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GST: Input Tax Credit Provisions for Banking Sector

Input Tax Credit

Under the GST regime, 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 following two options to avail ITC in terms of Section 17(4) of the CGST Act. And the option once exercised shall not be withdrawn during the remaining part of the financial year.

OPTION I

Reverse the credit pertaining to exempted services as per the method stated in Section 17(2) of the CGST Act read with the relevant State Act and Rules thereof.

OR

OPTION II

Avail 50% of the eligible ITC on inputs, capital goods and input services in that month and the rest shall lapse. And accordingly, follow the following procedure in accordance with Rule 38 of the CGST Rules:

  • Such banking company or financial institution shall not avail credit of:
    • the tax paid on inputs and input services that are used for non-business purposes and
    • the credit attributable to the supplies specified in Section 17(5), in FORM GSTR-2
  • Further, the condition of 50% restriction would not be applicable in case of the tax paid on supplies made by one registered person to another registered person having the same PAN. Hence, a banking company or financial institution shall avail the credit of tax paid on inputs and input services in case of supplies made to its own branches i.e. inter-branch i.e., by one registered person to another registered person having a different GSTIN.
  • 50% of the remaining amount of input tax shall be admissible and shall be furnished in FORM GSTR-2.
  • The amount referred in point 2. and 3 above shall subject to the provisions of Section 41, 42 and 43, be credited to the electronic credit ledger of the said banking company or financial institution.

Clarification on reversal of credits for banks and financial institutions including NBFCs

Relevant provisions have been amended to exclude banks and financial institutions including NBFCs engaged in providing services by way of extending deposits, loans or advances from its ambit. It has been provided in the said explanation that value for reversal of common ITC taken on inputs and input services used in providing taxable and exempted services, shall not include the value of services by way of extending deposits, loans or advances against consideration in the form of interest or discount.

Apportionment of credit

Section 17(2) of the CGST Act stipulates that, 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 IGST 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.

Credit attributable to exempt supplies is not available to a registered person. Exempt Supplies’ for this purpose mean all supplies other than taxable and zero-rated supplies and specifically include the following:

  • Supplies liable to tax under RCM;
  • Transactions in securities;
  • Sale of land; and
  • Subject to Para 5(b) of Schedule II, sale of the building.

Moreover, vide the CGST Amendment Act, 2018 w.e.f. 1-02-2019, the “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 i.e. Sale of Land (S-III) / building (S-II).

Hence, they will not entail any reversal of credit. Further, vide the CGST Amendment Act, 2018 w.e.f. 1-02-2019, a couple of clauses has been inserted within Schedule III of the CGST Act:

“7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

[box type=”note” align=”” class=”” width=””]

8. (a) Supply of warehoused goods to any person before clearance for home consumption;

(b) Supply of goods by the consignee to any other person, by the endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption”

From the above, it can be gathered that excluding supplies covered under Schedule III has resulted in lower reversal of credit particularly in the case of high sea sales and merchant trade transactions.[/box]

Rule 42 of the CGST Rules: Manner of determination of ITC in respect of inputs or input services and reversal thereof via illustration:

Particulars Reference CGST SGST/ UTGST IGST
Total input tax on inputs and input services for the tax period May 2018 T 1,00,000 1,00,000 50,000
Out of the total input tax (T):
Input tax used exclusively for non-business purposes (Note 1) T1 10,000 10,000 5,000
Input tax used exclusively for effecting exempt supplies (Note 1) T2 10,000 10,000 5,000
Input tax ineligible under Section 17(5) (Note 1) T3 5,000 5,000 2,500
Total 25,000 25,000 12,500
ITC credited to Electronic Credit Ledger (Note 1) C1 = T -(T1+ T2 +T3) 75,000 75,000 37,500
Particulars Reference CGST SGST/ UTGST IGST
Input tax credit used exclusively for taxable supplies (including zero-rated supplies) T4 50,000 50,000 25,000
Common credit C2 = C1 – T4 25,000 25,000 12,500
Aggregate value of exempt supplies for the tax period May 2018 (Note 2 & 3) E 25,00,000 25,00,000 25,00,000
Total Turnover of the registered person for the tax period May 2018 (Note 2) F 1,00,00,000 1,00,00,000 1,00,00,000
Credit attributable to exempt supplies D1 = (E/F)* C2 6,250 6,250 3,125
Credit attributable to non-business purposes D2 = C2 * 5% 1,250 1,250 625
Net eligible common credit C3 = C2 – (D1 + D2) 17,500 17,500 8,750
Total credit eligible (Exclusive + Common) G = T4 + C3 67,500 67,500 33,750

