Background

At present, India Inc. faces a levy of indirect taxes at two levels, one being levied by the Central Government and the other being levied by the State Governments. The fact that the taxes are being levied by different administration clearly demonstrates the non-fungibility of credit amongst the taxes being levied. In fact, there is lack of fungibility of taxes being levied by the same administration. For example, service tax and excise duty do not have full fungibility amongst themselves. For this simple reason, there occurs a regular double taxation on the same transaction. It is an accepted position that in a value addition based taxation system, the tax should be levied only on the component of value addition and not on the taxes being levied on the transaction within the chain.

Owing to this inefficiency in the Indian tax structure, there was a demand from the industry for a levy of a single indirect tax with seamless flow of credits. The same paved way for the levy of a uniform indirect tax levy in the form of Goods & Service Tax law. However, considering the various political aspects involved, unlike the international perspective of GST wherein there is generally a single tax, India adopted a dual model of GST with the levy and administration of tax being governed by both, Central and State Government with a concept of destination based tax, i.e., in the case of intrastate transactions, the revenue will be share by the Central and State Government (CGST plus SGST) and in the case of interstate transactions, the revenue will be shared by the receiving state and the Central Government (IGST).

The Constitutional Amendment billing paving the way for the levy of the uniform Goods & Service Tax received an impetus with the Bill getting passed by the Upper House of the Parliament (the Lower House having already passed the Bill), getting the required state ratification as well as the Presidential Assent paving a way for the introduction of the new levy. The Empowered Committee of State Finance Ministers have also released the draft model GST law in public domain and invited comments from the general public.

Provisions under the Model GST law

The basic provision relating to the claim of input tax credit are covered u/s 16 of the model GST law. The section heading reads as “Manner of taking input tax credit”. The term “input tax credit” has also been defined u/s 2 (58) of the model GST law as credit of “input tax” as defined in section 2 (57). The term input tax has been defined to mean any tax charged on supply of any goods and/or services that are used or intended to be used in the course or furtherance of business and shall include tax payable under reverse charge mechanism.

In the course or furtherance of Business

What is important in the definition of input tax is the use of phrase “in the course or furtherance of business” in the definition of input tax and therefore the phrase needs to be analyzed in detail. While the term “business” has been defined, the phrase “in the course or furtherance of” has not been dealt with in any manner under the model GST law.

It would be therefore essential to refer the dictionary meaning of the said phrase. The Australian Concise Oxford Dictionary (1997) defines the phrase 'in the course of' as 'during' and the word 'furtherance' as to mean 'furthering or being furthered; the advancement of a scheme etc.'

In fact, the Explanatory Memorandum relating to the A New Tax System (Goods and Services Tax) Bill 1998 confirms this ordinary meaning at paragraph 3.10 which states:

‘In the course or furtherance' is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

Further, the term business has been defined u/s 2(17) to include:

(a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any transaction in connection with or incidental or ancillary to (a) above;

(c) any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital assets and services in connection with

(e) commencement or closure of business;

(f) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be;

(g) admission, for a consideration, of persons to any premises; and

(h) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

It would be therefore sufficient to say that any supplies received by a taxable person which is used/ consumed in the course or further of business, the meaning of which is very wide, as discussed above, will be creditable.

The fact that the initial definition does not restrict credit if the supplies are used for providing exempt supplies is a departure from the existing regime, wherein those items which were not used for manufacture/provision of output goods/ output services were excluded from the scope of the definition of inputs/ input services at the first stage itself.

Therefore, if some supply is either used exclusively in the course/ furtherance of business or partly used in the course/ furtherance of business, the basic provision enabling the claim of credit does not contain any restrictions. The restriction would apply only in cases where the supply is not to be used exclusively in the course or furtherance of business. The following chart explains the above:

Electronic Credit Ledger

Having discussed the basic concept, it is now time to understand the new requirement to claim credit, which is provided u/s 16(1) of the model GST law, i.e., every registered taxable person shall be entitled to take credit of input tax admissible to him which shall be credited to the electronic credit ledger of such person.

The important takeaways from the general rule is that the credit should be admissible and the same shall be credited to the electronic credit ledger. If one takes the background from the definition of input tax credit and input tax, it can be inferred that all taxes paid on inward supplies in general will be admissible for credit subject to the simple condition that the said supply would be used in the course or furtherance of business.

