GST envisages seem-less Input Tax Credit!
JANUARY 01, 2018
By CA Brijesh Kothary & CA Nikhil Agarwal
INDIA has witnessed one of the greatest tax reforms since Independence with the introduction of the Goods and Services Tax (GST) w.e.f. 1 st July, 2017. Among the various objectives of GST, one of them is "One Nation – One Tax – One Market" with major thrust on the concept of seamless flow of input tax credits across the Nation. But one of the major concerns that a taxpayer often comes across in his day-to-day business transactions is whether GST is really allowing seamless flow of credit across the Nation? Let us analyse a case to understand whether GST law in its present form can pass the test of allowing free flow of credits.
Let us take an example of a Company X Ltd. that has obtained registration under GST only in the State of Karnataka. The employees of the Company often visit Mumbai, Maharashtra for official purposes and avails accommodation services. The accommodation service provider Y Ltd. located in Maharashtra issues a tax invoice in the name of the Company X Ltd. located in Karnataka. Now, the question arises whether the X Ltd. based in Karnataka is eligible to take input tax credit of GST paid on accommodation services of hotel located across India?
Continuing with the above example let us take a scenario where the X Ltd. avails services of renting of immovable property located in Maharashtra. In this case the provider of services Z Ltd. relating to the immovable property is registered under GST law in Goa.The Z Ltd. will issue a tax invoice in the name of the Company located in Karnataka from Goa. Whether X Ltd. based in Karnataka is eligible to take input tax credit of GST paid on services of immovable property located in Maharashtra?
Analysis of Legal Provisions
In terms of Sec. 2(62) of the Goods and Services Tax Act, 2017 (CGST Act) "input tax" in relation to a registered person, means the central tax, state tax, integrated tax or union territory tax charged on any supply of goods or services or both made to him and it also includes integrated tax charged on import of goods, GST paid under reverse charge, but does not include tax paid under composition levy scheme. In terms of Sec. 2(63) of the CGST Act "input tax credit" means the credit of input tax. Sec. 16 of the CSGT Act lays down provisions relating to input tax credit.
Sec. 16(1) of the CGST Act provides that 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.
Sec. 16(2) of the CGST Act provides specific conditions for entitlement of input tax credit in respect of any supply of goods or services or both. The specific conditions to be satisfied for availing input tax credit are listed below:
- Registered person should be 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;
- Registered person has received the goods or services or both;
- The tax charged in respect of such supply has been actually paid to the government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
- Registered person has furnished the return under Section 39 of the CGST Act.
Sec . 12(1) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) helps in determination of the place of supply of services, where the location of supplier as well as recipient of services are in India.
As per Sec. 12(3) of the IGST Act, the place of supply by way of lodging or accommodation by a hotel, or by way of accommodation in any immovable property for official, or business function including services provided in relation to such function at such property shall be, the location at which the immovable property is located or intended to be located. Therefore , the place of supply for services in relation to a hotel would be the State where such immovable property is located and the transaction would be an intra-State supply.
Also for the other scenario, where the service provider i.e. Z Ltd. is registered in Goa but the immovable property is located in Maharashtra, the place of supply for services in relation to an immovable property would be the State where such immovable property is located. In the instant case, location of the supplier would be in Goa and the place of supply would be Maharashtra, which will be an inter-State supply in terms of Section 7(1) of the IGST Act, and hence the Z Ltd. will raise a tax invoice from Goa, charging Integrated Tax.
Input Tax Credit of Central Tax
The conditions for taking input tax credit is covered under Sec. 16(2)(a) of the CGST Act, which inter alia provides that a registered person shall be entitled to the credit of any input tax in respect of any supply if he is in possession of a tax invoice issued by a supplier registered under this Act. Sec. 1 (1) of the CGST Act provides that this Act may be called "the Central Goods and Services Tax Act, 2017" . The fact that the hotel issues a tax invoice under GST establishes that they are registered under the CGST Act. Therefore, the X Ltd. which is in possession of a tax invoice issued by the accommodation service provider registered under the CGST Act,is entitled to take the credit of Central Tax charged by the Y Ltd. for intra-State supply of services in another State.
