Section 16 of CGST Act: Statutory Provision
(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 or section 43A], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization 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.
[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019]
Analysis of the Provision
Registered person to take credit:
Every registered person subject to Section 49 (payment of tax), shall 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. The input tax credit is credited to the electronic credit ledger.
Rule 36 of the Central Goods and Service Tax Rules, 2017 provides that input tax credit can be taken on the basis of any of the following documents:
(i) Invoice issued under section 31 by supplier of goods or services.
(ii) Debit note issued under section 34 by supplier of goods or services.
(iii) Bill of entry or any similar documents under Custom Act, 1962.
(iv) Invoice prepared in respect of supplies made under reverse charge basis issued u/s 31(3)(f).
(v) Invoice/ Credit Note issued by ISD for distribution of credit in accordance with Rule 54(1) of CGST Rules, 2017.
It is important to observe the words ‘used by him’ and ‘in his businesses as appearing in section 16(1). These words refer to the registered taxable person in question and not the legal entity. So, input tax paid in a State must not be in relation to the business of a taxable person in another State, even if belonging to the same person.
Credit in case registration cancelled:
When ‘registered person’ is only entitled to take credit, registration is a pre-requisite to claim credit. And if registration once obtained is later cancelled, no further credits from the date of cancellation would be eligible.
Not only will that, as at the date of such cancellation reversal of credits under section 29(5) come into operation without any provision for refund of any surplus credit after such reversal too. Care must be taken that registration is not cancelled so that credits are not endangered. This aspect becomes significant while planning M&A transactions where business is transferred on a given date to another existing or new entity.
In all these transactions, ‘credit preservation’ would be a key component in the M&A transaction structure. Credits can be irretrievably lost if there were a break in the registration position of transferor or transferee. Reference may be had to section 85 and rule 41 for detailed discussion about credit transfer in such transactions.
Credit in case registration suspended:
Suspension of registration is NOT cancellation of registration. However, during the period of suspension, there is presumption of stoppage of business as a result, inward supplies during suspension are not admissible as it contradicts with such suspension.
Please note that suspension is the result of ‘application’ by taxable person as noted from rule 21A. It does not lie with the taxable person to make such application for suspension of registration pending settlement of all dues to enable cancellation of registration and at the same time assert the existence (and continuation) of business by claiming credit on inward supplies. As such, where registration is suspended, credit is NOT admissible due to the presumption that is contrary to the premise in section 16(1).
Wastage of inputs in the course of production:
Credit in respect of inputs that may have been wasted during the course of production of finished products does not cease to be ‘used or intended to be used’ in the course or furtherance of business. As such, there is no restriction to read into the language of section 16(1).
In fact, the full extent of credit would be available whether the extent of wastage of inputs in the course of production of finished goods is within normal wastage norms or even exceeds that to be called abnormal wastage of inputs. Unless there is a diversion of inputs (in respect of which credit has been availed), there is no embargo on taking and retaining input tax credit.
Section 17(5)(h) restricts credit on “goods lost” since these can no longer be used for the purpose of business but does not provide for restriction of credits on “loss of goods” which could be a process loss inherent to the nature of product on which credit has been availed.
Therefore, “goods lost” must be given a completely different meaning as compared to “goods lost during production / process or a normal / abnormal loss”. Please note that such in-process loss occurring in the course of job work would receive different treatment. Where the job work loss (of inputs) is normal loss, then credit claimed by the Principal would be undisturbed, but credit related to abnormal loss (of inputs) would be regarded as ‘non return of inputs by job worker’ which is ‘deemed to be supply’ under section 19(3) and 19(6), in case of capital goods.
The CENVAT Credit Rules, 2004 under the excise and service tax regime allowed for credits on input and input services used for manufacture of excisable goods or for rendering taxable services. The credit under GST law is available on procurements which are “used” or “intended to be used” in the course or furtherance of business. Hence, any procurements though not having any remote connection with the manufacturing or rendering of outward supplies, would also qualify for input tax credit so long as it is used or intended to be used for the purpose of business.
Eg. Air Conditioner installed in the cabin of the Managing Director, Maharashtra has no correlation with the car manufactured at the Company Plant in Gujarat but the credit of tax relating to such air conditioner would be available since the air conditioner has been installed for the purpose of business.
