online application for registration on September  17, 2020 and gets GSTIN on September 19, 2020. He is eligible for input tax credit on input held in stock (and/or contained  in semi-finished/finished goods) as on September 2, 2020 (i.e., the day immediately preceding the day when he becomes  liable to pay GST).

2.   Voluntary GST Registration –

The case of voluntary registration, covered by section 18(1)(b), is as follows –

1.    A person has applied for GST registration (his turnover is less than Rs. 20 lakh, law does not require him to get registration, even than he has applied for registration).

2.   On his uploading registration request, registration has been granted.

3.   If the above two conditions are satisfied, he is entitled to take credit of input tax in respect of –

a.   inputs held in stock;

b.   inputs contained in semi-finished goods, and

c.   inputs contained in finished goods.

Input tax credit is available in respect of these held in stock on the day immediately preceding the date of grant  of registration. However, a registered person shall not be entitled to take input tax credit in respect of any supply  of goods/services to him after the expiry of 1 year from the date of issue of tax invoice relating to such supply.

See also  Levy and Collection of GST under CGST Act, IGST Act and UTGST Act.

Example :

X deals in manufacture and sale of plastic flooring in Madurai. His annual aggregate turnover is not more than Rs. 15 lakh.  There is no other provision under which GST registration is required. However, he applies for GST registration by  submitting online request on October 12, 2020 and gets GSTIN on October 18, 2020. He is eligible for input tax credit on input  held in stock (and/or contained in semi-finished/finished goods) as on October 17, 2020 (i.e., the day immediately preceding  the day of grant of registration).

3.   Registered Person ceases to pay GST under Composition Scheme –

Section 18(1)(c) covers the case  when a Composition Scheme dealer ceases to pay tax under Composition Scheme. This section is applicable as  follows –

1.   A person has opted for Composition Scheme [see para 512].

2.   During the year, he ceases to pay tax under Composition Scheme (as his turnover exceeds the specified limit).

3.   If the above two conditions are satisfied, he is entitled to take credit of input tax in respect of –

a.   inputs held in stock;

b.   inputs contained in semi-finished goods;

c.   inputs contained in finished goods, and

d.   capital goods.

Input tax credit is available in respect of these held on the day immediately preceding the date from which he  becomes liable to pay GST under normal provisions. However, a registered person shall not be entitled to take  input tax credit in respect of any supply of goods/services to him after the expiry of 1 year from the date of issue  of tax invoice relating to such supply.

Example :

Case 1 –

X deals in retail trading of readymade garments. He has opted for Composition Scheme and pays GST at the rate  of 1%. However, his aggregate turnover exceeds the specify amount of Rs 1 Crore on December 8, 2020. Consequently, he  ceases to pay GST under Composition Scheme (with effect from December 9, 2020).

He is eligible for input tax credit on input held in stock (and/or contained in semi-finished / finished goods) and capital  goods as on December 8, 2020 (i.e., the day immediately preceding the day on which he becomes liable to pay GST under normal provisions ).

However, credit on Capital Goods shall be calculated proportionately for remaining useful life of the Capital Asset.

4.   When an Exempt Supply becomes a Taxable Supply under GST Act–

Section 18(1)(d) covers the case when an exempt  supply of goods/services by a registered person becomes a taxable supply. Such person shall be entitled to take  credit of input tax in respect of –

a.   inputs held in stock;

b.   inputs contained in semi-finished goods;

c.   inputs contained in finished goods, and

d.   capital goods.

Input tax credit in respect of these goods (held in stock relatable to such exempt supply) and on capital goods  (exclusively used for such exempt supply) shall be available on the day immediately preceding the date from  which such supply becomes taxable. However, a registered person shall not be entitled to take input tax credit  in respect of any supply of goods/services to him after the expiry of 1 year from the date of issue of tax invoice  relating to such supply.

See also  Rule 6DD – Exception to the [Section 40A(3)(a)] Payment in excess of Rs. 10,000

5.   Input Tax Credit (ITC) in case of change in the constitution of Registered Person –

Section 18(3) covers the case  when there is a change in constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business with the provision of transfer of liabilities. In such a case, the registered person  is allowed to transfer input tax credit which remains unutilised in his electronic credit ledger to such sold,  merged, demerged, amalgamated, leased or transferred business as follows –

1.    The registered person shall, in the event of sale, merger, etc., furnish the details of sale, merger, demerger, 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.

2.    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.

3.    The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant/cost accountant certifying that the sale, merger, demerger, etc., has been done with a specific provision for the transfer  of liabilities.

4.    The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the unutilized credit specified in Form GST ITC-02 shall be credited to his electronic credit ledger.

5.    The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

6.   When a Registered Person who has availed Input Tax Credit (ITC) opts for Composition Scheme –

Section  18(4) covers the following two cases –

1.    When any registered person who has availed of input tax credit opts to pay tax under Composition Scheme.

2.   Where the goods/services supplied by a registered person become wholly exempt.

In these two cases, the registered person 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 –

a.   inputs held in stock;

b.   inputs contained in semi-finished goods;

c.   inputs contained in finished goods, and

d.   capital goods.

This payment shall be made in respect of inputs held on the day immediately preceding the date of exercising  of such option or, as the case may be, the date of such exemption. After payment of such amount, the balance  of input tax credit, if any, lying in his electronic credit ledger shall lapse.

7. Supply of Capital Goods on which Input Tax Credit (ITC) has taken –

Such a case is covered by section 18(6).  These provisions are given below –

See also  [Section 32(2)]- Carry Forward and Set Off of Unabsorbed Depreciation

1.   The taxpayer is registered under GST.

2.   He has availed input tax credit at the time of inward supply of capital goods/plant and machinery.

3.   Subsequently, these capital goods/plant and machinery are supplied to another person.

4.   Input tax credit will have to be reversed as follows –

a.   input tax credit taken on the said capital goods (as reduced by the percentage points), or

b.   GST on transaction value, whichever is higher.

5.   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 [in such a case, point 4(a) above will be irrelevant].

6.   The above provisions of section 18(6) for reversal of input tax credit availed on capital goods would be applicable to banks only to the extent of the input tax credit availed by it. In case a banking company opts to avail  input tax credit to the extent of 50 % in terms of the second proviso to section 17(4), reversal of credit would  be calculated with reference to 50 % of the input tax credit availed by it on capital goods.

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