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One of the most talked about feature of the Goods and Services Tax Law is seamless input tax credit.

Section 16 of the CGST/SGST Act reads as under:

“Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

“Input tax” in relation to a Registered Person, means the Central tax, State tax, Integrated tax or Union Territory tax charged on any supply of goods or services or both made to him and includes –

1. IGST charged on the import of goods
2. Tax payable under reverse charge under sec 9(3) and 9(4) – includes IGST, SGST and UTGST

But does not include tax paid under the composition scheme

“Input tax Credit” means the credit of input tax.

Items on which Input tax Credit will not be available – blocked credits

THE LAW:

Notwithstanding anything contained in Section 16(1) and 18(1), ITC shall not be available in respect of the following:

1. Motor vehicle and other conveyance except when they are used for making the following taxable supplies , namely-

(a) Further supply of such vehicles or conveyances or

(b) Transportation of passenger or

(c) Imparting training on driving, flying, navigating such vehicles or conveyances

2. Motor vehicle and other conveyance except used for transportation of goods

3. Supply of goods and/or services such as –

1. food and beverages, outdoor catering, beauty treatment, health services,  cosmetic and plastic surgery except where such supply of goods or services of  each category is used for making an outward taxable supply of the particular  category of goods or services or both or as an element of a taxable composite or  mixed supply
2. membership of a club, health and fitness centre
3. rent-a-cab, life insurance, health insurance except where it is notified by the  Government as obligatory for an employer to provide to its employees under any  law for the time being in force; or such inward supply of goods or services or both  of a particular category is used by a  registered person for making an outward  taxable supply of the same category of goods or services or both or as part of a  taxable composite or mixed supply; and
4. travel benefits to employees on vacation i.e. leave or home travel concession.

 4. Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is for further supply of works contract service

5. Goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even though it is used in course or furtherance of business.

6. Goods or services or both on which the tax is paid under composition scheme.

7. Goods or services or both received by a non-resident taxable person except on goods imported by him.

8. Goods or services or both used for personal consumption.

9. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

10. Tax paid in terms of sections 74, 129 and 130.

THE LAW SIMPLIFIED:

1. Motor vehicle and other conveyances

Part -I

Input Tax credit (ITC) on the purchases of motor vehicles and other conveyances shall generally not be available to a registered person.

ITC is available on the above only when, the motor vehicles and other conveyances are used for making the following taxable supplies:

1. Further supply of such vehicles or conveyances
2. Transportation of passengers
3. Imparting training on driving, flying, navigating such vehicles or conveyances

Part –II

ITC on the purchases of motor vehicles and other conveyances shall be available when they are used for transportation of goods. Thus when motor vehicles and other conveyances are used for transportation of goods for either self or some other recipient, ITC will be available.

2. Supply of specific goods and/or services or both

ITC shall not be available to a registered person for the following supply of goods and/or services or both:

1. food and beverages
2. outdoor catering services
3. beauty treatment
4. health services
5. cosmetic and plastic surgery services

The above restriction is not absolute.

Situations in which ITC is available on the above goods and/or services or both

Part - I

ITC shall be available on the above specified goods or services or both when an inward supply of such goods or services or both is used for making an outward taxable supply of such goods or services or both.

Example – M/s ABC Caterers is engaged in providing catering services to various clients on occasions of marriage, business functions, festivals, etc. During peak festive season, M/s ABC Caterers availed the services of M/s XYZ Caterers with a view to cater to the huge demand from clients. M/s XYZ Caterers raised an invoice on M/s ABC Caterers for a specific amount including GST. M/s ABC Caterers will be able to claim ITC of the GST paid to M/s XYZ Caterers since the inward supply of catering services is being used by M/s ABC Caterers for making an outward supply of same category of services. Hence in this case, ITC is available for outdoor catering services.

Part – II

ITC shall be available where an inward supply of goods or services or both of a particular category is used by a registered person as an element of a taxable composite or mixed supply.

Example – PQC Ltd is engaged in supply of transport of passengers by air services. The company avails outdoor catering services of M/s ABC Caterers in order to provide food and beverages to the passengers. M/s ABC Caterers raises an invoice on PQC Ltd charging GST. PQC Ltd will be entitled to avail the ITC of the GST paid to M/s ABC Caterers since outdoor catering services forms part of taxable composite supply of passengers by air services.

3. Membership of a club, health and fitness centre

ITC will not be available for any GST paid on membership of a club, health and fitness centre under any circumstances. This restriction is absolute and there is no exception.