“One-to-one correlation” of credit from unrelated businesses with single GSTIN:
There is a well-accepted principle in any value added tax system to inquire whether the given set of rules requires ‘one-to-one correlation’ for credit admissibility and utilization. An example may present this principle better.
Say, a proprietor runs a furniture trading business in Indore, MP and a software services business in Jabalpur, MP. If the given tax system does not permit cross-utilization of credit (validly availed) in the furniture trading business with the output liability in the software services business then, it can be said that that tax system requires ‘one-to-one correlation’.
But, if another tax system (which GST is) allows such cross-utilization, then it can be said that ‘one-to-one correlation’ is NOT required. Taking this principle into the furniture business, credit availed in respect of inputs purchased for customer ‘A’ can be utilized towards payment of output tax supplied to customer ‘B’. This too, is an example of the principle at work. As long as all credits and corresponding output tax liability are contained within one single GSTIN, such cross-utilization is freely permitted.
Credit involved in ‘capital or debt’ raising activities:
There are a host of instances due to ‘remoteness’ of connection between taxable outward supplies and the expenditure involving GST credit. Experts caution that absence of a specific embargo in, say, section 17(5) for such cases is reason enough to claim credit but consider that these expenditure have been a riddled with controversy and contested as to whether they are ‘used in business’.
Time limit to avail the input tax credit:
A registered person is not entitled to avail input tax credit on tax invoice/ debit notes after the due date of furnishing of the return under section 39 for the month of September of the subsequent financial year or furnishing of the relevant annual return, whichever is earlier. In fact, not only is registration a pre-requisite (see, ‘registered taxable person’ shall be entitled to claim credit) but filing of return under section 39 is also a requirement. Input tax credit is a right that does not ‘vest’ until the last of conditions in section 16(2) are fulfilled.
Section 16(2) lays down these steps that can be taken immediately or in course of time. And once all these steps are taken then the right i.e. ‘available’ becomes a right that can be ‘availed’. After the credit stands availed, it is available without any time limit. Section 18(4) provides a condition (known at the time of availing credit) that this credit will be reversed if the outward supplies become exempted. Other than this situation, the credit availed is permanently available to the taxable person.
Section 16(4) provides for time limit for taking credit for Invoices and Debit Notes. Bill of Entry is not mentioned in Section 16(4) and hence it appears that there is no time limit for taking credit in case of Bill of Entry.
It would be important to note that the due date for availing credit of debit notes, it is linked to the financial year to which invoice relating to such debit note pertains to and not the financial year in which the debit note has been issued.
Deemed receipt of goods:
Section 16 permits a registered person to avail credit only after he has received the said goods or services or both. However, in case of bill to-ship to transactions (including where such goods are sent for job work), by which the registered person instructs his supplier to ship the goods to another person on his behalf, the date of receipt of goods by such another person shall be deemed to be the date of receipt of goods by the said registered person.
Therefore, what exactly does ‘received’, mean in this context? Does it refer to actual receipt of goods at factory premises or even constructive receipt of goods would suffice? Broadly, receipt of goods may be said to be complete when goods have been supplied as per the recipient’s instructions and the supplier is discharged from any further liability on such goods. The delivery must be complete in all respects to the utmost satisfaction of the recipient. The point of acceptance in cases of pre-requisite of quality control may have to be clear.
Goods received in instalments:
If goods are received in instalments against a single invoice, credit can be availed upon receipt of last instalment of goods.
Example: A consignment of coal is to be dispatched from Kolkata to Mumbai using five trucks. An invoice was issued to the recipient on March 30, 2018. Four trucks reached the claimant by March 30, 2018 but the truck carrying the final lot of the consignment reached the recipient only on April 2, 2018. In this case, input tax credit for the entire consignment can be availed only in the month of April 2018.
Receipt of Services:
The recipient can claim credit only upon receipt of services except a situation mentioned in Explanation to Section 16(2)(b). In the commercial world, while it is easy to demonstrate receipt of goods (by way of physical stock, e-way bill, GRN, etc), the same is not to be in case of services which is an intangible in nature. Determination of actual receipt of services could be a formidable task especially when the contracting period for provision of service extends beyond a tax period but consideration is received in advance.
