Blocked Credit, Goods and Services Tax - GST

[VENU K]

This is just a query to get the opinion of experts on the specific interpretation of an issue.

Sec 17 Apportionment of credit and blocked credits

(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:—

[(a)

motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—

(A)		further supply of such motor vehicles; or
(B)		transportation of passengers; or
(C)		imparting training on driving such motor vehicles;

In the above provision if we take Sec 17(5)(a)(B) does it mean that such credit can exclusively be taken from output tax exclusively relating to such supply ?

To make this more clear, let us take an example as below.

X is a businessman having large number of businesses and he is registered under GST. He purchases a luxury vehicle and registers it as a Taxi thus fulfilling conditions in Sec 17(5)(a)(B).He has an input of Rs. 60 lakhs on purchase of such car.

In the same month he shows Rs. 5,000/- as TAXI hire charges with appropriate GST receipt. During the tax period his total output tax liability is Rs. 60 lakhs including the taxi hire charge GST.

The query is can he take the entire 60 lakh ITC during that tax period ?

Or can this provision be interpreted to mean that such IPT can be set off only against the tax dues relating to his taxi hire business ?

Is there any specific provision in GST law to restrict IPT only to TAXI hire charge receipts?

Posts / Replies

[Padmanathan KV]

In my humble opinion, once the credit is not blocked under section 17(5) due to a specific exclusion in one of the limb, the utilization of credit cannot be restricted to that particular limb. So, the credit can be utilized against any output tax. So in your example, the ITC of 60 lakhs can be set off against total output tax liability.

[Ganeshan Kalyani]

Provided, the other business vertical is also taxable.

[VIPUL JHAVERI]

NORMALLY ANY CAMOUFLAGE TRANSACTIONS FAILS TO SURVIVE

[Shilpi Jain]

Credit once eligible as per provisions of law, can be utilised for paying any output liability. 

All eligible credits become a common pool to be utilisable against any output liability.

However, certain output services are not eligible to be paid by credit. Those liabilities cannot be paid by any credit. Ex: 5% tax on sale of residential units.

[KASTURI SETHI]

No one-to-one correlation is required in GST laws.

[VENU K]

Any way let us caution our readers not to embark on such dangerous journeys under  the lure of availing an otherwise forbidden input tax credit. 

[KASTURI SETHI]

You are absolutely right.

[Padmanathan KV]

Agreed. One should bear in mind, the classic formulations in Westminster and McDowell case.

[Amit Agrawal]

Subject businessman has registered said vehicle at TAXI and thereby, must have paid higher road taxes to state Govt.. And hence, before claiming such arrangements as colorable devise / camouflage etc. to deny ITC, one will need more evidences.

Only because tax-payer is getting substantial tax-benefit which is NOT allowed to other businesses (i.e. other than 3 listed supplies under Section 17(a)) cannot be sole reason to deny such ITC. 

And, hence, one cannot directly apply classic formulations like McDowell case on their face values to deny ITC and something more will be needed (For example: Non-genuineness of transport of passenger business) for courts to deny subject ITC for applying these classical formulations. 

If said transport of passenger business is indeed genuine (i.e. not some artificial / colorable devise used for tax-evasion) and tax-payer can demonstrate the same, ITC cannot be denied for the reason that he got substantial tax-benefit in form of ITC. 

In this regard, one must also note that SC ruling in case of VODAFONE INTERNATIONAL HOLDINGS BV. VERSUS UNION OF INDIA & ANR. (2012 (1) TMI 52 - SUPREME COURT), specially the followings: 

"64. The majority judgment in McDowell held that “tax planning may be legitimate provided it is within the framework of law” (para 45). In the latter part of para 45, it held that “colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods”. It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds “on this aspect one of us, Chinnappa Reddy, J. has proposed a separate opinion with which we agree”. The words “this aspect” express the majority’s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the “Westminster” and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.

...........

117. Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. Revenue’s stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger branch." 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[VENU K]

Thank you experts

Padmanathan,Ganesh Kalyani,Vipul Jhaveri,Shilpi Jain,Kasturi Sethi and Amit Agrawal....

for your kind participation and enlightening views. The bottom line is....

Seemingly bonafide means are not all right if your ends are obviously malafide.

[KASTURI SETHI]

Means and ends both should be noble-------Mahatma  Gandhi

[Amit Agrawal]

In continuation of my earlier post, let me explore what can be called as genuine for 'transport of passenger business' in given facts of the query:

If said businessman uses such vehicle for supply of transport of passenger services to third parties at market rate for 3/4 days of every month (& thereby, pay GST@12% there-against) over a long period of time, continue paying vehicle insurance premium applicable for taxi (which are higher than own-use vehicles), shows turnover from such business exceeding ('direct costs associated when such supplies are made in those 3/4 days' PLUS 'additional costs borne' due to duel use of the vehicle (For example: additional TRO charges, differential insurance premium, increased depreciation etc.)) and uses such vehicle for his other business activities for remaining days of the month, then, I do not see any problem in availing entire ITC of Rs. 60 Lacs (of course, subject to Section 17(1) & (2) & Rule 42 & 43, if & as applicable). 

And if so, he can also explain that availability of entire ITC and its usage in first month itself (due to gst liabilities of his other business), makes it a compelling case for him to dual use such vehicle for his multiple business lines as prudent business-man using tax-planning (which is duly allowed in law) to make supplies of transport of passengers much more profitably. If there is additional advantages in Income-tax from dual use etc., same also needs to be taken into account. 

Of course, I understand that such determination about genuineness will always be case-specific involving multiple factual aspects to be taken into consideration holistically. But, I have shared a hypothetic scenario above where tax-payer can demonstrate his genuineness IMHO. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.