Ineligible Input Tax Credit Under GST

Goods and Services Tax (GST) , implemented in 2017 on the sale of all goods and services within India, replaces VAT (Value Added Tax) . GST rules, though applicable on all stages of production, enable all intermediary parties to claim a refund except the final consumer through a mechanism called Input Tax Credit (ITC). There are several items that qualify under eligible and ineligible input tax credit and GST rules define blocked credit under gst items on which ITC cannot be claimed on purchase.Let us understand the ineligible itc goods and services mentioned in the GST rulebook.

Input Tax Credit is not available for motor vehicles with a seating capacity of less than or equal to 13 persons (including the driver) used for transportation of people. Navigation facilities such as vessels and aircrafts have also been blocked credit in gst. Therefore, if an organisation buys a luxury car, a yacht, or an aircraft for its leadership team, then it cannot claim ITC for the GST of those purchases. However, there are following exceptions to the rule of ITC on motor vehicles:

• Supplying other vehicles, conveyances, aircrafts, and vessels If a motor vehicle is used to transport another vehicle, aircraft, and vessel or a part of a vehicle to be finally assembled into a complete product, then the business can claim ITC. This refers to any entity which is involved in manufacturing of motor vehicles/aircrafts/vessels and their further distribution for sales as well as after sales service. For instance, if an automobile dealer purchases a vehicle from an automobile manufacturer and later sells it for a profit, then he can claim ITC on the sale of that vehicle. Another example would be of a vendor who buys a vehicle for transporting specific parts of an aircraft to an aircraft manufacturer. The vendor can claim ITC for the GST on the purchase of the vehicle.
• Passenger transportation If an organisation purchases a vehicle specially for moving passengers from one place to another either for official or recreational purposes, then the organisation can claim ITC on that purchase. For example, XYZ is a tour and travel company and it uses a vehicle for transporting tourists. Another example would be ABC Ltd. which offers vehicles for transportation of daily office goers of numerous companies. Here, both XYZ and ABC can claim ITC for the GST on the purchase of their vehicles and, therefore, these are not in the gst block credit list.
• Training to navigate vehicles, vessels, and aircrafts Any organisation that has purchased vehicles, vessels or aircrafts with the sole intent of imparting training on driving can claim ITC on their purchases. For instance, Company D, a flight school involved in training and certifying pilots for aeroplanes can claim ITC for the purchase of their aeroplanes. Similarly, Company B, a motor driving school can claim ITC and is not in the block credit under gst.
• Goods transportation Any company that is not a Goods Transport Agency (GTA) but involved in transporting goods can claim ITC on the purchase of a vehicle. This generally refers to individual truck or tempo owners who transport goods but do not issue a consignment note, and therefore not covered under the definition of a GTA.To summarise, ITC cannot be claimed by an organisation simply for the purchase of a vehicle, aircraft, or a vessel unless the organisation is not in the business of automobile, transportation of passengers/goods, or providing training on how to drive a vehicle.

Also Read: Tax Deducted At Source: Meaning, Returns, Filing And Due Dates

Food and beverages and outdoor catering is in the list of ineligible itc under gst. However, an organisation for which the inward and the outward supply is in the same category, i.e. essentially, the company is in the business of providing food, beverages, and outdoor catering is exempted from the above rule. Therefore, it means that if a paint manufacturer arranges a pizza party for its employees, it cannot claim ITC on the GST of the pizza order. However, a caterer who is in the business of providing catering services is not in the gst block credit list and, therefore, can claim ITC for the GST incurred on the purchase of raw materials.

Organisations cannot claim ITC for the GST on the purchase of goods and services towards beauty treatment, health services, cosmetic surgery, and plastic surgery. The exception is organisations for which the inward and the outward category is the same. Since, these are in the same business, they can claim ITC. For instance, an FMCG manufacturer cannot claim ITC on the purchase of a beauty and wellness package for its employees, however, a spa and wellness saloon is not in the block credit list under gst and can claim a refund through ITC.

Buying a membership of a club, health, and fitness centre is in the list of ineligible itc in gst as defined by the GST act. So, if an organisation X pays for the gymnasium membership of its employees, it cannot claim ITC on the same. Similarly, any organisation cannot claim ITC for the club membership fees paid for its top management.

Leasing a cab and insurance premiums for health are under ineligible itc items. There are two exceptions:

• Government mandate If a government specifies that the service is obligatory for the employer towards its employees, then ITC can be claimed for the same. Consider a scenario where the government enacts a law for providing cab services to all employees aged more than 45. In that case, the organisation can claim ITC for the GST incurred on the purchase of cab leasing services.
• Same category of inward and outward supply Any organisation that is in the business of providing cab rental services as well as insurance can claim ITC. Suppose there is an insurance company G which outsources its complete onboarding and documentation process to a different company H and G pays H a fixed amount per policy. In this scenario, company G can claim a refund through ITC on the expenses incurred for its onboarding and documentation.

