written by Khatabook | September 13, 2021

Where Can Input Tax Credit under GST Not Be Availed?

The GST law has specific cases where no Input Tax Credit or ITC can be claimed or is available to the taxpayer. These are called blocked credit. The GST section 17(5) describes the circumstances when such block credits are ineligible and the special conditions when they become eligible to avail ITCs. Blocked credits under GST are the tax that cannot be claimed even after paying a purchase or expense. Let's learn more about the ineligible ITC under GST in this article. 

List of ineligible products, services and goods:

Here’s a list of cases as of September 8th 2020, where under Section 17(5) of GST Act, ITCs are not available and the exceptions to the rule along with the HSN (Harmonized System of Nomenclature) code of the category of services or goods ineligible to avail inward supply input tax credit.

Sl.

No.

Category of services and goods

 HSN or SAC Code

When ITC is allowed

1

Other Conveyances and Motor Vehicles  

87

  • If the conveyance or vehicle is being supplied further. 
  • If it is used for passenger transportation.
  • If used for providing driving or navigating training.
  • If used for goods transportation.
  • It is used for business purposes and has passenger transportation of more than 13, including the driver.
  • If it is a bus used for employee pick and drop services.

2

Insurance, maintenance and repairs for conveyance & motor vehicles are not allowed.

998714

997134

  • Allowed if ITC is allowed on the vehicles.
  • If the ITC on the vehicle is not allowed, then repairs, maintenance, and insurance are also not allowed.

3

Outdoor      Catering, Beauty Treatment, Food &  Beverages, Health Services,  Plastic and Cosmetic Surgery

99932

99633

99972

99713

99934

99931 99933

99935

  • The inward goods or services supplied are used by the registered taxpayer to affect outward taxable supplies of the same goods or services with an element of mixed supply or composite taxable product.
  • For Food and Beverages or health services, ITC is available where the goods or services supplied inward are obligatory under the law to be provided by the employer to employees.

4

Club Memberships, Fitness & Health Centre

99972

 –

5

Life and Health Insurance, Rent-a-cab

996601

997132 997133

997141 997142

  • If the Government notifies it as a mandatory service under prevailing laws, the employer provides them to employees. 
  • The inward supply of goods or services is used to make an outward taxable supply of the same goods or services category as part of a mixed supply or taxable composite of the product.

6

Vacationing employees travel benefits 

NA

  –

7

LTA ( Leave Travel Concessions) travel benefits 

NA

  –

8

Works contract for services supplied when an immovable property is constructed.

9954

  • If the input service is for further works and supply of machinery and plant in service works contract.

9

Services or goods received by a taxpayer for an immovable property construction

9954

  • If the services or goods are received in the taxpayer’s account to be used as goods or services used in plant and machinery or business furtherance.

10

Services & goods or services taxed and paid for U/S 10 of the Composition Scheme.

NA

  –

11

Services & goods received by a non-resident taxpayer

NA

  • Except on goods imported by the non-resident taxpayers.

12

Personal consumption services or goods 

NA

  –

13

Goods that have been written off lost, damaged, destroyed or stolen

NA

  –

14

Free and gift samples goods 

NA

  • A gift to employees up to Rs 50,000 per employee are exempt from GST U/S 7, Schedule I of the 2017 CGST Act.

15

Taxes paid U/S 129, 74, 130, namely misstatements, fraud, etc.

NA

  –

Also Read: Tax Collected At Source ( TCS ) Under Goods and Services Tax

Let us explore the above ineligible ITC list-

  • Conveyance and Motor vehicles: 

Motor vehicles used to transport persons cannot be used to avail ITC if their seating capacity is equal to or less than 13 persons, including the driver. If the seating capacity is more than 13 persons, then ITC is available. For example, ABC Enterprises buys a luxury car for their travel business. No block credit in GST is available as the seating capacity is less than 13 persons.

Aircraft, ships, yachts, etc., also fall under ineligible ITC. But this rule has exceptions that we shall discuss below with examples.

ITC is available if the vehicle is used to supply goods or services that are taxable.

