In the context of India, currently, CENVAT Credit Rules,
2004 (the CENVAT Rules) govern the credit provisions for
central legislations of service tax, which is a levy on
provision of services and central excise duty which is a levy
on manufacture. Similarly, there are separate input tax credit
provisions in various state VAT legislations. Cross-credit
restrictions w.r.t. centre and state legislations is one of the
key concerns under the existing indirect tax regime and rightly
so, elimination of cascading effect by allowing fungibility of
credits is one of the most important reasons for introducing
goods and services tax (GST) in India.
In light of the above background and the Central Goods and
Service Tax (CGST) Bill, this article analyses the input tax
credit provisions as given in the recent GST law
vis-à-vis the CENVAT Rules under the present
Input tax credit
Section 16(1) of the CGST Act is the enabling section for
availment of credit. As per the said section: "every
registered person, subject to conditions and restrictions as
prescribed, be entitled to take credit of input
tax charged on supply of goods or services or both
which are used or intended to be used in the
course of furtherance of business"
Further, section 2(62) of the CGST law has defined 'input
tax' to mean "central tax (CGST), state tax (SGST),
integrated tax (IGST) and union territory tax (UTGST) and
- IGST paid on imports;
- CGST, SGST, IGST and UTGST paid on reverse
- CGST, SGST, IGST and UTGST paid under
reverse charge on procurements from unregistered
The section is widely worded and seems to allow the credit
of input tax on supply of goods or services. A quick and
upfront comparison between the credits under the CENVAT Rules
and the GST law indicates that, under the CENVAT Rules, credit
can be taken only if the goods qualify as inputs or capital
goods and the services qualify as input services. As opposed to
this, a person making only taxable supplies liable at 18% or
28% under GST is eligible to avail credit of CGST, SGST, IGST
charged on supply of goods or services.
Thus, terms like 'inputs', 'input services' and 'capital
goods' that have been defined under GST also essentially have
their relevance only in cases where a supplier under GST
undertakes taxable supplies which have restrictions on
availment of credit and/or exempt supplies.
Inputs and input services under the CGST Act
Section 2(59) "means any goods other than capital goods
used or intended to be used by a supplier in the course or
furtherance of business".
Section 2(60) "means any service used or intended to be
used by a supplier in the course or furtherance of
Both the definitions have been widely defined as compared to
the CENVAT Rules. Even the goods or services intended to be
used are covered, unlike the CENVAT Rules. A simpler definition
tends to remove the litigation possibility on some of the
issues that currently exist such as credit restrictions in
cases of the use of services beyond place of removal.
Similarly, litigation around terms like 'in relation to',
'means' and 'includes', coverage of the definition of input
services etc. would tend to go away.
This is in line with the centre and state policy of ease of
doing business in India.
Thus, while the availment of credit seems to be simpler
under GST, credit restrictions continue to exist under GST in
the form of Section 17(5) of the CGST Act which provides for
the blocking of credits.
Capital goods under the CGST Act
Section 2(19) – "means goods, the value of
which is capitalised in the books of account of the person
claiming input tax credit and which are used or intended to be
used by a supplier in the course or furtherance of
There is a complete overhaul of the definition when compared
to existing definition of the said term in the CENVAT Rules.
The existing definition is an inclusive tariff heading based
definition. The definition under GST has been brought in line
with the treatment given to the goods in the books of accounts.
Hence, the treatment in books of accounts will determine
whether the goods are capital goods or inputs. This is against
certain judicial precedents which have held that the treatment
in the books of accounts cannot determine the treatment for tax
To cite an example, mivan/shuttering material used in
construction projects generally forms part of
'work-in-progress' in the books of the developer, however, the
same qualifies as capital goods in terms of the CENVAT Rules.
Under GST, the same would not qualify as capital goods if such
purchases are not capitalised in the books of accounts.
Further, the entire credit in respect of capital goods can
be availed in the year of purchase itself. There is no
provision that defers part credit to subsequent year, unlike in
the CENVAT Rules, where only 50% credit can be availed in the
year of purchase and balance 50% in the subsequent year.
A major deviation in the context of capital goods credit is
with respect to credit on such goods when used for taxable and
exempted transactions. As per the CENVAT Rules, the entire
credit on capital goods can be taken as long as such capital
goods are not exclusively used for exempted goods/services.
However, under GST, a proportionate reversal is required when
capital goods are partly used for taxable supplies and partly
Condition for availment of credit
As per the Section 16(2) of the CGST Act, the person can
avail the input tax credit only upon fulfilment of the
- The person is in possession of a tax
invoice or debit note as may be prescribed is issued by the
supplier under this Act;
- The person has received the goods or
services or both;
- Tax is actually paid by the supplier to
the government; and
- Details have been furnished in the
In view of the above, credit is allowed only when the goods
or services are 'received' by a person claiming input tax
credit. Does it mean a person making an advance payment is not
eligible for input tax credit?
Further, explanation to Section 12(2) and 13(2) of the CGST
Act specifically states that "supply is deemed to be made
to the extent it is covered by invoice or payment". Thus,
for the purpose of payment of GST, it appears that a supply
shall be deemed to have been made to the extent covered by the
invoice (which needs to be raised even on receipt of advance).
But, on the same analogy, can one be deemed to have received
the goods/services to the extent it is covered by invoice or
payment? Well, on a prima facie reading it appears
that credit may be available only when goods/services are
actually received. If so, then there would be timing issues
(especially for advance payments) between a supplier treating
goods/services as supplied and the receiver receiving the
Apart from the above, the credit under GST law is eligible
only upon payment of tax to the government. This would mean
that the recipient cannot avail the input tax credit until the
time the supplier does discharge the tax.
This marks a significant move from long established CENVAT
principles laid down in Apex court decisions of Collector
of Central Excise vs. Dai Ichi Karkaria Ltd. [1999 (112) ELT
353 SC] and Eicher Motors Ltd. vs. Union of India
[1999 (106) ELT 3 SC] which stated that CENVAT is an
inherent right and is indefeasible.
Such a provision is, however, in line with the decision of
the Bombay High Court in the case of Mahalaxmi Cotton
Ginning Pressing and Oil Industries vs. State of Maharashtra
[2012 (051) VST 001 BOM] wherein the court upheld the
validity of granting credit only upon payment by the other
The provision is also against the legal maxim "Nemo
Punitor Pro alieno delicto" which means no one should be
punished for the crime of another.
Thus, one can summarise the credit provisions in light of
the aforesaid provisions as per the below table:
Aspect under the credit provisions
Change compared to the CENVAT
|Credit eligibility for a
person making only taxable supplies at 18% or 28%
|Definition of input and
|Definition of capital
|Capital goods commonly
used for taxable and exempt supplies
|Conditions for availing
|(i) Actual receipt of
|(ii) Payment of tax by
One can thus conclude that similar to other provisions under
GST, analysis of the input tax credit provisions needs a
careful reading. As of now it appears that the law does not
entirely speak the intention of the Act. However, one needs to
wait and watch to unveil the pros and cons of the credit
provisions and its impact on the industry.
Having said so, there are bound to be new challenges with
the introduction of a new law, at least in the initial period.
These challenges are likely to arise on account of multiple
business scenarios, ever-evolving technological and marketing
ideas which may not have been factored under the current law.
However, the authorities may do well to adopt at least from the
learnings under the existing legislation to ensure enough
flexibility under the new law to facilitate business
||Nishant Shah and Harsh
Economic Laws Practice