INELIGIBLE INPUT TAX CREDIT UNDER GST REGIME

[Mr. M. GOVINDARAJAN]

Section 17(5) of the Central Goods and Services Act, 2017 provides that input tax credit in respect of the following shall not be available-

(a) motor vehicles and other conveyances except when they are used-

(i) for making the following taxable supplies, namely-

(A) further supply of such vehicles or conveyances; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category 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 centre;

(iii) rent-a-cab, life insurance and health insurance except where-

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(C) travel benefits extended to employees on vacation such as leave or home travel concession;

(c) works contract services when supplied for construction of 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 and machinery) on his own account including such goods or services or both are used in course of furtherance of business;

(e) goods or services or both on which tax has been paid under Section 10 (Composition scheme);

(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 Section 74, 129 and 130-

• Section 74 provides for the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of fact;
• Section 129 deals with the detention, seizure and release of goods and conveyances in transit and the tax paid in this procedure;
• Section 130 deals with the confiscation of goods or conveyances and levy of penalty.

Construction

The explanation to Section 17(5) (d) defines the term ‘construction’ as including re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Plant and machinery

The explanation to Section 17(5) defines the term ‘plant and machinery’ as 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
• pipeline laid outside the factory premises.

Analysis

Input services

Rule 2(60) of CGST Act, 2017 defines the term ‘input service’ as any service used or intended to be used by a supplier in the course of furtherance of business.  Though this definition is very clear that any input service that is used or intended to be used by a supplier , Section 17(5) provides that input tax credit shall not be available for certain categories.   Some of the provisions of Rule 2(l) of CENVAT Credit Rules, 2004 are incorporated in Section 17(5) of the CGST Act, 2017.

Rule 2(l) of CENVAT Credit Rules, 2004 defines the term ‘input service’.  This term excludes certain services that means that such services are not eligible to take and utilize CENVAT credit which are as below-

• service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (specified services) in so far as they are used for –

• construction or execution of works contract of a building or a civil structure or a part thereof;
• laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or

[Section 17(5) (c) of CGST Act provides that the works contract services when supplied for construction of an immovable property, other than plant and machinery is ineligible for taking input tax credit.]

• services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods; or

[the rent-a-cab service is ineligible for input tax credit subject to exception clause mentioned in Section 7(5)(b)(iii)]

• service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, when used by-

• a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or
• an insurance company in respect of a motor vehicle insured or reinsured by such person; or

• such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel concession, when such services are used primarily for personal use or consumption of any employee.

• [Outdoor catering, beauty treatment, health services, cosmetic and plastic surgery are declared as ineligible input tax credit vide Section No. 17(5)(b) (i).Howeverwhere an inward supply of goods or services or both of a particular category 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.The particular category is to be prescribed by the Government.
• Membership of a club, health and fitness centre, life insurance services are not eligible in GST regime also vide Section 17(5)(b)(ii);
• Travel benefits extended to employees on vacation such as Leave or Home Travel Concession, services are also made ineligible for input tax credit vide Section 17(5)(b)(iv);
• Life insurance, health insurance is also made ineligible for input tax credit.However exceptions are there in this case.

• The Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force (this may be due to the various judgments of Tribunals/High Courts declaring that input service tax credit is eligible if it is spent for the compliance of the provisions of law);
• Such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of taxable composite or mixed supply]

Capital goods

Rule 2(a) of CENVAT Credit Rules, 2004 defines the term ‘capital goods’ as-

(A) the following goods, namely:-

              (i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 and wagons of sub-heading 860692 of the First Schedule to the Excise Tariff Act;

             (ii) pollution control equipment;

             (iii) components, spares and accessories of the goods specified at (i) and (ii);

             (iv) moulds and dies, jigs and fixtures;

             (v) refractories and refractory materials;

             (vi) tubes and pipes and fittings thereof; 

             (vii) storage tank and

           (viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis, but including dumpers and tippers

            used-

             (1) in the factory of the manufacturer of the final products;  or

            (1A) outside the factory of the manufacturer of the final products for generation of electricity or for pumping of water for captive use within the factory; or      

             (2) for providing output service;

      (B) motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for-

                    (i) providing an output service of renting of such motor vehicle; or

                    (ii)  transportation of inputs and capital goods used for providing an output service; or

                    (iii) providing an output service of courier agency

      (C) motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of-

                    (i)  transportation of passengers; or

                    (ii) renting of such motor vehicle; or

                    (iii)  imparting motor driving skills

     (D) components, spares and accessories of motor vehicles which are capital goods for the assesse.

