The new Goods and Services Tax (GST) is a comprehensive indirect tax on manufacture, sale and consumption of goods and services across India. GST is a destination-based, value added taxation system. GST will be a dual levy in India and the eligible transactions will be subject to levy of both CGST and SGST in the case of intra-state supplies and IGST in the case of inter-state supplies and imports/exports.
It is said that in GST, the cascading effect of VAT, CENVAT and service tax would be removed, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level would be established. This would be achieved through the mechanism of Input Tax Credit (ITC).
Section 2(57) of the Model GST Law (MGL) defines input tax to mean the (IGST and CGST) / (IGST and SGST) charged on any supply of goods and/or services to a registered taxable person which are used or intended to be used in the course or furtherance of his business and includes the tax payable under reverse charge mechanism as per Section 7(3) of the MGL. As per Section 2(58) of the MGL, ITC means credit of input tax as defined in Section 2(57) [inadvertently mentioned as 2(56) in the MGL].
Section 16(1) of the MGL provides that every registered taxable person is entitled to take credit of input tax admissible to him and such amount will be credited to his electronic credit ledger. Further, Section 16(11), inter alia, provides that in order to avail the ITC, the registered taxable person should have furnished return under Section 27 of the MGL. As per Section 28, a registered taxable person is entitled to take ITC in his return on self-assessment basis and the same will be credited on a provisional basis to his electronic credit ledger to be maintained at the common portal. Further, Section 2 (41) of the MGL defines electronic credit ledger as the input tax credit leger in electronic form maintained at the common portal for each registered taxable person in the manner as may be prescribed in this behalf.
A combined reading of the above provisions of the MGL points to the position that once the eligible credit is availed on self-assessment basis in his return by the registered taxable person, the same would stand credited to his electronic credit ledger which would be maintained at the common portal registration wise for every registered taxable person.
GST is a destination based consumption tax and the credit thereof is available in the State where the supply has been consumed. To determine the place of consumption, the MGL provides for the rules to find out the place of supply for goods as also services. As far as domestic supplies are concerned, where the location of the supplier and the place of supply are within the same State, CGST and SGST are to be paid and where the location of the supplier and the place of supply are in two different States, IGST is to be paid. The credit of such input tax(es) is available to the registered taxable person in his electronic credit ledger maintained at the common portal.
In a situation where the place of supply is within the State of the supplier but the recipient of supply is not located in the supplier’s State, availment of ITC by the recipient, of the SGST and CGST paid on such intra-State supply would be an issue. This is for the reason that the ITC is to be credited to the electronic credit ledger of the recipient and the recipient is not having any registration in the supplier’s State.
For example, the place of supply of goods which involve movement is the location of the goods at the time at which the movement terminates for delivery to the recipient. Suppose, supplier in State A supplies goods to a recipient in State B and the goods were moved and delivered in State A. Here, since the movement of goods terminates in State A, the place of supply is in State A. As suppler and place of supply are in State A, it is an intra-State supply of goods and the supplier will pay CGST and SGST in State A. However, recipient is not registered in State A and has no electronic credit ledger associated with any registration in State A. In such a situation, how will the input taxes be credited to the recipient is not clarified in the MGL.
Similarly, in a situation where the place of supply and supplier’s location are in two different States and the recipient is located in a third State which is different from the aforesaid two States, the availment of ITC of the IGST by the recipient would pose an issue. The MGL does not provide as to how the IGST paid by the supplier would be credited to the electronic credit ledger of the recipient maintained registration-wise in the common portal. But we may note that there is no bar on the recipient taking ITC either!
For example, the place of supply of services provided by an architect (i.e. Supplier) in relation to an immovable property is the location/intended location of the immovable property. Suppose, supplier in State X provides architecture services to a recipient in State Y and the immovable property is intended to be located in State Z. Here, since the immovable property is located in State Z, the place of supply is in State Z. As Supplier and place of supply are in different States, it is an inter-state supply of services and the supplier will pay IGST, on the said supply, in State X. However, recipient is not registered in State X and has no electronic credit ledger associated with any registration in State Z. In such a situation, how will the input taxes be credited to the recipient is not clarified in the MGL though there is no bar as such prescribed for the recipient taking credit.
The same ambiguity exists in the situation where the recipient is liable to pay IGST on reverse charge basis on, say, import of goods/service and the place of supply thereof happens to be in a State other than the State in which such recipient is located. Can it be said that since CGST and IGST are levies by the Central Government, registration [for CGST/SGST or IGST] in any of the States / Union Territories with legislature in India would suffice to avail the credit of CGST or IGST? If such a position is taken, then it leads to a situation where the ITC is made available in a State other than the one in which the place of supply is located. This would go against the very basic principle of GST that it is a destination based consumption tax.
On the contrary, if the ITC is not made available to the recipient in the above situations, it breaks the credit chain and would be contrary to the purpose of GST itself.
One of the aims of introducing GST is to make the seamless flow of ITC possible in a destination based consumption tax structure. In order to achieve the same, the above issues are to be addressed in the MGL and more clarity is to be brought in at the earliest.
[The author is a Joint Partner, Tax Practice, Lakshmikumaran & Sridharan, New Delhi ]
Input Tax Credit under GST regime – Make it seamless