a) Section 16(1) of the CGST Act 2017
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Section 16(1) of the CGST Act, 2017 provides that a person would be entitled to take credit of input tax charged on any supply of goods or services or both provided such supplies are used or intended to be used in the course or furtherance of his business. Therefore, if the primary condition of supplies being used or intended to be used in the course or furtherance of business is satisfied, a person would be entitled for Input Tax Credit subject to fulfillment of other conditions as prescribed under the law.
b) Meaning of the term “Used or Intended to be used in the course or furtherance of business” :-
The words “in the course of business” has been defined by Businessdictionary.com as follows:
“Daily or regular routine peculiar to a firm or trade, involving purchase, production, and sale of usual goods and/or services, and payment and receipt of money.”
The words “furtherance” has been defined by Businessdictionary.com as follows:
“furtherance is the act of helping, or an advancement, preposition for, for the sake of, in favor of, in the name of, in the service of, on account of, on behalf of”
Hon’ble Gujarat High Court in the matter of Cinemax vs Union on 23 August, 2011 described the meaning of furtherance as follows:
The meaning of ‘furtherance’, as per Black’s Law Dictionary, 6th Edition, 11th reprint, 1997, is “act of furthering, help forward, promotion, advancement or progress”. Furtherance of business will, thus mean, act of furthering business, helping forward business, promotion of business, advancement of business or progress of business.
Thus, “In the course or furtherance of business” would include all such activities which are being carried out by any taxable person during the course of running of business and also activities which would further the interest of business.
c) Is Input Tax Credit an automatic entitlement or conditions have to be satisfied as prescribed under the law before claiming the entitlement
A claim of Input Tax Credit is not an inherent right which a person can claim independent of the provisions of the law and without fulfilling conditions and restrictions as may be laid down. A claim of Input Tax Credit is an entitlement created under the statute and cannot be claimed independent of the Provision.
Hon’ble Bombay High Court in the matter of M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries vs. the State of Maharashtra and Ors. analyzed the set-off provision and held that the purpose of set-off is to obviate a cascading effect of the tax burden on the ultimate consumer and this element of legislative policy is to be balanced with the need for securing tax compliance and ensuring against a loss of legitimate revenue owed to the Government.
After analysing the erstwhile provisions contained in the Bombay Sales Tax Act and the Maharashtra Value Added Tax Act, the Division Bench of the Bombay High Court held that a set-off constitutes a concession granted by the legislature and, in the absence of set-off, the selling dealer would be liable to pay tax on the sale consideration and there is no independent right to a set-off apart from Section 48.
In Mohammed Haji Manachithodi Agencies vs. State of Kerala [2012 (3) KLT (SN) 17], the Division Bench of the Kerala High Court held that the set-off is in the nature of a concession and no dealer has a right to claim input tax credit independent of the provision of Section 11 of the Kerala VAT Act.
On this very same issue Hon’ble Rajasthan High Court in the Matter of Panwar Trading Corporation V/s State of Rajasthan held that
“The availment of ITC is creature of Statute. The concession of ITC is granted by the State Government so that the beneficiaries of the concession are not required to pay the tax or duty which they are otherwise liable to pay under Rajasthan VAT Act. In extending the concession, it is open to the Legislature to impose conditions. Section 18 is one such condition imposed making it mandatory for the registered dealer to claim ITC within 90 days under sub-section (2), from the date of issuance of invoice, and no ITC will be allowed on certain purchases under sub-section (3). The entitlement to claim Input Tax Credit is created by Rajasthan VAT Act and the terms on which Input Tax Credit can be claimed must be strictly observed.”
Therefore, conditions and restrictions as laid down under the law needs to be fulfilled for the Tax paid on goods and/or services to be allowed as set off under the Law.
d) Conditions for Blocked Credit as prescribed under Section 17(5): Overrides Section 16(1)
Provisions of Section 17(5) starts as follows:
“Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:— “
As is pretty much evident from the wordings of the section that provisions of Section 17(5) overrides provisions of Section 16(1). Thus, any credit of Input Tax which is allowable as per the provisions of section 16(1) would have to satisfy conditions or restrictions as laid down under Section 17(5). One just cannot plainly contend that as conditions under section 16(1) have been fulfilled therefore he is entitled for credit of Input Tax.
Discussing principle laid down by Hon’ble Gujarat High Court in the matter of Gujarat Chamber of Commerce & Industry Vs Union of India, Judgement dated 17th March 2017 although with regard to the taxes on fringe benefit, it was held that
“Under the circumstances with respect to any expenses incurred by the employer on, or by the payment made by the employer for the purposes mentioned in any of the provisions of Section 115WB(2)(A) to 115WB(2)(P), irrespective of the fact whether such services are relatable to the employees or not, the employer is liable to pay the FBT, as the aforesaid benefits are treated as Fringe Benefits deemed to have been provided by the employer to his employees. Any other interpretation and/or reading of sections 115W and 115WB shall be contrary to the provisions of the Statute and/or any other interpretation and/or reading, more particularly as sought to be canvassed on behalf of the respective assessees / employers would make sections 115WA and 115WB nugatory and/or otiose.”
Hon’ble Gujarat High Court in the above matter clearly upheld that once certain expenses have been incurred by the assessee for the purposes mentioned under Section 115WB, then irrespective of the fact that such expenses are relatable to the employees or not, fringe benefit would have been deemed to have been provided by the employer to his employees.
On a similar footing, even though supply of goods or services might have been used in the course or furtherance of business, but if it falls within the clutches of Section 17(5)(h), then in such case input tax credit would be blocked and would not be available to the taxpayer.
In the next update, we would be discussing about the provisions and intricacies of section 17(5)(h) of CGST Act and treatment of gifts given by the taxpayers to the employees, customers or associates.