This article is prepared considering the changes in ITC eligibility under GST which are effective from 01.02.2019.

The changes in credit restrictions is a product of ambiguity and scope of various interpretations of the law. The aim was to bring in clarity, and ensure common man is not burdened with the law. An analysis on the same has been provided below.

The changes in eligibility of Input tax credit (effective from 01/02/2019)

The objective while introducing GST was to provide seamless credit, and to avoid cascading effect of taxes due to various state and central indirect tax laws.

Although, the cascading effect has been significantly reduced (subject to a few exceptions such as IGST on Imports, IGST on Import Ocean Freight service, GST on TCS, etc.), the dream of seamless credit has not yet been realised. Adding to our woes, the recently introduced section 49A, provides for a change in utilisation of ITC, in such a manner which would result in higher accumulation of CGST credit and payment of SGST liability in cash.

ITC is eligible when used for the furtherance of business subject to specific restrictions under section 17(5) of CGST Act, on the following, namely:

ITC on Motor Vehicles

a) Motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when

i. further supply of such motor vehicles; or

ii. transportation of passengers; or

iii. imparting training on driving such motor vehicles;

Analysis:

Motor vehicles used for goods transport remain eligible – No change from earlier Act – only the wordings are simplified:

♦ The words ‘motor vehicle and other conveyance’has been replaced with the words “transportation of passengers”.

♦ The words “transportation of goods”have been removed from the exceptions listed as ineligible ITC under the Act through the recent amendment.

Motor Vehicle > 13 seaters is eligible for ITC

♦ ITC relating to any vehicle with approved seating capacitymore than 13 persons (including driver) is eligible.

♦ Physical verification of the motor vehicle could be performed to confirm number of seats available.

♦ Verification of approved seating capacity could be based on registration certificate (RC-smart card) issued by State RTO for such vehicle.

Illustration 1:

A Tempo traveller has seating capacity of 20 persons, although while registering with RTO, owner has mentioned seating capacity as 12 persons (incl. driver) for the purpose of evasion of higher registration fee.

Now in this case, as per RC-smart card seating capacity will be 12 persons – ITC would be said to be ineligible. It is suggested to ensure checking of documentation (RC Card).

Illustration 2:

A Tempo traveller has seating capacity of 12 persons, although while registering with RTO, owner has mentioned seating capacity as 15 persons for the purpose of claiming ITC.

Now in this case, as per RC-smart card seating capacity will be 12 persons – ITC would be said to be ineligible.  Physical verification of the vehicle could be performed.

ITC on Vessels & Aircrafts

(aa) Vessels and aircraft except when they are used –

(I) for making the following taxable supplies, namely:

i. further supply of such vessels or aircraft; or

ii. transportation of passengers; or

iii. imparting training on navigating such vessels; or

iv. imparting training on flying such aircraft;

  (II) For transportation of goods;

Analysis:

Earlier vessels and aircrafts were not specifically covered under the list of restricted credits. Although, they could have been construed to be covered under “other conveyances”.

♦ It could be argued that as the ITC on the same is being restricted now under GST w.e.f 1st February 2019 onwards, i.e. the ITC was eligible from July 2017 – January 2019.

♦ Section 17(5)(g) restricts ITC on goods used for personal consumption, and where such goods are not utilised for conditions specifically mentioned under Section 17(5)(aa), the department may dispute the credit eligibility.

♦ This area could be litigable, with high risks/high benefits. If ITC is being taken for the past period, the same could be disputed by the department as there is no clarity. Tax payers could consider the option after cost benefit analysis. To support the view, expert legal opinion could be obtained from experts. Such opinions could be useful during departmental officer’s visit as well.

 ITC on Insurance, repairs & maintenance, etc.

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa)

Conditions for claiming the ITC:

1) Where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

2) Where received by a taxable person engaged—

a) in the manufacture of such motor vehicles, vessels or aircraft; or

b) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

Analysis:

It has now been clarified that, where ITC is eligible on motor vehicles, vessels and aircrafts, the ITC on repairs & maintenance and related insurance also would be eligible. The possible categories of above-mentioned goods are as follows:

  • Motor vehicles – transport of goods
  • Motor vehicle – passengers – when approved seating capacity > 13.
  • Other Motor vehicle – passengers – satisfies approved conditions only
  • Vessels & aircrafts – satisfies approved conditions only

Earlier there were various schools of thought, as represented below:

♦ Some claimed, as such expenses were not specifically mentioned under section 17(5), the ITC would be eligible. – ITC also has been claimed from July 2017 upto January 2019.

♦ Some claimed, as section 17(5) included the words “in respect of”, credit in relation to motor vehicles, i.e. repairs & maintenance & insurance are ineligible.

Although, I opine, the word “namely” used in the same section, confirms that ITC is restricted specifically to those listed below, and cannot be said to be applicable on ITC on other related credits.

It could also be argued that as the ITC on the same is being restricted now under GST w.e.f 1st February 2019 onwards, i.e. the ITC was eligible from July 2017 – January 2019.

