Understanding ineligible or block input tax credit (ITC) is as important as learning the conditions of eligibility of input tax credit (ITC). A taxpayer should also be aware where the GST Act restricts you from availing input tax credit in your returns else you can lend yourself in reversal of input tax credit along with interest and penalty.
In this post, I will discuss a few points as per Section 17(5) of the GST Act so that you can avoid availing block input tax credit.
It is very important the aspects of Section 17(5) to avoid unnecessary notice from the GST department. This post will help you to do so. I want to give you an overview of this Section, which blocks the availment of input tax credit (ITC) on self-consumption, non-business expenses, composition taxable person, non-resident taxable person, travel benefits, works contract. We will discuss each part in detail.
Section 17(5) as per GST Act
17. Apportionment of credit and blocked credits.— (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (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 center; 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.
(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.
What Section 17(5) says in simple terms
You cannot avail and utilize the input tax credit on these inputs or input services: –
- Purchase of Motor vehicle
- Vessels and Aircraft
- Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft
- Membership of a club, health and fitness center;
- works contract services for personal purposes,
- Gift or sample
- Travel or home benefits for employees
- When you set up a manufacturing plant for other purposes, then you cannot avail ITC on civil structure, telecommunication towers, and pipelines laid outside the factory premises
This section does block input tax credit but also gives exceptions. You can always take credit on your inputs or input services if the same is used for furtherance of your business. Your business cannot be run without those specific inputs or input services. Actually, you need them so that further you can run your business.
Explained with Examples
But, generally taxpayers avail input tax credit without evaluating the business they are into. Example-1, Suppose, You build a factory for manufacturing of plastic bottles, you can only avail input tax credit on raw materials like plastics and capital goods like molds, as they are in relation or furtherance of your business. You cannot avail credit on building of civil structure or related works contract service as that is not considered for your furtherance of business.
Example -2: You are into the IT software development business. You can avail input tax credit on related inputs and input services which help you in further running your business. You cannot avail input credit on vehicle purchase, food beverages as those are ordered for personal consumption not for business purposes, travel expenses if not related to business, hotel accommodation if not related to business, gift to employees, cannot avail on civil structure or construction work.
You can avail input tax credit on inputs like laptop, accessories, rent paid, maintenance services, security services and similar services as they are related and required to smooth run of your IT business. You can also avail credit on insurance provided by you to your employees as it is a necessity and comes under employees welfare.
Example-3: if you are a builder and intend to build a flat and sell it to others. You can also avail input tax credit on works contract services as you need those services to construct and sell the flat. But, if you are registered under GST and give contract to the builder for construction of your own house, you are not entitled to avail.
However, the GST Council has made changes for developers of apartments. GST on services of construction of an apartment by a developer at the rate of 1% on affordable housing and 5% on premium housing is to be discharged in cash only. ITC, if any, may be used for discharging any other supply of service. This now it is restricted to avail ITC on construction services. It is implemented for the projects started on or after 01.04.2019.
You need to learn a simple trick in this. No input tax credit should be availed if it is related to “personal consumption”. Otherwise you are allowed to avail ITC.
Final Thoughts
Now, the question arises, Why cannot credit be available if you build a factory for manufacturing of any goods as it is related to business only? Section 17(5)(d), states that the construction of immovable property (civil structure) is built on his account including for furtherance of business also, you are not allowed to avail ITC.
Here, “on his account” is not specifically mentioned but in general, it is meant for personal use or consumption or from your own pocket. You can avail input credit on plant and machinery but not civil structure construction. In this scenario, your business is considered as manufacturing, not construction work.
I think these examples will definitely help in determining the eligible input tax credit that can be availed in your GST returns under GST Act. Just note down, every input tax credit should be in-relation to the furtherance of your business.
Read more – Consider these factors for claiming Credit under GST Act
Follow my blog – finbloom.in to know the penalties under GST if any Section is violated or avail wrong input tax credit. I will post separately on this topic.
