In this article, we will cover items on which GST credit is not allowed. These items should be recorded in the books at a price inclusive of GST.
Section 17(5) of CGST Act, 2017 talks about ineligible items for input tax credit. Broadly, there are 12 items on which ITC is not available.
Let’s have a look one by one !!
💡 Motor vehicles and Conveyances [u/s 17(5)(a)]
Input tax credit (ITC) is not available for motor vehicles and conveyances even if they are used in the business.
Example: XYZ Ltd a manufacturing company buys 2 Motorcycles and 1 truck for transportation of employees (not for goods). ITC for both motorcycle and truck will not be available to XYZ Ltd.
However, there are 4 exceptions to this rule. These are mentioned below:
1. Seller of such motor vehicles and conveyances
M/s Dutta Motors sells new cars. He purchases cars from Car manufacturers. In this case, GST paid on the purchase of car can be used as ITC to pay Output GST liability.
2. Transporter of Passengers
M/s Paradise Travels provide passenger transportation by Bus from Delhi to Amritsar. In this case, GST paid on the purchase of Bus can be used as ITC to pay output GST liability.
3. Provider of training on driving, flying, navigating Vehicles or conveyances
Right Motor Training School provides driving lessons on Cars. GST paid on the purchase of training Cars can be used as ITC to pay output GST liability.
4. For transportation of goods
In the 1st example above, tax paid on the purchase of Truck was not available as ITC to XYZ Ltd because the truck was used for the transportation of employees (not passenger). However, if the truck was used for transportation of goods than ITC could have been availed by XYZ Ltd.
💡 Food, Beverages and others [u/s 17(5)(b)(i)]
ITC of the following input is not available:
- Food and beverages
- Outdoor catering
- Beauty treatment
- Health services (Doctors)
- Cosmetic and plastic surgery
Exception: If you are using above good/services for making an outward taxable supply of same goods or services or both or as an element of a taxable composite or mixed supply.
Exception’s Example: An Event Management company organizes Birthday party and purchases food and beverages for such event. In this case, Event Management Company can use ITC of food and beverages to pay output GST liability.
💡 Membership of a club, health, and fitness center [u/s 17(5)(b)(ii)]
The club, health and fitness centre providing taxable supplies to their member charges GST on Membership fees/subscription. GST paid on such fees is ineligible for ITC.
Example: Global Ltd pays membership fees of GYM on behalf of the employees. These fees include GST. In this case, Global Ltd can’t take ITC of GST paid for such fees.
💡 Rent-a-cab, Life Insurance and Health Insurance [u/s 17(5)(b)(iii)]
GST paid for rent-a-cab, Life insurance and health insurance can’t be taken as ITC.
1. Where the Govt. notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force.
For Example, say govt. mandate employer to insure the health of employees. In such case, GST paid on the purchase of Health insurance will be available as ITC to the employer.
2. If you are using above good/services for making an outward taxable supply of same goods or services or both or as an element of a taxable composite or mixed supply.
Example: If X Cab Ltd (Service receiver) uses Cabs of Y Cabs Ltd (service provider) for providing rent-a-cab services than GST charges by Y Cab Ltd can be used as ITC by X Cab Ltd.
💡 Travel benefits extended to employees on vacation [u/s 17(5)(b)(iv)]
Travel benefits extended to employees on vacation such as leave or home travel concessions are ineligible ITC. Example: XYZ Ltd pays for the holidays of the employees. These payments are ineligible ITC.
Note: Payment for a business trip or site visits are eligible ITC.
💡 Works Contract Services [u/s 17(5)(c)]
Works Contract Services when supplied for construction of an immovable property (other than plant and machinery), are ineligible ITC.
Exception: Where work contract service is used as an input service for the further supply of works contract service.
Exception’s Example: X contractor hires Y, a sub-contractor for the construction of a building. Y contractor charges GST on the supply of work contract services. In this case, X contractor can take ITC of GST charged by Y Contractor.
Read more: GST on works contract for Govt.
💡 Self Construction of Immovable property [u/s 17(5)(d)]
ITC of Goods or services or both used for the construction of an immovable property (other than plant or machinery) on own account is not available. ITC will not be available even if such goods or services or both are used in the course or furtherance of business.
Example: X Hosiery constructs a building to be used as a warehouse. GST paid on purchase of goods or services used in the construction of warehouse will not be eligible as ITC.
Exception’s Example: However, If X hosiery construct machinery for weaving than GST paid on purchase of goods or services used in the construction of machinery will be available as ITC.
💡 GST paid to Composite Dealers [u/s 17(5)(e)]
ITC of GST paid to composite dealers will not be available to the recipient. Example: X Ltd purchases stationery from a composite dealer. In this case, ITC will not be available to X Ltd.
Read More: All about Composition Scheme
💡 Input used by Non Resident taxable person [u/s 17(5)(f)]
No ITC of Goods or services or both received by a non-resident taxable person.
Exception: Goods imported by a non-resident person shall be available as ITC.
💡 Input used for personal consumption [u/s 17(5)(g)]
No ITC of Goods or services or both used for personal consumption. However, if goods are used for both personal and business purpose, proportionate ITC for business purpose will be eligible as ITC.
💡 Goods lost, stolen, destroyed and others [u/s 17(5)(h)]
No ITC for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Tax Credit already availed need to be reversed in case of subsequent loss, theft, destruction etc.
💡 No ITC of tax paid u/s 74, 129, 130 [u/s 17(5)(i)]
|u/s 74||Tax paid on the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.|
|u/s 129||Tax paid on Detention, seizure and release of goods and conveyances in transit.|
|u/s 130||Tax paid on Confiscation of goods or conveyances and levy of penalty|
Recomended to Read: Reversal of Input Credit
Source: CGST Act, 2017