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Setting up of GST credit: Interstate transactions

By Finance Advisory, 3rd Eye Advisory®
Setting up of GST credit: Interstate transactions

Introduction:

Inputs refer to materials or services that a manufacturer procures or avails in order to manufacture a product or services which is the output. The taxes paid by a manufacturer, while buying the raw material or services, are known as input tax and similarly the tax collected on the sale of the product or services is called the output tax. Given that GST is charged on both goods and services, input credit can be availed on both goods and services. Input tax credit means that a business can reduce the taxes it has paid on inputs from the taxes it has to deposit on output. The concept is nothing new as it already exists under the service tax, value added tax (VAT) and excise duty. Only its scope has been widened however, as per earlier rules input tax credit cannot be claimed for Central Sales Tax, Entry Tax and Luxury Tax and so on.

Let us understand in detail:

What is allowed as Credit?

  • every registered taxable person
  • subject to conditions and restrictions specified in Sec. 49
  • shall be entitled to take credit of input tax
  • charged (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying document(s) as may be prescribed;
  • 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

What is Input Tax?

Sec. 2(62) defines input tax as "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

Conditions for claiming the credit:

  • he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying document(s) as may be prescribed;
  • he has received the goods and/or services;
  • subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
  • he has furnished the return

Documents on the basis of which credit can be availed:

  • an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31;
    a debit note issued by a supplier in accordance with the provisions of section 34;
  • Bill of entry
  • an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31; - RCM + URS+ CTD
  • a document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule invoice.7;
  • a document issued by an Input Service Distributor, as prescribed in clause (g) of sub-rule (1) of rule 4.

Goods received in Lots:

Act provides that where the goods against an invoice are received in:

lots or installments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or installment.

Concept of Supervening Impossibility - Goods Destroyed

  • Rolcon Engineering Co. Ltd. v. State of Gujarat (2009) 21 VST 117 (Guj.) - Condition to run the wind farm for at least six years - Due to devastating cyclone wind farm could not be run - Held, from the language of scheme there will be no violation if one could not run the wind farm for reasons beyond his control ('Act of God')
  • Will not be applicable under GST Law in case goods are destroyed and money is received from insurance company. No GST payable on money received from insurance company.
  • Will credit be denied if destroyed goods are supplied later on ? Our answer is no. - Prakash Trading Co. v. State of Gujarat (1969) 24 STC 106 (Guj.)

Example: Mr. A has following credits available

State CGST SGST
Maharashta 10000 15000
Karnataka 20000 5000

No, CGST + SGST of one state cannot be set-off against CGST + SGST of another state.

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Article by: Finance Advisory, 3rd Eye Advisory®