The GST regime came into force on 01/07/2017.It has successfully removed the cascading effect from our indirect taxation system. Tax in any form (input, input services and capital goods) is allowed to be setoff but along with some restrictions under GST regime. Such restrictions are commonly known as “Blocked credit” or, “restrictions under section 17(5)”. This article aims to elucidate the complexities surrounding blocked credit and provide clarity on the tests one must pass to claim ITC.
(Note: – Unless specifically mentioned, whole discussion is in relation to CGST Act, 2017 only)
Not all the tax paid by the taxpayer is “Eligible ITC”. For any ITC to became eligible, it must pass certain tests which can be categorized as:
(a) Test 1: Whether supplier is Casual Taxable Person (CTP)?
(b) Test 2: To check it fulfills the criteria as laid down under section 16?
(c) Test 3: To check whether it is blocked credit u/s section 17(5)?
(Note: – GST law in itself being a very vast subject matter due to which it might be possible that even after clearing the above three tests ITC might not be available in certain cases.)
Q.1 Now a very common question that comes to our mind: That why We need to pass these three tests even when claiming ITC must be an unconditional right of taxpayer?
Ans.
| > Well it’s not the case as the ITC is not an unconditional right rather it is a privilege or, concession that is provided by the Government. So, in order to claim ITC, one has to follow the conditions that has been mentioned in law. |
| > There may be conflicts regarding the views being expressed above. Some consider ITC as a basic fundamental right and same cannot be restricted by any statute. |
| > One of the famous supreme court Judgement in the case of “M/s TVS Motor Company Ltd vs. The State of Tamil Nadu” held that ITC cannot be claimed as a matter of right but only in terms of provision of statute. Thus, the condition mentioned in statute shall be fulfilled. |
- There are always confusions among taxpayer regarding the admissibility of the ITC. In this discussion, our primary motive is to make you understand the Blocked credit under GST. But, from the above discussion it might be clear that Blocked credit is 3rd test in all the three tests. In order to have a deep understanding of blocked credit, one must go through the pathway of 1st and 2nd
♦ Test 1 (i.e. whether supplier is CTP): –
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♦ Test 2 {i.e. whether Taxpayer fulfils the conditions mentioned in section 16}: – Certain conditions that need to be satisfied before availing the ITC are: –
> “Business” covers any transaction with commercial motive, whether or not there is profit motive in it and whether or not it is with or without any frequency. > Also, the definition of business is wide enough to cover any activities which has any ancillary nexus with the business. |
> Tax Invoice, Debit note, bill of entry, Self-invoice (RCM) and ISD Invoice are the valid documentary evidences. > Mandatorily to be included in documentary evidences: details of tax charge, description of Goods and services, total value of Goods and services, GSTIN of supplier and recipient and Place of supply. |
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| > Section 16(2) (ba) Shall not be in contravention of section 38
Contravention of section 38: – > Supplier is such as person who has defaulted in payment of tax. > Value of invoice declared in FORM GSTR-1 of supplier> Value of invoice declared in FORM GSTR-3B. > Supply is received from such registered person within such period of taking registration as may be prescribed. > Input tax credit availed in GSTR-3B > Input Tax credit as declared in FORM GSTR-2B of the supplier. > Payment made in violation of Rule 86B. |
> Currently there is no mechanism to ensure payment been made by supplier. > Therefore, 2B can be used as a confirmation. If Tax actually not paid till 30th Nov of succeeding financial year, then ITC earlier claimed added to output tax liability along with interest 18%p. a. > Refer case law Beathel Enterprises v. State Tax Officer (HC), wherein it was held that recovery proceeding shall first be initiated against the supplier |
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> If payment not made, then ITC claimed earlier added to output tax liability along with Interest @18%p.a. > Even though there is contract between the supplier and taxpayer, no relief has been provided in the proviso so far. |
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> ITC can be availed on invoice or, debit note on or before 30th November of the succeeding financial year. > Is the debit Note date valid for Section 16(4) eligibility or, not? > Often there are confusions about which date to refer in case of debit note. To put an end to all the confusions, one must refer the debit note date and not the original invoice date. |
♦ 3rd and the last test, whether ITC is blocked ITC or, not: – Unless specifically mentioned ITC mentioned in section 17(5) is blocked credit.