1. Supply of aircraft, yachts, vehicles etc.: 

For example, if you are supplying cars as part of your business for transporting passengers, then ITC is available. Consider a dealer who buys a car for Rs 50 lakh. They pay GST of Rs 14 lakh plus Cess. As part of their business, they sell the car for a profit of 20 lakh, and the GST is now Rs 19 Lakh 60 Thousand. Since they satisfy the above conditions in Section 17(5) of the GST Act, they can claim ITC for Rs 14 lakh and pay just the difference amount in GST, i.e. Rs 5 Lakhs 60 Thousand.

2. Passenger transport vehicles:

If you buy a passenger vehicle like a bus, ITC is available. For example, XYZ Tours and Travels buys a bus for transporting passengers from Bangalore to Mangalore (intercity) and back. ITC can be claimed for the GST paid on the bus.

3. When the motor vehicle is used for training on flying, driving, navigating etc.: For example, Bharat Flying Training School buys an aircraft as a trainer aircraft for flying training to its students. Or, ABC Driving School buys a car to train students in driving. Both cases are exceptional cases of ineligible ITC on the GST paid.

4. Goods vehicles used for transportation of goods or services: This section is not about the regular goods transport agencies but other goods vehicles used for goods and services transportation. For example, Mr Raj buys an animal bus to safely transport his racehorses or XYZ Company purchases a bus to provide veterinary emergency services in Bangalore. Here, ITC can be claimed for the GST amount paid.

5. Vehicles used solely to transport employees: For example, ABC Enterprises buys a bus to transport its employees for designated pick-up and drop facility to its office. ITC can be availed on the purchase of the bus.

  • Food, beverages, club memberships and others

The supply of the following goods or services or both fall under ineligible input tax credit, such as:

  • Beverages & Foods
  • Beauty salon treatment
  • Outdoor catering
  • Health services
  • Plastic/Cosmetic surgery

ITC becomes available only when the category of goods or service is under the Composition Scheme or mixed supply, or the outward and inward supply of service/goods is the same. For example, XYZ Enterprises has a New Year party for all its employees. Because of the nature of the event, it falls under ineligible ITC as per section 17(5) and cannot claim blocked credit on the beverages and food served at the party.

  • General insurance and ITC on repair and maintenance of vehicle under GST:

ITC is not allowed on life services and general insurance, repair, maintenance and servicing of vehicles related to conveyance and motor vehicles, vessels, aircraft, vessels etc., referred to in Clause (1). The exceptions too are similar in logic for these vehicles and when the taxpayer is: 

  • Engaged in manufacturing of these motor vehicles, aircraft, vessels etc., or
  • Supplies services of general insurance services for such vessels, motor vehicles, vessels or aircraft.
  • Club, fitness and health club memberships:

Club, fitness and health club memberships are ineligible for blocked credit under GST. For example, the CEO, Mr Rajesh buys a club membership at Bangalore Club and his company ABC Stock Broking pays for it. No ITC can be claimed here.

  • Life and health insurance, Rent-a-cab services:

Life and health insurance, Rent-a-cab services are ineligible for ITC under Sec 17(5) of GST. The rule's exceptions are when:

  • Such services are obligatory by law that the employees are provided with the mentioned services by the employer. For example, the Indian Government established a rulemaking it mandatory to provide female employees with cab services for their night shifts. If XYZ Company hires a cab to do so, it can claim ITC.
  • When the outward and inward supply or the goods or services are under composite or mixed supply, for example, DEF Enterprises lends a car to QRS Travels. Therefore, DEF Enterprises can claim ITC refunds.
  • The renting, hiring or leasing of motor vessels, vehicles or aircraft with the exceptions already discussed in Clause (1).
  • LTA Travel:

ITC is unavailable when a taxpayer travels under Leave Travel Allowance (LTA) or when home travel concessions are extended by the employer to employees. Suppose PQR Enterprises provides its employees with an LTA package. ITC cannot be claimed for vacationing purposes. But if its employees are travelling for business purposes, then block credit under GST can be claimed. For example, Sales Officer Mr Shyam, a resident of Bangalore, travels from Mangalore to Bangalore by flight after a business conference; in this case ITC can be claimed.   

