Section 16 of the CGST Act deals with the eligibility and conditions for taking Input Tax Credit (ITC).

Section 16(1)

Every registered person shall,

subject to conditions and restrictions as may be prescribed in rule 36 and in the manner specified in  section 49

be entitled to take credit of input tax charged on any supplies of goods or services or both made to him

which are used or intended to be used in the course or furtherance of his business and

such ITC shall be credited to his e-CrL.

Section 16(1) provides that RP shall take ITC charged on inward supplies which are used in the course or furtherance of his business.

Only registered person is entitled to take ITC.

ITC may be availed only if goods/services are used for business purposes.

ITC is not available on such supplies of goods/services which are not used for business purposes.

The “intention to use” the goods and/or services in the course or furtherance of business would also suffice for availing ITC on such goods and/or services

Section 16(2)

Notwithstanding anything contained in this section,

no RP shall be entitled to the credit of any input tax in respect of any supply of goods or services or both made to him, unless he satisfied all of the following conditions

ITC may be availed by RP only if all below conditions are satisfied.

Section 16(2)(a)

he is in possession of a tax invoice or DN issued by registered supplier or

such other tax paying documents as may be prescribed in rule 36(1);

Rule 36(1)

ITC shall be availed by a RP including ISD on the basis of any of the following documents, namely,-

(a) an invoice issued by the supplier u/s 31[Tax Invoice];

(b) an invoice issued u/s 31(3)(f), subject to the payment of tax [Invoice on inward supply from URP taxable under RCM];

(c) DN issued by a supplier u/s 34;

(d) a bill of entry or any similar document prescribed under Customs Act or rules made there under for the assessment of integrated tax on imports;

(e) an ISD invoice or CN or any document issued by an ISD as per u/r 54(1).

ITC may be availed only if RP is in possession of above documents

Rule 36(2)

ITC shall be availed only if all the applicable particulars as specified in Chapter VI are contained in the said document [1][***].

[2][Proviso to Rule 36(2)

ITC may be availed even if the said document does not contain all the specified particulars but contains following details

• amount of tax charged,
• description of goods or services,
• total value of supply of goods or services or both,
• GSTIN of the supplier and recipient and
• POS in case of inter-State supply,]

[3][Section 16(2)(aa) read with ^[4][Rule 36(4)

No ITC shall be availed in respect of invoices/DN, the details of which are required to be furnished u/s 37(1) unless,-

(a) the details of such invoices/DN have been furnished by the supplier in GSTR-1 or 1A or IFF; and

(b) the details of [5][ITC in respect of] such invoices/DN have been communicated to the RP in GSTR-2B as per rule 60(7)

Wef 01-01-2022, ITC may be availed only on those invoices/DN which has been furnished by the supplier in his GSTR-1/1A/IFF and such details of ITC on such invoices/DN must be communicated to the buyer in his GSTR-2B.

Thus, in respect of invoices/debit notes the details of which are not furnished by the suppliers in their GSTR-1s or using IFF (and thus they are not visible in GSTR-2B of the recipient), ITC cannot be availed by such recipient.

For old provision on availing ITC Refer Para 16.6

Section 16(2)(b)

he has received the goods or services or both.

For availing ITC RP must have received the goods and / or services.

[6][Explanation to Section 16(2)(b)

For the purpose of this clause, it shall be deemed that RP has received the goods or services–

(i) where the goods are delivered by the supplier to

• a recipient or
• any other person on the direction of such RP, whether acting as an agent or otherwise [Bill to ship to model]

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 RP.]

Physical receipts of goods by RP is not necessary

The explanation expands the meaning of receipt of goods to provide that it is not necessary that the goods are physically received by the recipient. The recipient can issue directions to deliver the goods to third person.

Bill to Ship to Model     

‘A’ bills to ‘B’ but ships the goods to ‘Ç’ on direction of ‘B’. In effect, two supplies take place in this scenario viz., from ‘A’ to ‘B’ and from ‘B’ to ‘Ç’.

Thus, under this model, RP who purchases such goods does not receive the said goods.

So, ITC will be available to RP, on whose order the goods are delivered to a third person.

No ITC can be availed when tax is paid on advance receipt

Section 16(2)(b) provides that the receiver should have received the goods or services for availment of credit. When the payments are made on advance receipt of supplier, the recipient has not received the goods or services. Therefore, he is not entitled for credit on input tax paid.