The new variation for the claim of credit is that the credit should be reflected in the electronic credit ledger of the said taxable person. An electronic credit ledger has been defined u/s 2(41) as a ledger in electronic form maintained at the common portal for each registered taxable person in the prescribed manner. The administration of GST will be done by a common portal wherein all the taxable persons will have to give details of all their outward supplies in their returns to be filed under the GST. In case of B2B model, where credit flow is possible, the supplier is required to tag each outward supply to the tax identification number of the recipient. This will result in the transaction being automatically being reflected in the electronic credit ledger of the receiver so as to enable him to claim the credit of the tax paid. This in fact means that a recipient cannot claim credit unless the supplier has paid the corresponding tax as well as disclosed the said supply as being made to the recipient in his GST returns.

This is a departure from the existing provisions under the Central Excise/ Service Tax where there is no such requirement. Even under the VAT law, while the credit is not allowed if it is not reflected by the selling vendor, there is no restriction to claim credit and the disallowance takes place on a future date at the time of assessments. That process is now proposed to be done at the stage of claim of credit itself at the time of filing of returns.

Essential Conditions for claim of Credit

In addition to the above condition that the credit should be admissible and credited to the electronic credit ledger of the recipient of supply, sub-section (11) imposes further conditions for the claim of credit, which inter alia include:

(a) possession of document on the basis of which credit is intended to be claimed, i.e., invoice, debit note, credit note, etc.

(b) actual receipt of goods and/or services

(d) furnishing of return u/s 27

While condition (a) is present even under the current law and conditions (c) & (d) are indirectly enshrined under sub-section (1), the consequences of condition in sub-section (b) needs to be analyzed in more detail.

While the condition for actual receipt of goods can be satisfied owing to the tangible nature of goods and other documents and is already a requirement for Excise, it will be a mammoth task to maintain records of receipt of services on account of the intangible nature of the service which makes it a difficult proposition for implementation.

For example, currently, the film producers who have entered into an agreement with a distribution house, receive the consideration in advance. To the extent, the consideration is taxable, service tax has to be paid in advance, at which point an invoice is issued to the distributor who can claim credit on the same. However, under the GST regime, the scenario will completely change wherein even though invoice will be received by the distributor upon payment of advance, he will not be eligible to claim the credit till the time the film is made available for distribution, i.e., supply has been made. While in this scenario, it can be tracked the receipt of supply of service has not been received, there can be various other scenarios wherein it would be difficult to track the actual receipt of supply of service, for instance in case of annual maintenance contracts, billing is done on advance while the actual receipt of supply takes place over a period.

Non-availability of credit on certain supplies

Consistent with the current provisions wherein credit on certain transactions is not eligible, even the GST law continues to bar credit on following supplies to be received by a registered taxable person:

(a) motor vehicles, except when they are supplied in the usual course of business or are used for providing the following taxable services— (i) transportation of passengers, or (ii) transportation of goods, or (iii) imparting training on motor driving skills;	Under the current regime, credit is not allowed on services received pertaining to motor vehicles, such as renting, insurance, etc. The way the provisions are currently worded, it seems that the input services relating to motor vehicles will be eligible for credit.
(b) goods and / or services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness center, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession, when such goods and/or services are used primarily for personal use or consumption of any employee;	The credit of tax paid on employee welfare expenses, i.e., expenses meant for the personal consumption of employees continue to be non-eligible even under the GST regime.
(c) goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery	This is in line with the current provisions of VAT/ Service tax where procurements for construction of an immovable property for self-consumption continue to be non-taxable
(d) goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
(e) goods and/or services on which tax has been paid under section 8;	This is in line with the current VAT provisions wherein a dealer cannot claim credit of inputs procured from dealer discharging credit under composition scheme.
(f) goods and/or services used for private or personal consumption, to the extent they are so consumed	This is a difficult provision for implementation as it will not be always possible to keep a track of goods/ services being used for both, business as well as non-business use. For example; business phone used for personal consumption, how will the quantum be identified. This provision will result in lot of subjectivity in allowing the claim of credit.

Conclusion

While the credit flow will indeed become seamless, one will need to wait and watch for the manner in which the final legislation pans out.

[Views expressed are strictly personal]