Proportionate ITC when party used for business or taxable supplies :
Principle of Vat is that input tax credit is available only when tax is payable on his output. If some of supplies are taxable and some are exempt, the taxable person can take only proportionate input tax credit.
This principle applies to input goods, input services and capital goods. These are provided in section 17 of CGST Act.
Where the goods or services or both are used by the registered taxable person partly for the purpose of any business and partly for other purposes, the amount of input tax credit shall be restricted to so much of the input tax as is attributable to the purposes of his business – section 17(1) of CGST Act.
Where the goods and/or services are used by the registered person partly for effecting taxable supplies including zero rated supplies under CGST or IGST Act and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zerorated supplies – section 17(2) of CGST Act.
The Central or a State Government may, by notification issued in this behalf, prescribe the manner in which the proportionate input tax credit is to be taken – section 17(6) of CGST Act.
This provision is similar to rule 6 of Cenvat Credit Rules.
“Exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11 of CGST Act or under section 6 of IGST Act, and includes nontaxable supply- section 2(47) of CGST Act.
“Taxable supply” means a supply of goods or services or both which is leviable to tax under CGST Act – section 2(109) of CGST Act.
‘Non-taxable supply’ means a supply of goods or services or both which is not leviable to tax under CGST Act or IGST Act – section 2(78) of CGST Act.
Zero rated supply – “Zero-rated supply” means a supply of any goods or services or both in terms of section 16 of IGST Act – section 2(23) of IGST Act.
Export of goods or services or both and supplies of goods or services or both to SEZ unit or SEZ developer will be zero rated supply – section 16(1) of IGST Act.
Credit of input tax may be availed for making zero-rated supplies, even if such supply is exempted supply – section 16(2) of IGST Act.
The registered person making zero rated supply can claim refund under either of two options –
(a) supply goods under bond or LUT without payment of IGST and claim refund of unutilized input tax credit or
(b) supply goods on payment of IGST and claim refund of IGST paid on goods and services. The refund will be in accordance with section 54 of CGST Act – section 16(3) of IGST Act.