Table of contents:
Section 16 of the CGST Act, 2017 elaborates and explain the ITC mechanism with details on eligibility and conditions for availing ITC claims. The provision of claiming Input Tax Credit (ITC) is one of the key features of the GST system in India. It enables taxpayers to reduce tax burdens by claiming credits on taxes already paid on purchases. We take a look at CGST Section 16 here to understand the rules governing the ITC mechanism, and the amendments made to the section over time – i.e., Section 16(4) of CGST Act and Section 16(2) clause (aa).
What is Section 16 of CGST Act?
Chapter V, Section 16 of the Central Goods and Services Tax Act, 2017 (CGST) deals with the eligibility and conditions under which taxpayers can claim Input Tax Credit. This ensures that only eligible taxpayers can claim and offset input credits to maintain compliance in the GST system.
- Meaning and purpose: Outline of the eligibility and conditions for claiming ITC to ensure accurate claims, avoid tax duplicity, and reduce cascading tax effect
- Basic eligibility criteria: Must be a GST registered business, having a valid invoice, the goods/services must have been received, GST to government paid on time, taxpayer returns filed
- Key sub-sections: Section 16(1) on eligibility criteria, Section 16(2) on conditions to be fulfilled for claiming ITC, Section 16(3) on ITC claim prohibitions, Section 16(4) on the ITC claim limit
- Amendments: Multiple additions over the years, primarily on stricter compliance and documentation requirements
Note: Those businesses that have opted for the GST Composition Scheme cannot claim ITC.
Section 16: Eligibility and Conditions for ITC
The mechanism of Input Tax Credit ensures that taxes are levied on the value added and not multiple times. Let’s take a look at the details of CGST Section 16 to understand how businesses can reduce their tax liabilities.
Eligibility for ITC:
Applicable to GST registered taxpayer:
As per CGST Section 16, all GST registered taxpaying businesses will be eligible to claim Input Tax Credit for goods and services which is used or will be used in the furtherance of business. This amount will be credited in the ledger.
Fulfilment of the following criteria:
In order for a business to claim tax credits, the following criteria must be met:
- Business must be in possession of an actual tax invoice or debit note from the supplier
- The goods and services in question must actually be received (i.e., ITC not applicable if the goods have not been received by the buyer)
- Taxes (GST) to the government must have been paid for the said supply of goods/services (Section 41) either through cash or input tax credits
- GST returns must have been filed (Note: For instalment delivery, ITC can be claimed only after the last instalment has been fulfilled)
Moreover, the payment of invoice must be made within 180 days of issuing the invoice for claiming ITC. If not, then can be reversal of credits. That is, the amount equal to input tax credits will be added to output tax liability, along with interest charged.
Ineligibility for ITC:
Claim on tax component for depreciation of capital goods:
Section 16 CGST Act also highlights if the taxpayer has claimed depreciation on the tax component on the cost of capital goods and plant and machinery, ITC cannot be claimed (i.e., depreciation under Income Tax Act, 1961).
Claiming Time limit
The taxpayer shall not be able to claim ITC if the due date for filing GST returns has lapsed (under Section 39 for the month of September, 2018 following the end of the financial year, i.e., March 2019*).That is, ITC must be claimed within the due date of filing GST return for September following the end of the financial year or annual return filing date, whichever is earlier.
Other Conditions:
- ITC cannot be claimed on goods/services for personal use (i.e., must be for business use) and on exempted goods/services
- ITC cannot be claimed with fake invoices (fraud or tax evasion)
Complying with these conditions under Section 16 of CGST Act helps in seamless GST administration and financial planning for businesses.
Amendments, new clauses and what it means
Indirect taxes in GST were introduced in 2017. Since then, there have been specific changes made to the taxation rules to ensure adaptation as per changes times and wider adoption of GST rules.
Section 16(2) of CGST Act:
For instance, Section 16(2) has undergone amendments to keep it relevant to current business scenario. Section 16(2)(aa) is a new clause and that allows taxpayers to claim ITC as per records appearing in GSTR-2B. This is applicable since 1 January 2022, which lessens the purpose off the previous CGST rules. Key points to note here:
- Primary conditions of ITC claims: Section 16(2) of the CGST Act highlighted the conditions that a taxpayer must fulfil before claiming ITC in their GSTR-3B (monthly or quarterly)
- Revised conditions of ITC claims: Going forward, with the addition of clause (aa), ITC can be claimed if the supplier/seller has updated and filed GSTR-1 with the details so that only genuine transactions are eligible for credits
- Matching requirements: This is because, once the seller files GSTR-1, relevant data on ITC and sales will be fetched and reflected in GSTR-2A and auto-generated for GSTR-2B (i.e., helps to verify and match claims accurately)
- Time limit for claiming ITC: The time limit is also set at the due date for returns in September following the end of the financial year or date of annual return filing, whichever is earlier (i.e., quick ITC reconciliation required, follow-ups with suppliers, etc.)
- Documentation requirements: Claims made must be supported by compliant documents failing which, it will be rejected resulting in lower profitability (can also result in GSTIN suspension or penalties)
Section 16(4) of CGST Act:
Section 16(4) of CGST deals specifically with the time limit between which ITC claims have to be made. That is, ITC claims on any goods and services have to be made either:
- Within the due date of filing returns in September of the following financial year
- Or the date of filing the annual returns, whichever is earlier
The amendment therefore has:
- Extended the deadline for claiming ITC
- Specified the need for authentic documentation (debit notes, invoices, etc.)
- Outlined the penalties and loss of credit claims in case of non-compliance
It has also been helpful for businesses to:
- Avoid penalties and interest charges by making timely claims
- Coordinate in time with suppliers to ensure ITC claims are properly reported and recorded (e.g., ensuring matching data in GSTR-2A and GSTR-2B for filing)
- Have better cash flow and work capital management and financial planning in place
As can be understood, CGST Section 16 provides the conditions and eligibility for seamless ITC claims. Over the years, there has been additions and amendments made to this Section to ensure smoother compliance. While Section 16(4) of the CGST Act has been revised to provide strict time frames within which ITC claims must be made, Section 16 (2) (aa) of CGST, elaborates on the ease of claims based on timely returns filing.
FAQs
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A product manager with a writer’s heart, Anirban leverages his 6 years of experience to empower MSMEs in the business and technology sectors. His time at Tata nexarc honed his skills in crafting informative content tailored to MSME needs. Whether wielding words for business or developing innovative products for both Tata Nexarc and MSMEs, his passion for clear communication and a deep understanding of their challenges shine through.
Good to know that the government has denied claiming ITC when depreciation has been claimed on a good/service. This stops the possibility of taking advantage of refund on two instances for the same good/service.