Circular No. 241/35/2024-GST

Explanation to 16(2)(b) provides that where goods are delivered by the supplier to any other person, whether acting as an agent or not, upon the direction of the registered person, and where such delivery occurs either through transfer of documents of title to goods or otherwise, the registered person is deemed to have “received” such goods for the purpose of the clause (b) of section 16(2) of CGST Act.

Accordingly, in cases where goods are delivered by the supplier to the registered person, either directly or to any other person on the directions of the said registered person, the registered person shall be considered to have “received” the said goods for the purpose of clause (b) of section 16(2) of CGST Act.

3.3.1

it is clarified that as per Explanation to 16(2)(b) of CGST Act, the registered person (the dealer) can be considered to have “received” the said goods at the time of such handing over of the goods by the supplier to the transporter, at his factory gate, for their onward transmission to the said registered person (the dealer).

For complete circular, please click on above hyperlink.

1^st Proviso to Section 16(2)

if goods are received in lots or instalments,

RP shall take ITC upon receipt of the last lot or instalment:

[7][Section 16(2)(ba)

Details of ITC in respect of the said supply communicated to such RP u/s 38 has not been restricted

Section 38(2)(b) provides for details of ITC which cannot be availed.

Section 16(2)(c)

subject to section 41,

tax charged is respect of such supply has been actually paid to Govt.,

either in cash or through utilization of admissible ITC

It is now specially provided that the supplier has actually paid tax to Govt. tax.

It means supplier will give the credit to recipient only when tax is paid to the Govt.

However, ITC may be availed by RP on the basis of GSTR-2B even if tax is paid by supplier before 30^th sep following the end of relevant FY as per section 41.

Refer guide on section 41

1

A series of HC rulings stress that an innocent buyer shouldn’t be denied ITC merely due to the seller’s non-payment of tax—as long as transactions are genuine.

2

For various judgement – Click here

Section 16(2)(d)

he has furnished the return u/s 39

RP taking ITC must have filed his return u/s 39

2^nd Proviso to Section 16(2) read with Rule [8][37(1)

a RP, who has availed of ITC on any inward supply of goods or services or both other than supplies taxable on RCM basis

but fails to pay to the supplier thereof, amount towards value & tax of such supply [9][whether wholly or partly,]

within period of 180 days from the date of issue of invoice,

shall pay [10][or reverse] an amount equal to ITC availed in respect of such supplies [11][proportionate to the amount not paid to the supplier,]

along with interest payable thereon u/s 50,

in GSTR-3B for the tax period immediately following the period of 180 days from the date of the issue of the invoice.

RP shall pay reverse proportionate ITC if payment is not made to the supplier within 180 days from the date of invoice

1^st Proviso to Rule 37(1)

value of supplies made without consideration as specified in Schedule I shall be deemed to have been paid.

[12][2^nd Proviso to Rule 37(1)

value of supplies added as per section 15(2)(b) shall be deemed to have been paid]

2^nd Proviso to Section 16(2)

Conditions for payment within 180 days does applies to supplies on which tax is payable under reverse charge

3^rd Proviso to Section 16(2) read with [13][Rule 37(2)

Where the said RP subsequently makes the payment towards the value & tax of such supply to the supplier thereof,

he shall be entitled to re-avail the ITC earlier reversed.

ITC so reversed can be again taken when the payment for supplies has been made to the supplier

[14][Rule 37(3)

RP shall pay interest @ 18% notified u/ss 50(1) for the period

from the date of availing credit on such supplies

till the date when the amount added to the output tax liability

Rule 37(3) has been omitted wef 01-10-2022.

Section 16(3)

Where RP has claimed depreciation on the tax component of cost of capital goods and plant and machinery under Income-tax Act,

ITC on said tax component shall not be allowed.

Rule 36(3)

No ITC shall be availed by RP  in respect of any tax

that has been paid in pursuance of any confirmed demand order on account of any fraud, willful misstatement or suppression of facts [15][u/s 74]

Section 16(4)

RP shall not be entitled take ITC in respect of any invoice/DN for supplies of goods or services of both after

[16][30^th Nov] following the end of FY to which such invoice/DN pertains or

furnishing of the relevant annual return,

whichever is earlier.

Para 1 of Circular 160/16/2021-GST dated 20-09-2021

In case of debit notes, the date of issuance of debit note and not the date of underlying invoice is relevant to determine the relevant financial year

Reason for Time limit for availing ITC

[FAQ-22/12/2018-Ch10-17]

The underlying reasoning for this restriction is that no change in return is permitted after Nov of next FY. If annual return is filed before the month of Nov, then no change can be made after filing of annual return. However, in cases of new registration or where a person shifts from composition scheme to regular tax payment or where an exempt supply become taxable, the time limit for taking ITC is one year from the date of invoice of inward supplies. [Section 18(2) of CGST Act]

Rule 37(4)

Time limit specified u/ss 16(4) shall not apply for re-availing of any reversed ITC.

