Understanding Input Tax Credit Ineligibility Under GST Law
This comprehensive guide details various scenarios under India's GST law where businesses cannot claim Input Tax Credit (ITC). It covers specific categories like motor vehicles, insurance, food and beverages, club memberships, and personal use items. The article also highlights important exceptions, such as ITC availability for plant and machinery construction, and updates from the Supreme Court on construction-related rental services.
The Goods and Services Tax (GST) framework includes specific provisions outlining instances where taxpayers cannot claim Input Tax Credit (ITC). This document will explore these situations where ITC is ineligible, providing illustrative examples.
Recent Update on ITC As of October 3rd, 2024, the Supreme Court has clarified that GST input tax credit can be availed for construction expenses related to rental services. The Court determined that if a building's construction is crucial for delivering services such as leasing or renting, it might fall under the 'plant' exception outlined in Section 17(5)(d) of the CGST Act. This section typically prohibits ITC claims on construction materials used for immovable property, except for plant and machinery.
Vehicles and Conveyances
ITC is not permitted for motor vehicles designed for passenger transport with a seating capacity of 13 persons or fewer (including the driver). However, if the seating capacity exceeds 13 persons, ITC becomes available. Additionally, ITC is generally unavailable for vessels and aircraft. For example, a company purchasing a car for its business operations cannot claim ITC on this purchase.
Exceptions for ITC on Vehicles, Vessels, and Aircraft:
ITC will be applicable when these conveyances are used for making taxable supplies in the following scenarios:
| Type of Service | Whether ITC is available | Example |
|---|---|---|
| Supply of other vehicles or conveyances, vessels or aircraft | If your business involves supplying cars, ITC will be available. | A car dealer acquires a car for ₹50 lakh, incurring ₹14 lakh in GST. This car is later sold for ₹70 lakh with ₹19.60 lakh GST. As a dealer, they can claim ₹14 lakh ITC, paying only ₹5.60 lakh (₹19.60 lakh - ₹14 lakh). |
| Transportation of passengers | If you provide passenger transport services, ITC is allowed on the purchased vehicle. | Happy Tours bought a bus for inter-city passenger transport. ITC is available. |
| Training in driving, flying, or navigating such vehicles, conveyances, vessels, or aircraft | A driving school acquiring a car for student training can claim ITC on the GST paid for the car. | Good Drivers Inc., an Indian driving school, purchased a hatchback for driving lessons. Good Drivers Inc. can claim ITC on the GST paid for the hatchback to offset their GST liability. |
| Transportation of goods | ITC is allowed on motor vehicles and other conveyances utilized for transporting goods. This applies to general transporters, not specifically goods transport agencies (GTA). | ABC Ltd. purchased a vessel to transport goods between Indian ports. In this instance, ABC Ltd. can claim ITC on the GST paid for the vessel. |
General Insurance, Servicing, Repair, and Maintenance
No ITC is permitted for general insurance, servicing, repair, and maintenance services related to the motor vehicles, vessels, or aircraft mentioned above.
Exceptions for ITC on Insurance, Repair, or Maintenance:
- The same exceptions as those listed for motor vehicles, vessels, and aircraft apply.
- ITC is available when these services are received by a taxable person involved in:
- The manufacturing of such motor vehicles, vessels, or aircraft; or
- The provision of general insurance services for such insured motor vehicles, vessels, or aircraft.
Food, Beverages, Club Memberships, and Other Services
ITC is not allowed for the supply of the following goods or services:
- Food and beverages
- Outdoor catering
- Beauty treatments
- Health services
- Cosmetic and plastic surgery
However, ITC becomes available if the inward and outward supply categories are identical, or if the component is part of a mixed or composite supply under GST. For example, Ajay Enterprises hosting an office party for its employees cannot claim ITC on the food and beverages served.
Club, Health, and Fitness Centre Memberships
No ITC is allowed on membership fees for gyms, clubs, or similar facilities. For instance, if a company pays the club membership fees for its Managing Director, neither the company nor the MD can claim ITC.
Rent-a-Cab, Life Insurance, and Health Insurance
ITC is generally not available for rent-a-cab services, health insurance, and life insurance. Nevertheless, there are exceptions where ITC is permitted:
- For any services that an employer is legally mandated by the Indian Government to provide to its employees under existing law. For example, if a government regulation requires employers to provide mandatory cab services for female staff working night shifts, ABC Ltd. can claim ITC on the GST paid for rent-a-cab services used for this purpose.
- If the inward and outward supply categories are the same, or if it constitutes a part of a mixed or composite supply. For instance, if ABC Travels leases a car to XYZ Travels, then XYZ Travels can claim ITC on that transaction.
- For leasing, renting, or hiring of motor vehicles, vessels, or aircraft, with exceptions mirroring those mentioned for vehicles and conveyances.
Travel Expenses
ITC is not available for travel expenses or benefits provided to employees for personal vacation, such as leave or home travel concessions. For example, if a company offers a travel package to its employees for personal holidays, ITC on the GST paid for this package will not be allowed. ITC is, however, permitted for travel undertaken for business purposes.
Works Contract Services
ITC is not available for works contract services. Specifically, ITC cannot be availed for the construction of an immovable property, unless the input service is used for further works contract services. For instance, XYZ Contractors, while constructing an immovable property, cannot claim ITC on the works contract. However, if XYZ hires ABC Contractors for a portion of the works contract, XYZ can claim ITC on the GST charged by ABC Contractors.
Self-Construction of Immovable Property
No ITC is available for goods or services used in the construction of an immovable property by a person on their own account. This restriction applies even if such goods or services are utilized in the course or furtherance of business, with the exception of plant or machinery. ITC is available on inputs employed to manufacture plant and machinery for self-use.
For example:
- Ajay Steel Industries constructing an office building for its headquarters cannot avail ITC.
- However, if Ajay Steel Industries constructs a blast furnace for steel manufacturing, ITC is available as this qualifies as plant and machinery.
Composition Scheme
Individuals who have opted to pay tax under the GST composition scheme are not eligible to claim ITC.
Non-Resident Taxable Persons
ITC cannot be availed on goods or services received by a non-resident taxable person, except for goods imported by them.
Personal Use
No ITC is available for goods or services used for personal rather than business purposes.
Free Samples and Destroyed Goods
ITC is not available for goods that are lost, stolen, destroyed, written off, or provided as gifts or free samples.
Fraud Cases
ITC will not be available for any tax paid as a result of fraud cases leading to:
- Non-payment or short payment of tax
- Excessive refunds
- Improper ITC utilization
Fraud cases include instances of fraud, willful misstatements, suppression of facts, or confiscation and seizure of goods.
Restaurant Services
As per Notification No. 46/2017-Central Tax (Rate), dated November 14th, 2017, standalone restaurants charge only 5% GST and are not eligible to claim ITC on their inputs. Conversely, restaurants located within hotels where the room tariff exceeds ₹7,500 continue to charge 18% GST and are permitted to avail ITC. For example, a McDonald's outlet charges 5% GST without ITC claims, while Taj's Grill by the Pool restaurant, being part of the Taj Bengal hotel in Kolkata, charges 18% GST and enjoys ITC benefits.