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Ineligible input tax credits (blocked credits) under GST

Background:

  1. The object of taxation in GST is supply, which is a much wider concept than manufacture and removal in central excise, provision of service under service tax or that of sale of goods in State VAT. The scope of supply is wider enough to cover something more than business, as defined. Consequently, the scope of input tax credit should also be commensurately wider.

Input tax provisions under GST:

  1. As per section 2(62) of the Act, input tax includes all the taxes i.e., CGST, SGST, UTGST and IGST charged on the supply of goods or services or both including the IGST charged on imports and tax payable under RCM. Further, as per section 16(1) of the Act, a registered person would be entitled to take credit of the input tax charged on the supply of goods or services or both which are used or intended to be used in the course or furtherance of business.
  2. Section 17 (1) & 17 (2) of the Act read with rule 42 and rule 43 of the CGST Rules, provide that a registered person would be eligible only to that much of ITC that has been used for the purposes of business and for effecting taxable supplies, which means that if the goods or services are used partly for exempt supplies and partly for taxable supplies, then ITC shall be eligible only to the extent of taxable supplies where;
    1. The term ‘exempt supply’ as defined in section 2(47) of the Act, means the goods or services which attracts ‘Nil’ rate of tax or which is wholly exempt from tax and includes non-taxable supplies.
    2. And non-taxable supply as defined under section 2(78) of the Act, means the supply of goods or services which are not leviable to GST.
  3. Thus, the following can be inferred from the above provisions:
    1. If the procurements are used exclusively for effecting taxable supplies, then the total ITC would be eligible.
    2. If the procurements are used exclusively for effecting exempt supplies, then the credit would not be available.
  4. Thus, under GST the ITC that would be available to any registered person is a very wide term wherein, the GST taxes paid in respect of all procurements which are used or intended to be used for the business and for effecting taxable supplieswould be eligible except the ITC specifically blocked under section 17(5) of the Act. This restriction specified under section 17(5) of the Act would be applicable even if such inputs are used in the course or furtherance of business and for providing taxable supplies

In this article we will understand the list of input tax credits which are restricted under GST.

  1. Purchase of motor vehicles and services of general insurance, servicing, repairs, and maintenance of such motor vehicles:
    1. Section 17(5)(a) of the Act restricts credit on motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including driver). Exception has been carved out inter-alia, where credit would be eligible in case
      1. When such motor vehicles are used for further supply like sale or renting.
      2. When such motor vehicles are used for
        1. Transportation of passengers or
        2. Imparting training on driving such motor vehicle.
    2. From the above provision it can be carved out that the ITC would be eligible on the purchase of motor vehicles, services of general insurance, servicing, repairs, and maintenance in the following:
          1. Motor vehicles having approved seating capacity of more than 13 persons i.e., minibuses and buses etc.
          2. Goods transport motor vehicles like tempos, Eicher’s etc.
  2. Purchase of vessels, aircrafts and services of general insurance, servicing, repairs and maintenance of such vessels and aircrafts except when they are used for
          1. Further supply like sale or renting.
          2. When used for
            1. transportation of goods or passengers
            2. imparting training on navigating such vessels or flying such aircrafts.

 Note: Credit on services of general insurance, servicing, repairs and maintenance on vehicles specified in point 1 and 2 will be eligible when such services are received by

    • The manufacturer of such motor vehicles
    • Persons engaged in supplying general insurance services in respect of such motor vehicles, vessels, and aircrafts.
  1. Credit will be restricted on the following goods and services:
    • Food and beverages
    • Outdoor catering
    • Beauty treatment
    • Health services
    • Cosmetic and plastic surgery
    • Leasing, renting of motor vehicles whose seating capacity is not more than 13 persons (including driver). However, it is to be noted that such restriction will not apply for renting of motor vehicles having seating capacity more than 13 persons like renting of busses.
    • Life insurance and health insurance services. Medical insurance will fall under the category of health insurance services, thereby ITC would be restricted. However, it is to be noted that credit restriction will not apply for general insurance services. Thereby taxes paid on general insurance services will be an eligible credit.
    • Membership of a club, health and fitness centres. However, it is to be noted that tax paid on membership fee for trade associations like HYSEA will be an eligible credit as restriction is applicable only for clubs.
    • Travel benefits extended to employees on vacation such as leave or home travel concession.