Section 17(5)(a) (aa)(ab) Motor Vehicle, Vessel and Aircraft: –
- Motor Vehicle: –
Means any vehicle {including (+)} & {excluding (-)}
| (+) | Vehicles that are made to run on roads |
| (+) | Only mechanically propelled vehicles (i.e. excludes cycle, rickshaws and vehicle pulled by animals or, humans |
| (-) | Any vehicle running on fixed rails (i.e. railways, metro) |
| (-) | Vehicle running in fixed premises (i.e. Fork lift) |
| (-) | Vehicle < 4 wheels & capacity < 25 CC engine |
- Vessel and Aircraft: –
> Aircraft: – An aircraft must be a machine driven airborne craft.eg. Airplane, Helicopter, Motor Kite, hot air balloons, gliders etc.
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> Vessel: – a vessel can be either mechanically or non-mechanically propelled (unlike motor vehicle). It would cover any kind of vessel like ship, boat, sailing vessel, houseboat etc. The condition is that it should be used for the purpose of navigation in waters. The navigation can either be for human beings or goods.
Blocked ITC in case of above: –
| Vehicle Designed to carry passengers | Vehicle Designed to carry Goods | ||
| Particulars | (1) Motor Vehicle | (2) Vessel and Aircraft | Both (1) & (2) |
| (a) Seating capacity> 13 Person | Allowed | N/A | ITC allowed in all the cases |
| (b) Further supply (i.e. selling, renting & leasing such vehicle) | Allowed | Allowed | |
| (c) Training of driving | Allowed | Allowed | |
| (d) Transportation of passengers | Allowed | Allowed (Blocked in case of leisure and tourism) | |
| (e) Training on Navigating such vehicle | N/A | Allowed | |
| (f) Servicing, General Insurance and repair & maintenance* |
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| (g) Any other case | Blocked | Blocked | |
{*Note: – In case of Servicing, General Insurance and repair & maintenance, ITC will also be allowed in two special cases: –
(a) to the manufacturer of such vehicle
(b) to the insurer of such vehicle}
- Section 17(5)(b)(i) Renting, leasing and hiring of Motor Vehicle, vessel and Aircraft: –
| > Section 17(5)(b)(i) specifically blocked the ITC on renting, leasing and hiring of motor vehicle except in cases {a to d} in case of motor vehicle and cases {b to d} in case of Vessel and aircraft. | |||||||||||||||
> Important Note: – Renting Vs Transportation
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| > If above services are part of inward supplies for providing the outward taxable supplies of the same category of Goods or, services, then ITC will be allowed. | |||||||||||||||
| > ITC in respect of 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. |
- Section 17(5)(b)(i) Food and Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic and Plastic Surgery: –
> Food: – The term ‘food” appearing in section 17(5)(b) would have to be given the meaning as used in common parlance and considering the context it should be given a narrow meaning. The use of the term “food” along with the term “beverage” further supports this view. The term food would only cover the food which is prepared food for consumption and not the foodstuff which are used for preparing it.
(Note: – The scope of the term “food” under the GST law depends on how the Courts interpret it in future.)
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> Beverages: – In general sense, alcoholic or, Non-alcoholic drink other than “water”. May be aerated or, non-aerated, hot or cold. Alcoholic drinks are outside the scope of GST under section 9.
> Water can be used as an “raw material” in industries. > Drinking is not only the use of water. In that case ITC is available, still one need to be cautious before availing ITC. |
> Where inward supplies being used to provide the same category of outward supplies.
