Understanding Input Tax Credit under Ex-Works Contracts
This is a great summary of the CBIC circular on ITC claims for Ex-Works contracts. Here are the key takeaways in bullet points:
Problem:
- Disputes arose between taxpayers and tax authorities regarding when to claim ITC on goods delivered under EXW contracts, especially in the automobile sector.
- Taxpayers believed ITC was claimable when goods were handed over to the transporter at the supplier’s factory gate, while authorities often insisted on physical receipt at the buyer’s premises.
Solution:
- CBIC issued Circular No. 241/35/2024 to clarify the situation and ensure uniform application of the law.
Key Clarifications:
- No specific location: GST law doesn’t specify a location for receiving goods to claim ITC, unlike previous laws.
- EXW contracts: Goods are considered “received” when handed over to the transporter at the supplier’s premises under EXW terms, even if the buyer physically receives them later.
- Deemed receipt: This aligns with the concept of deemed receipt under Section 16(2)(b) of the CGST Act, where delivery to a transporter on the recipient’s instructions constitutes receipt.
- Broad applicability: While the issue arose in the automobile sector, the clarification applies to all industries using EXW contracts.
Conditions:
- Business use: Goods must be used for business purposes to claim ITC.
- No diversion: ITC must be reversed if goods are lost, stolen, destroyed, or diverted for non-business use.
Benefits:
- Uniformity: Consistent interpretation across industries.
- Administrative ease: Reduces disputes and simplifies compliance.
- Enhanced liquidity: Businesses can claim ITC earlier, improving cash flow.
Action for Taxpayers:
- Review contracts to ensure they align with EXW terms.
- Adjust accounting practices to reflect the clarified ITC claim timing.
- Ensure compliance with all ITC conditions to avoid future disputes.