Crucial changes in definitions relating to Input Tax
Credit – ITCÂ
Input tax credit or ITC, as it is popularly called, has been a primary highlight of the GST since its very inception, given the fact that one of the primary arguments for GST has been ‘seamless flow of credit’. The First Model of GST Law was released in the public domain on the 14th of June, 2016. The CBEC received suggestions from throughout the country on the same. Subsequently, the Revised Model of GST Law was released on the 26th of November. One of the laudable features of this new version is that the provisions with regard to input tax credit have been streamlined.
This paper discusses the revision in definitions of input, input services and capital goods, and impact of the same.
Definition of ‘Capital Goods’
The first model GST law gave a definition which was similar to the one existing in the present CENVAT law. It gave a list of goods which were to be considered ‘capital goods’, and nothing outside those could fall within its purview.
This was taken as a huge disappointment by industry, which had expected streamlined flow of credit under GST.
Now, in the revised model law, we witness a much more simple and comprehensive definition. As per the new definition, if the following two conditions are met, the goods will be ‘capital goods’:
- the value of such goods is capitalized in the books of accounts of the person claiming the credit; and
- such goods are used or intended to be used in the course or furtherance of business.
Now, the meaning of capital goods for the purpose of GST has been brought in line with the accounting practices, which is expected to reduce considerably the time and effort in identifying admissible and inadmissible credit, apart from providing a more efficient and comprehensive credit mechanism.
Definition of ‘input’ and ‘input service’
Under the first model law, two conditions were required to be fulfilled for goods to fall under ‘input’, or for services to fall under ‘input services’:
- used or intended to be used for making an outward supply; and
- used or intended to be used in the course or furtherance of business.
The first condition above was considered to be regressive in nature given the fact that it was limiting the credit to those goods/services which were directly in relation to the outward supply. However, a business makes use of various kinds of goods and services, quite a few of which are not directly in relation to the outward supply, but are definitely in relation to the business. Examples of the same are audit services, printing and stationery etc.
Representation were made, and this condition has been dropped in the revised model law. Now, credit shall be allowed on all inputs/input services if they are used or intended to be used in the course or furtherance of business irrespective of whether or not it is used for making an outward supply, but subject of course to other conditions and limitations prescribed in the law.
The participative approach being adopted by the government in bringing this crucial piece of legislation is praiseworthy. It marks a remarkable shift in the manner of governance, and certainly sets the tone for greater appreciation and acceptability for reforms by the citizens.
