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The Central Board of Indirect Tax and Customs (CBIC) issued a Circular 172/04/2022-GST yesterday clarifying the ambiguities related to Ineligible Credits.

As per the Section 17(5) of the CGST Act, 2017 certain credits are declared as Ineligible and the Assessee cannot claim Input Tax Credit (ITC) for those taxes paid to the supplier of such services/goods.

In Section 17(5)(b) there are two provisos given in the CGST Act, 2017 as reproduced below

“(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.”

There is a Proviso after sub-clause (i) and another Proviso after sub-Clause (ii) & (iii) given in the Section 17(5)(b) of CGST Act, 2017.

The general interpretation of the above clause till date is that the second proviso is applicable only for sub-clause (ii) & (iii) and not applicable for sub-clause (i) since there is another Proviso exclusively given for sub-clause (i)

There were debates going on for a very long period, that sub-clause (i) also can be considered under Second Proviso.

Ineligible Credits after recent GST Circular dated 06th July 2022

Already GST Council issued a Press note after 28th GST Council meeting held on 21.07.2017 which clarifies that whatever obligation for an employer to provide certain services to his employees, he can avail ITC even though it was blocked under Section 17(5).

However, that is only a Press Note which has no legal back up, Tax Payers are left with uncertainty whether they can claim the ITC or not.

Now the CBIC circular released on 06.07.2022 gives a clarification as under.

“ ….it is clarified 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.”

With this clarification the long pending confusion got cleared, as the Tax Payers are entitled to claim ITC for any services which are blocked under Section 17(5) of the CGST Act, 2017, if such services are mandatory to be provided as obligatory under any law in force.

Thus Canteen Services, Catering Services, Hiring of Cabs for Women Employees, to employees in the Factory Premises as mandated by Factory Act, 1948 is now becomes eligible to claim ITC.

There is no need of Reversal of ITC for already taken for such services, as this is a Clarification Circular for the existing Proviso of the CGST Act.

Hope the above will clear the ambiguities in Sec 17(5)(b) of the CGST Act, 2017

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May 2024