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Blocked credit under GST

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A seamless credit flow is the base of an efficacious GST mechanism whereby a cascading effect of taxes is eliminated through a chain of tax credit allowed for set-off against output tax liability at each stage.

With the introduction of the GST in India, expectations were high on seamless availability of Input Tax Credit ('ITC) on various business expenses such as employee insurance, business travel, rent-a-cab, etc., that are currently 'blocked' under the GST law.

In simple words, the taxpayer cannot avail ITC on goods or services specified as "Blocked Credit" under Section 17(5) of the CGST Act.


Recent updates

 

Budget 2022

  • ITC on invoice or debit note can be claimed only when the details of such input tax credit in respect of said invoice/debit note have not been restricted in GSTR-2B.
  • Time-limit to avail ITC u/s 16(4) extended till 30th November of next year from 30th September.
  • A retrospective amendment (with effect from July 01, 2017) has been proposed for levying interest on ITC wrongly availed and utilized. The interest on such ITC would be 18%p.a. (instead of 24% p.a.).
  • In terms of the proposed amendments in section 38, Form GSTR-2B would provide the details of supplies where ITC would be available and where ITC cannot be availed.
  • The concept of provisional ITC has been proposed to be removed as the matching of returns would no more be there.
  • Also, the proposed provision also provides that where the supplier has not paid the tax, the recipient would be required to reverse the ITC of the same along with the interest. 

 

List of goods or services on which credit is blocked in GST

  • Motor vehicles, conveyances and related services
  • Vessels, aircraft and related services
  • Membership of a club, health & fitness centre
  • Works contract service
  • Self-construction of immovable property
  • Inward supplies of restaurants who opted to pay GST at a reduced rate
  • Inward supplies of composition taxpayer
  • Inward supplies used for personal consumption
  • Free samples, gifts, goods lost, etc
  • Travel benefits to employees
  • Inward supplies of the non-resident taxable person
  • Food and beverages, health services, beauty treatment services and other services
  • Tax paid in fraud cases, detention, confiscation, etc

 

 

There are certain exceptions to GST blocked credit as well which means the ITC can be claimed on the above-mentioned goods or services in certain cases. These are discussed hereunder: 

Motor vehicles and conveyances

(a) ITC is blocked for motor vehicles or conveyances used for the transportation of persons.

(b) ITC is also not available for services of general insurance, repair, maintenance, and servicing, of motor vehicles or conveyances.

Note, this restriction applies to those vehicles, having an approved seating capacity of less than or equal to 13 persons (including driver).

Exception: ITC is available for motor vehicle/conveyance used for the following taxable supplies:

  • Further supply of vehicles or conveyances
  • Transportation of passengers
  • Imparting training on driving such vehicle or conveyances

 Illustration:

  1. Fortuner car is purchased by ABC associates for business purposes. In the instant case, ABC associates cannot claim input of GST paid on the car as the seating capacity of Fortuner is less than 13 persons. Further, ABC associates shall not be entitled to claim input of GST paid on servicing of the car.
  2. Fortuner of Rs 20 lakh (including GST of Rs 3.60 lakh) purchased by Cars24 (Car dealer) and the later car sold to ABC associates for Rs 25 lakh (including GST of Rs 4.5 lakh). In this case, Cars24 can take input credit of Rs 3.60 lakh and be liable to pay the balance amount of GST of Rs 90 thousand.

Read all about ITC on car purchase under GST


Vessels and aircraft

(a) ITC is not available in the case of vessels & aircraft.

(b) Services of general insurance, repair, maintenance, and servicing, of vessels & aircraft are also blocked from claiming ITC.

Exception: List of taxable supplies when ITC is available on vessel or aircraft

  • Further Supply of vessels or aircraft
  • Transportation of passengers
  • Imparting training on flying or navigating such aircraft or aircraft.
  • Transportation of goods

Membership of a club, health & fitness centre

Any amount of fees paid for membership in clubs, gyms, or fitness centre etc will not be eligible for credit in GST.

