Context
Supreme Court laid down functionality and essentially test for Input Tax Credit (ITC) eligibility
About Input Tax Credit (ITC) Under GST
- Allows businesses to claim credit for taxes paid on inputs.
- The tax paid on inputs can be reduced from the tax payable on the output.
- Enables smooth credit flow and eliminates the cascading effect by taxing only value addition.
- Mechanism: The tax paid during purchase is adjusted with the output tax (tax on sales), reducing the tax liability to the government.
- Avoiding Cascading Taxes with ITC
- Pre-GST System: Central and state taxes (e.g., excise duty and VAT) couldn’t offset each other, leading to multiple layers of taxation.
- Post-GST: Central and state taxes are subsumed into a single levy, ensuring that tax is levied only on value addition at each stage.
- Impact of ITC
- Transparency and Efficiency: Encourages proper documentation and compliance, reducing the overall tax burden on businesses.
- Competitive Pricing: Makes goods/services more competitively priced by lowering taxes.
- Reversal of Input Tax Credit (ITC)
- Reversal of ITC: Claimed ITC is cancelled, adding the amount to the tax liability.
- Conditions for Reversal:
- Non-payment of Invoices (180 Days): ITC is reversed if invoices remain unpaid beyond 180 days.
- Credit Note to ISD: If a credit note is issued to the Input Service Distributor, claimed ITC is reduced.
- Partially Used Inputs: ITC used for personal purposes must be proportionally reversed.
Supreme Court Ruling on Input Tax Credit (ITC)
- Case: Chief Commissioner of Central GST & Ors. vs. Safari Retreats, 2024.
- ITC for Real Estate: SC allowed ITC on construction costs for commercial buildings used for leasing or renting, under the functionality and essentially test. Earlier, ITC wasn’t allowed for immovable property construction.
- Clarification on ‘Plant and Machinery’: Buildings used for leasing/renting may qualify as plant and machineryunder Section 17(5)(d) of the CGST Act, permitting ITC on such constructions.
- Case-Specific Determination: Whether a building qualifies as ‘plant’ under Section 17(5)(d) should be determined based on the business nature and the building’s role in operations.
- Functionality and Essentially Tests
- Functionality Test: Evaluates if the building supports the supply of services, akin to plant/machinery in a factory.
- Essentially Test: Goods/services claimed for ITC must be essential for business operations. Only items directly needed for constructing property (e.g., cement, steel) can claim ITC.
Source:
TH
Previous Year Question
What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’?
1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India.
2. It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its foreign exchange reserves.
3. It will enormously increase the growth and size of the economy of India and will enable it to overtake China in the near future.
[UPSC Civil Services Exam – 2017 Prelims]
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a)
