Input Tax Credit (ITC) is a significant feature of the Goods and Services Tax (GST) system that allows businesses to claim credit for the taxes paid on their purchases against the taxes they owe.
However, the GST framework sets certain restrictions on the availability of ITC. There is overview of goods and services that are not eligible for ITC, along with exceptions where applicable.
By clearly understanding the scenarios where ITC cannot be claimed, businesses can better manage their GST compliance and avoid unnecessary disputes with tax authorities. Being aware of the exceptions is equally crucial to ensure eligible credits are not overlooked.
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Goods and Services Not Eligible for Input Tax Credit (ITC) Under GST
Input Tax Credit (ITC) is a significant feature of the Goods and Services Tax (GST) system that allows businesses to claim credit for the taxes paid on their purchases against the taxes they owe.
However, the GST framework sets certain restrictions on the availability of ITC. Below is a detailed overview of goods and services that are not eligible for ITC, along with exceptions where applicable.
Motor Vehicles Not Eligible for Input Tax Credit
Clause (a) of Section 17(5) of CGST Act provides that input tax credit shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons(including the driver), except when they are used for making following taxable supplies, namely:
- further supply of such motor vehicles; or
- Transportation of passengers;or
- Imparting training on driving such motor vehicles.
The intention of law, as it appears from the use of expression ‘when they are used for making the following taxable supplies’ in clause (a) of section 17(5) of CGST Act, is to exclude certain cases (based on the nature of outward taxable supplies being made using the said motor vehicle) from the restriction on availment of input tax credit in respect of the specified motor vehicles i.e. motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver).
The taxable supplies, permitted for the purpose of being excluded from the blockage of input tax credit as per provisions of clause (a) of section 17(5) of CGST Act, being further supply of such motor vehicles, transportation of passengers and imparting training on driving such motor vehicles.
Other Conveyances Not Eligible for Input Tax Credit
ITC on other types of conveyances is also disallowed.
Exceptions:
- Conveyances used for providing training on driving or navigation.
- For transportation of goods.
- Buses used to transport employees with an approved seating capacity of more than 13 persons (including the driver).
Insurance, Repairs, and Maintenance for Motor Vehicles/Conveyances
ITC is not permitted for expenses related to insurance, repairs, or maintenance of motor vehicles and conveyances.
Exceptions:
- When inward supplies are used to produce outward taxable supplies of the same category.
- If providing food, beverages, or health services is obligatory for the employer under law.
Membership Of Clubs & Fitness Centre
ITC is not permitted on membership of clubs and fitness centres.
Works Contract Services
ITC is disallowed for works contract services used in constructing immovable property.
Exceptions:
- If the services are used for further supply of works contract services or plant and machinery.
Rent-a-Cab, Life Insurance, and Health Insurance
ITC is not available for these services.
Exceptions:
- ITC is available if such services are mandatory under existing laws.
- Gifts provided to employees up to ₹50,000 per annum are exempt under Schedule I of the CGST Act, 2017.
Employee Benefits
ITC is not available on Travel benefits extended to employees during vacations such as leave and Travel benefits under the home travel concession (LTA).
Construction of Immovable Property
Goods and services used for the construction of immovable property are not eligible for ITC.
Exceptions:
- ITC is allowed if the property is constructed for furtherance of business (e.g., plant and machinery).
Composition Scheme Supplies
Tax paid under the composition scheme as per Section 10 of the CGST Act.
Non-resident Taxable Person
Goods or services received by non-resident taxable persons.
Exceptions:
- ITC is available for imported goods.
Free Samples, Personal Use and Losses
ITC is not allowable on Goods and services used for personal consumption; Goods lost, stolen, destroyed, or written off; and Gifts or free samples exceeding the value of ₹50,000 per employee annually.
Under the GST framework, Input Tax Credit (ITC) cannot be claimed on goods that are:
- Given as free samples.
- Destroyed, lost, written off, discarded, or gifted.
Key Examples:
- Free Samples:
- A ready-to-eat snack manufacturer organizing a free-sampling event at a retail outlet cannot claim ITC on the GST paid for the goods used as free samples. These items fall under the block credit list as per GST regulations since no consideration is received for such supplies.
- Gifts:
- An automobile manufacturer rewarding its dealers with gifts to celebrate annual sales milestones cannot claim ITC on GST paid for the purchase of these gifts. Under the GST Act, goods provided without consideration, such as gifts, are also ineligible for ITC.
Reasoning:
The GST Act restricts ITC on these categories because they do not contribute to the generation of taxable outward supplies. By denying ITC in such cases, the law prevents misuse and ensures that credit is only available for goods and services directly linked to business operations and revenue generation.
Penalty-Related Tax
ITC is not available on tax paid as per the provisions of Sections 74, 129, and 130, which pertain to fraud, misstatements, or suppression of facts.
Food, Beverages, and Outdoor Catering: Input Tax Credit (ITC) under GST
Under GST regulations, food, beverages, and outdoor catering typically fall under the ineligible category for claiming Input Tax Credit (ITC) as outlined in Section 17(5) of the CGST Act. However, an exception applies when these goods or services are directly linked to the core business operations of an organization in the same category.
General Rule:
ITC on food, beverages, and outdoor catering is not available when these services are used for:
- Personal use.
- Employee welfare or entertainment purposes.
For example:
- If a paint manufacturer organizes a pizza party or catering services for its employees, it cannot claim ITC on the GST paid for the pizza or catering expenses. These activities are deemed unrelated to the organization’s core business operations.
Exception to the Rule:
If the organization operates in the food, beverage, or catering sector, it can claim ITC for expenses related to those services. This exception ensures that inputs directly tied to the business of food or catering can be credited.
For example:
- A catering company can claim ITC on GST paid on purchases like raw materials (vegetables, spices, grains) or input services that directly contribute to their catering services.
