12 Cases where Input Tax credit (ITC) is not available to set off against GST - GST ITC Rules explained with example

 

1.0 Introduction

Thought GST is very famous for the free flow of credit, there are at least twelve cases where input tax credit is not available to the taxpayer under GST regime. As said, Input tax credit (ITC) under GST is very important to understand, because it is directly related to your GST tax payment, hence any mistake may result in fines and penalties.

Before discussing the 12 cases, let us understand the meaning of Input tax credit.

                                                                                  

2.0 Meaning of Input Tax Credit (ITC) under GST

As per clause 63 of section 2 of CGST, input tax credit means the credit of input tax.

The input tax means the central tax (CGST), state Tax (SGST), integrated tax (IGST) or Union territory tax (UTGST) charged on any supply received or purchased by a registered taxable person on goods or services or both.

Example: Suppose you buy a raw material from Kerala. Your vendor in Kerala will now charge IGST to you. Hence, that IGST shall be your input tax.

Let us now move forward and understand all the 12 cases where credit under GST is not allowed to be set off.

 

#Case no.1 – Input tax credit (ITC) of Motor vehicles and other conveyance not allowed under GST

As per GST law, the ITC on motor vehicles paid shall not be allowed to set off against output tax liability. In another word, you cannot claim the credit on motor vehicles and other conveyance.

Example: Suppose you buy a car for your business. As per motor vehicle act, the car is covered under the definition of motor vehicle, hence ITC on car shall not be allowed.

Cases where Input Tax Credit (ITC) shall be available on motor vehicle under GST

There are only four cases where ITC on motor vehicles are allowed under GST. The four cases are as follows:

• Dealer of motor vehicles: If you are a trader of a motor vehicle, then ITC on cars purchased shall be allowed.
  
  Example: If you are a registered dealer of Maruti cars and you purchased 10 cars for Rs.50 lakh plus 14 Lakh GST. In total, you paid Rs.64 lakh. Now you sold 10 cars for 70 Lakh on which you charge Rs.19.60 lakh GST. You are a dealer of motor vehicles, the ITC paid to purchase 10 cars shall be allowed and final payment due shall be Rs.5.60 lakh (19.60 – 14).

 

• Transportation of passengers:  If you are a travel agent or a taxi driver and providing services of transportation to the passengers, then the ITC shall be allowed to set off. 
  
  Example: Taxi drivers, Ola drivers, Uber drivers, school Van etc.

 

• Driving schools:  If you are imparting training on driving, flying, navigating such vehicles or conveyance, then ITC shall be allowed on motor vehicles.
  
   
• The vehicle used for transportation of Goods: If you are using motor vehicles to transport your goods from one place to another, then the credit of GST shall be allowed. However, here we are not talking about the Goods Transport Agency (GTA).

 

#Case no.2 – Membership of club, health and fitness center;

If you have taken any subscription of the gym, yoga classes, or membership of any club for any sport or for anything else, the ITC credit shall not be allowed.

 

#Case no.3 – Travel benefits extended to employees on vacation such as Leave or home travel concession

If you have arranged any travel packages like Manali package for holidays etc, then ITC on payment of travel package shall not be allowed.

However, if you arrange any traveling package for business purpose, then ITC shall be allowed.

 

#Case no.4 – Rent a cab, life insurance, and health insurance

The input tax credit on rent a cab, life insurance and health insurance is not allowed except under two cases:

• When the government makes mandatory for an employer: Where 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. 
  
  Example: Suppose government makes mandatory for the employer to provide mandatory cab services to female staff. In simple words, wWhere rent a cab service are availed by a rent a cab service provider then the ITC shall be available. If a provider of rent a cab or health insurance or life insurance uses any aforesaid service then the ITC shall be available.

 

#Case no.5 – Goods or services or both used for personal consumption

If goods or services or both are used for personal consumption, then the ITC shall not be available. The basic logic behind this law is that ITC is only available in cases where tax is paid or payable on the outward supply of goods or services.

 

#Case no.6 – Works contract services when supplied for construction of immovable property

This is perhaps of the most disputed area of ITC. The work contract services have always been a matter of dispute between the taxpayer and the tax department. However, under GST the works contract matter has been resolved to a certain extent.

Based on the analysis, there are two important aspects of working contract:

• The work contract is a service under GST.
• Work contract is only related to immovable property

Now, let us move forward and understand the status of ITC of works contract.

 

Status of ITC of works contract

As per GST law, Works contract service when supplied for construction, alteration, renovation etc, shall not be allowed as input tax credit (ITC). However, if a works contractor is taking help of another work contractor, then the ITC to the former shall be available.

Example: If Amarpali group (Real estate developer) appoints a work contractor for any particular service, then ITC shall not be available to Amarpali group.

 

#Case no.7 – ITC under Composition levy

The ITC on goods or services on which tax has been paid by composition dealer; the ITC shall not be available.

 

#Case no.8 – ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

If the goods are lost, stolen or destroyed or distributed as free samples, then ITC on such goods shall not be available.

 

#Case no.9 – ITC on goods or services received by Real Estate Developer

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

 

#Case no.10 – ITC in case of Nonresident taxable Person

If the Nonresident taxable person receives any goods or services, then ITC shall not be available to them. However, if an NRTP imports any goods or services, then he shall be eligible to claim the ITC.

Further, on imports and exports, IGST act is applicable.

 

#Case no.11 – ITC in case of Food and beverages, outdoor catering, health services etc

The input tax credit shall not be available for food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery.

However, where an inward supply of aforesaid goods or services or both 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 then the input tax credit shall be available.

 

#Case no.12 – ITC in case of willful fraud

The input tax credit shall not be available in case of fraud.

 

Conclusion

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