CBIC Issues Game-Changing Circular on ITC Under Ex-Works Contracts: All you need to know

Introduction

In a landmark clarification, the Central Board of Indirect Taxes and Customs (CBIC) has addressed a critical aspect of Input Tax Credit (ITC) eligibility under Ex-Works (EXW) contracts. Circular No. 241/35/2024-GST, issued on December 31, 2024, provides much-needed clarity on ITC availability for businesses, particularly in sectors like automobiles. This marks a significant step toward aligning GST compliance with commercial realities.

Understanding the Context: What Are Ex-Works Contracts?

Ex-Works contracts place the responsibility for goods on the buyer as soon as they are handed over at the supplier’s factory gate. Ownership and risk transfer at this point, making it critical for businesses to understand the implications for ITC claims. For instance, automobile Original Equipment Manufacturers (OEMs) frequently operate under EXW contracts, where dealers assume ownership before goods reach their destination.

Challenges in ITC Eligibility Under EXW Contracts

Under Section 16(2)(b) of the CGST Act, 2017, ITC eligibility requires that goods are “received” by the recipient. However, the term “received” has been a point of contention, with tax authorities often insisting on physical receipt of goods at the buyer’s location. This disconnect has led to:

• Delayed ITC claims
• Strained working capital
• Increased compliance burden

Key Clarifications in Circular No. 241/35/2024-GST

The CBIC’s circular bridges this gap by interpreting Section 16(2)(b) more practically:

1. Deemed Receipt Defined: Goods are considered “received” when delivered to any person as per the buyer’s direction, including:
   
   • Delivery through document transfer
   • Delivery to third-party transporters
2. Location Irrelevant: The physical location of receipt is not a condition for ITC eligibility.
3. Safeguards for Misuse: ITC remains linked to goods being used for business purposes. Reversal is required for non-business use, loss, or destruction.

Practical Implications Across Sectors

For Automobile Dealers:
Dealers can now claim ITC as soon as ownership transfers at the OEM’s factory gate, reducing the need to wait for physical delivery. This accelerates cash flow and simplifies compliance.

For Other Industries:
The circular’s principles extend to sectors like textiles and manufacturing. For example, a Chennai retailer receiving goods from Surat under EXW terms can claim ITC at the point of ownership transfer.

Benefits of the Clarification

1. Improved Working Capital Management: Businesses no longer need to delay ITC claims, ensuring better liquidity.
2. Reduced Compliance Burden: Documentation of ownership transfer becomes the key compliance requirement.
3. Alignment With Modern Practices: GST now better reflects contemporary supply chain dynamics.
4. Broader Sector Impact: From automobiles to textiles, the clarification benefits a wide range of industries.

Safeguards and Conditions for ITC

The circular underscores the importance of robust documentation:

• Records of ownership transfer
• Transport arrangements
• Proof of business use

It also reiterates that ITC must be reversed for goods:

• Diverted for non-business purposes
• Lost, stolen, or destroyed
• Given as gifts or samples

Conclusion: A Milestone in GST Compliance

CBIC’s Circular No. 241/35/2024-GST marks a progressive shift in GST administration, aligning tax compliance with real-world business practices. By addressing ITC eligibility under Ex-Works contracts, it simplifies processes, improves cash flow, and reduces compliance stress for businesses.

This move reinforces the government’s commitment to creating a business-friendly tax environment while maintaining safeguards against misuse. Businesses must adapt to these changes by strengthening their documentation processes, ensuring compliance with GST provisions, and leveraging the benefits of timely ITC claims.

For further insights and examples, read the full CBIC Circular No.241/35/2024-GST