Inputs means = Inputs held in stock and inputs contained in semi-finished or finished goods held in stock

Section 18(1)

It provides availment of ITC in following circumstances

Cl

Types

Avail ITC on

on the day immediately preceding the date

(a)

Person applying for registration within 30 days of becoming liable to registration and has been granted such registration

Inputs

when he becomes liable to pay tax

(b)

Person taking voluntary registration u/s 25(3)

Inputs

of grant of registration

(c)

RP ceases to pay tax under composition levy u/s 10

Inputs and Capital Goods

from which he is liable to pay tax u/s 9

(d)

exempt supplies becomes a taxable supply

Inputs and Capital Goods

from which such supply becomes taxable

Ex

Clause 18(1)(a)

Mr. X becomes liable to pay tax on 1st Sep and has obtained registration on 15th Sep.

Mr. X is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 31st Aug.

Mr. X cannot take ITC on capital goods.

Ex

Clause 18(1)(b) [FAQ-22/12/18-Ch10-29]

Mr. X applies for voluntary registration on 5th Jul and obtains registration on 22th Jul.

Mr. X is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 21st Jul.

Mr. X cannot take ITC on capital goods.

Ex

Clause 18(1)(c) [FAQ-22/12/18-Ch10-28]

Mr. A, a registered person was paying tax under Composition Scheme up to 30th July. However, wef 31st July, Mr. A becomes liable to pay tax under regular scheme.

Mr. A is eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and capital goods as on 30th July. ITC on capital goods will be reduced by 5% per quarter or part thereof from the date of invoice.

Question & Answer

Proviso to Section 18(1)(c) & (d) read with Rule 40(1)(a)

ITC on CG shall be reduced by 5% per quarter of a year or part thereof from date of invoice or documents on which capital goods were received.

Question & Answer

Section 18(2)

RP shall not be entitled to take ITC u/ss (1)

after the expiry of 1 year from the date of issue of tax invoice relating to such supply.

Question & Answer

Rule 40(1)(b)

RP shall make a declaration in GST ITC-01 to the effect that he is eligible to avail ITC within

30 days from the date of becoming eligible to avail ITC u/s 18(1), or

within such further period as may be extended by Commissioner by a notification.

For all extended date of ITC-01, please refer notification

Rule 40(1)(c)

Declaration u/c (b) shall clearly specify details of inputs, or capital goods

on the day immediately preceding the date of ITC taken u/s 18(1)

Rule 40(1)(d)

If aggregate ITC of CGST, SGST, UGST and IGST > Rs.2 lacs,

details furnished in the declaration u/c (b) shall be duly certified by

a practicing chartered accountant or

a cost accountant

Rule 40(1)(e)

ITC claimed u/c of Section 18(1)(c) and (d) shall be verified with the corresponding details furnished by the corresponding supplier in GSTR-1 or GSTR-4.

Section 18(4)

RP who has availed of ITC on normal levy and

opts to pay tax u/s 10 or,

his taxable supply become wholly exempt,

he shall pay tax equivalent to credit of input tax on

inputs and

on capital goods - such percentage points as prescribed in rule 44,

on the day immediately preceding the date of

exercising of such option or,

such exemption:

Proviso to Section 18(4) - Lapse of Balance in ECrL

after payment of such amount, balance of ITC, if any, lying in RP’s ECrL shall lapse

Section 18(5)

ITC u/ss (1) and amount payable u/ss (4) shall be calculated in such manner as prescribed.

ITC shall be reversed way of debit in ECrL or ECaL.

Section 29(5)

RP whose registration is cancelled

shall pay an amount higher of,

(i) ITC on inputs or on capital goods or plant and machinery on the day immediately preceding the date of such cancellation or

(ii) output tax payable on such goods, calculated in such manner as may be prescribed

1^st Proviso - Calculation of Tax on Capital Goods or P&M

in case of CG or P&M, RP shall pay an amount higher of

ITC taken on the said CG or P&M (-) such percentage points as may be prescribed or

tax on transaction value of such capital goods or plant and machinery u/s 15

Section 29(6)

The amount payable u/ss (5) shall be calculated in such manner as may be prescribed.

