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    BLOCKED CREDITS

    Introduction: 

    In general, Supplier is liable for payment of Goods and Services Tax on the outward Supplies he made during a period of time by filing the required returns as per Sec 39 of the Central Goods and Services Tax Act,2017 (herein after referred to as CGST Act,2017). At the time of payment, he is provided an option for utilization of taxes paid on purchase of inputs or input services or both which are used against the output tax liability and balance to be paid in cash.

    Section 16(1) of the CGST Act,2017 provides for various conditions to be satisfied in order to claim input tax credit. However, Section 17(5) states that “notwithstanding anything contained in Section 16(1) of the CGST Act,2017 input tax credit (here in after referred to as ITC) shall not be availed in respect of following transactions”. So, the main objective of this article is to understand the list of transactions specified under Section 17(5) on which credit is not allowed to be adjusted against outward supplies. These are also called blocked credits which include the following;

    • Motor vehicles and other conveyances except when they are used for making –
      1. Further supply of such vehicles or conveyances; or
      2. Transportation of passengers; or
    • Imparting training on driving, flying, navigating such vehicles or conveyances;
    1. Transportation of goods.

     

    The above clause makes it clear that when the motor vehicles or other conveyances are used for business, credit is ineligible. However, when we are in the business relating to dealing in/with Motor vehicles or other conveyances credit is eligible. The above clause makes it clear about the credit eligibility regarding purchase of motor vehicles.

    However, section 17(5) uses the language ‘ITC shall not be availed in respect of’ which means that ITC is denied if it is in respect of motor vehicles. Does this mean that ITC availed on purchase or lease motor vehicles alone is denied or the ITC in respect of transactions related to motor vehicles like vehicle insurance, repairs etc are also restricted? The phrase “in respect of “is open to multiple interpretations. Hence ITC eligibility in respect of these transactions is ambiguous.

    Examples:

     

    i)

    A Businessman purchases car for the purpose of his business

    - Credit isIneligible

    ii)

    A dealer of cars purchases a car in the course of his business

    - Credit is Eligible

    Iii) A company dealing in manufacture of goods purchases a lorry

     

     

    for transportation of goods

    -Credit is Eligible

      

    • Credit on supply of the following is blocked:
      1. Food and beverages, outdoor catering and

     

    1. beauty treatment, health services, cosmetic and Plastic surgery except where they are used for making the same category of outward supply.

     

    Examples:

    1. i) Provision of food to employees by a corporate entity -Credit is Ineligible
    2. ii) A Hotel purchasing provisions for making an

    outward supply of food                                                                                             - Credit is Eligible

     

    • Membership to any club, health and fitness centre is specifically blocked.

     

    Example:

     

    1. i) Partner of a firm took membership in Lions club -Credit is ineligible *Further, no exceptions are provided for it.

     

    • ITC on the following services is not eligible

     

    1. Rent-a-cab- For the Services procured from a rent a cab operator credit is not eligible. However, as the term cab is not defined in the GST law, we can adopt the definition from Motor Vehicles Act 1988, the term motor cab is defined “as any motor vehicle construed or adopted to carry not more than 6 passengers excluding driver, for hire or reward”. From the above definition, it is clear that ITC on hiring of a bus is eligible as the term bus doesn’t fall under the definition of Cab.

     

    1. Life insurance- Any life insurance services procured by any entity for any person in the entity, ITC is not eligible.

     

    • Health insurance- Any health insurance services procured by any entity for any person in the entity, ITC is not eligible.

     

    Exceptions:

     

    1. Where the government notifies the services, which are obligatory for an employer to provide to his employees under any law in force.

     

    1. The above supplies are used for making the same category of outward supplies.

     

    Examples:

     

    1. I) Director of a company book a cab(Uber) from office to airport for his business trip- ITC on Uber services is not eligible whereas the ITC on flight tickets is eligible

     

    1. An employer providing life insurance services to his employees- ITC is not eligible, if the government notifies that the life insurance is must for the Key person in the business then ITC can be availed.

     

    • Employer providing travel benefits to employees on vacation such as leave or home travel concession, then inputs used for such employee benefits is not allowed to be claimed as Credit. Example:

     

    The business trip of an employee is later extended as a vacation for few more days, credit on expenses incurred for business trip is allowed and the credit on expenses incurred for vacation is not allowed but proper records are to maintained showing the distinction of expenses. Otherwise, the entire credit is blocked.

     

     

    • Credit on works contract services for construction of an immovable property is not allowed excep when the said input service is used for

     

    1. For further supply of works contract service,
    2. For construction of a plant and machinery

     

    The term works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property which involves both supply of goods and services and the title in the goods shall pass to the owner.

    Example:

    XYZ Manufacturers are constructing their office building. For this purpose, they have given works contract to PQR Constructions. To execute the construction, PQR constructions has sub-contracted a portion of the work to ABC Works. In this example, XYZ Manufacturers cannot claim ITC of works contracts services whereas PQR can claim ITC of the said services. 

    In the above example, let us assume that the construction undertaken is of plant and machinery, then ITC can be claimed even by the XYZ Manufacturers. 

    • ITC is restricted when 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 even in the course or furtherance of business. 

    The term own account here refers to construction of an immovable property or plant and machinery by an entity for its own business.

    Examples:

    1. i) ABC Ltd. constructs on their own an office building for its headquarters-ITC not allowed.
    2. ii) ABC Ltd also constructs a machinery for manufacturing of steel- ITC is allowed

    For the purpose of the above clause (6) and (7) the term 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—

     

    1. Land, building or any other civil structures;
    2. Telecommunication towers; and
    3. Pipelines laid outside the factory premises.

     

    • No ITC would be available to the person who has made the payment of tax under composition scheme in GST law. 

    Composition Taxable person is a person who pays the tax on a concessional rate at a very low rate compared to the general slab rates. ITC to such person is not allowed as he is already enjoying the privilege of paying taxes at a lower rate.

    • ITC cannot be availed on goods/services received by a non-resident taxable person. ITC is only available on any goods imported by him.

    Example:

    Mr. A, Jewellery businessman who is a Non-resident came to India to sell jewellery in an exhibition held in India. In the course of his business he purchased certain jewellery in India and also imported from his country. ITC is not allowed for the goods he purchased in India. With respect to imports, ITC is allowed.

    • No ITC will be available for the goods/ services used for personal purpose and not for business purposes.
    • No ITC is available for goods lost, stolen, destroyed, written off or given off as gift or free samples.
    • No ITC in fraud cases where

    Any taxes paid in accordance with the provisions of sections 74, 129 and 130

    .?Sec74-Determination of tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts. 

    ?Sec129-Detention, seizure and release of goods and conveyances in Transit. ?Sec130-Confiscation of goods and/or conveyances and levy of penalty.

    Conclusion:

    From an entity point of view, apart from the above list of transactions on which credit is not eligible, there are another set of hidden ineligible credits in the form of taxes paid for purchase of petrol or diesel and electricity on which we have been paid VAT (as petrol, diesel and electricity are yet to be fall under GST upon recommendations of the GST council)and the same cannot be taken as credit as VAT cannot be adjusted against GST. In view of this reason, for a heavy manufacturing entity which involves heavy consumption of electricity to run machines and bulk consumption of fuel for transportation of goods, the ineligible credits is a burden and accordingly added to the cost.

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