> In case of restaurant services, one need to refer notification no. 11/2017-Central Tax(rate) which clears that ITC will be allowed but only in case restaurant services provided at hotel having declared tariff above Rs.7,500. > ITC will also be available in case where Foods and beverages are received as “Goods”. Be cautious about the nature of outward supplies while availing the ITC. For e.g. ITC will be allowed in case of ice cream parlours. ice cream parlours sell already manufactured ice-cream; they do not have the character of a restaurant. >ITC will also be available in case Food and beverages are provided as an element of composite or, mixed supply. For e.g. in a marriage function, organizer arranges catering services and ITC for the same will be available. > If the Food and beverages are provided as an obligation in statute, then ITC is available. |
> Some says that ITC is allowed and some say ITC should not be allowed as per restriction given 17(5). One must be cautious while availing ITC. |
> ITC on outdoor catering Services: –
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> “Outdoor catering services” are same as restaurant services. The only difference is that outdoor catering services are occasional in nature. |
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> ITC allowed when services are received as inward supply for providing same nature of outward supply. This happens in case of caterer when sub-contracting is done. And, therefore ITC in that case will still be available. |
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> Also, where it is obligatory on part of employer, ITC will be allowed in that case also. |
> ITC on beauty Treatment: –
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> Beauty treatments are superficial treatments, there is no major transformation of a person as in the case of cosmetic and plastic surgery. |
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> ITC can be availed in case inward supply are used for providing the outward supplies of same nature. |
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> FILM INUSTRIES CASE: In case of film industries, beauty treatment say Makeup received as an inward supply. But outward supply is not of same nature due to which it raises cost for these industries and ITC is blocked in such cases |
> ITC On Health Services, Cosmetic and Plastic Surgery: –
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Section 17(5)(b)(i) ITC on Insurance Policies
(a) Life Insurance: – a contract between the insurer and insuree, wherein insurer promise to pay a specified amount (sum assured) in exchange of premium from insuree. Some types of Life insurance are: –
(b) Health Insurance: – a contract which provide sickness or, medical, surgical or, hospital expense benefits. Various types of Health insurance: –
(c) General Insurance: – means fire, marine or miscellaneous insurance business. Various Types of General Insurance are:- >Theft Insurance > Marine Insurance > Fire Insurance > Agricultural Insurance (d) ITC will not be available in case of health and life insurance but, fully allowable in case of general insurance as long as they are compliance of section 16(1) and section 17(5) (ab). (e) Multi-Insurance: – Life Insurance along with health and life Insurance. In such a case Insuree should have a clear bifurcation along with documentary evidence for availing ITC. In absence of such information, whole ITC may stand blocked. Hence, it always recommendary to have clear bifurcation. (f) Keyman Insurance Policy (KIP): –KIP is compensation against financial losses caused due to some uncertainty with KMP. Even though the said compensation is in relation to life, the same is received by the employer. And, ITC is allowed on same. One can refer M/s Om Logistics Ltd vs. Commissioner (Appeals) Central Goods. (g) Accidental Insurance Policy: – One must be cautious about availing the ITC. Availing ITC only when it is in relation to accidental loss of the premises. It should not have any element of life insurance. (h) ITC will not be blocked in case Insurance is an inward supply for providing the outward supply of same nature or, it is a statutory obligation. |
Section 17(5)(b)(ii) Membership of Club, Health and Fitness Centre: –
| Disallowance of ITC is only in respect of membership of club not other services provided in such club. For e.g. sales meeting in sales banquet hall of a club. | ||
| Health and Fitness Services are provided by clubs, fitness centres, health salons, hotels, gyms and massage centres. | ||
Important Note: –
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Section 17(5)(b)(iii) Travel benefits extended to employees: –
| > Travel benefit in nature of leave or, home travel concession for employees, then ITC is blocked on same. |
| > ITC will be allowed in case booking made by employees and later on claim the reimbursement. |
| > Travel benefits to the non-employees (say non-executive director), then ITC will be allowed. |
Section 17(5)(c)(d) Works contract services or, Goods or, services for construction of Immovable property: –
> Works contract Services: – 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.
> Construction includes re-construction, renovation, additions or alterations or repairs. For e.g. a building is constructed for first time and then subsequently some repair needs to carried at the building, then such repairs will also be considered as part of work contract services in respect of Immovable property.
> Immovable Property: – Immovable Property means not only “land and Building” but also things attached to earth.
> Please Note: –
√ Immovable property involves permanent fixing, embedding or attachment.
√ If it can be dismantled without causing significant harm, then it a movable property.
√ Whether an article is permanently attached is matter of professional judgement.
> Plant and Machinery: – apparatus, equipment and machinery fixed to earth by foundation including such foundation, structural support excluding:
√ Land and Building and other civil structure.
√ Telecommunication towers.
√ Pipeline outside factory.
> One must be cautious about availing ITC on foundation and structural support. Be clear, it must not fall within the definition of other civil structure.