[box type=”note” align=”” class=”” width=””]

Note 1: T1, T2, T3 and T4 shall be DETERMINED AS ABOVE and declared in Form GSTR-2 and at a summary level in FORM GSTR-3B.

Note 2: If the registered person does not have any turnover for May 2018, then the value of Exempt Supplies (E) and Total Turnover (F) shall be considered for the last tax period for which such details are available

Note 3: 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.

Note 4: In case of a supply of services covered by clause (b) of paragraph 5 of Schedule II of the said Act, the value of T4 shall be zero during the construction phase because inputs and input services will be commonly used for the construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the project, whichever is earlier, and those which are not booked by the said date.

Note 5: In case of the supply of services covered by clause (b) of paragraph 5 of Schedule II of the Act, the value of ‘E/F’ for a tax period shall be calculated for each project separately, taking a value of E and F as under: –

E = aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the apartments, construction of which is not exempt from tax, but are identified by the promoter to be sold after issue of completion certificate or first occupation, whichever is earlier;

F = aggregate carpet area of the apartments in the project;

Explanation 1: In the tax period in which the issuance of completion certificate or first occupation of the project takes place, the value of E shall also include aggregate carpet area of the apartments, which have not been booked till the date of issuance of completion certificate or first occupation of the project, whichever is earlier.

Explanation 2: Carpet area of apartments, tax on construction of which is paid or payable at the rates specified for items (i), (ia), (ib), (ic) or (id), against serial number 3 of Table in the notification No. 11/2017-Central Tax (Rate), published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) dated 28th June 2017 vide GSR number 690(E) dated 28th June 2017, as amended, shall be taken into account for the calculation of the value of ‘E’ in view of Explanation (iv) in paragraph 4 of the notification No. 11/2017-Central Tax (Rate), published in the Gazette of India, Extraordinary, Part II, Section 3, Subsection (i) dated 28th June 2017 vide GSR number 690(E) dated 28th June 2017, as amended.

Remarks: Note 4 and 5 may only be applicable in the case of an apartment construction project-promoter and not a banking company.

Note 6: Amount of ‘C3‘, ‘D1’ and ‘D2’ shall be computed separately for ITC of CGST, SGST, UTGST and IGST declared in FORM GSTR-3B or through FORM GST DRC-03.

And the amount equal to the aggregate of ‘D1’ and ‘D2’ shall be reversed by the registered person in FORM GSTR-3B or through FORM GST DRC-03.

Note 7: The registered person is expected to make such computation for each tax period and reverse the same in the periodic returns being filed by such a registered person. However, on completion of the financial year, ITC shall be determined accurately based on actuals, in the same manner as provided in Rule 42. Reconciliation is required to be done on an annual basis (between the amounts reversed for each tax period during the year and the amount determined at the end of the financial year) and any excess credit availed needs to be reversed with interest while short credit, if any, needs to be re-availed within 6 months from the end of the financial year.[/box]

It is to be noted that the registered person would be required to remit excess ITC claimed (as determined in Note 7 above) with interest calculated for the period starting from the first day of April of the succeeding financial year till the date of payment. However, no interest can be claimed if, at the end of the financial year, it is found that short credit was availed.

Therefore, an auditor can check whether the Designated/ Nodal branch is reversing the ITC in compliance with the above Rule. If ITC is not reversed in compliance to the above Rules, it shall be treated as ITC wrongly taken and the same will be recovered along with the interest under Section 50 of the CGST Act.

Please note that ITC by a Registered Taxable Person can only be availed subject to the fulfilment of the following conditions:

itc

Documents required for availing credit are:

Invoice issued by a supplier of goods or services or both as per S-31 Invoice issued as per S-31(2)(f) by the recipient along with proof of payment of tax A debit note issued by supplier u/s 34
Bill of entry or similar document prescribed under the Customs Act, 1962 Revised invoice Document issued by Input Service Distributor (“ISD”).