Question & Answer

Circular No. 211/5/2024-GST dated 26-06-2024

Issue

What will be the time limit specified u/s 16(4) for the purpose of availment of ITC by the recipient on the tax paid by him under RCM in respect of supplies received from unregistered persons.

2.5

Analysis of some provisions

Section 16(4) links the time limit for ITC availment with the financial year to which the invoice or debit note pertains.

In case of supplies where the supplier is unregistered and recipient is registered and the tax has to be paid by the recipient on RCM basis, the recipient is required to issue invoice as per section 31(3)(f) and pay the tax on the same in cash under RCM.

Section 16(2)(a) - ITC cannot be availed by a RP in respect of any supply unless he is in possession of a tax invoice or debit note or such other tax paying documents as may be prescribed.

2.6

A combined reading of the above provisions leads to a conclusion that as ITC can be availed by the recipient only on the basis of invoice or debit note or other duty paying document, and as in case of RCM supplies received by the recipient from unregistered supplier, invoice has to be issued by the recipient himself, the relevant financial year, to which invoice pertains, for the purpose of time limit for availment of ITC u/s 16(4) in such cases shall be the financial year of issuance of such invoice only.

In cases, where the recipient issues the said invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax.

2.7

Clarification

it is clarified that in cases of supplies received from unregistered suppliers, where tax has to be paid by the recipient under RCM and where invoice is to be issued by the recipient of the supplies u/s 31(3)(f) of CGST Act,

the relevant FY for calculation of time limit for availment of ITC u/s 16(4) will be the FY in which the invoice has been issued by the recipient u/s 31(3)(f), subject to payment of tax on the said supply by the recipient and fulfilment of other conditions and restrictions of section 16 and 17 of CGST Act.

In case, the recipient issues the invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax.

Further, in cases of such delayed issuance of invoice by the recipient, he may also be liable to penal action u/s 122 of CGST Act.

[17][Proviso to Section 16(4)

RP may take ITC even after the due date of return u/s 39 for Sep, 2018 till the due date of return for March, 2019

in respect of any invoice or DN for supply of goods or/and services made during the FY 2017-18,

the details of which have been uploaded by the supplier u/s 37(1) till the due date of return for March, 2019.]

[18][Section 16(5)

Notwithstanding anything contained in sub-section (4),

in respect of an invoice or debit note for supply of goods or services or both

pertaining to the Financial Years 2017-18, 2018-19, 2019-20 and 2020-21,

RP shall be entitled to take ITC in any return u/s 39

which is filed up to the 30th Nov, 2021.]

[19][Section 16(6)

Where registration of a person is cancelled u/s 29 and subsequently the cancellation of registration is revoked

by any order u/s 30 or

pursuant to any order made by the Appellate Authority or the Appellate Tribunal or court and

where availment of ITC in respect of an invoice or debit note was not restricted u/ss (4) on the date of order of cancellation of registration,

the said person shall be entitled to take the ITC in respect of such invoice or debit note,

in a return u/s 39,–

(i) filed up to 30^th Nov following the FY to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier; or

(ii) for the period

from the date of cancellation of registration or the effective date of cancellation of registration,

till the date of order of revocation of cancellation of registration,

where such return is filed within 30 days from the date of order of revocation of cancellation of registration,

whichever is later.]

Circular No. 237/31/2024-GST dated 15-10-2024

Refer above circular for

xlarification in respect of various issues pertaining to availment of benefit of the said amendments in section 16 to the taxpayers against whom demands have been issued alleging wrong availment of ITC in contravention of section 16(4), who are now entitled to avail the said ITC as per the retrospectively inserted provisions of sub-section (5) or sub-section (6) of section 16 of the CGST Act.

Sl No-1 of Circular No. 47/21/2018-GST dt. 08-06-2018

Whether moulds and dies owned by OEM that are sent free of cost (FOC) to a CM) is leviable to tax and whether OEMs are required to reverse ITC in this case?

Goods supplied Free of cost to unrelated parties is not deemed supply as per Sch-I

1.1 Moulds and dies owned by OEM which are provided to CM (the two not being related persons or distinct persons) on FOC basis does not constitute a supply as there is no consideration involved.