> ITC in various scenarios: –
| Purpose | Types of Assets | Treatment Books of Accounts | Eligible Vs Ineligible |
| Used in B&P | Other than plant and machinery(P&M) | Capitalize | Ineligible |
| Used in B&P | Other than P&M | Debit to P&L A/c | eligible |
| Used in B&P | P&M | Either capitalize or, debited to P&L A/c | eligible |
| For making further supply (Real estate business or, otherwise) | P&M or, otherwise | Debited to P&L A/c(COGS) | Eligible* |
(*Note: – ITC in respect of sale of units by developer where consideration received after issuance of completion certificate is not allowed as such supply forms part of nontaxable supplies.)
> ITC on purchase of lift: – It depends on professional judgement. If lift is considered as part of Plant and machinery, then ITC is allowed. On the other hand, if it is considered as part of land and building, ITC will be blocked in such a case. One must be cautious while availing ITC.
> ITC on centralized AC and Firefighting equipment: – One must be cautious while availing ITC. Avail ITC in case it is categorized as Plant and Machinery.
> whether ITC will be allowed in case immovable property used for renting? One can rely on Safari Retreats (P.) Ltd. Vs Chief Commissioner of Central Goods (HC), wherein apex court held that if tax is payable on rental services, then ITC on inputs for rental services (i.e. building) shall be allowed.
Section 17(5)(e)(f) tax paid on inward supplies from composition supplier or, Non-Resident Taxable Person (NRTP)
> Composition taxable is not entitled to claim ITC as per Section 10.
> ITC to NRTP is blocked in case of purchase of domestic Goods or, services and import of services. This means that ITC is allowed only in case of import of Goods.
- Section 17(5) (fa)ITC in respect of CSR activities: – fully blocked in respect of tax paid for CSR activities under section 135 of companies act, 2013
- Section 17(5)(g) ITC on Goods for personal consumption
- Section 17(5)(h) ITC in respect of Goods lost, stolen, destroyed, written off or, disposed by the way of gift or, free samples
| > ITC has been blocked in case of lost Goods but, if the same is been allowed where loss is in relation to normal loss associated with manufacturing process necessary to produce such Goods.
> ITC will not be allowed in case Goods destroyed or, stolen. > What if scrap of destroyed Goods is sold: –GST is charged in sale of scrap (i.e. it is a taxable supply) and it is nowhere mentioned in the entire statue that ITC will be allowed only when sale value>purchase price. Hence, ITC should have been allowed in such a case. Still be cautious, while availing ITC. > Insurance claim on Goods lost, stolen and destroyed: – ITC will still be blocked. > ITC blocked in case Goods are written off. The term “write off” simply means complete value is erased from books > Written off Vs Written down: – blocked only in case of write off not in case of written down. The term “written down” means proportionate fall in value due to depreciation or, impairment. > ITC is blocked in case of gifts and free samples. > Gift/free samples to related Party (i.e. Schedule 1 transaction): – In case Gift is given to the related party (as defined in CGST Act, 2017), then the same would fall under schedule 1 transaction and tax has to be paid on outward supply even without any consideration. In such a case ITC will be allowed. > Gift as donation: – where donation is not treated is supply within the meaning of section 7, then ITC on same is blocked. |
- Section 17(5)(i) ITC on Tax paid under section 74, section 129 and section 130
| > Section 74: – determination of tax not paid, short paid, erroneously refunded or, ITC wrongly availed or, utilized for reason of fraud, willful misstatement or, suppression of Facts.
> In Easier terms, ITC will not be allowed in case of deliberate or, willful intent of Fraud or, misstatement. > Section 129: – relates to detention and seizure of Goods for contravention of provision of E-way bill. > Section 130: – relates to confiscation of Goods & conveyance. > ITC will not be allowed in case of section 129 and section 130. |
Conclusion: Navigating the intricacies of GST law, particularly concerning blocked credit, requires a thorough understanding of the eligibility criteria and restrictions outlined in section 17(5). By comprehensively examining the tests for claiming ITC and the implications of blocked credit, taxpayers can ensure compliance and make informed decisions in their business transactions.
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Disclaimer: – The views expressed in article is strictly based on practical exposure on individual cases and is only for educational purpose. It does not constitute any professional advice. Author do not accept any liabilities for any loss or, damage of any kind arising out of any information in the article.
Prepared By: –
> Name: – Arun Ahuja
> Educational qualifications: – CA Finalist and B.COM.
Author Bio