ITC shall be reversed way of debit in ECrL or ECaL of RP

Rule 44(1)(a)

For section 18(4) or 29(5),

ITC for inputs shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed on such inputs;

Rule 44(3)

If tax invoices related to the inputs held in stock are not available,

amount u/sr (1) shall be based on the prevailing market price of the goods on the effective date of the occurrence of any of the events specified in section 18(4) or 29(5)

Rule 44(5)

The details furnished u/sr (3) shall be duly certified by a practicing

chartered accountant or

cost accountant.

Rule 44(1)(b)

For section 18(4) or 29(5),

ITC for Capital Goods to be reversed = ITC attributable to remaining useful life in months shall be computed on pro-rata basis, taking the useful life as 5 years.

Illustration: Capital goods have been in use for 4 years, 6 month and 15 days.

The useful remaining life in months= 5 months ignoring a part of the month

ITC taken on such capital goods = C

ITC attributable to remaining useful life= C*5/60

Rule 44(2)

ITC to be reversed u/sr 44(1) shall be determined separately for CGST, SGST, UGST and IGST

Rule 44(4)

The amount determined u/sr 44(1) shall form part of the output tax liability and

details of amount shall be furnished in

ITC-03, for event specified in section 18(4) and

GSTR-10, for cancellation of registration in section 29(5).

Question & Answer

Section 18(6) read with Rule 40(2)

In case of supply of CG or P&M, on which ITC has been taken,

RP shall pay an amount higher of 

(i) ITC taken on CG or P&M - 5% for every quarter or part thereof from the issue date of invoice for such goods or

(ii) Tax on transaction value of such CG or P&M determined u/s 15,

1^st Proviso – Sale of Scrap such as bricks, moulds etc

where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, RP may pay tax on transaction value determined u/s 15.

ITC on sale of Capital Goods

Rule 44(6)

Amount of ITC for section 18(6) relating to capital goods shall be determined in the same manner as specified in rule 44(1)(b) such as

ITC for Capital Goods to be reversed = ITC attributable to remaining useful life in months shall be computed on pro-rata basis, taking the useful life as 5 years.

Tax u/s 18(6) to be shown as output tax in GSTR-1

Proviso to Rule 44(6)

Provided that if amount so determined > tax determined on transaction value of capital goods,

the amount determined shall form part of the output tax liability and the same shall be furnished in GSTR-1.

Question & Answer

Section 18(3)

On change in the constitution of a RP

due to sale, merger, demerger, amalgamation, lease or transfer of the business

with the specific provisions for transfer of liabilities,

RP shall transfer ITC which remains unutilised in his ECrL to such new entity

in such manner as may be prescribed.

Rule 41(1)

RP shall furnish details of sale, merger etc in GST ITC-02 along with a request for transfer of unutilized ITC lying in his ECrL to the transferee:

Proviso to Rule 41(1)

In case of demerger, ITC shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

[1][Explanation: - For this sub-rule, “value of assets” means value of the entire assets of the business, whether or not ITC has been availed thereon]

Rule 41(2)

Transferor shall submit a copy of a certificate issued by a practicing CA or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

Rule 41(3)

Transferee shall accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in GST ITC-02 shall be credited to his ECrL.

Rule 41(4)

Inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Circular No. 96/15/2019 - GST dated 28-03-2019

Doubts have been raised whether section 18(3) provides for transfer of ITC which remains unutilized to the transferee in case of death of the sole proprietor.

As per rule 41(1), RP (transferor of business) can file GST ITC-02 with a request for transfer of unutilized ITC lying in his ECrL to the transferee.

Further, clarification has also been sought regarding procedure of filing of GST ITC-02 in case of death of the sole proprietor.

2.

Transfer in ownership of business includes transfer due to death of sole proprietor

Section 29(1)(a) provides that reason of transfer of business includes “death of the proprietor”.

Similarly, for uniformity and for section 18(3), section 22(3), section 85(1) and rule 41(1), it is clarified that transfer or change in the ownership of business will include transfer or change in the ownership of business due to death of the sole proprietor.

3.