Explanation to Section 16(2) (b) has been amended to include services. It has been stated that the registered person will be deemed to have received the services where the services are provided by the supplier to any person on direction of and on account of such registered person.
The person receiving any services may be different from the person who is liable to make the payment as the recipient under the law. The definition of recipient under the GST law has been defined to mean the person liable to make the payment. However, there are multiple cases where the payment is made by a particular person, but the services are received by another person. In such a situation, the person liable to make the payment will be deemed to have received the services.
For instance, X is providing advisory services to Z for which the payment is agreed to be made by Y. In this situation, Y will be deemed to have received the services as per the new deeming fiction in the Explanation to Section 16(2). Thereby, Y will be allowed to avail input tax credit even though he is not in actual receipt of the services.
Failure to pay to supplier of goods or service or both, the value of supply and tax thereon:
Where the recipient of goods or services or both have failed to pay the supplier within 180 days from date of invoice, input tax credit availed, in proportion to such unpaid consideration shall be added to the recipient’s output tax liability along with interest as may be applicable.
Such non-payment of the value of invoice must be disclosed in FORM-GSTR 2 filed for the month immediately following the expiry of 180 days from the date of issue of invoice. However, such input tax credit may be reclaimed as and when the unpaid amount (including taxes) is subsequently paid.
Capital goods on which depreciation is claimed:
Input tax credit shall not be allowed on the tax component of the cost of capital goods and plant and machinery if depreciation on such tax component has been claimed under the provisions of the Income Tax Act, 1961.
Unmatched credit capped at ’10 per cent’:
section 16(2)(c) places an onerous burden on trade to claim credit ‘after’ tax has been deposited with the Government by the supplier. This clause operates like a ‘condition precedent’ to claim credit.
Rule 36(4) has been inserted vide notification 49/2019-CT dated 9 Oct 2019 and it applies to all returns filed after 9 Oct 2019, that is, to Sept returns as well. This sub-rule states that (i) eligible credits appearing in GSTR 2A will be allowed (total credits minus ineligible credits under 17(2), 17(5), etc.) and (ii) additional unmatched ad hoc credit of 10 per cent of the eligible credits.
Further, relaxation has been provided via Circular No. 142/12/2020- GST dated 9th October, 2020 while filing of returns for the period February to August 2020 and will be applicable on a cumulative basis for these months while filing of return for September 2020.
|Registration||16(1)||Payment to supplier within|
|Possession of valid tax|
|16(2)(a)||Actual end-use in taxable|
|Delivery of goods or|
services (complete and
|16(2)(b)||Not blocked (default)||17(5)|
|Payment of tax by supplier||16(2)(c)||Not ineligible (special|
|Credit show in return filed||16(2)(d)||Time limit to claim credit||16(4)|
Summary of Section 16 of CGST Act
- The claimant should be registered under the GST Law to avail the input tax credit (except for certain exceptions covered under Section 18)
- The goods and/ or services must be used “by him” in the course or furtherance “of his” business.
- Possession of original tax Invoice/Supplementary Invoice/ Debit note/ ISD invoice/ Bill of Entry and other related documents is a must.
- The said document must contain all the particulars prescribed / specified in Rule 46 of Central Goods and Service Tax Rules, 2017 relating to a Tax Invoice. It may be noted that the Tax Invoice or such other document can contain additional details other than those prescribed but NO LESS. For details of invoice, see Chapter VI of the CGST Rules. This requirement has been relaxed wef September 4, 2018. The registered person can avail input tax credit if the documents contain the following minimum details
- Amount of tax charged
- Description of goods or services
- Total value of supply of goods or services or both
- GSTIN of the supplier and recipient
- Place of supply in case of inter-State supply
- Supplier of goods and/ or services must upload the details of such documents in the common portal i.e. GSTN. Subject to section 41 and 43A being claim of ITC and provisional acceptance thereof, the supplier must have remitted the tax charged on such supplies. The new return filing mechanism (Section 43A) may allow taking of input tax credit to the recipient in certain situations and subject to certain conditions even if payment of tax is not made by the supplier. So, payment of tax by the supplier has been made subject to the procedure in the new return filing mechanism which is yet to be notified.