ITC on various other goods & services

(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.”

We have summarised the above in a simple manner below:

1. Leasing, renting or hiring of motor vehicles, vessels or aircraft

2. Food and beverages

3. Outdoor catering

4. Beauty treatment

5. Health services

6. Cosmetic and plastic surgery

7. Health Insurance

8. Life Insurance

9. Membership of club, health & fitness centre

10. Travel benefits extended to employees on vacation. (Ex: LTA)

ITC is only eligible

Notes:

1) *Used for Outward Supply

Where the inward supply is used even as element of a composite or mixed supply, the credit would be eligible.

For example: Outdoor catering services obtained as inward supply by a Training Academy.

Training academy charges Rs. 5,000 + GST per delegate for Training along with free lunch.

Whether the ITC on outdoor catering is eligible? – Yes, as it is an element of the composite supply, i.e. training services.

 2) ^ Obligatory for employer to provide to employee

There are certain state and central laws which require an employer to provide certain facilities to employees. Where the same are obligatory in nature, the credit on the same would be eligible to the employer. Few possible examples have been listed below:

♦ Section 46 of Factories Act 1948 – State governments may notify mandatory requirement of maintaining canteen for factories within more than 250 workers. (Applicable in Karnataka). The food & beverages/canteen services procured would be eligible in such instances.

♦ Karnataka Factories Rules, 1969 – Mandatory free transport of women workers to be provided where they work upto 10 pm. The hiring or renting of motor vehicle be eligible in such instances.

Employees Deposit Linked Insurance Scheme (EDLI), 1976 is mandatory for employees who are registered under Employee Provident Fund (PF). Where it is mandatory for the employer to provide PF and EDLI to their employees, the credit on Life Insurance under EDLI would be eligible.

3) #Vehicles Vessels, Aircrafts covered are as below:

  • Motor vehicle – goods
  • Motor vehicle – passengers – seating capacity > 13.
  • Motor vehicle – passengers – satisfies approved conditions
  • Vessels & aircrafts – satisfies approved conditions

It would be important to note, the ITC eligibility is linked to Section 16 r/w Rule 36, wherein the requirement to possess a tax invoice with contents which as consistent with Rule 46, and receipt of goods/services, etc., is mandatory to be able to claim the eligible ITC.

Note, the other section under Section 17(5) have not been substituted, and would continue to remain the same.

Conclusion:

The amendments provide some transparency and clarity in the ITC ineligibility under GST. Although, the additions in the ineligible credits, puts a dent in the concept of seamless credit.

Therefore, all ITC appearing in GSTR-2A (report on vendor filed GSTR 1), cannot be considered as eligible ITC. The restrictions under Section 17(5) and documentation requirements under Rule 36 are to be re-verified to ensure compliance under GST and avoidance unnecessary burden of interest/penalty.

The government has put many restrictions in the law considering the nature and track record of the Indian population. Either we as Indians become compliant under the law, which will in turn reduce our tax liability as a whole, or the government, must take the leap of faith and simplify the law to enable a larger population to be compliant.

The author could be reached at akshay@hiregange.com, vetted by CA Mahadev R.

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36 Comments

  1. Harsh Mishra says:

    I want to ask that whether a motor vehicle having seating capacity more than 13 passengers used for personal use is eligible for input credit or not??

  2. Anil Kumar Saini says:

    We have taken a Insurance Policy from LIC for Gratuity of employee.
    Can we take ITC of GST paid on Insurance premium paid for gratuity.

    1. Akshay Hiregange says:

      Dear Anil,

      Great question. Only health and life insurance is restricted under section 17(5), therefore, tax on insurance premium on gratuity would be fully eligible.

  3. Max Manish Kujur says:

    Dear Sir,

    We are ,ECGC Ltd, credit insurance co. Assets & equipments bought for office use.

    being a specialized insurance sector.Can we claim ITC on those goods??

    1. Akshay Hiregange says:

      Dear Max Manish,

      It would not matter if you are a insurance Co. or any other co. Assets & equipments would be eligible for credit when used in the course or furtherance of business. Few of them are specifically restricted under 17(5), please have a look at the article.

  4. Harneet singh says:

    Hello sir,
    I need a little clarification. The rule that mentions that a company that provides transport of passengers can claim ITC. And further it states that only vehicles that have a capacity of 13 passengers or more are eligible.
    So my question is I have a car rental firm and have 5 seater and 7 seater cars so I cannot claim ITC on the new cars purchased for business purpose ?

    1. Akshay says:

      Dear Harneet,

      Your case would not be covered under exception of “transport of passengers” as that is for public transport where a fee is collected for transport only. Rent a cab services would not be covered here. Although, you could be covered under clause (a) – further supply of such motor vehicle, where supply could include goods/services. Ensure your rate is 12% and not 5% to enable ITC claim. Suggest to obtain a written opinion in this regard as there as opposing Advance Rulings.

