Section 17 | Apportionment of credit & blocked credit | Simplified

Section 17- Apportionment of credit & blocked credit

(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act, and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Explanation.—For the purposes of this sub-section, the expression “‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule

(4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year.

Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

Analysis – The input tax credit eligibility is based on the fact as to whether the goods or services or both are used for taxable supplies or exempt supplies. Where the goods or service or both are used for both taxable and exempted supplies, only proportionate credit is allowed to a registered person.

• Proportionate credit: ITC based on usage in business- In simple words use of Input tax credit for business purpose, ITC Available and for other purpose ITC not available. Attribution of ITC to be made as per Rule 42 of CGST RULES, 2017.
• ITC used partly for Taxable supplies including zero rated supply and partly for Non-taxable, Nil Rated and exempt supply so attribution of ITC to be made as per rule 42 of CGST RULES 2017.
• Definition of Exempt Supply- It is very interesting to note that although an exempt supply is defined in section 2(47), section 17(3) read with explanation (2) in rule 45 for purposes of input tax credit reversal includes the following transactions as well –

a. Tax paid under reverse charge

b. Transaction in securities

c. Sale of land and sale of building subject to clause (b) of Paragraph 5 of Schedule II.

√ Point to be noted that the value of supplies in respect of which the outward supplier is not liable to pay tax but the recipient is made liable to pay tax under Sections 9(3) and 5(3) of the CGST and IGST Act respectively, would be regarded as ‘exempt supplies’ for the limited purpose of determining net available input tax credit. In this context, it would be relevant to note that Section 17(3) identifies supplies attracting reverse charge to be an exempt supply in the hands of the supplier effecting such supplies and not in the hands of the recipient who avails such services liable under reverse charge.

√ Transactions listed in schedule III are “NOT SUPPLIES” and hence they are neither ‘exempt supplies’ nor are they ‘non-taxable supplies’

√ An explanation has been added to Section 17(3) to provide that value of exempt supplies shall not include transactions listed under Schedule III (Transactions which are treated “neither as a supply of goods nor a supply of services”) except sale of Land and Completed Building.

• In case of banking and financial institution option available to them either apportion ITC as per rule 42 of CGST RULES or avail every month amount equivalent to 50 % of eligible ITC.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following namely:-

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely: —

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

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

(i) for making the following taxable supplies, namely:—

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;

(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):

Provided that the input tax credit in respect of such services shall be available—

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

(ii) where received by a taxable person engaged—

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

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

(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 to its employees under any law for the time being in force.

 (c) works contract services when supplied for construction of immovable property, (other than plant and machinery), except where it is an input service for further supply of works contract service

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account, including when such goods or services or both are used in the course or furtherance of business;

Explanation. – For the purpose of clause (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

i) any tax paid in accordance with the provisions of sections 74, 129 and 130 .

(6) The Government may prescribe the manner in which the credit referred to in sub-sections (1) and (2) may be attributed.

• Analysis of Blocked credit-  Motor Vehicles-  

Similar conditions prescribed for Aircraft and Vessel. Additionally, Aircraft and Vessel used for transport of goods will also be eligible purchases for credit availment.

• In certain specified cases credit is blocked unless they are used in making a further outward supply as such or as an element of a composite or mixed supply-

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√ As per amended section 17(5), input tax credit of all above services shall be eligible if it is obligatory on the part of employer to provide the same to its employees under any law for the time being in force. For E.g. Credit of GST paid on outdoor catering services used in factory may be allowed after effective date, as Factories Act made it compulsory to provide canteen services if factory has certain no of employees. Earlier, this credit was not allowed.

√ Although credit is restricted on the above supplies, credit would still be allowed if they are used for effecting further taxable supply of the same category; or as an element of a taxable composite or mixed supply.

• Construction of Immovable Property (other than plant & machinery)- Work contract services except where it is an input service for further supply of work contract service and goods or services received by taxable person for construction of an immovable property on his own account even when used in course or furtherance of business- ITC not available. “Construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.
• So what does it mean??? It means if not capitalised you can claim ITC, Yes you can claim but keep in mind you have to distinguish between capital expenditure and revenue expenditure.
• Self construction- Inward supply of goods or services for construction of an immovable property for ‘own use’ would also not be eligible for input tax credit. This restriction applies even when such immovable property is used in the course or in furtherance of business. Understanding the scope of ‘immovable property’ is very important. Immovable property is well understood to be land and building but it also includes everything that is attached to or forming part of the land and rights-in-land. Credit is blocked on all inward supplies leading to the establishment of such immovable property. Credit is blocked on all inward supplies leading to the establishment of such immovable property. Inward supply of services from real estate agent, architect, interior decorators and contractors are all blocked as these are involved in the establishment of the immovable property. But, if inward supplies such as security, house-keeping and property maintenance are used after construction, then such credits are not blocked as these are received after establishment of the immovable property
• Goods or services or both on which tax has been paid under Section 10- Section 10(4) provides the conditions to be fulfilled for a person falling under composition scheme, with respect of input tax credit. One of the conditions state that a person opting for the composition scheme should not collect any taxes from the recipient. As no taxes are paid by the recipient, no input tax credit can be availed by them either.
• Goods or services or both received by a non-resident taxable person except on goods imported by him- A non-resident taxable person (NRTP) is a person who temporarily supplies any goods or services within India even though they are not a resident of the taxable territory. In respect of the goods or services received within India, no input tax credit can be availed by them. However, they are free to avail the input tax credit of the goods imported by them from outside India.
• Personal consumption- Now what is personal consumption?? There must be some nexus between credit availed and outward supply. This clause provides a check to see if the ‘immediate and ultimate’ use or consumption any item is personal benefit to the person (employee or director or any person who can consume on behalf) or not then credit not available but if ultimate benefit to company then credit available. Example- Inward supplies by company such as raw-material, capital goods including computers, air-conditioning, work areas, factory and office building taken on lease, flight tickets, hotel accommodation, etc. are creditable by the company even though they are for ‘immediate’ consumption by employees, they are for ‘ultimate’ benefit by company.
• Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples- Input A is converted into output B But if output B destroyed by fire then ITC claimed on Input A is liable to be reversed. Section 16 (1) clearly states that ITC can be claimed if used in course or furtherance of business, Simple No use No ITC.

> Lost means goods are missing not traceable.

> Stolen means goods found to be lower upon physical verification.

> Destroyed – Any goods which get destructed due to any natural calamity like flood, earthquake or a man-made event like fire, water leakage etc

> Written off – If any goods are having a certain value as per the books of accounts but are completely written off due to any reason such as obsolescence or lapse of time

> Disposed off by way of gift or free samples- Disposed off means to get rid off-unfit for sale- by way of gift or free sample– Gift means if it is irrevocable and free samples indicates delivery of goods for use or consumption on non-contractual basis.

> Some examples- Prescription drug samples marked ‘Physician’s sample not to be sold’

• Any taxes paid in accordance with the provisions of Sections 74, 129 and 130-

Section 74 talks about payment of taxes in a situation where taxes is not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of “fraud or wilful misstatement or suppression of facts”

Section 129 talks about detention, seizure and release of goods and conveyance in transit.

Further, Section 130 mentions about confiscation of goods and/or conveyance and levy of penalty. In above cases if any payment is made by any person under these sections, no input tax credit in respect of these will be available.

For any queries/doubts, author can be reached at [email protected] . Have a nice day ….