Ineligible Input Tax Credit or Block Credits Under GST

Section 16 of CGST ACT prescribed Input tax credit and Section 17 of CGST ACT Prescribed Apportionment of credit and blocked credits.

Apportionment of credit and blocked credits means situations where, in input tax credit under GST is not available. These situations have been enumerated in section 17 of the central goods & services act 2017.
We shall discuss them through this article:

Cases when ITC is unavailable under GST

1.) When a registered person is using goods or services for both business & non-business purpose

Credit of GST paid on goods & services used for non-business purpose shall not be available.

For Example Mr A purchases 100 meter of cloth on which GST of Rs 10,000 has been paid. 75 meter of that cloth is used by him for making shirts for his Clients & 25 meter is used by him for his household/personal purpose. Now out of GST of Rs 10,000 paid by Mr. A, Credit of Rs 2500 will not be available to him.

2.) When a registered person is using goods or services for making taxable & Exempt Supply

Credit of GST paid on goods & services used for making exempt supply will not be available.

Exports & supply of Goods or services to SEZ is counted as zero rated supply. Credit of GST paid on goods & services used for making zero rated supply will be available.

For Example Mr A purchases 100 meter of cloth on which GST of Rs 10,000 has been paid. 75 meter of that cloth is used by him for making shirts for his Clients out of which some shirts are also exported & 25 meter is used by him for making army uniform, which is a exempt supply. Now out of GST of Rs 10,000 paid by Mr. A, Credit of Rs 2500 will not be available to him.

3.) Purchase of motor vehicles & other conveyance

ITC is not available on purchase of motor vehicles & other conveyance. There are few exceptions to this.

– When motor vehicles & other conveyance are used for further providing supply of such vehicles or conveyances

For example when a car is purchased by a dealer & further sold to a consumer for use, ITC of GST in respect of that car will be available to the dealer.

– When motor vehicles & other conveyance are used for further providing services of transportation of passengers

For example when a car is purchased by UBER for providing services of transportation of passengers.

– When motor vehicles & other conveyance are used for imparting training on driving, flying, navigating such vehicles or conveyances;

For example when a car is purchased by driving school for providing driving training.

– When motor vehicles & other conveyance are used for transportation of goods.

For example when a truck is purchased by a GTA for providing transportation service.

4.) Food and beverages, outdoor catering, beauty treatment, health services, cosmetic, plastic surgery, membership of a club, health and fitness centre, rent-a-cab, life insurance and health insurance except when they are used as input for providing same category of service.
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Section 17 of CGST ACT, Apportionment of credit and blocked credits

5.) Travel benefits extended to employees on vacation such as leave or home travel concession

6.) GST paid on works contract services, goods & services used in relation of Immovable Property except when they are used for providing output service.

For Example when a DLF is paying GST on works contract service used for construction of Flats for further sale, the same can be utilized by him for setting off his output liability.

Now when works contract service is used by DLF to make its office, GST paid on it will not be available as input credit.

Balance Sheet as on XX/XX/XXXX

DLF Ltd

The expression construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

For the purposes of this Chapter and Chapter VI, the expression plant and machinery means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises

7.) Goods or services or both on which tax has been paid under composition scheme

8.) Goods or services or both received by a non-resident taxable person except on goods imported by him;

9.) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

10.) Any tax paid in accordance with the provisions of sections 74, 129 and 130 of Central goods & service Tax Act (These sections are related to assessment in GST Act)

For Example Suppose Mr A has done evasion of Tax Evasion of Rs. 20,00,000 & the same is caught by Assessing Officer. He shall not be allowed to use input tax credit for payment of this tax liability. Similary input tax credit cannot be used for payment of any interest or penalty levied in this act.

11. 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.

Extracts of Section 17 of CGST ACT, Apportionment of credit and blocked credits.

17. (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.

(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.

(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 and other conveyances except when they are used

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

(A) further supply of such vehicles or conveyances ; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

(b) the following supply of goods or services or both

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category 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;

(iii) rent-a-cab, life insurance and health insurance except where

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;

(c) works contract services when supplied for construction of an 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 or 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 purposes of clauses (c) and (d), the expression construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, 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.

Explanation. For the purposes of this Chapter and Chapter VI, the expression plant and machinery means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

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Section 17 of CGST ACT, Apportionment of credit and blocked credits

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