Also Like: 25 FAQs related to Supply under GST

No ITC allowed being availed

  • Beyond September of the following FY to which invoice pertains  or date of filing of annual return, whichever is earlier
  • In terms of Section 36(4), ITC 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 section 37(1), shall not exceed 10%* of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under section 37(1) of the CGST Act.

 * Substituted vide Notification No. 75/2019 – Central Tax dated 26.12.2019 w.e.f. 01-01-2020. Prior to such substitution it was 20 % vide Notification No. 49/2019 – Central Tax dated 09-10-2019 via which Section 36(4) was inserted

No ITC can be availed in terms of S- 17(5) of the CGST Act 

No ITC shall be available in respect of the following namely:

  1. 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: —
  • further supply of such motor vehicles; or
  • transportation of passengers; or
  • imparting training on driving such motor vehicles; (aa) vessels and aircraft except when they are used––
    • for making the following taxable supplies, namely: —
      • further supply of such vessels or aircraft; or
      • transportation of passengers; or
      • imparting training on navigating such vessels; or
      • imparting training on flying such aircraft;
    • 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 ITC in respect of such services shall be available—

  • where the motor vehicles, vessels or aircraft referred to in clause or clause (aa) are used for the purposes specified therein;
  • where received by a taxable person engaged—
    • in the manufacture of such motor vehicles, vessels or aircraft; or
    • in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

2. the following supply of goods or services or both—

  • 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:

Provided that the ITC in respect of such 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;

  • membership of a club, health and fitness centre; and
  • travel benefits extended to employees on vacation such as leave or home travel concession.

Provided that the ITC in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide to its employees under any law for the time being in force.]*

*Substituted vide the CGST Amendment Act, 2018 w.e.f.1-02-2019 & earlier it was:

  1. motor vehicles and other conveyances except when they are used–
    1. for making the following taxable supplies, namely: —
      1. further supply of such vehicles or conveyances; or
      2. transportation of passengers; or
      3. imparting training on driving, flying, navigating such vehicles or conveyances;
    2. for transportation of goods;
  2. the following supply of goods or services or both—
    1. food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category 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;
    2. membership of a club, health and fitness centre;

3. works contract services when supplied for construction of immovable property, (other than plant and machinery), except where it is an input service for further supply of works contract service;

4. goods or services or both received by a taxable person for construction of an immovable property (other than plant and 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 purpose of clause (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

4. goods or services or both on which tax has been paid under section 10;

5. goods or services or both received by a non-resident taxable person except on goods imported by him;

6. goods or services or both used for personal consumption;

7. goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

8. any tax paid in accordance with the provisions of sections 74, 129 and 130.

Explanation. – For the purposes of Chapter V and Chapter VI of the CGST Act, 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:

  • the land, building or any other civil structures,
  • telecommunication towers; and
  • pipelines laid outside the factory premises
  • rent-a-cab, life insurance and health insurance except where––
    1. the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
    2. such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
  • travel benefits extended to employees on vacation such as leave or home travel concession;

Credit utilization [Sec 49(5)]

[tie_list type=”checklist”]

Credit of: Allowed for Payment of
IGST CGST SGST /UTGST
IGST
  • (1)
  • (2)
  • (2)
CGST
  • (2)
  • (1)
SGST /UTGST
  • (3)
  • (1)

[/tie_list]

*The numbers represent the order of utilization of credit. Applicable from 1.07.2017 to 31.01.2019

Further, in terms of section 49(5)(e) and (f), CGST shall not be utilised towards payment of SGST/ UTGST and vice versa respectively

With effect 1-02-2019, vide the CGST Amendment Act 2018 read with Notification No. 02/2019-Central Tax, dated 29-01-2019, Section 49A and 49B has been inserted.

Section 49A of the CGST Act provides for manner of ITC utilisation, wherein, the Credit of IGST has to be utilised first and only after which, credits of CGST and SGST/UTGST can be utilized.

“49A. 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.”

