Section 16 of CGST Act 2017: Eligibility and Conditions for taking Input Tax Credit (ITC)

Provisions under Section 16 of the Central Goods and Services Tax (CGST) Act, 2017 relating to “Eligibility and Conditions for taking Input Tax Credit (ITC)”:

Section 16 of CGST Act 2017: Eligibility and Conditions for taking Input Tax Credit (CHAPTER V – INPUT TAX CREDIT)

(1) 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.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,–

(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 documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37; [Refer Note 3]

(b) he has received the goods or services or both.

Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise; [Refer Note 1(a)]

Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services–

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted; [Refer Note 4(a)]

(c) subject to the provisions of section 41 section 41 or section 43A, 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 [Refer Note 1(b) & 4(b)]

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or installments, the registered person shall be entitled to take credit upon receipt of the last lot or installment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September thirtieth day of November following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier. [Refer Note 2 & 4(c)]

Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019. [Refer Note 5]

Amendments History:

1. Amendments made vide Section 8 of the CGST (Amendment) Act, 2018 (GOI Notification dated 29/08/2018), followed with Central Tax Notification 2/2019 dated 29/01/2019 on commencement date of 01/02/2019 (except for clause (b) below for which effective date will be separately notified later):

a) Explanation to clause (b) of sub-section (2) substituted; and

b) In clause (c) of sub-section (2), the text ‘section 41 or section 43A’ substituted for the text “section 41”.

2. In sub-section (4), the text “invoice relating to such” omitted vide Section 120 of the Finance Act 2020 (GOI Notification dated 27/03/2020), followed with Central Tax Notification 92/2020 dated 22/12/2020 on commencement date of 01/01/2021.

3. Clause (aa) has been inserted in sub section (2), vide Section 109 of the Finance Act 2021 (GOI Notification dated 28/03/2021). Subsequently, CBIC notifies 01/01/2022 as the commencement date vide Central Tax Notification 39/2021.

4. Amendments made vide Section 100 of the Finance Act 2022 (GOI Notification dated 30/03/2022) followed with Central Tax Notification 18/2022 on commencement date of 01/10/2022:

(a) Clause (ba) has been inserted in sub section (2);

(b) In Clause (c) of sub section (2), the text “or section 43A” omitted; and

(c) In sub section (7), the text “due date of furnishing of the return under section 39 for the month of September” substituted with the text “thirtieth day of November”.

5. Proviso to sub-section (4) inserted vide ROD Order 2/2018 dated 31/12/201/8 applicable from 31/12/2018.

Commentary on Section 16 of the CGST Act

Section 16 of the CGST Act, 2017 deals with the input tax credit (ITC) mechanism, which allows businesses to offset their output tax liability with the tax they have paid on their inputs. This helps in avoiding the cascading effect of taxes and promotes seamless flow of credit throughout the supply chain. Summary of the provisions of Section 15 is as under:

i) Eligibility and conditions for taking input tax credit: A registered person is eligible to claim input tax credit on any supply of goods or services that are used or intended to be used in the course or furtherance of their business.

ii) Conditions for claiming input tax credit: For claiming input tax credit, the following conditions need to be met:

a) The person must possess a tax invoice or other prescribed documents, which is crucial for claiming input tax credit. It must include details such as the supplier’s and recipient’s GSTIN, invoice number, date of issue, description of goods or services, tax amount, and other relevant details.

b) The recipient must have received the goods or services to claim input tax credit. In case of goods being delivered in installments, input tax credit can be claimed only when the last installment is received.

c) The tax charged in respect of the supply has been paid to the government, either in cash or via utilization of input tax credit. The supplier must have paid the tax charged on the supply, for the recipient to be able to claim input tax credit.

d) The recipient must file the required returns, such as GSTR-1 and GSTR-3B, to claim input tax credit. Filing these returns helps in reconciliation of input tax credit and ensures that there is no mismatch between the credit claimed by the recipient and the tax paid by the supplier.

iii) Availability of credit in special cases: The Act specifies certain special cases, such as when a person becomes liable to be registered under the Act, or when they apply for voluntary registration. In these cases, the person is allowed to claim input tax credit on the inputs held in stock or in capital goods, as long as certain conditions are met.

iv) Apportionment of credit and blocked credits: This provision discusses the apportionment of input tax credit between taxable and exempt supplies, as well as the input tax credit that is not available for specific supplies.  Cases where ITC is not available, like motor vehicles, food and beverages, and membership of clubs, among others. These are called blocked credits and are specified in Section 17(5) of the CGST Act, 2017.

Section 16 plays a vital role in the smooth functioning of the GST system by allowing businesses to claim input tax credit and avoid the cascading effect of taxes. However, it’s important for businesses to comply with the conditions and documentation requirements to ensure proper utilization of the input tax credit mechanism.

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Note: The CGST Act 2017 has been notified vide GOI Notification dt. 12/04/2017, which has subsequently been amended through CGST (Extension to J&K) Act 2017, Finance Act 2018, CGST Amendment Act 2018, Finance Act 2019, Finance Act 2020, Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020, Finance Act 2021, Finance Act 2022 including various Notifications issued by the Govt./ CBIC from time to time, relating to the commencement dates of various Sections/ Provisions in the respective CGST/ Amendment Acts, wherever required. Information on this page is a Section-wise compilation of the Amendments made by various Notifications issued by CBIC from time to time, with best possible efforts for accuracy. In any case, E&OE. For official/ updated information, please visit CBIC website.