Input Tax Credit and Registration — Practice

Question 1

A registered buyer holds a valid tax invoice for goods purchased, has received the goods, and has filed the relevant return, but the supplier has not actually deposited the corresponding GST with the government. Advise on whether the buyer can claim input tax credit, and explain the rationale for this condition.

Accepted Answer

The buyer cannot claim input tax credit on this purchase, notwithstanding satisfying three of the four conditions under section 16(2), because the fourth condition, that the tax charged has actually been paid to the government by the supplier, either in cash or through utilisation of admissible input tax credit, has not been met. All four conditions, possession of a valid tax invoice or debit note, actual receipt of the goods or services, actual payment of the tax to the government by the supplier, and furnishing of the recipient's own return, must be satisfied together before credit is available; satisfying three of the four is not enough, and a candidate who assumes credit follows automatically from holding a genuine invoice and having filed a return is missing this specific, frequently tested condition. The rationale is structural to how GST's credit chain is meant to work: input tax credit is, in substance, the recipient's share of tax the supplier is supposed to have already remitted to the government at the prior stage, and allowing the recipient to claim credit for tax the government never actually received would create a revenue leak, letting a downstream taxpayer effectively reduce their own liability by an amount the government was never paid in the first place. This condition places pressure on recipients to deal with compliant suppliers and check that their suppliers are actually filing and paying, since the recipient's own credit position depends on it.

Question 2

A registered person avails input tax credit of ₹90,000 on an invoice dated 1 April, but pays the supplier the value along with tax only on 15 November of the same year. Advise on the consequence, and state what happens once payment is eventually made.

Accepted Answer

The 180-day period from the invoice date of 1 April expires around 28 September, and payment made on 15 November falls after that period has elapsed, so the recipient has failed to pay the supplier the value of the supply along with tax within the required 180 days. The consequence is that an amount equal to the credit availed, 90,000, must be added back to the recipient's output tax liability, along with interest computed for the period from the date the credit was originally availed until the date the amount is added back, reflecting that the recipient effectively enjoyed the benefit of the credit without having actually paid the supplier for the corresponding period. This add-back is not a permanent forfeiture of the credit, however: once the recipient subsequently makes the payment to the supplier, here on 15 November, the credit that was added back may be re-availed, restoring the recipient's entitlement to it from that point onward. The rule exists to prevent a registered recipient from claiming and enjoying input tax credit while indefinitely delaying actual payment to the supplier, which would otherwise let a recipient obtain the cash-flow benefit of the credit without ever having genuinely borne the cost the credit is meant to offset, effectively financing itself at the supplier's and the government's expense through unpaid trade credit dressed up as an ordinary commercial delay.

Question 3

A company purchases: (a) a car with seating capacity of 5, used for transporting its sales executives to client meetings; (b) an identical car used by a driving school it operates as part of its business of imparting driving training; (c) a truck used to transport its finished goods to customers; (d) a bus with seating capacity of 20, used to transport factory workers to and from the plant. State the input tax credit position for each.

Accepted Answer

Item (a) is blocked. Section 17(5) blocks credit on motor vehicles for transportation of persons with a seating capacity of not more than 13, including the driver, and this car, being used to transport sales executives, that is for transportation of persons rather than goods, and having a seating capacity within that block, does not fall within any of the exceptions, since it is used for the company's ordinary business travel rather than for further supply of such vehicles, for transportation of passengers as a service, or for imparting driving training; credit is accordingly blocked. Item (b) is available, falling within the express exception for vehicles used for imparting driving training, since the seating-capacity block on vehicles for transportation of persons does not apply where the vehicle is used precisely for that training purpose, which is the company's actual business here. Item (c), the truck, is entirely outside the block: the block applies specifically to vehicles for transportation of persons, and a truck used for transportation of goods is not caught by this provision at all, so credit is fully available regardless of any exception, simply because goods-transport vehicles were never within the blocked category to begin with. Item (d), the bus with seating capacity of 20, is also outside the block, since the block is confined to vehicles with seating capacity not more than 13, and a vehicle exceeding that threshold falls outside the restriction entirely regardless of the purpose it is used for, so credit is available on the bus used to transport factory workers without needing to rely on any of the specific exceptions.

Question 4

A company provides subsidised meals to its factory workers because a state labour law requires it to do so for factories of its size, and separately provides health insurance to its office staff purely as a discretionary benefit with no statutory requirement. State the input tax credit position on the GST paid for both.

