One of the primary reasons why GST has been hailed as a game changer in the face of Indian economy is the elimination of cascading effect of taxes allowing for a more seamless flow of credit. This is to take effect by making available Input Tax Credit (ITC) to the purchasing dealer in respect of GST paid by the supplying dealer, which resultantly does away with layers of restrictions existing in the erstwhile CENVAT credit rules, thus, maintaining a seamless flow of credit in the credit chain and rendering the end goods and services cheaper as a result of this tax benefit availed.
In the present GST scheme, ITC can be utilized in the given order – Integrated Tax credits can be utilized for payment of Integrated, Central and State Taxes, or Union Territory tax, if applicable. Central Tax credits can be used for payment of Central Tax and Integrated Tax, whereas State Tax credits can be used for payment of State Taxes or Union Territory taxes and Integrated Tax. Under this system, tax paid on inputs or input services or capital goods used in the course or furtherance of business by the recipient shall be available as credit. This is certainly something to cheer about since it does away with multiple restrictions imposed in the erstwhile tax regime under various heads, some of those being – ‘use in factory’, ‘in or in relation to the manufacture’, ‘for use in manufacturing or processing of goods’, ‘for sale’ and the like.
While the word ‘furtherance’ opens up the tax ambit for new heads to businesses to fall under, there are still some goods and services against which ITC cannot be claimed. The list of items falling in this negative list have been placed under section 17 (5) of the CGST Act under the head ‘Blocked credits’, and have been discussed as below:
a) Motor vehicles and conveyances (includes cars, buses, aircraft, trucks boats, etc), except when:
Which essentially means that expenses related to regular use of motor vehicles for personal or office purposes cannot be claimed as input tax credit.
b) Food, beverages and outdoor catering services, except when: Inward and outward supply of goods/services or both fall under the same category or the component belongs to a mixed or composite supply under GST. As a result, most business expenses that include taking a prospective client or customer out for lunch/dinner would not qualify for credit.
c) Beauty treatment, Health Services & Cosmetic and Plastic Surgery, is not eligible for input tax credit, much like the category immediately preceding it, except when: inward supply of goods or services or both of the same category is used by a registered person for making an outward supply of goods/services of the same category or as an element/component of a composite or mixed supply. This is probably to the fact that these services are mostly rendered for personal consumption rather than core business activities, barring a few professions (such as the entertainment industry). If however, a beautician uses another beautician’s services or a caterer, another caterer’s services, this rule shall not apply since then such use would fall under the head of business consumption and not personal consumption by employees.
d) Membership of club, health and fitness centre would also not fall under this privilege bracket.
e) Life and Health Insurance (this includes expenses relating to rent-a-cab facilities as well). Consequently, businesses (especially IT companies functioning on 24/7 operations), where rent-a-cab services are an integral part of the entire system, will continue to take the hit as they did under CENVAT and not qualify for ITC. Similarly, for life insurance purchased voluntary, credit benefits shall not apply. The exception though, shall apply only when the Government mandates these services as obligatory and to be provided by an employer to its employees under the law in force – such as, when these services are provided for women’s safety of physically challenged persons or health insurance for factory workers as per statute. Additionally, this shall also apply if the inward and supply of goods/services fall under the same category or are part of a mixed or composite supply
f) Travel benefits for employees is also excluded from coming under the ambit of input tax credit. This includes benefits extended to employees on vacation, that being leave or home travel concession.
g) Works contract services continue to remain untouched by GST, following roughly the same fate they did under the CENVAT rules. These services employed for construction of immoveable property (such as a building) shall be excluded from the ITC benefit. This also applies to persons renting out immoveable property who will not be receiving the benefit of ITC on the GST paid to the builder of the property. Input tax credit though, shall be available in cases where the input service is used for further work contract services (an example being – a works contractor receiving such works contract services from his subcontractor).
h) Construction of immovable property too has been prohibited from qualifying under the input tax credit head, which means no ITC shall be available on the goods or services or both supplied to a taxable person used in the construction of an immovable property on his own account or when used in the course or furtherance of business. This would include all kinds of construction activities such as re-construction, renovation, alterations, repairs, etc.
Interestingly, this disqualification does not apply if such construction is for an immovable property in the nature of a plant or machinery. As per definition of the expression of ‘plant and machinery’ laid down in chapter V of the CGST Act, this includes “apparatus, equipment, and machinery fixed to the earth by foundation or structural support” but does not include - land, building or any other civil structures, telecommunication towers, pipelines laid outside factory premises. Consequently, input tax credit shall not be available on any of these exclusions.
i) Goods or services or both availed by a non-resident taxable person except where such goods have been imported by him, shall not qualify for ITC.
j) No ITC would be available to a person paying tax under the composition scheme of GST. So will tax paid as interest, penalty or fine remain outside this purview.
k) No ITC shall be made available for goods or services or both used for personal consumption.
l) Goods lost, stolen, destroyed or written off or disposed of by way of gifts or free samples will also not qualify for GST. This includes diaries, calendars and other gifts disposed of/distributed on occasions such as New Year’s Eve, etc.
m) ITC will also not be available against any tax paid due to non-payment or partial payment of tax, excessive or erroneous refund or input tax credit utilized or availed by way of fraud or willful misstatements or suppression of facts or confiscation of goods (basically any tax paid in accordance with the provisions of sections 74, 129, 130).