Input Tax Credit - Is the Credit Elusive?

Goods & Services Tax (“GST”) which was touted as the “new age” tax has now sadly turned to be a breeding ground for protracted litigation

In the sphere of GST, input tax credit (“ITC”) forms an integral part of the ecosystem. It would indeed be apodictic that the essence of GST lied in improvising the ways of reducing the “cascading” effect of taxes by ensuring set-off at each stage of the supply chain until it reaches the ultimate consumer. Through this mechanism, the cascading effect of taxes would stand mitigated thereby reducing the overall product cost.

To put the above in context, in the pre-GST era taxes paid under state laws were not allowed as credit whilst discharging the liability under central laws. For instance, a service provider who is subjected to service tax was not allowed credit in respect of VAT paid (for instance) on capital goods procured by him. All these restrictions led to a cascading effect. GST being a common tax on both goods and services with similar provisions across the nation was introduced with the objective of overcoming the problem of cascading effect.

1.Overview of the provisions governing ITC 

The legal precepts governing input tax credit is provided in Section 16 of the Central Goods & Services Tax Act, 2017 (“the Act”). The said section deals with the eligibility and conditions of taking input tax credit. Section 16(1) of the Act read as follows:

“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”.