Accepted Answer

Credit on the meals is available, while credit on the discretionary health insurance is blocked, and the distinction turns on the statutory-obligation exception that section 17(5) carries for several of its blocked categories. The general rule blocks credit on food and beverages and on health insurance among other listed categories, but each carries an exception where the employer is under a statutory obligation to provide the relevant goods or services to its employees. The subsidised meals fall within this exception precisely: the company provides them because a state labour law mandates it for factories of its size, which is exactly the statutory-obligation circumstance the exception addresses, so the general block on food and beverages does not apply, and input tax credit on the GST paid in connection with providing these meals is available to the company. The health insurance for office staff, by contrast, is provided purely as a discretionary benefit with no statutory requirement compelling it, so it does not fall within the statutory-obligation exception, and the general block on health insurance under section 17(5) applies in full, meaning no input tax credit is available on the GST paid for this insurance, however genuinely business-related the company might consider the benefit to be for staff retention or morale purposes. The lesson worth extracting is that the exceptions to several of these blocks turn specifically on legal compulsion, not on general business benefit or good HR practice, and a candidate must check for an actual statutory obligation before applying the exception.

Question 5

A company constructs a new office building on its own account for use in its business, incurring GST on cement, steel and construction services. Separately, it installs a new production machine bolted to the factory floor, incurring GST on the machine and its installation. State the input tax credit position for each, explaining the plant and machinery distinction.

Accepted Answer

Credit on the office building construction is blocked, while credit on the machine is available, and the distinction turns on the express carve-out for plant and machinery within the construction-related blocks. Section 17(5) blocks credit on goods or services received by a taxable person for construction of an immovable property, other than plant and machinery, on his own account, including when such goods or services are used in the course or furtherance of business, and it separately blocks credit on works contract services for construction of an immovable property, again other than plant and machinery, except where such services are themselves an input service for further supply of works contract service. The office building is an immovable property constructed on the company's own account for its own use, and it does not fall within the plant and machinery exception, since a building used generally for office purposes is exactly the kind of immovable property construction the block targets; credit on the cement, steel and construction services used to build it is accordingly blocked in full. The production machine is different: although bolted to the factory floor and in that sense physically affixed to the immovable structure, plant and machinery is expressly carved out of both construction-related blocks, so credit on the machine's cost and on its installation services remains fully available notwithstanding its physical attachment, because the specific policy concern behind blocking construction credit, which is to prevent an immovable property itself, essentially real estate, from generating an endless chain of unrelated credit, does not extend to machinery genuinely used to produce taxable output, which the plant and machinery exception is designed to preserve credit for.

Question 6

A company uses electricity for both its manufacturing operations, generating fully taxable output, and its adjoining residential quarters provided free to the factory manager for personal use. It also makes both taxable and exempt supplies from the same factory using common input services. Explain how input tax credit is apportioned in each case.

Accepted Answer

Two separate apportionment principles apply to these two situations, each addressing a different kind of mixed use. Where goods or services are used partly for business purposes and partly for non-business purposes, such as the electricity consumed partly in manufacturing operations, a genuine business use, and partly in the residential quarters provided to the factory manager for personal use, which is a non-business purpose notwithstanding that the manager is an employee, credit is restricted to the portion attributable to business use only, and the non-business portion is simply not available for credit at all, requiring the company to apportion the electricity's total input tax between the two uses on a reasonable basis, typically metered or estimated consumption, and claim credit only on the business-use share. Where goods or services are used partly for making taxable supplies, including zero-rated supplies, and partly for making exempt supplies, such as common input services used across a factory that produces both taxable and exempt output, a different apportionment applies: credit is restricted to the portion attributable to the taxable supplies, computed under a prescribed proportionate formula generally based on the ratio of turnover of taxable supplies to total turnover for the relevant period, with the portion attributable to exempt supplies being ineligible for credit consistently with the general principle that exempt supplies do not carry input credit entitlement on the inputs used to make them. Both apportionment rules share the underlying logic that credit should track genuine business, taxable use, and neither non-business consumption nor exempt-supply inputs should silently ride along on credit intended for the taxable business activity.

Question 7

Mr. Oberoi supplies goods with aggregate turnover of ₹38 lakh in a financial year, entirely within his home state, none of it exempt or outside GST. Advise on whether he must register. Separately, Ms. Prabhu, a freelance consultant providing only taxable services, has aggregate turnover of ₹22 lakh in the same year. Advise on her position.

