INPUT TAX CREDIT (ITC) IN GST (PART-II)

[Alkesh Jani]

    In our earlier discussion, we have gone through the conditions, restriction and manner by which ITC can be taken. In this session, we shall discuss Section 17 of CGST Act, 2017. The whole Section exhibits the different scenario for availing ITC and also goods and/or services, although said goods and/or services has passed the conditions and restriction, for which ITC is not available. In simple language, it can be said that negative list of goods and/or services, for which ITC is not available.

2.       Let’s start with sub-section (1) of Section 17 of the said Act, which reads as under:-

“(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business”.

          From above, it is clear that, if inputs and/or input services are USED, partly for business and partly for other than business, (here, other than business does not include zero rated i.e. export and/or exempted goods or services) in such case, ITC can be availed proportionate to business and balance is to be reversed.

3.       The sub-section (2) and (3) of Section 17 of the said Act, deals with the scenario under which goods and/or services for taxable supply (including exports) as well as exempted supply, and availability of ITC, the same is as under:-

“(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building”.

          The above sub-section reveals that, when goods and/or services are used for taxable as well as exempted goods or services, the ITC can be utilized to the proportionate to taxable supplies (including exports). To arrive at the eligibility of ITC available in terms of sub-section (1) and (2) of Section 17 of the said Act, the formulae are given in Rule 42 of CGST Rules, 2017. It is important to note that for sub-section (2) the value of goods and/or services includes, the value on which the tax is paid on reverse charge, transaction of securities and sale of land and /or building.

4.       The GST Act, is said to be very specific Act. The sub-section (4) of Section17 of the said Act, deals with the ITC available by the banking and financial institution, including non-banking financial company (NBFC). The banks and NBFC are generally registered under RBI. The said sub-section is given below:-

“(4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:

Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year:

Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number”.

          The Banks, financial institutions, and non-banking financial companies are either registered or are approved by the Reserve Bank of India and are statutorily under the supervision of RBI. The banking services is limited to the activities covered by the definition of the term “banking” given at Section (5) (b) of The Banking Regulation Act,1949, which is as under:-

“(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or other wise;”

          In view of above, it implies that as the above mentioned entities may be providing services other than banking services which are classified under HSN code 9971, which may be taxable and/or other than taxable. The sub-section (4) of Section17 of the said Act, stipulates that the entities mentioned therein, shall have the option to comply with sub-section (2) i.e. taxable supply (including export of goods and/or service) and exempted services (please refer Notification No.12/2017-CT (Rates) dated 28.06.2017 as amended from time to time) in either case, the bank or entities mention above, has an option to accumulate all the eligible ITC of the month and reverse 50% of ITC and may utilize the balance ITC. If the above entities avails this option, it cannot be withdrawn during the financial year. The restriction of 50% is not applicable when these entities make supply to its branch or any registration availed on the same PAN number.  

5.       Now we shall proceed to Section 17(5) of CGST Act, 2017, which is kind of negative list. This sub-section urges that despite one is eligible for ITC in terms of Section 16 of the said Act, ITC is not available for goods and/or services mentioned therein. The said sub-section is reproduced below for ready reference:-

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(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

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

(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;

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

(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 sections 74, 129 and 130”.

5.1     The very first in the negative list for which ITC is not available is “motor vehicle”. This has been defined at Section 2(28) of Motor Vehicle Act, and is as under:-

“28. Motor vehicle" or "vehicle" means  any  mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is  transmitted thereto from an external or internal source and includes  a chassis  to which  a body  has not been attached and a trailer; but  does not include a vehicle running upon fixed rails or a vehicle of  a special type adapted for use only in a factory or in any other enclosed  premises or  a vehicle  having less than four wheelsfitted  with  engine  capacity  of  not  exceeding  thirty five  cubic centimetres;”

5.2     Ongoing through the plain reading it becomes clear that all vehicles by whatever name called in common parlance, falls under this definition. For purpose of GST, it is important to note that “motor cab”, “maxi-cab” “omnibus” etc. has been defined under this Act. The denial of ITC for goods and/or services is “motor vehicle or conveyance”. The conveyance has been defined at Section (2)(34) “conveyance”  includes a vessel, an aircraft and a vehicle” in simple language we can say “cargo ships” and “cargo aircraft”.   If we consider motor vehicle or conveyance, as goods, the ITC is available for further supply, till end user, which the spirit of indirect tax. The example can be quoted as, a company manufactures a car and sells it to its dealer and dealer sales this car to one end user, the ITC is available to the dealer but not to the end user, further, if this car is used for further supply of taxable services, i.e. one cab operator to another, for transportation of passengers, imparting training, the ITC is available. Here the question arises is that if the said car is booked as a capital goods in the book of accounts, the depreciation under Income Tax Act, may be availed or else ITC under GST. The useful life under GST for capital goods is termed for five years, so before availing ITC proper calculation is required (please refer Rule 43 of CGST Rules,2017). Moreover, ITC is made available if the said motor vehicle is used for imparting training on driving i.e. ITC available for driving school. The ITC is also available if the said vehicle is used for transportation of goods. Summarizing above, it can be said that ITC on motor vehicle or conveyance is available only if it is used for further supply, for transportation of passengers or goods and for imparting training.

5.3     Further, in terms of clause (i) of sub-section (b), food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, ITC is not available; however, if the input service and outward services are same, you are at full liberty to take ITC, without any restrictions. The ITC of above services can be taken if they are an element of composite or mixed supply, but here utmost care is to be taken for satisfying composite and mixed supply as defined under Section (2) (30) and (74) of CGST Act,2017.