Any travel benefits provided by an organisation to its employees such as leave or home travel concession is in the list of blocked credit under gst for which ITC cannot be claimed. Consider a case where a company provides an end-to-end travel package for its employees for its annual offsite retreat. The company cannot claim ITC in that case. Also, if an employee avails of leave travel concession (LTA) benefits for travelling out of town, the employer cannot avail of ITC benefits.

No ITC can be claimed for goods and services purchase of a works contract for an immovable property (except machinery and plant). An exception to this rule is that if the works contract for constructing an immovable property serves as an input for another works contract, then it is eligible for ITC. Suppose, a real estate developer gets a flat constructed for its customers through a subcontract by hiring company Z, then the developer can claim ITC on the GST charged by the sub-contractor. Another case would be a construction company manufacturing a corporate office for a biotech company. If the construction company hires an electrical fitting and wiring company to take care of all the electricity wiring needs of the corporate headquarters, then the construction company can claim an ITC for the GST charged by the electrical fitting and wiring company.

If an organisation is constructing an immovable property (except machinery and plant) for its own business use, then this comes under blocked credit in gst and ITC will not be available. Basically, this rule prohibits an entity from claiming ITC on its own inputs. However, ITC is available for plant and machinery for a company on its own account. For example, suppose a tyre manufacturer constructs a corporate office building, then it cannot claim ITC on the building. But if the same manufacturer constructs a rubber processing plant, then ITC can be claimed on the cost.

If a business has registered itself to pay tax under the composition scheme of GST rules, then that business is not eligible to claim ITC on its purchases and expenses incurred for its business operations. This scheme is usually available for small businesses under which they pay taxes at a fixed rate of 1% - 6% of its revenue. Composition scheme has several benefits for small business owners such as reduced compliance requirements and lower tax rates. But the downside for such businesses is that they cannot benefit from ITC. Suppose there is a tobacco manufacturer who has registered the business under composition scheme. Then, for any business cost of the tobacco manufacturer, ITC cannot be claimed.

Goods and services purchased for personal consumption or use have been added to the gst block credit list, and thereby, ITC cannot be claimed on those. The GST Act has laid down elaborate steps to calculate ITC-eligible expenses for goods and services that have been used for both personal and business use because ITC is only allowed on business use. If there is a cricket bat manufacturer that buys wood for its business but also uses some of the bats it manufactures for participating in local tournaments, then the bat manufacturer can claim ITC for the GST paid on expenses incurred only for business purpose.

A non-resident taxable entity cannot claim ITC on goods or services or both. The only exception is that such entities can claim ITC for goods imported by them. In such cases, the taxes paid by the entity will be available as a credit.

Free samples and destroyed goods

For the cost of goods that are given as free samples or have been destroyed, lost, written off, discarded, or given as gifts, ITC cannot be claimed. For instance, consider a ready-to-eat snack manufacturer which organises a free-sampling day at a retail outlet. Since the goods are given as free samples, these are in the block credit list under gst. Another scenario could be an automobile manufacturer that presents a gift to all its dealers on the occasion of achieving its annual sales targets. Now, for the GST paid during the purchase of such gifts, ITC cannot be claimed as per the GST Act.

Restaurants that are in business as standalone entities come under the gst block credit list and they have to pay GST at standard rate of 5%. Restaurants that are part of a hotel with room charges over and above ₹7,500 have to pay GST at 18%, but they can enjoy the benefits of ITC. For example, if there is a standalone Starbucks or a KFC outlet, it cannot avail ITC benefits. Even if a restaurant outlet is part of a mall, the outlet still cannot avail ITC benefits on its business expenses. However, if a Starbucks outlet is located inside a hotel run by The Oberoi group, the outlet can claim ITC on expenses incurred for its business operations. Now, consider a hypothetical scenario where a standalone restaurant is part of a local hotel with room tariff below ₹7,500. In such a circumstance, the restaurant outlet is not eligible to enjoy the benefits of ITC.

The GST Act has classified fraud under three sections - section 74, section 129, and section 130. Section 74 pertains to wrongly claimed ITC and taxes not paid either wholly or partly by intentional suppression of facts. Section 129 levies penalties on businesses for release of goods that were seized in transit because they violated GST rules. Section 130 relates to confiscation of goods and conveyances and levy of penalties. So, for all such goods and services which are fraudulent, ITC cannot be claimed by the business entity. Consider a case where the consignment of a business in transit is checked by the GST authorities and confiscated due to tax evasion. The GST officials ascertain a penalty on the goods based on the market value which the business entity has to pay. In this case, the business entity cannot claim ITC benefits on the penalty or fine that has been paid by it for indulging in a fraudulent activity. Also Read: E-Filing 2.0: New Income Tax E-filing Portal Explained Ready to make the most of your money? Start your tax planning journey now!