Accepted Answer

Mr. Oberoi is not liable to register on turnover grounds alone, on these facts, since a supplier of goods is liable to register where aggregate turnover in a financial year exceeds 40 lakh under the general threshold, and his 38 lakh falls below that figure; nothing in the facts places him within any of the compulsory registration categories under section 24 that would override the threshold, since his supplies are entirely intra-state and there is no mention of reverse charge liability, e-commerce involvement, or any other overriding category. He therefore remains outside the compulsory registration requirement, though he could choose to register voluntarily if he wished to, for instance to be able to claim input tax credit on his own purchases or to deal with buyers who prefer registered suppliers. Ms. Prabhu, however, must register: a supplier of services is liable to register where aggregate turnover exceeds 20 lakh under the general threshold applicable to services, and her turnover of 22 lakh exceeds that lower services threshold. The comparison illustrates the deliberately different thresholds applicable to goods and services, 40 lakh for goods against 20 lakh for services under the general thresholds, meaning turnover figures that would leave a goods supplier below the compulsory registration line can place a service provider above it, and a candidate must always check which threshold applies based on whether the supply in question is of goods or of services.

Question 8

Mr. Qureshi's business has aggregate turnover of only ₹5 lakh for the year, entirely from making a single inter-state supply of goods to a buyer in a neighbouring state. Advise on his registration obligation, explaining why the ordinary threshold analysis does not apply.

Accepted Answer

Mr. Qureshi must register despite his aggregate turnover of 5 lakh falling well below the general 40 lakh threshold applicable to a supplier of goods, because he falls within the compulsory registration list under section 24, which applies irrespective of turnover and overrides the threshold analysis entirely for the categories it lists. One of those categories is persons making inter-state taxable supply, and Mr. Qureshi's supply to a buyer in a neighbouring state is precisely such a supply; the moment a person makes any inter-state taxable supply, however small in value, the compulsory registration requirement under section 24 is triggered, and the general turnover threshold that would otherwise apply to an intra-state supplier of goods becomes entirely irrelevant to the analysis. This is a frequently tested point precisely because it runs against the natural instinct to check turnover first: a candidate presented with a low turnover figure may too readily conclude no registration is required, without checking whether the person falls within any of the section 24 categories that make registration compulsory regardless of how small the turnover actually is. The policy reason for this override, at least for inter-state supply specifically, is administrative: GST's destination-based, inter-state IGST mechanism depends on being able to identify and track cross-border supplies precisely, and exempting small inter-state suppliers from registration purely on a turnover basis would complicate that tracking in a way the government has chosen not to permit, unlike the position for purely intra-state suppliers where a turnover threshold is considered administratively acceptable.

Question 9

A trust runs a school providing education up to higher secondary level, with annual fee receipts of ₹1.2 crore, all of which are exempt educational services with no other taxable activity. Advise on whether the trust must register for GST.

Accepted Answer

The trust is not liable to register despite its receipts of 1.2 crore substantially exceeding the ordinary 40 lakh threshold that would apply to a supplier of goods, or even the 20 lakh threshold for services, because a specific rule exempts a person exclusively engaged in supplying goods or services, or both, that are wholly exempt from tax, from the registration requirement altogether, regardless of the turnover figure. The trust's educational services, being provided by an educational institution up to and including higher secondary education, fall squarely within the exempt category discussed in the exemptions material, and since this is the trust's exclusive activity with no other taxable supply being made, the exclusive-exempt-supplier exception applies in full. The underlying rationale is straightforward: registration exists to bring a person into the GST compliance and payment system, but a person making only exempt supplies has no GST to charge, collect or remit on those supplies in any event, so requiring registration purely because turnover crosses a threshold, when the person will never actually have any positive tax liability on that turnover, would impose compliance burden with no corresponding revenue benefit. Had the trust also operated some incidental taxable activity, such as a canteen open to the general public or a bookshop selling to outsiders rather than only to students under an exempt arrangement, the exclusive-exempt-supplier exception would no longer apply once that taxable activity existed alongside the exempt one, and ordinary threshold analysis, considering the trust's aggregate turnover across both activities, would then need to be applied.

Question 10

A Delhi-based company wishes to set up a temporary stall to sell goods at a trade exhibition in Gujarat for ten days, having no fixed place of business in Gujarat. Advise on its registration obligation, the timeline, and the deposit requirement.

