How to avoid ITC Blocked Credit Disputes?

Learn why taxpayers should avoid claiming blocked ITC. Consult a GST expert or Chartered Accountants udaipur to prevent legal disputes and ensure compliance for peace of mind.

Section 17(5) – As per section 17(5) of CGST Act 2017, there is list of cases, where the ITC is blocked for the goods & services. Hence the Input Tax Credit is called ineligible or blocked credits under GST.

Taxpayers should not claim ITC of Blocked credit not claim for avoiding the legal disputes & discrepancies. Claiming blocked credits would not only  lead the taxpayers  to reverse the ITC so claimed  but also would lead to  penalties, fines, interests and legal cases.

Hence it is necessary to have through knowledge about the provision for claiming the ITC or should consult regularly expert GST Consultant or best Ca.

Section 17(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:-

The following items on which ITC is not allowed

1. Motor vehicles & conveyances

ITC is not available for Motor vehicles used to transport persons, having a seating capacity of less than or equal to 13 persons (including the driver).

ITC is not available on vessels and aircrafts. 

Exceptions: -However, ITC Available in the following cases.

ITC will be available when motor vehicle or vessel or aircraft is used for making taxable supplies by the following:

1. Transportation of passengers
2. Transportation of goods
3. Supply of other vehicles or conveyances, vessels or aircrafts.
4. Imparting training on driving, flying, navigating such vehicle or conveyances or vessels or aircrafts, respectively.
5. ITC will be allowed on motor vehicles (and other conveyances) used to transport goods from one place to another. However, this is concerning other transporters and not goods transport agencies (GTA) .

Example:

1. Vehicle purchased by car dealer for sale – ITC is available.
2. Vehicle purchased for personal use – ITC is not available
3. Vehicle purchased by driving school for providing training to the learners.– ITC is available

2. Food, beverages, club memberships and others

ITC is not available for the supply of following goods or services or both:

1. Food and beverages
2. Outdoor catering
3. Beauty treatment
4. Health services
5. Cosmetic and plastic surgery
6. leasing, renting or hiring of motor vehicles (Rent a Cab),, vessels or aircraft 

Exceptions: – However, ITC Available in the following cases

1. When such services are used for furtherance of business and not end use or as an element of taxable composite or mixed supply
2. Where it is obligatory for an employer to provide such supplies to its employees under any law for the time being in force.

Example:

1. X and Company used outdoor catering services for its annual function – ITC is not available
2. Beauty products purchased by the salon – ITC available as per exception

3. Services of general insurance, servicing, repair and maintenance

Exceptions: – However, ITC Available in the following cases

1. Same as exceptions mentioned for motor vehicles/vessels/aircrafts
2. Where services  received by a taxable person engaged—
3. In the manufacture of such motor vehicles, vessels or aircraft; or
4. In the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him

Example:

a. General insurance of motor vehicle purchased for personal use – ITC not available

b. Repairs and maintenance of vehicle used for driving school – ITC available as per above exception

4. Sale of membership in a club, health, fitness center

Membership fees paid for a club, health or fitness center

Exception:- However, ITC Available in the following cases

1. Where it is obligatory for an employer to provide such supplies to its employees under any law for the time being in force.

Example:

Membership of health center paid by Mr. Ram  a businessman – ITC not available

5. Rent-a-cab, life insurance, health insurance

Exceptions:-However, ITC Available in the following cases

1. Services which are made obligatory by the Govt of India under any law in force for an employer to provide the service to its employee
2. Same Category for the inward supply and outward supply or it is a part of the mixed or composite supply. 
3. Leasing, renting or hiring of motor vehicles, vessels or aircraft with exceptions same as those mentioned for (1).

6. Travel

ITC is not available in the case of travel, benefits extended to employees on vacation such as leave or home travel concession..

Exceptions:-However, ITC Available in the following cases

1. Where the travel is conducted for the purpose of  business
2. Such Services which are made obligatory by the Govt of India under any law in force for an employer to provide the service to its employee

Example:

1. ABC Ltd. allows its employees to book flight tickets for personal under company’s name – ITC not available
2. GST on flight tickets for sales personnel travel for business purpose  – ITC available as per  exception

7. Works contract

ITC is not available for the services of any work contract. ITC for the construction of an immovable property cannot be availed, except where the input service is used for further work contract services.

Exceptions:-However, ITC Available in the following cases

Input service of works contract used for further supply of works contract service

Example:

1.  LMB Contractors constructing a building  – ITC not available
2. LMB  Contractors hires   Contractors for works contract (an input service) – ITC available as per exception

8. Constructing an immovable property on own account

No ITC is available for goods/services for construction of an immovable property on his own account. Even if such goods/services are used in the course or furtherance of business, ITC will not be available. But this rule does not apply to the plant or machinery. ITC is available on inputs used to manufacture plant and machinery for its own use.

Exceptions:-However, ITC Available in the following cases

1.  Goods or services used in construction of plant and machinery.
2. Goods or services or both used in furtherance of business.

Example:

1.  PQR Ltd hires Mr. Zaj a  Contractors for construction of a building (immovable property) – ITC not available
2. PQR Ltd buys a motor for machinery – ITC available as per exception

9. Composition Scheme

Goods or services or both on which tax has been paid under section 10 i.e. composition scheme

Exceptions:-However, ITC Available in the following cases

No exceptions for composition dealer under GST

Example:

Purchases from composition dealer – ITC not available

10. No ITC for Non-residents

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

Exceptions:-However, ITC Available in the following cases

Goods imported by him.

Example:

1. Goods or services purchased within India – ITC not available
2. Goods imported from outside India – ITC available as per exception

11. No ITC for personal use

Goods or services or both used for personal consumption

Exceptions:-However, ITC Available in the following cases

No Exceptions

Example:

Goods purchased for personal use in the name of business

12. Free samples and destroyed goods

Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Exceptions:-However, ITC Available in the following cases

No Exceptions

Example:

ABC Limited an Oil manufacturer distributed goods (oil) as free samples – ITC not available on such goods

13. No ITC in fraud cases

Cases where tax was not paid with intention to evade tax, then ITC thereon has been prohibited in order to penalize such assesses. Hence Any tax paid in accordance with –

1. Section 74 – Tax not paid or short paid due to fraud, excessive refund
2. Section 129 – Detention, seizure and release of goods and conveyance in transit
3. Section 130 – Confiscation of goods or conveyance and levy of penalty
4. Fraud cases include fraud or wilful misstatements or suppression of facts or confiscation and seizure of goods.

Exceptions:-However, ITC Available in the following cases

No Exceptions

14. No ITC on restaurants

Under GST, restaurants fall under the 5% GST rate, with no option to claim input tax credit (ITC) or the 18% GST rate, with ITC claims. This rate is decided depending on the location of the restaurant.

15. No ITC for Goods & Services purchased for exempted supplies.

16. No ITC on account of detention, seizure, and release of goods and conveyances in transit. (Under Section 129)

17. No ITC allowed on payment of late fees, penalties, interests, etc.

18. No ITC on tax paid on account of confiscation of goods or conveyances and levy of penalty (Under Section -130)

Note:-

For the purpose of Point 7- works contracts and 8 – Construction of an immovable property on own account

1. Construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property

• 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—
• Land, building or any other civil structures;
• Telecommunication towers; and
• Pipelines laid outside the factory premises

Avoid legal troubles and penalties by not claiming ITC on blocked credits. Ensure compliance with the advice of GST Consultants our Chartered Accountants Udaipur.