The full utilization of IGST credit by taxpayer facilitates the Government in the following:

  1. Reduction of transactions of inter -settlement between the Centre & States.
  2. Self-utilization of IGST deposited in Consolidated Fund of India through payment route of taxpayer instead of post return calculation

However, it may lead to a situation wherein taxpayer has to pay SGST in cash while his balance in CGST Credit ledger still lying.

Illustration:

Nature of Tax Tax liability ITC available
IGST 100(ip) 200 (ic)
CGST 100 (cp) 50 (cc)
SGST 100 (sp) 50 (sc)
As per Old provision As per New provisions
Tax liability Paid through ITC Paid through Cash / Balance

Credit

Paid through ITC Paid through Cash Balance ITC
IGST 100 (ip) 100 (ic) Nil 100 (ic)
CGST 100

(cp)

50 (ic)

50 (cc)

Nil 100 (ic) 50 (cc)
SGST 100

(sp)

50 (ic)

50 (sc)

Nil 50 (sc) 50

Further, Section 49B of the CGST Act stipulates that notwithstanding anything contained in ITC Chapter V of the CGST Act and subject to section 49(5)(e) and (f) of the CGST, the Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of the ITC on account of IGST, CGST, SGST or UTGST, as the case may be, towards payment of any such tax.

In this regard, w.e.f. 29-03-2019 vide Notification No. 16/2019 – Central Tax dated 29.03.2019, Rule 88A of the CGST Rules has been inserted which provides order of utilization of ITC.as:

“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.”

Therefore

[tie_list type=”checklist”]
Credit of: Liability of ↓
IGST CGST SGST / UTGST
IGST
(1)
(1)
(1)
CGST
(2)
(2)
SGST /UTGST
(3)
(2)

*The numbers represent the order of utilization of credit [/tie_list]

From the above two sets of opinion can be drawn:

  • Available ITC of account of IGST will first be utilised for payment of IGST, then CGST/SGST and then for SGST/CGST or vice versa
  • Available ITC of account of IGST will first be utilised for payment of IGST and then for payment of CGST and SGST (in any proportion). E.g.,
ITC

available

Lability ITC Utilization OPTION-I ITC Utilization OPTION-II
IGST Rs. 2000 Rs. 1200 IGST- Rs. 1200 IGST-Rs. 1200 IGST- Rs. 1200
CGST Rs. 500 Rs. 1800 IGST- Rs. 800

CGST- Rs. 500

Cash- Rs. 500

IGST- Rs. 0

CGST-Rs. 500

Cash- Rs. 1300

IGST- Rs. 400

CGST- Rs. 500

Cash- Rs. 900

SGST Rs. 300 Rs. 1800 IGST- Rs. 0

SGST- Rs. 300

Cash-Rs. 1,500

IGST- Rs. 800

SGST- Rs. 300

Cash-Rs. 700

IGST- Rs. 400

SGST- Rs. 300

Cash- Rs. 1,100

However, the CBIC vide Circular No. 98/17/2019-GST, dated 23.04.2019 clarified that after the insertion of Rule 88A, the order of utilization of input tax credit will be in any order and in any proportion. The same has been given below:

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

For e.g., – Amount of ITC available and output liability under different tax heads

Head Output Liability Input Tax Credit
IGST 1000 1300
CGST 300 200
SGST/UTGST 300 200
Total 1600 1700

Option 1:

ITC on account of Discharge of output liability on account of Balance of ITC
IGST CGST SGST/UTGST
IGST 1000 200 100 0
ITC on account of IGST has been completely exhausted
CGST 0 100 100
SGST/UTGST 0 200 0
Total 1000 300 300 100

Option 2:

ITC on account of Discharge of output liability on account of Balance of ITC
IGST CGST SGST/UTGST
IGST 1000 100 200 0
ITC on account of IGST has been completely exhausted
CGST 0 200 0
SGST/UTGST 0 100 100
Total 1000 300 300 100

Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.

IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION

Vikas Sharmahttp://taxclue.in
A writer by passion. Reading and traveling in my free time enhances my creativity in work. I enjoy exploring my creative side, and so I keep myself engaged in learning new skills.

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