Works contract service

Works contract service for construction of the immovable property is not eligible to claim input tax credit except where service received as input for further work contract services. Note that the word "construction" includes renovation, reconstruction, addition, or alterations to the extent of capitalization.

Illustration:

  1. ABC builder (Sub-Contractor) provides service of construction of building to XYZ Builder (Main Contractor) – XYZ is entitled to take credit of GST paid to ABC.
  2. ABC Builder (Sub-Contractor) provides service of construction of building to Tech Company –Tech Company shall not be allowed to take credit of GST paid to ABC.

Read more: GST on works contract services


Restaurants

Restaurants shall not be permitted for credit of tax paid on input as restaurants are liable to pay GST at a reduced rate of 5%. However, this restriction will not be applicable to restaurants inside hotels having a room tariff of Rs 7,500 or more.  

Illustration:

  1. Burger King will not be allowed to claim ITC on purchases of goods or services and is liable to pay GST@ 5%.
  2. Restaurant in Taj Hotel are allowed to claim ITC on purchases of goods or services and liable to pay GST@ 18%

Keep reading: GST on restaurant services


Composition scheme

Composition levy is an optional scheme of levy of tax designed for small taxpayers in the Goods and Services Tax (GST) regime. Under the composition scheme, tax is levied at a reduced rate with less compliance.

Composition dealer, the person who opted for a composition levy, needs to pay GST at a prescribed percentage of his turnover every quarter. Composition dealer shall not be eligible to claim ITC of GST paid on inward supplies.


Complete guide on composition scheme under GST


Personal consumption

Goods or services used for personal purposes shall be covered under blocked credit. For example, ITC will not be available for GST paid on the purchase of a laptop for personal use. Now the question arises whether the credit will be available if the input is utilized for both personal and business purposes. In that case, the concept of common credit will be applicable.

Free samples

Goods given as free samples are ineligible for ITC.

Travel benefits to employees

GST paid on travel benefits given to employees is blocked for claiming credit. For example, TaxGyata Pvt. Ltd. provided a holiday package to employees on vacations. In that case, the said company cannot claim credit of GST paid on such travel expenses.

However, ITC is not restricted where;

  • Travel benefits to employees are required under any law for the time being in force
  • Travelling is for business purposes 

Read more: ITC on travel expenses


Non-resident taxable person

Goods or services received by a non-resident taxable person are ineligible for ITC. However, a non-resident can claim credit of input on the import of goods.

Other goods or services

ITC shall not be available in case of the following goods or services:

  • Outdoor catering
  • Health services
  • Beauty treatment services
  • Food and beverages
  • Cosmetic & plastic surgery

However, input on the above-mentioned goods or services can be claimed where the category of inward and outward supply of goods or services is the same.

Frequently asked questions (FAQs)

Yes, section 17(5) (h) specifically restricts input tax credit on goods disposed of by way of gift or free samples.

In the process of manufacture, if some inputs become waste and are sold as scrap, credit shall not be denied. Further, output tax shall be payable on the sale of such waste/scrap.

However, Section 17(5) (h) specifically restricts ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Therefore, if the goods have been destroyed in full, an input tax credit will not be available.

Yes, the mobile phones/ laptops would be covered under the definition of ‘capital goods’ as they are used in the course/ furtherance of business.

Non-availability of ITC in case of motor vehicles restricted to only those meant for transportation of persons having approved capacity of not more than 13 persons (including the driver) except when used for specified purposes.

Further, the words ‘other conveyances’ have been removed from the ambit of blocked credit. Hence, the input tax credit would be available in respect of dumpers, work trucks, fork-lift trucks and other special-purpose motor vehicles.

Yes. Section 17(5)(b) of the CGST Act provides that tax paid w.r.t health insurance services will be eligible as input tax credit where the Government notifies that such services are obligatory for an employer to provide to its employees under any law for the time being in force.

The expression “plant and machinery” has been defined in Explanation to Section 17  for the purpose of Chapter V or VI of the CGST Act.

It 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-

(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises


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CA Anand Singh

CA Anand Singh

I am a practising Chartered Accountant with 6 years of experience in Direct and Indirect Taxation, FEMA, Corporate Law and Audit etc.