  5. vishek thapa says:

    Dear Sir,

    Sir I provide tent and decoration for birthday and wedding party and I pay GST for that, I use to hire Hire pickup and truck from transport company it is expensive, now I want to purchase pickup for tent loading can I get benefit GST on purchasing Pickup, if I buy in my GST firm.

    1. Akshay says:

      Dear Vishek,

      By pick-up i understand a goods transport vehicle, which would be classified under HSN 8704. If it is then, ITC on such pick up vehicle would be eligible where utilised to provide taxable outward supply. For your services assumed outward rate – 18%.

  6. kirpal singh says:

    Sir, Can We take GST input on car purchase for self for the year 2017-18. and kindly inform the date of ineligibility on car purchase for personal use.

    1. Akshay says:

      Dear Mr. Kirpal,
      Car used for personal use would always be ineligible owing to restriction under Section 17(5).
      Where the motor vehicle is having 13 or more seating capacity, and used for or in the course of furtherance of business, ITC would be eligible.
      In your case, ITC on car would not be eligible, although can be added to cost and depreciation could be claimed.

  7. Khageswar Gahir says:

    I am a tax free goods supplier, I’m not taken itc on raw materials but can i claim itc on capital goods or not. If yes how to adjust itc bcoz I’m supplying taxfree goods.

    1. Akshay M Hiregange says:

      Notification 2/2019 dated 29th January 2019.
      Please note, section 17 mentioned therein, refers to Section 17 of CGST Amendment Act (2018), and not Section 17 of CGST Act 2017.

    1. AkshayH says:

      Dear Ashish,

      Input tax credit on renting or hiring of motor vehicle for transportation of persons (not passengers) restricted even after the amendment in CGST Act.

      Exception: Input tax credit can be availed if it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

    1. Akshay M Hiregange says:

      Yes Ranjeet. Although, GTA would generally avail 5% outward supply rate. As per notification 11/2017-Central Tax(Rate), where a supplier uses 5% rate – ITC in relation to goods (input & capital goods) and services would not be eligible.
      Option of 12% outward rate with full ITC eligibility could be explored – suggest to get a cost benefit analysis done.

      1. SAURABH MODI says:

        Dear Akshay,

        Can the ITC on Purchase of Motor Vehicles be taken by GTA Company where the GST on Transportation is being paid under RCM but GST on Loading & Unloading Charges are being paid under NCM.

        1. Akshay M Hiregange says:

          Dear Mr. Saurabh,

          It could be disputed that the vehicle is not used for loading and unloading activity and as no GST paid on transport credit could be disallowed.
          Where it can be proved as a common credit towards RCM & NCM, ITC would be eligible proportionately.

  8. ramansingl28 says:

    Kindly reply point to point
    I am manufacturer/trader of Taxable goods and use the four wheeler for supplies of taxable goods only

    a) Is GST ITC on purchase of four wheeler eligible ?
    b) Is GST ITC on maintenance of four wheeler eligible ?
    c) Is GST ITC on insurance of four wheeler eligible ?

  9. Raman Singla says:

    Kindly reply in layman language….if possible point to point
    Case 1- I am a trader of taxable goods and i purchased four wheeler for supply of taxable goods….
    a) Is GST ITC on purchase of four wheeler eligible ?
    b) Is GST ITC on maintenance of four wheeler eligible ?
    c) Is GST ITC on insurance of four wheeler eligible ?

    Case 2- I am a manufacturer of taxable goods and i purchased four wheeler for supply of taxable goods….
    a) Is GST ITC on purchase of four wheeler eligible ?
    b) Is GST ITC on maintenance of four wheeler eligible ?
    c) Is GST ITC on insurance of four wheeler eligible ?

    1. Akshay says:

      For all your cases –
      Whether it is for transport of taxable goods? – If yes, then ITC eligible on purchase, repairs & insurance. or;
      Whether it is a motor vehicle with approved seating capacity more than 13? – If yes, then ITC eligible on purchase, repairs & insurance.
      Please email me if further doubts.

      1. vikash says:

        sir, i am traders of taxable goods, i purchased pickup van from door delivery goods supply. so can i avail input for this vehicle.

    2. Akshay says:

      ITC would be eligible subject to following conditions:
      Whether for transport of taxable goods? – If yes, ITC eligible on motor vehicle purchase, repairs & insurance.
      Motor vehicle to be registered as a goods transport vehicle and not passenger transport/personal vehicle.
      For further doubts, please email me.

  10. MIRZA123 says:

    QUESTION:- SIR THERE IS COMPANY WHICH DEAL IN SERVICE WORK,COMPANY PROVIDE BIKES TO FIELD WORKER, COMPANY ARE REGISTERED UNDER GST.
    ARE INPUT FOR GST IS ELIGIBLE WHEN COMPANY BUY NEW BIKE FOR A NEW FIELD WORKER?

    1. Akshay says:

      Two wheelers are covered under “Motor Vehicles”. Here the credit would not be eligible even if used for business, as specific restriction available under 17(5)(a).

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