Bill-to/Ship-to Transactions and Input Tax Credit (ITC): Implications and Restrictions

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Bill-to/Ship-to transactions have become increasingly common in the business world, allowing for greater flexibility in the supply chain. However, businesses need to understand the implications and restrictions of these transactions, particularly when it comes to availing of the Input Tax Credit (ITC). Let us understand the Input Tax credit; while paying tax on sales, you can reduce the tax you have already paid during the purchases and pay the balance amount.

Bill-to/Ship-to transaction, there are three parties involved:

  • The buyer (bill-to-party)
  • The seller (ship-from party)
  • The ultimate Supplier (who ships the goods, third party)

The buyer orders with the seller on behalf of the Supplier, and the third party ships the goods. This arrangement allows for the efficient delivery of goods, reducing the transportation costs and time for the Supplier and recipient;

In the Bill/to Ship To case, the recipient can claim the input tax credit based on the invoice issued by the Supplier on whom the order is placed. The Supplier can claim the ITC on the invoice issued by the third party even though the Supplier has not received the goods at his location.

For Example, M/s G Ltd, a dealer of electronic goods located in Karnataka, receives an order from M/s M Ltd., Located in Tamil Nadu, for the supply of 5000 numbers of Electronic parts. M/s. G Ltd needs more stock in its warehouse, which he must procure from his Principal M/s. P Ltd, based out of Tamil Nadu. M/s. G Ltd requests M/s. P Ltd to deliver the goods to M/s. M Ltd and invoice them directly.

M/s P Ltd will raise invoice -1, with Bill To as M/s. G Ltd and Ship To M/s. M Ltd. M/s. G Ltd can avail the input tax credit based on the tax invoice issued by M/s. P Ltd, In GSTR – 1 of M/s. P Ltd will update Table 4 with M/s. G Ltd details and this will be auto-populated in GSTR – 2B for the M/s. G Ltd to avail the input tax credit. In case if M/s P Ltd is eligible to issue the e-invoices, M/s. P Ltd has to generate it. In the e-waybill M/s. P Ltd will select the option of Bill To/Ship To cases.

M/s G Ltd will raise the invoice -2 on M/s M Ltd, and based on this tax invoice, M/s. M Ltd can avail the input tax credit. M/s G Ltd tax invoice will be reflected in GSTR – 2B of M/s. M Ltd. E-invoice has to be generated by M/s G Ltd if they are required to issue the same.

Either M/s G Ltd or M/s M Ltd can avail the input tax credit only if they satisfy the following conditions:-

  1. a) the recipient has the original tax debit note or tax invoices issued by the Supplier of goods or services or both
  2. b) the recipient has received the goods or services or both
  3. c) the Supplier has filed his returns
  4. d) the tax invoice or debit note is reflected in the Recipient’s GSTR – 2B

Failure to meet these conditions can result in denying ITC claims, leading to potential financial implications for businesses. The input tax credit can be availed only on goods and services used in the course or in the furtherance of business. If they are used for personal consumption or for making exempted supplies, ITC cannot be claimed. Therefore, taxpayers engaging in Bill-to/Ship-to transactions must carefully review and understand the tax implications and restrictions associated with such arrangements.

In conclusion, while Bill-to/Ship-to transactions offer advantages in terms of supply chain efficiency, businesses must navigate their tax implications carefully. Understanding the conditions and restrictions surrounding Input Tax Credit claims is crucial to ensure compliance and avoid potential penalties or loss of tax benefits. By staying informed and implementing proper documentation and compliance practices, businesses can make the most of Bill-to/Ship-to transactions while safeguarding their financial interests.

Logo strongly recommends following the due process and having the contracts drafted accordingly to avoid any potential litigation in the future.

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CMA Shrreya Gupta Industrial Trainee

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