Input Tax Credit of State Tax
As discussed supra , the term input tax includes Central Tax as well as State Tax. The term State Tax is defined under Section 2(103) of the CGST Act to mean the tax levied under any State GST Act. Therefore , the fact that the hotel is registered under CGST Act also entitles the Company to take the credit of State Tax charged by the hotel for intra-State supply of services in another State on the basis of their tax invoice.
It is,however,pertinent to note the definition of State Tax under Section 2(104) of the Karnataka Goods and Services Tax Act, 2017 (KGST Act) which means tax leviable under this Act, i.e., KGST Act. Therefore, the Credit of State Tax, which is otherwise eligible under the CGST Act is restricted for utilization under the KGST Act towards payment of State Tax.
Though, as per Section 49(5)(c) of the CGST Act, the State Tax should first be utilized towards payment of State Tax and the amount remaining, if any, may be utilized towards payment of Integrated Tax. Therefore, the Credit of Maharashtra State Tax, is eligible for limited utilization towards payment of Integrated Tax.
Input Tax Credit of Integrated Tax
In scenario where the immovable property is let out by Z Ltd. registered person in Goa to the Company X Ltd. in Karnataka, where the immovable property is located in Maharashtra, the transaction is leviable to Integrated Tax. The fact that the provider of renting of immovable property issues a tax invoice under GST establishes that they are registered under the CGST Act. Therefore, the X Ltd. which is in possession of a tax invoice issued by the owner of immovable property registered under the CGST Act, is entitled to take the credit of Integrated Tax charged by the Z Ltd. for inter-state supply of services in another State.
In the instant case, taking the example cited above, when the Vendor situated in Maharashtra discharges Central Tax and Maharashtra State Tax, the same is required to be reported in Table 4A under Form GSTR-1 of the Vendor with GSTIN of the Company and Maharashtra as the place of supply.
Similarly, when the Vendor situated in Goa discharges Integrated Tax, the same is required to be reported in Table 4A under Form GSTR-1 of the Vendor with GSTIN of the Company and Maharashtra as the place of supply.
As a result of such information being uploaded, the Central Tax, Maharashtra State Tax or Integrated Tax as the case may be would get auto-populated in Table 3 under Form GSTR-2A of the Company. Once the above entry is accepted by the Company, the Central Tax, Maharashtra State Tax or Integrated Tax as the case may be moves to Table 3 under Form GSTR-2 of the Company. Once Form GSTR-2 is furnished by the Company, the credit of Central Tax, Maharashtra State Tax or Integrated Tax, as the case may be, should ideally get transferred to the Electronic Credit Ledger of the Company.
It would be pertinent to note that awrit petition was filed before the Hon'ble High Court of Delhi by appellant D Paul Travels and Tours Ltd. The Appellant is engaged in the business of booking tours and hotel packages for its customers and charges Integrated Tax towards accommodation services for hotels located outside Delhi. However, they are unable to avail input tax credit of GST charged by the hotels located outside Delhi since they are not registered in other States. The Appellant submitted that they would have to be registered in all States and Union Territories to avail input credit of GST which, according to them, is contrary to the purpose and objective of Goods and Services Tax. The Hon'ble Court in its order reported in 2017-TIOL-37-HC-DEL-GST dated 06.12.2017 has directed the respondents (the Union of India and the GST Council) to examine the assertions and anomalies and consider if the matter should be placed before the GST Council for reconsideration.
It is expected that the GST Council reconsiders its decision to allow input tax credit of GST paid on supplies made in a State where the recipient is not registered. However, at this juncture it may be noted that the GSTN portal is not configured to allow availment of input taxcredit (of the Central Tax, State Tax or Integrated Tax)in case the place of supply is other than the State where the recipient is registered.
The law as it stands today perhaps falls short of imbibing the idea of "One Nation-One Tax – One Market". It seems that the GSTN portal has some missing analogy of GST law, which needs to be time tested, so that taxpayer sat least get the input tax credit, which is duly available to them legally.
If the input tax credit is not made available to the recipient of services in the scenarios discussed above, it would break the input tax credit chain and would be contrary to the purpose of GST law itself. To achieve the idea of seamless credit, the above issues are required to be addressed by the Government at the earliest. Else, it would be a seem-less credit!
(The views expressed in this article are strictly personal.)
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