Thus the definition of ‘capital goods’ gives restrictions in availing credit.  Section 2(19) of CGST Act, 2017 defines the term ‘capital goods’ as goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course of furtherance of business.  Therefore in taking input tax credit in respect of capital goods, it is the bounden duty on the assessee to prove that the capital goods for which input tax credit is claimed, are used or intended to be used in the course or furtherance of business.  We may expect that litigation may be less since the definition is very clear.

Input

Rule 2(k) of CENVAT credit defines the term ‘input’ as-

(i) all goods used in the factory by the manufacturer of the final product; or

          (ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or

          (iii) all goods used for generation of electricity or steam or pumping of water for captive use; or

          (iv) all goods used for providing any output service; or;

          (v) all capital goods which have a value up to ten thousand rupees per piece,

 but excludes-

           (A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;

           (B) any goods used for -

                      (a) construction or execution of works contract of a building or a civil structure or a part thereof; or

                      (b)  laying of foundation or making of structures for support of capital goods,

                      except for the provision of service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act;

             (C) capital goods, except when,-

(i) used as parts or components in the manufacture of a final product; or

           (ii) the value of such capital goods is up to ten thousand rupees per piece;

                (D) motor vehicles;

               (E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and

               (F) any goods which have no relationship whatsoever with the manufacture of a final product.

               Explanation. – For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;

Section 2(59) defines the term ‘input’ as any goods other than capital goods used or intended to be used by a supplier in the course of furtherance of business.  Thus this definition on ‘inputs’ removes the restrictions and hindrances put forth in the definition of ‘input’ in Rule 2(k) of CENVAT Credit Rules, 2004 and litigation will be very much reduced.

Conclusion

The definition of the term ‘capital goods’, ‘inputs’ and ‘input services’ is clear without giving place for interpretation as in the case of CENVAT Credit Rules.  The only condition to observe is that the goods or services are used or intended to be used for the furtherance of business.    Even though some categories mentioned in Section 17(5) (a), (b), (c) and (d) are not eligible to take input tax credit but if they are used for furtherance of business or some activities.  The taking of input tax credit in GST regime is having no complex when comparing the CENVAT Credit Rule regime.

Discussions to this article

[Sanketh Meri]

Dear Sir,

The major issue under GST on capital goods definition is majorly pertaining to the word 'Capitalization in books' used. Not all capital goods are capitalized in books. This is surely going to cause dilemma. Your views will be appreciated.

[JAIPRAKASH RUIA]

Section 17 of CGST Act having following cluases :

(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;

Dear Sir,

What is the significance of using the Word plant and machinery in clause c and plant or machinery in clause d.

Whether it is clear now that input tax credit of construction material like steel and cement used for construction of plant in the course or furtherance of business is available to the assesse.

Whether input tax credit of any type of construction work (service) and material used for repairing ( not capitalized) of plant in the course or furtherance of business is available to the assesse.

Sir, you are highly learned person in this regard and hope to receive the guidance.

Thanks

Jaiprakash Ruia

[chintan shah]

sir i manufacturer chocolates and companies buy it from me for sales promotion as gifting. can the company buying the chocolate take input credit for their purchase of chocolates?

[Pradeep Dadhich]

Sir,

My Client is Constructing a Hotel building, whether we will get input tax credit of material used in constructing the Hotel Building like Cement, HVAC Items, Lift and Others

[abnish rastogi]

Sir,
I want to take your help regarding GST.

In Financial year 2016-2017 My VAT ITC was ₹ 1345.00.

In Financial year 2017-2018 in 1st Quater, I claimed that ITC (₹ 1345.00).

Now the problem is, on 10-july-2017 by mistake i filed Tran-1 with ₹ 1345 ITC balance.

then i filled Form-3b for July having paid CGST ₹ 1295.00 by cash and SGST paid by credited ITC(Rs.1345), then i summited form-3b but not filed it.

After two three days i realized my mistake then i diposited SGST tax ₹ 1295.00

Now my cash ledgar balance is ₹ 1295.00 and credit ledger balance is ₹ 50.00 ,

I want to know how can i correct my mistake in Form-3b for August.

i am thinking of filling coloum (D) "Ineligiable ITC under section 17(5)" with amount ₹ 1345 kindly help me with this.

Regards

Abnish Rastogi