Further, since moulds and dies are provided free of cost by the OEM to the CM in the course or furtherance of his business, there is no requirement for reversal of ITC availed on such moulds and dies by the OEM.

Value of moulds and dies shall not be added to value of supply of CM

1.2 While calculating value of the supply of CM, value of moulds and dies provided free of cost shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the CM and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) CGSTA, 2017.

1.3 However, if the contract between OEM and CM was for supply of components made by using the moulds/dies belonging to the CM, but the same have been supplied by the OEM to the CM on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on such moulds/ dies, as the same will not be considered to be provided by OEM to the CM in the course or furtherance of the former’s business.

^[20][Rule 36(4)

ITC to be availed on invoices or DN, details of which have not been [21][furnished] by the suppliers u/ss 37(1),

shall not exceed [22][5%] of the eligible credit available on invoices or DN the details of which have been [23][furnished] in GSTR-1 by the suppliers u/s 37(1)]

Extract of Circular No. 123/42/2019–GST dt. 11-11-2019

3.

This being a new provision, the restriction is not imposed through the common portal and it is the responsibility of the taxpayer that credit is availed in terms of the said rule and therefore, the availment of restricted credit shall be done on self-assessment basis by the tax payers.

Various issues relating to implementation of Rule 36(4) have been examined and the clarification on each of these points is as under:

Sl No

Issue

Clarification

1.

What are the invoices/ DN on which restriction u/r 36(4) shall apply?

Restrictions are not applicable on Import, RCM supplies, ITC from ISD

Restriction of availment of ITC is imposed only on those invoices/DN, details of which are required to be uploaded by the suppliers u/s 37(1) and which have not been uploaded.

Therefore, taxpayers may avail full ITC in respect of IGST paid on import, documents issued under RCM, credit received from ISD etc. which are outside the ambit of section 37(1), provided that eligibility conditions for availment of ITC are met in respect of the same.

The restriction of Rule 36(4) will be applicable only on the invoices/DN on which credit is availed after 09.10.2019.

2.

Whether restriction is to be calculated supplier wise or on consolidated basis?

Restriction is not supplier wise

Credit available u/sr 36(4) is linked to total eligible credit from all suppliers against all supplies whose details have been uploaded by the suppliers.

Further, calculation would be based on only those invoices which are otherwise eligible for ITC. Accordingly, those invoices on which ITC is not available under any of the provision (say u/ss 17(5)) would not be considered for calculating 20% of the eligible credit available.

3.

GSTR-2A being a dynamic document, what would be the amount of ITC that is admissible to the taxpayers for a particular tax period in respect of invoices/DN whose details have not been uploaded by the suppliers?

ITC in respect of the invoices/DN whose details have not been uploaded by the suppliers shall not exceed 5% of the eligible ITC in respect of invoices or DN the details of which have been uploaded by the suppliers u/ss 37(1) as on the due date of filing of GSTR-1 of the suppliers for the said tax period.

The taxpayer may have to ascertain the same from his auto populated GSTR 2A as available on the due date of filing of GSTR-1 u/ss 37(1).

4.

How much ITC a RP can avail in his GSTR-3B in a month in case the details of some of the invoices have not been uploaded by the suppliers u/ss 37(1).

Rule 36(4) prescribes that the ITC to be availed in respect of invoices or DN, the details of which have not been uploaded by the suppliers u/ss 37(1), shall not exceed 5% of the eligible credit available in respect of invoices or DN the details of which have been uploaded by the suppliers u/ss 37(1). The eligible ITC that can be availed is explained by way of illustrations, in a tabulated form, below.

In the illustrations, say a taxpayer “R” receives 100 invoices (for inward supply of goods or services) involving ITC of Rs.10 lakhs, from various suppliers during the month of Oct, 2019 and has to claim ITC in his GSTR-3B of Oct, to be filed by 20^th Nov,2019.

Details of suppliers invoices for which recipient is eligible to take ITC

20% of eligible credit where invoices are uploaded

Eligible ITC to be taken in GSTR-3B to be filed by 20^th Nov.

Case 1

Suppliers have furnished in GSTR-1 80 invoices involving ITC of Rs.6 lacs as on due date of furnishing of outward supplies by the suppliers

Rs.1,20,000

Rs.6,00,000  + Rs.1,20,000

= Rs.7,20,000

Case 2

Suppliers have furnished in GSTR-1 80 invoices involving ITC of Rs.7 lacs as on due date of furnishing of outward supplies by the suppliers

Rs.1,40,000

Rs.7,00,000 + Rs.1,40,000

= Rs.8,40,000

Case 3

Suppliers have furnished in GSTR-1 75 invoices involving ITC of Rs.8.5 lacs as on due date of furnishing of outward supplies by the suppliers

Rs.1,70,000

Rs.8,50,000 + Rs.1,50,000

= Rs.10,00,000

5.

