Understanding the complexities of the Central Goods and Service Tax (CGST) Act is essential for every business and tax professional. One of the most critical parts is Section 17(5)(b), which outlines the specific supplies for which input tax credit (ITC) cannot be availed. The section underwent a clarification vide Circular No.172/04/2022-GST, dated 6th July 2022. In this article, we’ll delve deep into what this section and its proviso mean and how it impacts the eligibility of claiming ITC.
According to Section 17(5)(b) of the CGST Act, the following supplies are not eligible for ITC:
1. Food and beverages
2. Outdoor catering
3. Beauty treatment
4. Health services
5. Cosmetic and plastic surgery
6. Leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) of the provision except when used for the purposes specified therein
7. Life insurance
8. Health insurance
9. Membership of a club, health and fitness centre
10. Travel benefits extended to employees on vacation such as leave or home travel concession.
However, there is a proviso that allows input tax credit of the above supplies where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
Earlier there was a confusion whether the proviso applies to all the above mentioned services or not. The same was clarified vide Circular No.172/04/2022-GST dated 6th July 2022.
Sl.No.3 in the table of the circular clarifies that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act. The provision has been reproduced here:
(b) the following supply of goods or services or both-
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre; and
(iii) travel benefits extended to employees on vacation such as leave or home travel concession:
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
Whether ITC from the canteen services provided by the industry to its employees, which are obligatory in nature, is eligible?
Yes. When the canteen service is obligatory for an employer, ITC on such services can be availed of to the extent that the employer bears the cost. If any cost is recovered from employees, then ITC on the same is available to the extent the amount recovered cannot be availed of. (Refer: Advance Ruling No.GUJ/GAAR/R/2023/28 – Gujarat)
Hiring Motor Vehicles:
Whether ITC from the services of hiring motor vehicles provided, which is obligatory for some industries, is available even if the seating capacity of the vehicles is less than thirteen, like a motor car?
Yes. ITC is available through the services of hiring motor vehicles, which is obligatory for the employer even though the seating capacity of such motor vehicles is less than thirteen. (Refer: Advance Ruling No.14/ARA/2023 – Tamil Nadu)
Life and Health Insurance:
Likewise, if the registered person is an employee who is obliged to provide the services mentioned above, he is eligible to take ITC on such services as life insurance and health insurance.
Section 17(5)(b) of the CGST Act is a crucial piece of legislation that businesses must be aware of to correctly claim Input Tax Credit. The recent clarification has made it easier for employers to understand the scope of the provision. Companies that are obliged to offer any of the services listed in the section can now confidently avail ITC, provided they comply with the outlined conditions.
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Disclaimer: This article is only for the purpose of understanding the provisions of the Act, The author bears no responsibility on decisions taken by the readers whatsoever. E&OE.