Accepted Answer

The company is a casual taxable person for the purposes of this Gujarat exhibition, being a person who occasionally undertakes transactions involving supply of goods in a State or Union Territory where he has no fixed place of business, and it must obtain registration in Gujarat for this activity despite the temporary, ten-day nature of the engagement and regardless of how the resulting turnover compares to the ordinary registration thresholds, since a casual taxable person making taxable supply is within the compulsory registration list under section 24, applicable irrespective of turnover. The application for registration must be made at least 5 days prior to the commencement of the business at the exhibition, giving the tax authorities lead time to process the application before the activity actually begins. Registration for a casual taxable person is granted for a specified period, which the applicant estimates and states in the application, and this period may be extended on application if needed, though typically subject to an overall maximum duration. A distinctive requirement attaching to casual taxable person registration is the obligation to make an advance deposit of the amount of tax estimated to be payable during the period for which registration is sought, essentially securing the government's expected revenue in advance from what is, by its nature, a short-term and potentially hard-to-pursue-afterward taxable presence in the state; this deposit requirement does not apply to an ordinarily registered person conducting an ongoing business, and is a specific feature of the casual and non-resident taxable person categories reflecting the temporary character of their presence.

Question 11

A company's warehouse suffers a fire, destroying inventory on which ₹3,00,000 of input tax credit had earlier been claimed. Separately, the company distributes free product samples worth ₹80,000, with ₹9,000 of input tax credit attributable to them, as part of a marketing campaign. Advise on the input tax credit position for both.

Accepted Answer

Both amounts of previously claimed input tax credit must be reversed, since section 17(5) expressly blocks credit on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples, and both fact patterns fall within this list. The destroyed inventory falls within destroyed goods specifically; even though the credit was validly claimed at the time of purchase, when the goods were still intended for taxable use, the subsequent destruction is an event that triggers reversal of the corresponding credit, since the goods will now never actually be supplied onward to generate output tax, and allowing the credit to stand would leave the company with a permanent tax benefit on inventory that was never sold. The 3,00,000 of credit must accordingly be reversed. The free product samples fall within the express words disposed of by way of gift or free samples, which is one of the most literal and commonly tested items in the blocked list precisely because businesses routinely distribute samples as part of ordinary marketing, and candidates sometimes assume marketing expenditure of this kind should be treated as an ordinary deductible business cost carrying full credit; the provision specifically denies that, and the 9,000 of credit attributable to the samples must be reversed as well. In both cases the underlying logic is the same: input tax credit is meant to flow through to an eventual taxable outward supply, and where goods are lost, destroyed, or given away rather than sold, that chain is broken, and credit already claimed in anticipation of an outward supply that will now never occur must be given back.

Question 12

A company's head office in Mumbai centrally procures a common software licence for use across its Mumbai, Pune and Chennai branches, each separately registered under GST. Explain how the Input Service Distributor mechanism allows the credit on this common input service to reach the branches.

Accepted Answer

Without a specific mechanism, the input tax credit on the software licence invoice, raised to and paid by the Mumbai head office, would sit only with the Mumbai registration and could not be used by the Pune or Chennai branches, even though all three branches genuinely benefit from and use the software as part of their operations, because each branch, being separately registered, is a distinct person for GST purposes, and ordinary input tax credit generally attaches to the registration that actually receives the invoice. The Input Service Distributor mechanism exists precisely to solve this problem: an office of a supplier that receives invoices for input services on behalf of its distinct-person branches may register and function as an Input Service Distributor, and rather than retaining the entire credit itself, it distributes the credit to the various recipient branches by issuing a specific document called an ISD invoice. The distribution is not arbitrary; it is allocated in proportion to the turnover of the recipient branches in a prescribed manner, so that a branch generating a larger share of the group's turnover receives a correspondingly larger share of the common input service credit, reflecting a reasonable attribution of the shared benefit across the group. Once distributed via the ISD invoice, each recipient branch, Mumbai, Pune and Chennai in this example, can then avail its allocated portion of the credit in its own GST return, against its own output tax liability, achieving in substance what a single combined entity would have achieved automatically, but structured to work correctly across separately registered distinct persons of the same overall business.

Question 13

Distinguish a non-resident taxable person from a casual taxable person under GST, and state one common feature and one point of difference in their registration requirements.

