Section 16(4) of CGST Act: Ineligible ITC

Topic covers:

1. Introduction
2. Provision of Section 16(4)
3. Notification No. 18/2022-Central Tax dated 28.09.2022
4. Matters emphasis in the provision
5. Points need to be remembered
6. Reporting in GST return

Introduction:

Tax Credit means claiming the tax already paid by the person at the time of purchase of the goods or services. In GST law it is called Input Tax Credit or ITC.

In GST law person who is registered under the GST Act can use ITC of the goods or services used in the business or willing to use for the business. The tax GST liability will be reduced by the amount of Input tax credit, at the time of payment.

Example 1: A person registered under the GST Act purchases raw materials to produce tube lights. It cost him ₹ 10,000 on which he paid GST @ 18%. Hence, he paid a total of ₹ 11,800 upon purchasing raw materials.

Later, the company produced tube lights which sold for ₹ 12,000 tax rate applicable is @ 18% which he collected from the consumer. Hence, the company generated total revenue of ₹ 14,160 including tax collected from GST.

While paying taxes, the taxpayer is entitled to deduct the tax amount (₹ 1,800) he has already paid at the time of buying the raw materials. Hence, instead of paying ₹ 2160, the person is only liable to pay ₹ 360 (₹2160-₹1800).

But in GST law it’s not so easy to avail the Input tax credit of tax paid at the time of purchase. Some conditions need to be fulfilled to avail the benefit of the Input Tax Credit.

Section 16 of the CGST Act, deals with the eligibility and conditions to avail the input tax credit. Some conditions and eligibility stipulated under section 16 of the CGST Act are as follows:

• The registered person can claim the ITC
• The goods or services must be used in the course or furtherance of business. A person cannot avail the benefit of GST paid on goods or services of personal use.
• The registered person must have the tax invoice or a debit note, containing essential details as per the law.
• The goods or services must be received by the registered person.
• The GST collected must be paid to the government.
• The return is furnished.

However, there are certain provision and rules which restricts to claim the input tax credit even after complying with all the conditions mentioned in section 16(2) of the act. Tax paid on purchase of goods or services used to make exempted or non-taxable supply, Where section 16(2) of the act deals with conditions to claim the ITC. Section 16(4) deals with the time limit to claim it.

Provision of Section 16(4) of the CGST Act:

Section 16(4) of the act provides: “A registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the thirtieth day of November following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

The provision of section 16(4) provides that even though the eligibility and conditions are fulfilled registered person is not entitled to take input tax credit if the time to avail of the input tax credit has expired. The registered person can avail ITC against the invoice or the debit note earlier on the following two dates:

30^th day of November of the next financial year

Or

Date of filing of annual return relating to that financial year.

Example 2: X & Co, a buyer has a purchase invoice dated 10th September 2022 (FY 2022-23), and wants to claim input tax credit of GST paid on that purchase. And annual return filed as on 15^th December 2023. As per the criteria laid down to find out the time limit, the two dates are as follows:

• 30th November 2023. Or
• The date of filing the GST annual return for FY 2022-23 i.e. 15^th December 2023.

The earlier of the two is the date to claim ITC of FY 2022-23. Therefore, the last date to claim ITC is 30th November 2023.

Notification No. 18/2022-Central Tax dated 28.09.2022

Finance Act 2022 proposed an amendment with regards to the time limit, to claim the ITC, provided under section 16(4) of the act. In this regard, CBIC issued a Notification No. 18/2022-Central Tax dated 28.09.2022 to implement the amendment from 01-10-2022.

A registered taxpayer can claim the ITC only through GSTR-3B and there is no other alternative way available in the GST Law to avail of Input Tax Credits. We all know that the due date of filing GSTR-3B for the month of October is 20^th/22^nd /24^th November (as the case may be) and thereafter it can be filed subject to payment of Late fees as per the CGST Act.

As per the amended provision, ITC of the relevant financial year can be claimed up to “thirtieth day of November following the end of the financial year to which such details pertain, or furnishing of the relevant annual return, whichever is earlier.” So doubts have been raised, about whether the timelines for the said compliances stand extended to the date of filing/ furnishing of the return/ statement for the month of November 2022 or the said compliances can be carried out in a return or the statement filed/ furnished up to 30^th November 2022.

In this regard, it is clarified that the said compliances in respect of a financial year can be carried out in the relevant return or the statement filed/ furnished up to 30th November of the next financial year, or the date of furnishing annual return for the said financial year, whichever is earlier. It is also clarified that no extension of the due date of filing monthly returns/statements for the month of October (due in November) or the due date of filing quarterly returns/statements for the quarter ending September has been made vide the amendments in CGST Act, 2017 notified through Notification No. 18/2022-Central Tax dated 28.09.2022

Example 3: A Ltd. made purchases as on 10^th Oct 2022 of ₹10,00,000 and paid  GST of ₹1,80,000 @18%. A Ltd. not GST return of Oct 2022 on the due date. The GST return for the month of Oct 2022 is filed as on 1^st Dec 2023.

In the above instance, the relevant financial year is FY 2022-23. As per the amended provision, the time limit to claim the ITC is 30^th November of the next financial year, in this case, 30^th November 2023.  The return relevant is filed after 30^th November 2023. Hence A Ltd is not entitled to claim the ITC.

Matters emphasis in provision

The section emphasises on following matters:

• Section 16 (4) ensures that ITC should be claimed only for the business purposes. This provision ensures that businesses are accountable for their ITC claims and timely compliance with the law.
• Businesses must maintain accurate and complete records of all their purchases and expenses. Any discrepancy or incorrect information in the documentation can lead to the rejection of the ITC claim.
• Non-compliance of section 16(4) can result in tax burden on the registered person. A registered person cannot claim ITC beyond the time prescribed in the section.

Points need to be remembered

Here are some points which could help to comply with the provisions of the law:

1. Maintain Proper Documentation: Maintain accurate and up-to-date records of invoices, debit notes, and relevant documents that are essential to claim the ITC.
2. Separate Personal and Business Expenses: Businesses should maintain separate accounts for business and personal expenses. The registered person should not provide GSTN at the time of personal purchases as ITC cannot be claimed on such purchases.
3. Regular Internal checks: Regular checks help to ensure compliance with Section 16 (4) and other CGST Act provisions.
4. Stay updated: To comply with the latest requirements and regulations, the registered person must be aware about the changes in the law.
5. Reconcile the ITC Claims: Regular monitoring and reconciling of ITC claims helps to identify errors and discrepancies for timely corrections.

Reporting in GST return

At the time of filing of GSTR-3B the taxpayers will need to bifurcate the input tax credit into eligible and ineligible input tax credit. It allows the ineligible ITC to be deducted from the auto-populated total ITC figure.

The registered person is required to provide details of ITC under table 4(D)(2) of GSTR-3B, which is not eligible to claim as per section 16(4) of the CGST Act.

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