ITC on pre-operative expenditure

[LAKSHMINARAYANAN TR]

Hi

May I see expert opinion on availing ITC on pre-operative expenses when the outward supply includes both exempt and taxable. If the Input or Input services relate to exempt or taxable supply specifically, its apparent not to avail or avail ITC appropriately. But challenge comes when common input/input services and capital goods consumed well before commencement of commercial activity of the business, how to apply rule 42 or 43?

Request expert opinion please

best regards

Durai

[Rajagopalan Ranganathan]

Sir,

Section 16 (1) of CGST Act, 2017 stipulates that "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

Therefore the same rules and restrictions which is applicable to supply of goods and services after commencement of commercial activity of the business, will apply to when common input/input services and capital goods consumed well before commencement of commercial activity of the business. This is my view.

[CASusheel Gupta]

Agree with Rajagopalan Ranganathan ji.

GST does not differentiate between pre and post operative supplies.

Regards

CA Susheel Gupta

8510081001, 9811004443

[Ganeshan Kalyani]

The excess credit taken during the year can be paid with interest on or before September month of the subsequent financial year. Hence you may avail the credit now and when the year is over and you have the turover detail you can revise work and take corrective action.

[CSSANJAY MALHOTRA]

Not starting commercial activity sometimes means trial run on product development taken but no supplies made. In such scenarios, ITC on input and input services are not eligible as no supply made.

[KASTURI SETHI]

Sh.CS Sanjay Malhotra Ji,

Sir, Thanks a lot for throwing light on the issue.

[CASusheel Gupta]

Section 16 allows ITC 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

Supplies pertaining to Furtherance of business can be for trial run, advertisement expenses, branding expenses, etc.

Further, the ITC is not linked with making of supply. Had it been the case, no one shall be able to take ITC for putting up a factory which takes long time, since during this period no supplies shall be made.

Further, as per section 17(5)(h), ITC is blocked "if goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples". In case of trial run the goods are not disposed of by way of gift or free samples and the ITC is not blocked.

CA Susheel Gupta

[CSSANJAY MALHOTRA]

ITC is linked with supply which is main criteria in GST. Units avail ITC during factory set up considering that they shall be making supply of taxable goods. No one avails ITC if they know product is charged to nil GST.

[CASusheel Gupta]

Respected Sanjay ji

Agreed that No one avails ITC if they know product is charged to nil GST.

My reply was restricted to "that since during trial run there is no supply and in the absence of supply during trial run ITC is not allowed."

Regards

[LAKSHMINARAYANAN TR]

Dear All

Many thanks for your valuable suggestions, interestingly many dimensions have come out in this forum. I would like some details to my original question based on the feedback thread as below

" We have no trial runs, its a Public Sector undertaking engaged in developing and leasing industrial plots which is their primary supply; also exempted under gst. Side by side, they also develop other infrastructure facilities such as effluent treatment, R&D lab etc for the investors which may be taxable. At this point, both the development work is underway, most likely they may not start their outward supply until Sep 2018. How would I treat common credit for the purpose of rule 42 ro 43 at this stage?"

many thanks

Durai

AI Summary

Input Tax Credit on pre operative expenses: entitlement hinges on intended use and apportionment between taxable and exempt supplies. Whether Input Tax Credit may be availed on pre operative common inputs, input services and capital goods consumed before commencement of commercial supplies where outward supplies include both exempt and taxable components. Section 16(1) permits ITC for supplies 'used or intended to be used in the course or furtherance of business,' covering pre commercial activities; trial runs do not automatically trigger the block in section 17(5)(h). Mixed supplies require apportionment and potential reversal under Rules 42/43, and provisional claims may need adjustment once turnover is known.