When can balance ITC be claimed in case availment of ITC is restricted as per Rule 36(4)?

The balance ITC may be claimed in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers.

He can claim proportionate ITC as and when details of some invoices are uploaded by the suppliers provided that credit on invoices, the details of which are not uploaded u/s 37(1) remains under 20% of the eligible ITC, the details of which are uploaded by the suppliers.

Full ITC of balance amount may be availed, in present illustration by “R”, in case total ITC pertaining to invoices the details of which have been uploaded reaches Rs.8.3 lakhs (Rs 10 lakhs /1.20).

In other words, taxpayer may avail full ITC in respect of a tax period, as and when the invoices are uploaded by the suppliers to the extent Eligible ITC/ 1.2. The same is explained for Case No. 1 and 2 of the illustrations provided at Sl.No.4 above as under:

Case 1

“R” may avail balance ITC of Rs.2.8 lakhs in case suppliers upload details of some of the invoices for the tax period involving ITC of Rs. 2.3 lakhs out of invoices involving ITC of Rs. 4 lakhs details of which had not been uploaded by the suppliers. [Rs.6lakhs + Rs. 2.3 lakhs = Rs. 8.3 lakhs]

Case 2

“R” may avail balance ITC of Rs. 1.6 lakhs in case suppliers upload details of some of the invoices involving ITC of Rs. 1.3 lakhs out of outstanding invoices involving Rs. 3 lakhs. [Rs. 7 lakhs + Rs.1.3lakhs = Rs. 8.3 lakhs]

[24][1^st Proviso to Rule 36(4)

Said condition shall apply cumulatively for the period Feb-20 to Aug-20 and

GSTR-3B for the tax period Sept, 2020 shall be furnished with the cumulative adjustment of ITC for the said months in accordance with the condition above]

[25][1^st Proviso to Rule 36(4)

Said condition shall apply cumulatively for the period Apr-21 to Jun-21 and

GSTR-3B for the tax period June, 2021 or quarter ending June, 2021, shall be furnished with the cumulative adjustment of ITC for the said months in accordance with the condition above.]

Extract of Circular No. 142/12/2020 - GST dated 09-10-2020

3.

To ensure uniformity in the implementation of the said provisions across the field formations, the Board hereby clarifies certain issues in succeeding paragraphs.

3.1

It is re-iterated that the clarifications issued earlier vide Circular No. 123/42/2019–GST dt. 11-11-2019 shall still remain applicable, except for the cumulative application as prescribed in proviso to rule 36(4).

Accordingly, all the taxpayers are advised to ascertain the details of invoices uploaded by their suppliers u/s 37(1) for the periods of Feb-20 to Aug-20, till the due date of furnishing of GSTR-1 for the month of Sep, 2020 as reflected in GSTR-2As.

3.2

Taxpayers shall reconcile the ITC availed in their GSTR-3Bs for the period Feb-20 to Aug-20 with the details of invoices uploaded by their suppliers of the said months, till the due date of furnishing GSTR-1 for the month of Sep, 2020. The cumulative amount of ITC availed for the said months in GSTR-3B should not exceed 110% of the cumulative value of the eligible credit available in respect of invoices/DN the details of which have been uploaded by the suppliers u/s 37(1), till the due date of furnishing of GSTR-1 for Sep, 2020.

3.3

It may be noted that availability of 110% of the cumulative value of the eligible credit available in respect of invoices/DN the details of which have been uploaded by the suppliers u/s 37(1) does not mean that the total credit can exceed the tax amount as reflected in the total invoices for the supplies received by the taxpayer i.e. the maximum credit available in terms of provisions of section 16 of the CGST Act.

3.4

The excess ITC availed arising out of reconciliation during this period, if any, shall be required to be reversed in Table 4(B)(2) of GSTR-3B, for Sep, 2020. Failure to reverse such excess availed ITC on account of cumulative application of rule 36(4), would be treated as availment of ineligible ITC during the month of Sept, 2020.

4.

The manner of cumulative reconciliation for the said months in terms of proviso to rule 36(4) is explained by way of illustration.

For illustration, refer Circular No. 142/12/2020 - GST dated 09-10-2020