Introduction- GST Input Tax Credit

In earlier indirect tax regime, the
credit mechanism for indirect taxes
levied by the Union Government,
(central excise duty and service tax)
was governed by the CENVAT Credit
Rules, 2004; and the credit mechanism for state-level VAT on sale of goods was
governed by the States under their respective VAT laws. The VAT legislations
allowed ITC of VAT on inputs and capital goods in transactions within the state, but
not on inputs and capital goods coming in the State from outside the state, on
which central sales tax was paid. CENVAT Credit Rules, 2004 allowed availing and
utilization of credit of duty/tax paid on both goods (capital goods and inputs) and
services by the manufacturers and the service providers across the country.
The credit across goods and services was integrated vide the CENVAT Credit Rules,
2004 in the year 2004 to mitigate the cascading effects of central levies namely,
central excise duty and service tax. However, the credit chain remained fragmented
on account of State-Level VAT as the credit of central taxes could not be set off
against a State levy and vice versa. The chain further got distorted as ITC was not
available on inter-State purchases. This resulted in cascading of taxes leading to
increase in costs of goods and services.
The GST regime promises seamless credit on goods and services across the entire
supply chain with some exceptions like supplies charged to tax under composition
scheme and supply of exempted goods and/or services. ITC is considered to be
the lifeline of the GST regime. In fact, it is the provisions of ITC which essentially
make GST a value added tax i.e., collection of tax at all points of supply chain after
allowing credit of tax paid at earlier points.
Chapter V of the CGST Act [Sections 16 to 21] & Chapter V: Input Tax Credit of the
CGST Rules [Rules 36-45] prescribe the provisions relating to ITC. Further, section
49 and rule 88A prescribe the provisions relating to the manner of utilization of ITC.
State GST laws also prescribe identical provisions in relation to ITC. First the
statutory provisions of these sections together with the relevant rules have been
extracted followed by their analysis1
.