Specific and elaborated provisions related to Input tax credit are given under Chapter V (Section 16 to 21) of Central Goods and Service Tax Act, 2017 which contains various provisions. Section 17 of CGST Act, 2017 contains provisions related to Apportionment of credit and blocked credits or where inputs tax credit are not available for utilisation i.e. ineligible Input tax credit under GST.
Considering the fact that Goods and Service Tax (“GST”) is a tax based on value addition only, Input Tax credit (“ITC”) is a fundamental concept for such purpose. By availing ITC of taxes paid on Inputs, input services or capital goods, GST is paid by taxpayers on value addition only. Therefore, ITC under GST is an important point to become a GST complied business.
If you avail or utilise incorrect amount of Input Tax credit while filing your GST return, it will lead to heavy penalties and fines. Therefore, you must know about the items where the input tax credit is not available.
In this post, we will talk in detail about the ITC blocked under GST law.
1. What is Ineligible Inputs tax credit or Blocked Credit under GST
When a registered taxable person are entitled to claim Input Tax credit of paid at the time of purchase of Inputs, Input Services or Capital Goods under head CGST, SGST, IGST, or UTGST Which can be used for payment of output tax liability. However there are several cases where assesses can not claim input tax credit of GST paid while they receives or purchases goods or services.
Ineligible inputs tax credit or blocked credit is cost to the company.
Section 17 of Central Goods and Service Tax Act, 2017 provides all such scenarios and cases for which credit is not available based on purpose of use of item and nature of item.
Following are cases where the input credit under GST is not available:
2. Ineligible ITC on Items used for purpose other than Business Purpose (Section 17(1))
If goods and services purchased is used partly for business purpose and partly for other purposes then ITC shall be allowed to the extent such item is used for the purpose of business. Therefore, ITC to the extent use for some other purpose is not allowed.
Manner of determination of ITC between used for business purpose and other purpose is given under Rule 42 of CGST Rules, 2017.
2.1 Ineligible ITC on items used for making exempted supply (Section 17(2))
When goods and services purchased are used partly for making taxable supplies* (i.e. items on which GST is applicable) and partly for making exempted supplies (i.e., items on which GST is not applicable) then ITC shall be allowed to the extent such item is used for making taxable supplies including zero rated supplies.
* Exempted supply includes:
- Supplies on which recipient is liable to pay tax on reverse charge basis,
- Transaction in securities
- Sale of Land
- Sale of building.
Rationale behind non-admissibility of ITC on exempted items is as no GST is payable on outward supply, therefore, no ITC should be given on inward supply.
Manner of distribution of ITC between used for making taxable supplies and exempted supply is given under Rule 42 of CGST Rules, 2017.
2.2 Ineligible ITC to banking company or financial institution (Section 17(4)
Banking companies or financial institutions are engaged into the business of accepting deposits, extending loans or advances.
On such extended loans and deposits, banking companies or financial institutions receive interest income. However, such Interest received is considered as exempted supply for the purpose of GST and therefore, banking company or financial institution is not liable to pay GST on such interest income.
Therefore, as per section 17(2) of CGST Act, as banking companies are engaged in exempted supply, therefore, they are not entitled to claim corresponding ITC.
However, to simply working, section 17(4) given another option to these companies to claim ITC to the extent of 50% and balance shall stand lapsed.
2.3 Ineligible ITC Motor vehicles & conveyances having seating capacity less than 13 persons
Earlier ITC on all type of motor vehicle was restricted however with effect from 1st Feb 2019, Input tax credit shall only be restricted in case of motor vehicle for transportation of persons having approved seating capacity up to 13 persons (including driver).
However, such motor vehicle when put to use for following purposes, ITC would be allowed even if there seating capacity is equal to or less than 13 people.
- Further supply of such motor vehicles
- Transportation of passengers
- Imparting training on driving, such motor vehicle.
In other words, for all the motor vehicles with approved seating capacity of more than 13 people, ITC would be allowed.
2.4 Ineligible ITC for Vessels and aircrafts
In case of vessels and aircrafts, input tax credit shall be available only when vessels and aircrafts are used for following–
- Further supply of such vessels or aircrafts;
- Transportation of passengers;
- Imparting training on navigating such vessels;
- Imparting training on flying such aircrafts;
- For transportation of goods.