  • Works contracts:

Work contracts and services or goods under it are ineligible for ITC benefits. The immovable property construction cannot be used for ITC benefits except when the input of goods or services is further used under a work contract. Consider that Quick Contractors are under a work contract to construct Mr X’s immovable property. Here, no blocked credit in GST can be sought for on this works contract. But, if Quick Contractors hires Fast Contractors to complete a portion of this works contract, Quick Contractors can claim ITC for the portion of the contract awarded to Fast Contractors.

  • Constructing a self-owned immovable property: 

ITC is not provided for goods or services used for constructing self-owned immovable properties even if such goods or services are used in the business. This does not apply to plant & machinery where ITC can be availed for self-used plant & machinery manufactured for business purposes. Suppose Strong Steel Industries Ltd constructs its headquarters building on its self-owned land in Mysore. ITC cannot be claimed in this case. But if Strong Steel constructs an oven and blast furnace for its business on the same premises, ITC can be sought as it qualifies as a Plant. 

  • Goods under Composition Scheme:

Services and goods under the Composition Scheme list are ineligible for claims of ITC. For example, ABC Enterprises is under the Composition Scheme of the GST laws and supplies goods or services not exceeding a turnover of Rs 50 lakhs. No ITC is available to ABC Enterprises as they already pay tax at a nominal rate.

Also Read: All About Special Allowance - its Taxation & Calculation in Ind

Conclusion:

GST compliance is very important for all businesses. Input Tax Credits, as we have seen above, provide relief from the tax burden under the GST Act. Yet, there are cases where ITC on motor vehicles in GST are not allowed, or the services and goods are ineligible for ITC inputs. There are exceptions even in these cases, as discussed in this article. We hope through this article, we have been able to convey the blocked credit in GST and ineligible ITC.

If you want to know more about GST returns and compliances, download Khatabook today!

FAQs

1. How are restaurants treated for blocked credits under GST eligibility?

No ITC for restaurants: Under the Nov 14th 2017 Notification 46/2017 of the rates of Central Tax, standalone restaurants can charge 5% GST. But they do not get ITC on the GST paid. But if the restaurant is a part of a hotel having rooms charging more than Rs 7500, they have to pay 18% GST but can avail ITC inputs. For example, ABC is a standalone restaurant. It can charge 5% GST but cannot avail ITC on its inputs. The XYZ Restaurant in Bangalore is a part of the WXYZ, and the room tariffs are Rs 10000/day. Therefore, XYZ Restaurant can charge 18% GST and can avail of ITC. 

2. What happens to goods or services that are freebies, destroyed, and sample goods in ITC claims?

If goods are stolen, lost, written off, destroyed, given as free samples or gifts, no ITC can be claimed against them. For example, B Fine Pharma hands out 16 kilos of pain-killer drugs to doctors as a sample. No ITC can be claimed against it.

3. Is ITC available for goods or services used for personal use?

ITC benefits are unavailable if the goods or services are used for personal purposes. For example, Mr X, a luxury car dealer, buys a luxury car for his personal use. Here, he can claim no ITC.

4. Can I claim ITC if I am a non-resident taxpayer?

ITC is not available for goods or services received by a non-resident taxpayer. Only goods imported by him have the ITC facility. For example, ABC & Co send certain goods to Mr Suraj, an NRI taxpayer, for personal use. No ITC can be claimed. But if Mr Suraj imports goods from the XYZ & Co used in his business/ trading, say 3 Tonnes spices, ITC can be claimed. 

5. What happens to fraud cases detected and their ITC benefits?

If a fraud has occurred, then no ITC is available. Fraud is construed as willful and fraudulent suppression of facts, misrepresentations, seizure or confiscation of goods. Some cases are:

  • Short or non-payment of taxes.
  • ITC Refunds being excessive.
  • ITC over-utilisation fraudulent transactions.
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