Accepted Answer

A casual taxable person is someone who occasionally undertakes transactions involving supply of goods or services in a State or Union Territory where he has no fixed place of business, but who otherwise has an established business presence somewhere in India; the Delhi company setting up a temporary stall at a Gujarat exhibition, discussed elsewhere in this chapter, is a casual taxable person because it has a fixed place of business in Delhi and is merely temporarily active in Gujarat. A non-resident taxable person is someone who similarly occasionally undertakes transactions involving supply of goods or services in India, but who has no fixed place of business or residence in India at all; this describes a foreign entity with no established Indian presence coming into India temporarily to make taxable supplies, such as a foreign exhibitor at an Indian trade fair with no Indian branch or office of any kind. The common feature in their registration requirements is that both categories must apply for registration at least 5 days prior to the commencement of business, and both are required to make an advance deposit of the amount of tax estimated to be payable during the period for which registration is sought, reflecting the temporary and potentially hard-to-pursue-afterward nature of both categories' presence. The point of difference lies in what each is required to demonstrate or provide as part of registration: a non-resident taxable person, having no established Indian presence or PAN in the ordinary sense, must generally apply for registration on the basis of prescribed alternative identification documents and typically must appoint an authorised signatory who is a resident of India with a valid PAN, a requirement that does not arise for a casual taxable person, who already holds an ordinary Indian PAN and business registration through its existing fixed place of business elsewhere in the country.

Question 14

A registered person fails to file GST returns for a continuous period exceeding the specified threshold and has his registration cancelled by the proper officer. Explain the grounds on which cancellation can occur, and the process by which the person may seek revocation, including the key condition he must satisfy.

Accepted Answer

Registration may be cancelled by the proper officer, either on his own initiative or on the registered person's own application, for a range of specified reasons. These include the business having been discontinued, transferred, amalgamated, or otherwise ceased; a change in the constitution of the business; a person no longer being liable to be registered, such as where turnover falls below the threshold and the exclusive-exempt or similar exceptions apply; contravention of provisions of the Act or the rules made under it; a registered person, other than one who has voluntarily registered, not having commenced business within a specified period from the date of registration; and, the ground engaged on these facts, non-filing of returns for a continuous specified period, which for a person filing under the ordinary scheme is a specified number of consecutive tax periods, and for a composition taxpayer is a specified number of consecutive periods under that scheme, each threshold set to identify a persistently non-compliant registrant rather than someone with an isolated delay. Before cancelling, the proper officer must generally give the registered person an opportunity of being heard, consistent with the ordinary requirements of natural justice attaching to an adverse administrative action. Where cancellation has occurred, the affected person may apply for revocation of the cancellation within a prescribed period from the date of the cancellation order, and the key condition he must satisfy to succeed is generally to file all the returns that were due and outstanding, together with payment of any tax, interest, penalty and late fee in respect of those returns, since the underlying default that triggered cancellation, the non-filing itself, must be cured before the officer will consider restoring the registration; an application for revocation unaccompanied by the outstanding returns and payments is not ordinarily entertained, since revocation is meant to restore a person to good standing, not merely to undo the cancellation while the underlying non-compliance persists unaddressed.

Question 15

Company A in Karnataka orders goods from a supplier, instructing the supplier to deliver the goods directly to Company A's job worker in Tamil Nadu for processing, rather than to Company A's own premises. Explain how Company A can nonetheless claim input tax credit on this purchase, given that it never physically receives the goods itself.

Accepted Answer

Company A can claim input tax credit despite never physically taking delivery, because one of the four section 16(2) conditions, actual receipt of the goods or services, is satisfied through a specific deeming provision addressing exactly this bill-to-ship-to pattern. Where goods are delivered by the supplier to a third party, here the job worker in Tamil Nadu, on the instruction of the registered recipient, here Company A, before or during the movement of goods, whether by way of transfer of documents of title to the goods or otherwise, it is deemed that the said registered person, Company A, has received the goods for the purpose of satisfying the receipt condition under section 16, notwithstanding that the goods never physically pass through Company A's own premises. This deeming provision exists because modern supply chains routinely involve exactly this kind of triangular arrangement, where a buyer wants goods sent directly to a job worker, a customer, or another location for efficiency, rather than incurring the cost and delay of receiving the goods at its own premises first and then re-dispatching them; without this deeming rule, a strict, literal reading of the receipt condition would deny credit in every such arrangement, which would be commercially disruptive and would not reflect the genuine economic reality that Company A has, in every meaningful sense, received the goods it ordered and paid for, merely directing where they should be physically delivered. Company A must still satisfy the other three section 16(2) conditions independently, including holding a valid tax invoice, the supplier having actually paid the tax to the government, and Company A having furnished its own return, but the receipt condition specifically is satisfied through this deeming mechanism.

Practice — Input Tax Credit and Registration

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