5.4     ITC with regards to membership of a club, health and fitness centre has been specifically denied regardless inward and outward category is same in terms of sub-clause (ii).

5.5     The tax paid on the services, namely rent-a-cab, life insurance and health insurance, is not available. However, if is notified by the Government and obligatory for employer to provide to its employee under any law time being in force, ITC is available. If both the above services are inward services for providing outward services ITC is available. Here, it is surprising to learn that although motor vehicle or conveyance is mentioned, rent-a-cab, which is not mentioned in HSN code, is mentioned under this clause. The reason may be under any guise, ITC is not available. The most discussed issue is transportation facility extended to employee by staff bus or whatever name called, ITC is not available as Motor vehicles if used for supply of above mentioned taxable services namely, transportation of passengers, imparting training or transportation of goods. The pickup and drop of the employee is not notified under any law and same is not falling within the ambit of above clause. The ITC for any travel benefit extended to employee on vacation such as leave or home travel concession, is also not available. Here, it is pertinent to note that services and/or goods from  employer to employee is specifically mentioned at various section and schedules, any other than those shall be dealt with one’s own wisdom.

5.6     Proceeding to sub-section (c) and (d) of the Section17 of the said Act, it can be said that ITC with regards to works contract service with regards to construction of immovable property, is not available. The definition of works contract is given at Sub-section (119) of Section (2) of CGST Act, 2017. Here it is important to note that works contract as it was in erstwhile law has been restricted to immovable property only and remaining part has been defined as composite or mixed supply. Moreover, if sub-contractor raises and Invoice to its contractor, the main or principal contractor is eligible for ITC. Here, inward and outwards are also of same category. Further, all the goods and/or services received by any taxable person, although in the course or for furtherance of business, on his own account, ITC is not available. For example, if a Builder constructs his own office or building, which will be used for business, ITC is not available. The said goods and/or services are to be included for capitalization of immovable property.

5.7     The sub-section (e) to (i) stipulates that ITC is not available for composition scheme, under Section10, goods and/or services is supplied by non-resident taxable person, other than goods and/or services imported by him. Moreover, if goods and/or services are used for personal consumption, ITC is not available, the same concept of erstwhile law.

5.8     If goods are lost, stolen, destroyed or written off or gifted or free sample, ITC if availed is required to be reverse. The same concept continues in GST regime. No ITC is available if taxes paid in terms of notice for non-payment, short payment or erroneously refunded, or taxes paid on detention, seizure of goods and/or conveyance, or confiscation of goods and conveyance (Section 74,129 and 130 of the said Act.).

6.       As plant and machinery has already been discussed in our earlier session, it is not wise to repeat the same here. The sub-section (6) of Section17, mandates for manner in which credit attributed for sub-section ( &((2), in this regard, Rules 42 of CGST Rules, 2017 may be referred.

7.       Now Let’s summarized above for which ITC is not available:-

(i) Motor vehicle or other conveyance, however, ITC may be available if used for making further supply or transportation of passengers or goods or for imparting training.

(ii) Food and beverages, outdoor catering, beauty treatment, health service, cosmetic and plastic surgery, however, if inward and outward supply are of same category ITC is available

(iii) Membership of club, health and fitness centre, ITC not available.

(iv) Rent-a-cab, life insurance and health insurance, ITC is available only if it is notified by government under any law or inward and outward supply are of same category.

(v) Travel benefits extended to employee on vacation such as leave or home travel concession

(vi) Works contract services in respect to immovable property; however, ITC is available by taxes paid by the sub-contractor to principal or main contractor.

(vii) Goods and / or services used for construction of immovable property although used in the course or furtherance of business or on his own account.

(viii) Goods and /or services provided by composition dealer or non-resident taxable person, however, if goods are imported by non-resident taxable person ITC is available and not for the services imported by him.

(ix) Goods and/or services if used for personal consumption, if goods are lost, stolen, destroyed, written off or disposed of by way of gift or free samples, ITC if availed is required to be reversed.

(x) Any taxes paid in terms of section 74,129 and 130 of CGST Act, 2017, ITC not available.

8.       In conclusion of  this session, it is reiterated that as no case law has attained its finality and each case has its own facts and circumstances, therefore, to arrive at any conclusion one must rely on own wisdom and knowledge. We shall deal with Section 18 in our next part. A small effort has been made, but I would say “take the best and leave the rest”. As “thanks giving” is one of the non-GST supplies, I thank all the readers/experts for giving their valuable time for suggestions/comments.

Discussions to this article

[Madhavan iyengar]

I have joined this forum now and following are some queries i request the learned panel to look into the following

Sec 17 (5)(a) Meaning of term further Supply of such vehicles and other conveyances does it cover only supply ie supplied as such or renting also and meaning of word other conveyances

Is ITC available on motor vehicles and other conveyances ( section 17(5)(a)(i)(A) when motor vehicles and other conveyances are rented out and the GST rate is it 12% for renting it out

In case of a Company it has hired a bus for transportation of its employees no recovery is made it is free, employee being related party GST should be payable at market rate can we adopt 10% on cost ie marked up on the bill of bus transporter and discharge GST @ 12%

Can ITC be availed by company in full on the bus transporters bill as it is discharging GST on the output side ie recovery made from employees, like supply.

Kindly enlighten

[Madhavan iyengar]

A an Indian Company has asked its indian banker to give a bank guarantee to the foreign bankers of its overseas subsidiary B

The Indian Banker charges Bank guarantee charges with GST to A. and A has taken ITC.

Now A raises debit note on its overseas subsidiary B for reimbursement of bank guarantee charges.

Is A liable to charge IGST and will it be treated as Zero rated ( export of service ) and what value to be adopted being related party.