Eligibility of Input Tax Credit (ITC) on Prepaid Expenses ( Like Prepaid Insurance)

Introduction: –

Section 16 of CGST Act 2017 provides that every registered person shall be entitled to take Input Tax Credit of tax paid on input and input service, subject to such conditions and restrictions as may be prescribed.

Section 16(2) of CGST Act 2017 provides that ITC on Input and service shall be available subject to following conditions: –

  • he is in possession of a tax invoice or debit note issued by a supplier registered under this Act.
  • he has received the goods or services or both.
  • subject to the provisions of section 41 or section 43A ( Setoff of Tax liability with Input Tax credit) , the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
  • he has furnished the return under section 39.( GSTR 3B Return)

Accordingly, Input tax credit can be claimed only if above conditions are fulfilled.

#Q.1 Whether full ITC can be taken on prepaid expenses as soon as registered person received the tax invoice and payment is also made to the supplier or whether the ITC is required to be reversed on prepaid expense and avail on the actual realisation of economic benefits?

Answer:- 

As per section 16(2) of CGST Act 2017, input tax credit can be availed when the goods or services are received by the recipient.

Explanation to Section 13(2) of CGST Act, 2017 clarified that the supply shall be deemed to have been made to the extent it is covered by the invoice or by the payment.

Under GST law there is no provision which requires carry forward of expense including ITC to next accounting period based on associated benefit.

In view of the above discussion, it can be concluded that ITC can be availed based on tax invoice received towards input service and payment also made to the supplier. Hence, Input Tax Credit is not required to be reversed on prepaid expense of input service.

Accordingly, when the supply is deemed to have been provided to the extent it is covered by the invoice then it can be construed that the same has also been received by the recipient.

Further, according to matching concept of accounting, expenses which are paid in current accounting period for which associated benefit will arise in next accounting period are recorded as prepaid expense as an asset and booked as an expense in next accounting period. Therefore, according to the matching principle in accrual accounting system expenses are recognized when related benefit will arise regardless the cash outflow.

Under GST law there is no provision which requires carry forward of expense including ITC to next accounting period based on associated benefit.

Conclusion: –

In view of the above discussion, it can be concluded that ITC can be availed based on tax invoice received towards input service and payment also made to the supplier. Hence, Input Tax Credit is not required to be reversed on prepaid expense of input service.

Hope the readers will find the above article useful. In case of any query/information, feel free to write back to us. The author can be reached at Sandeep.purohit1@yahoo.com

The opinion is based on my understanding of law and regulation prevailing as on the date. There is no assurance that the Revenue Authorities will agree to the view expressed above. Further, the views, thoughts, and opinions expressed in this article belong solely to the author, and not necessarily represent or reflect the views of the author’s employer, organization, or other group or individual.

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