4. Rent-a-cab, life insurance, health insurance

ITC shall not be available to a registered person for any tax paid for rent-a-cab, life insurance, health insurance supplies received by it. This restriction is not absolute.

Situations in which ITC is available on the above services

ITC will be available for the above mentioned inward supplies under the following circumstances:

1. Where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force.

Example – ABC Ltd is a BPO which works on night shift basis. As per the terms of employment, it has to provide cab facilities to its employees who work on night shifts. ABC Ltd can claim ITC on the GST paid on such rent-a-cab services.

2. Where such inward supply of goods or services or both of a particular category is used by a registered person to make an outward taxable supply of the same category of goods or services or both.

Example -

3. Where such inward supply of goods or services or both of a particular category is used by a registered person as part of a taxable composite mixed supply.

5. Travel benefits to employees on vacation i.e. leave or home travel concession

ITC on tax paid on travel benefits extended to employees on vacation such as leave or home travel concession shall not be available under any circumstances. This restriction is absolute and no exception has been provided.

6. Works contract services when supplied for construction of immovable property

ITC shall not be available to a registered person for the tax paid on inward supply of work contract services which are used for construction of immovable property. This restriction shall not apply to plant and machinery used for construction of immovable property. This restriction is not absolute.

Situations in which ITC can be availed on any tax paid on work contract services:

ITC for any tax paid on work contract services shall be available in the following cases:

1. When supplied for construction of plant and machinery
2. Where it is an input service for further supply of works contract service.

Meaning of specific terms:

Works contract

Under Sec 2(119) of CGST Act “works contract” means a contract for building, construction, fabrication, completion,erection, installation, fitting out, improvement, modification, repair, maintenance, renovation,alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

The expression ‘works contract’ is limited to contracts to do with immoveable property, unlike the existing understanding of the phrase which also extends to moveable property. A contract will amount to a ‘works contract’ only where there is a transfer of property in goods, while such a transfer may result in goods or anything else (i.e., immoveable property).

Construction

The expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Plant and machinery

The expression ‘plant and machinery’ 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 such foundation and structural supports but excludes:

1. land, building or any other civil structures
2. telecommunication towers; and
3. pipelines laid outside the factory premises.

7. Goods or services received by a taxable person for construction of an immovable property

Goods or services or both received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business. This provision shall not apply to plant and machinery.

Note -  Distinction between Point No 6 and Point No 7

Point No 6 deals with works contract services i.e when such services are received under composite contracts and used for the purpose of construction of an immovable property (other than plant and machinery).

Point No 7 deals with situations when goods or services or both are received under different independent contracts i.e supply of goods and supply of services under separate contracts for the construction of an immovable property ( other than plant and machinery).

8. Goods or services or both on which the tax paid under composition scheme

ITC shall not be available to a registered person for any tax paid on goods or services or both on which tax has been paid under Composition Levy (Section 10). This restriction is absolute and shall not be available under any situation/circumstances.

9. Goods or services or both received by a non-resident taxable person except on goods imported by him.

ITC shall not be available for any tax paid on goods or services or both received by a non-resident taxable person except on goods imported by him. This restriction is not absolute. ITC shall be available to a non-resident taxable person only on goods imported by him. No credit shall be allowed to him on import of service.

10. Goods or services or both used for personal consumption

ITC shall not be available to a registered person for any tax paid on goods or services or both used for personal consumption. This restriction is absolute and shall not be available under any situation/circumstances.

11. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

ITC shall not be allowed to a registered person on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

In case of goods lost, stolen or destroyed, if the loss is due to unnatural reasons, tax credit will not be allowed. However, if the loss is due to natural reasons like in case of medicines (loss due to expiry or evaporation), then ITC may be allowed.

Where goods are lost, stolen, destroyed, written off, or disposed of as gifts or free samples, proportionate input tax credit should be reversed.

12. Tax paid in terms of sections 74, 129 and 130

ITC shall not be available to a registered person on any tax paid in accordance with the provisions of Section 74, 129 and 130.

The summary of the above sections is given as under

Thus, to conclude, ITC cannot be availed under any of the above mentioned circumstances subject to certain exceptions.

Disclaimer - The information provided in this document is for general information only. It is based on the information available publicly and the advice received from various professional experts regarding the GST law. The user of this document should be aware that the interpretation or implications of relevant GST rules may change/vary depending upon circumstances applicable to the user.