- Vesting condition for claiming input tax credit is filing return u/s 39 and not making supply out of such inward supplies.
- The claimant should have received the goods / services. Input tax credit in case of supplies in installment, would be on receipt of last installment of goods.
- The law casts an obligation on the recipient of supply availing credit to effect payment to the supplier within a period of 180 days from the date of invoice. If such payment is not effected/partially effected by the recipient to the supplier, Rule 37 obligates reversal/proportionate reversal of input tax credit so availed leading to consequential levy of tax and interest. Proviso to section 16(2) provides that the taxable person shall be entitled to avail input tax credit after making payment of the amount towards value of supply of goods or services or both along with tax payable thereon. Further, Rule 37(4) provides that the time limit specified under section 16(4) shall not be applicable for such re-credit.
- Claim of depreciation on the GST component disqualifies a recipient of Capital goods and plant and machinery from taking input tax credit.
- ITC cannot be availed after the due date of filing the return for September month of the next financial year or on furnishing the Annual Return whichever is earlier.
- No registered person is permitted to avail any input tax credit pursuant to an order of demand on account of fraud, willful misstatement, or suppression of fact.
Note: The last point is important as many of the cases in a routine manner the show cause notice would invoke these mala fide intentions and if not contested, the ITC would not be available to the receiver even if otherwise eligible.
Frequently Asked Questions(FAQ’s)
1.What are the conditions necessary for obtaining ITC?
Ans. As per Section 16(2) read with relevant rules of CGST Act, 2017, following are the four conditions 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) 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.
2.Can GST paid on reverse charge basis be considered as input tax?
Ans. Yes. The definition of input tax includes the tax payable under the reverse charge
3.If a company takes the wrong credit for “setting off” any tax liability, what will be the consequences?
Ans. As per section 73 of the CGST Act, where any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, the assessee shall be served a notice requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.
4.Who will get the ITC where goods have been delivered to a person other than the buyer/recipient (‘bill to’- ‘ship to’ scenarios)?
Ans. It would be deemed that the registered person has received the goods when the goods have been delivered to a third party on the direction of such taxable person. So ITC will be available to the person on whose order the goods are delivered to third person.
5.Can input credit be claimed in respect of any compensation cess paid for supplies notified by the GST council?
Ans. In terms of proviso to Section 11(2) of the Goods and Services Tax (Compensation to States) Act, 2017, the input tax credit in respect of cess on supply of goods and services leviable under section 8 of the same Act, shall be utilized only towards payment of said cess on supply of goods and services leviable under the said section. Therefore no cross utilization with other taxes are allowed.
6.What would happen of the ITC taken by the registered person if he has not paid the consideration along with tax within 180 days from the date of issue of invoice?
Ans. The amount of ITC would be added to output tax liability of the person. He would also be required to pay interest. However, he can take ITC again on payment of consideration and tax.
7.Can the recipient reclaim the credit in case he makes the payment any time after 180 days?
Ans. Yes. The recipient shall be entitled to avail 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.
8.Is there any time limit for re-claiming the credit where payment is made after 180 days from the date of issue of invoice?
Ans. No. The time limit specified in section 16(4) shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or these rules, that had been reversed earlier.
9.Certain supplies mentioned in Schedule I of the Act are deemed to be supplies even if made without consideration. Will the payment within 180 days’ rule for credit apply even to such cases?
Ans. No. The value of supplies made without consideration as specified in Schedule I shall be deemed to have been paid for the purposes of the second proviso to section 16(2). (Proviso to Rule 37 of the CGST Rules, 2017).
10.Where the registered person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, will ITC be allowed in such cases?
Ans. The input tax credit shall not be allowed on the said tax component in respect of which depreciation has been claimed.
11.What is the time limit for taking ITC and reasons therefore?
Ans. Time limit for availing ITC is the due date of furnishing of the return for the month of September following the end of financial year or date of filing of annual return, whichever is earlier. So, the upper time limit for taking ITC is 20th October of the next FY or the date of filing of annual return whichever is earlier.