In case of death of sole proprietor if the business is continued by any person being transferee or successor, ITC which remains un-utilized in the ECrL is allowed to be transferred to the transferee as per provisions and in the manner stated below –

a) Registration liability of the transferee / successor:

As per provisions of section 22(3), transferee or the successor, shall be liable to be registered with effect from the date of such transfer or succession, where a business is transferred to another person for any reasons including death of the proprietor. While filing application in GST REG-01 the applicant is required to mention the reason to obtain registration as “death of the proprietor”

b) Cancellation of registration on account of death of the proprietor:

Section 29(1)(a) allows the legal heirs in case of death of sole proprietor of a business, to file application for cancellation of registration in GST REG-16 on account of transfer of business for any reason including death of the proprietor. In GST REG-16, reason for cancellation is required to be mentioned as “death of sole proprietor”. The GSTIN of transferee to whom the business has been transferred is also required to be mentioned to link the GSTIN of the transferor with the GSTIN of transferee.

c) Transfer of input tax credit and liability:

In case of death of sole proprietor, if the business is continued by any person being transferee or successor of business, it shall be construed as transfer of business. Section 18(3) allows RP to transfer the unutilized ITC lying in his ECrL to the transferee in the manner prescribed in rule 41, where there is specific provision for transfer of liabilities. As per section 85(1), the transferor and the transferee / successor shall jointly and severally be liable to pay any tax, interest or any penalty due from the transferor in cases of transfer of business “in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever”. Furthermore, section 93(1) provides that where a person, liable to pay tax, interest or penalty under the CGST Act, dies, then the person who continues business after his death, shall be liable to pay tax, interest or penalty due from such person under this Act. It is therefore clarified that the transferee / successor shall be liable to pay any tax, interest or any penalty due from the transferor in cases of transfer of business due to death of sole proprietor.

d) Manner of transfer of credit

As per rule 41(1), RP shall file GST ITC-02 with a request for transfer of unutilized ITC lying in his ECrL to the transferee, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason. In case of transfer of business on account of death of sole proprietor, the transferee / successor shall file GST ITC-02 in respect of the registration which is required to be cancelled on account of death of the sole proprietor. GST ITC-02 is required to be filed by the transferee/successor before filing the application for cancellation of such registration. Upon acceptance by the transferee / successor, the un-utilized ITC specified in GST ITC-02 shall be credited to his ECrL.

C

Circular No. 133/03/2020 - GST dated 23-03-2020

2.

Provision of section 18(3) and rule 41(1) given

3.

In order to ensure uniformity in the implementation of the provisions of the law, the Board, in exercise of its powers conferred by section 168(1) clarifies the issues involved as follows

a.

(i)

For apportionment of ITC, whether value of new units is to be considered at states or all India Level

In case of demerger, proviso to rule 41 (1) provides that ITC shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

However, it is not clear as to whether the value of assets of the new units is to be considered at State level or at all-India level.

Clarification

Explanation to rule 41(1) states that “value of assets” means the value of the entire assets of the business, whether or not ITC has been availed thereon.

Under CGST Act, a person/ company (having same PAN) is required to obtain separate registration in different States and each such registration is considered a distinct person for the purpose of the Act.

Accordingly, for apportionment of ITC u/r 41(1), value of assets of the new units is to be taken at the State level (at the level of distinct person) and not at the all-India level.

Illustration

A company XYZ is registered in two States of M.P. and U.P. Its total value of assets is worth Rs.100 crore, while its assets in State of M.P. and U.P are Rs.60 cr and Rs.40 cr respectively. It demerges a part of its business to company ABC. As a part of such demerger, assets of XYZ amounting to Rs.30 Crore are transferred to company ABC in State of M.P, while assets amounting to Rs 10 crore only are transferred to ABC in State of U.P.

(Total assets amounting to Rs 40 crore at all-India level are transferred from XYZ to ABC).

The unutilized ITC of XYZ in State of M.P. shall be transferred to ABC on the basis of ratio of value of assets in State of M.P., i.e. 30/60 = 0.5 and not on the basis of all-India ratio of value of assets, i.e. 40/100=0.4.

Similarly, unutilized ITC of XYZ in State of U.P. will be transferred to ABC in ratio of value of assets in State of U.P.,i.e. 10/40 = 0.25.

(ii)

Is the transferor required to file GST ITC – 02 in all States where it is registered?

Clarification

No. The transferor is required to file FORM GST ITC-02 only in those States where both transferor and transferee are registered.