However, credit on the above goods and services would be eligible in case if it is obligation for an employer to provide the same to its employees under any law for the time being in force.

 Example:

    • G.O Ms No.25 dated 25.07.2019 issued by the Government of specifies that all Information Technology Enabled Services (ITES) and Information Technology Establishments are permitted to engage young and women employees during the night shift subject to provision of adequate security during the course of employment and to and fro transport from their respective residences.
    • GST paid to Cab operators would be an eligible credit even if such rented vehicle seating capacity is not more than 13 seaters, since it is obligation for the employers to provide to and fro transportation to their employees who are engaged in night duties.

4. Works contract services taken for construction of an immovable property and goods or services or both used for construction of an immovable property on own account will be an ineligible credit under GST. However, the said restriction will not be applicable in case the following cases

    • If the said works contract or goods or services is towards the construction of a plant and machinery.
    • If the said works contract is towards further supply of such works contract services.

Further, the term construction includes re-construction, renovation, additions or alterations or repairs, to the extent it is capitalised to the said immovable property.

Interior decoration services, civil constructions will fall under the purview of works contract services and if the same is capitalized, then credit on the same would be restricted under GST.

Further, the term plant and machinery as per explanation to section 17 would means 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 foundation and structural support but excludes

  • Land, building or any other civil structure
  • Telecommunication towers and
  • Pipelines laid outside the factory premises.

Following can be derived from the above discussion

S. No Description Credit eligibility
1 ITC on Construction of a movable property Eligible
2 ITC on Construction of an immovable property *Ineligible
3 ITC on Construction of a plant and machinery Eligible
4 ITC on additions, alterations, repairs, and maintenance for a movable property which is capitalised to the said property Eligible
5 ITC on additions, alterations, repairs, and maintenance for a movable property which is charged as expenses Eligible
6 ITC on additions, alterations, repairs, and maintenance for an immovable property which is capitalised to the said property Ineligible
7 ITC on additions, alterations, repairs, and maintenance for an immovable property which is charged as expenses. Eligible

*Construction is on own account and works contract is not for further supply of such works contract.

  • Goods or services on which tax is paid under composition scheme. i.e., persons paying tax at 1% on their turnover. Said tax will be blocked credit under GST.
  • Goods or services or both received by a non-resident taxable person (i.e., persons who don’t have fixed business place or residence in India but undertakes transactions involving supply of goods or services) except on goods imported by him.
  • Good or services or both which are used for personal consumption.
  • Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

For example: Purchase of gold coins and given as a Diwali gift to employees.

  • Any tax paid on issue of notice under section 74 (non-payment of tax or erroneous claim of credit due to fraud) or section129 (detention of goods in transit) or section 133 (Confiscation of goods)

Consequence of claiming indelible credit:

  1. Interest implications

Any persons who claim an ineligible credit would be require to reverse such credit along with interest @ 18% from the date of availment (utilization of credit for payment of tax) to the date of reversal as per section 50 of the CGST Act.

  1. Penalties

Penalty for claiming an ineligible credit will be higher of Rs10,000 or 10% of ITC claimed which may extend up to 100% of ITC claimed in case of fraudulent availment of credit.

Conclusion:

Every procurement made by a registered person would not fall under the category of eligible credit. It is the responsibility of the registered person to arrive at whether the procurements made by them would fall under the category of blocked credit or not. If not, then only the credit should be availed otherwise the consequence of interest and penalty may be faced.

By CA Hemanth Kumar.

 

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