2.5 Inputs tax credit on services of general insurance, servicing, repair and maintenance related to motor vehicle, aircraft and vessels
From 1st February, 2019, Services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft
- If ITC of Such Motor Vehicle , Vessel or Aircraft is allowed
- To manufacture of such motor vehicles, vessels or aircraft
- To supplier of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him
- ITC paid on Food and Beverages, Outdoor Catering
As food and beverage is of personal nature therefore, ITC is not available on food and beverages and outdoor catering. However, if a registered person is engaged into outward supply of same category of goods and service then he can claim ITC.
2.6 Fitness Center Membership, Clubs, Beauty and Health Services
Similar to food and beverages, fitness center, club, beauty and health services are also of personal nature. Therefore, ITC is not allowed on GST paid on such services. Therefore, if you join any membership such as a fitness center, sports club, yoga, etc. then ITC claim shall not be available.
2.7 Travel benefit extended to employees on vacation
If you extend any travel benefit to your employees on vacation such as leave or home travel concession then GST paid on travel booking shall not be allowed.
However, if the travel packages include business purposes, then ITC shall be available.
E.g. Flight tickets booked for employees traveling for business meeting purpose then ITC on such flight tickets are allowed. However, if flight tickets are booked for personal travelling purpose of employees then no ITC shall be available.
2.8 Work Contract Services and Goods & Services received for construction
Under the pre GST regime, work contracts have always been a matter of dispute about bifurcation of the same between goods and services. However, this issue is settled under GST law as work contract is classified as “Service” under GST.
However, section 17 clearly denies the benefit of ITC on work contract service received related to construction* of immovable property even if the same is used for business purposes. E.g., if a registered person carries out construction of its office premises or factory premises then no ITC shall be allowed to him for GST paid on such service even if the same is used for business purpose.
Exception: However, ITC of GST paid on work contract services is allowed in following cases:
- Work Contract service with respect to plant & machinery* or
- Where the recipient of work contract service or goods is engaged in further supply of work contract service. E.g. ITC is available on invoice of Sub-contractor.
*Construction: For this purpose construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
** For this purpose, “plant and machinery” has been defined as apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises
Note: There are many judgements against this provision.
2.9 ITC on tax paid under Composition Levy
ITC will not be available for the goods and services on which a composition dealer pays taxes i.e., if supplier pays GST under composition scheme as per section 10 then recipient will not be entitled to claim ITC of same.
2.10 Goods Lost, Destroyed or free samples
In case of Goods lost, destroyed, written off, stolen or disposed off by way of gift or distributed as free sample, recipient is not entitled to claim ITC as no output GST is paid by recipient on such goods.
In such cases, self reversal of ITC should be made in case ITC over such goods has been taken earlier.
2.11 Rent-a-cab, Life Insurance and Health Insurance Services
No ITC is available on Rent-a-cab, Life insurance and health insurance services will not allow any ITC payment. E.g., If an employer provides life insurance or health insurance to its employees then no ITC is allowed of GST paid on such service. ITC of rent-a-cab is also not available even if the same is used for business purposes.
However, in following some cases, ITC will be allowed it should:
- In case the government lists the services which are necessary for an employer to provide to their employees through any law for the time being in force. The circumstance should be in the time being where the employee and employer both are connected through their organization.
- The case does not include cab services as well. However, if the government makes it mandatory for the employer to provide cab services to every female employee, ITC is not available.
- If inward supply of such service is used by a registered person for making an outward supply of the same category of service or goods. E.g., A cab hire company obtains certain cabs on rental basis and in turn further runs it on rent then ITC will be allowed on inward supply.
Non-resident taxpayers can only avail ITC on goods they have imported. Other than that, a non-resident taxpayer cannot avail ITC on goods or services he has received. However, the NRTP persons who import goods and services are eligible to claim the ITC.
2.13 Ineligible ITC under GST in Fraud Cases
The input tax credits are not available for GST paid in cases by reason of fraud or any any wilful misstatement or suppression of facts.
- GST paid under section 74 on account of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.
- GST Liabilities paid under section 129 due to detention, seizure and release of goods and conveyance in transit
- GST demand under section 130 for confiscation of goods or conveyance