(iii)

Applicability of Proviso to rule 41(1) to other form of business reorganization other than demerger

The proviso to rule 41(1) explicitly mentions ‘demerger’. Other forms of business reorganization where part of business is hived off or business is transferred as a going concern etc. have not been covered in the said rule. Wherever business reorganization results in partial transfer of business assets along with liabilities, whether the proviso to rule 41(1) shall be applicable to calculate the amount of transferable ITC?

Yes, the formula for apportionment of ITC, as prescribed under proviso to sub-rule (1) of rule 41 of the CGST Rules, shall be applicable for all forms of business re-organization that results in partial transfer of business assets along with liabilities.

c.

(i)

Applicability of ratio of value of assets for each head of tax

Whether the ratio of value of assets, as prescribed under proviso to rule 41(1), shall be applied in respect of each of the heads of ITC viz. CGST/ SGST/ IGST/ Cess?

Clarification

No, the ratio of value of assets shall be applied to the total amount of unutilized ITC of the transferor i.e. sum of CGST, SGST/UTGST and IGST credit.

The said formula need not be applied separately in respect of each heads of ITC (CGST/SGST/IGST).

Further, the said formula shall also be applicable for apportionment of Cess between the transferor and transferee.

Illustration A:

The ITC balances of transferor X in the State of Maharashtra under CGST, SGST and IGST heads are 5 lakh, 5 lakh and 10 lakh respectively. Pursuant to a scheme of demerger, X transfers 60% of its assets to transferee B. Accordingly, the amount of ITC to be transferred from A to B shall be 60% of 20 lakh (total sum of CGST, SGST and IGST credit) i.e. 12 lakh.

(ii)

How to determine the amount of ITC that is to be transferred to the transferee under each tax head (IGST/CGST/SGST) while filing of FORM GST ITC–02 by the transferor?

The total amount of ITC to be transferred to the transferee (i.e. sum of CGST, SGST/UTGST and IGST credit) should not exceed the amount of ITC to be transferred, as determined under sub-rule (1) of rule 41 of the CGST Rules [refer 3 (c) (i) above]. However, the transferor shall be at liberty to determine the amount to be transferred under each tax head (IGST, CGST, SGST/UTGST) within this total amount, subject to the ITC balance available with the transferor under the concerned tax head. This is shown in the illustration below:

.

d.

(i)

In order to calculate the amount of transferable ITC, the apportionment formula under proviso to rule 41(1) has to be applied to the unutilized ITC balance of the transferor. However, it is not clear as to which date shall be relevant to calculate the amount of unutilized ITC balance of transferor.

Clarification

Provision of Section 18(3) and Rule 41(1) given

A conjoint reading of section 18(3) along with rule 41(1) would imply that the apportionment formula shall be applied on the ITC balance of the transferor as available in ECrL on the date of filing of ITC – 02 by the transferor.

(ii)

Which date shall be relevant to calculate the ratio of value of assets, as prescribed in the proviso to rule 41 (1)?

According to section 232(6) of the Companies Act, 2013, “The scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date”.

The said legal provision appears to indicate that the “appointed date of demerger” is the date from which the scheme for demerger comes into force and it is specified in the respective scheme of demerger. Therefore, for the purpose of apportionment of ITC under rule 41(1), the ratio of the value of assets should be taken as on the “appointed date of demerger”.

In other words, for the purpose of apportionment of ITC under rule 41(1), while the ratio of the value of assets should be taken as on the “appointed date of demerger”, the said ratio is to be applied on the ITC balance of the transferor on the date of filing GST ITC - 02 to calculate the amount to transferable ITC.

[2][Rule 41A(1)

RP who has obtained separate registration for multiple places of business in accordance with the provisions of rule 11 and

who intends to transfer, either wholly or partly, unutilised ITC lying in his ECrL

to any or all of the newly registered place of business,

shall furnish details in GST ITC-02A:

within 30 days from obtaining such separate registrations,

Proviso - ITC to be transferred in the ratio of the value of assets

Provided that ITC shall be transferred to the newly registered entities in the ratio of the value of assets held by them at the time of registration.

Explanation.- For this sub-rule, ‘value of assets’ means the value of the entire assets of the business whether or not ITC has been availed thereon.

Rule 41A(2)

Newly RP (transferee) shall accept the details so furnished by transferor and, upon such acceptance, the unutilised ITC specified in GST ITC-02A shall be credited to his ECrL.