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Ineligible ITC: Cases Where Input Tax Credit under GST Cannot Be Availed

Updated on: Dec 4th, 2024

3 min read

Specific cases are mentioned under the GST law where no input tax credit shall be available for claims to the taxpayer. We are going to discuss the ineligibility of input tax credit in the article with examples.

Latest Updates on ITC
3rd October 2024
The Supreme Court clarifies GST input tax credit can be claimed on construction for rental services. The apex Court ruled that if a building’s construction is essential for providing services like leasing or renting, it could fall under the ‘plant’ exception to Section 17(5)(d) of the CGST Act. Section 17(5)(d) of the CGST Act prohibits ITC claims on construction materials used in construction of immovable property except for plant and machinery.

Motor vehicles and conveyances

ITC is not available for motor vehicles used to transport persons, having a seating capacity of less than or equal to 13 persons (including the driver). However, ITC is available if the seating capacity of such motor vehicles exceeds 13 persons. Further, ITC is not available on vessels and aircrafts.

For example, XYZ & Co. buys a car for their business. They cannot claim ITC on the same.

Exceptions to ITC on motor vehicles/vessels/aircrafts:

ITC will be available when the vehicle is used for making taxable supplies by the following:

Type of Service	Whether ITC is available	Example
a) Supply of other vehicles or conveyances, vessels or aircrafts	If you are in the business of supplying cars then ITC will be available.	A car dealer purchases a car for Rs.50 lakh plus Rs.14 lakh GST (ignoring cess calculations). The same car was later sold for Rs.70 lakhs along with Rs.19.60 lakh GST. Since he is a dealer, he can claim ITC of Rs.14 lakhs and pay only Rs.5.60 lakh (19.60 – 14).
b) Transportation of passengers	If you are providing transportation of passengers then ITC will be allowed on the vehicle purchased.	Happy Tours purchased a bus for the inter-city transport of passengers. ITC is available.
c) Imparting training on driving, flying, navigating such vehicle or conveyances or vessels or aircrafts, respectively	A driving school purchases a car to give training to students. The school can claim ITC on the GST paid on the car.	Good Drivers Inc., a driving school in India, purchased a hatchback car to give driving lessons to students. Good Drivers Inc. can claim ITC of the GST paid on the hatchback while discharging their GST liability.
d) Transportation of goods	ITC will be allowed on motor vehicles (and other conveyances) used to transport goods from one place to another. However, this is concerning other transporters and not goods transport agencies (GTA).	ABC Ltd. purchased a vessel to transport goods from one port to another in India. In such a case, ABC Ltd. can claim ITC on the GST paid on the purchase of the vessel.

Here is a quick view of the Ineligible ITC on Motor Vehicles, Vessels and Aircrafts

Services of general insurance, servicing, repair and maintenance

No ITC is allowed on services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in (1).

Exceptions to ITC on insurance, repair or maintenance

Same as exceptions mentioned for motor vehicles/vessels/aircrafts
where received by a taxable person engaged—
- In the manufacture of such motor vehicles, vessels or aircraft; or
- In the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him

Food, beverages, club memberships and others

ITC is not for the supply of following goods or services or both:

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

However, ITC will be available if the category of inward and outward supply is same or the component belongs to a mixed or composite supply under GST.

Example- Ajay Enterprises arranges for an office party for its employees. Ajay Enterprises will not be able to claim ITC on the food & beverages served.

Sale of membership in a club, health, fitness centre

No ITC will be allowed on any membership fees for gyms, clubs, etc.

Example- X, a Managing Director has taken membership of a club and the company pays the membership fees. ITC will not be available to the company or Mr. X.

Rent-a-cab, life insurance, health insurance

ITC is not available for rent-a-cab, health insurance and life insurance. However, the following are exceptions, i.e., ITC is available for-

Any services which are made obligatory for an employer to provide its employee by the Indian Government under any current law in force.
For example, assuming the government passes a rule for all employers to provide mandatory cab services to female staff in night shifts. ABC Ltd. hires a rent-a-cab to provide transportation to its female staff on night shifts. Then ITC will be available to ABC Ltd. on the GST paid to the rent-a-cab service.
If the category is the same for the inward supply and outward supply or it is a part of the mixed or composite supply.
For example, ABC Travels lends out a car to XYZ Travels. Then XYZ Travels can claim ITC on the same.
Leasing, renting or hiring of motor vehicles, vessels or aircraft with exceptions same as those mentioned for (1).

Read our article on GST impact on cab services.

Travel

ITC is not available in the case of travel, benefits extended to employees on vacation such as leave or home travel concession.

For example, ABC Ltd. offers a travel package to its employees for personal holidays. ITC on GST paid by ABC Ltd. for the holiday package will not be allowed. ITC will be allowed for travel for business purposes. Please read our article to know more about the impact of GST on airfare and rail fare.

Works contract

ITC shall not be available for any work contract services. ITC for the construction of an immovable property cannot be availed, except where the input service is used for further work contract services.

For example, XYZ Contractors are constructing an immovable property. They cannot claim any ITC on the works contract. However, XYZ hires ABC Contractors for a portion of the works contract. XYZ can claim ITC on the GST charged by ABC Contractors. Please read our article on GST impact of the GST on works contracts.

Constructing an immovable property on own account

No ITC is available for goods/services for construction of an immovable property on his own account. Even if such goods/services are used in the course or furtherance of business, ITC will not be available. But this rule does not apply to the plant or machinery. ITC is available on inputs used to manufacture plant and machinery for its own use.

Example-

Ajay Steel Industries constructs an office building for its headquarters. ITC will not be available.
Ajay Steel Industries also constructs a blast furnace to manufacture steel. ITC is available since it is a plant.

Composition Scheme

No ITC would be available to the person who has made the payment of tax under composition scheme in GST law. Please read our extensive guides on the composition scheme under GST and whether you are eligible for it.

No ITC for Non-residents

ITC cannot be availed on goods/services received by a non-resident taxable person. ITC is only available on any goods imported by him. Please read our articles on GST on non-residents and the registration process for non-residents.

No ITC for personal use

No ITC will be available for the goods/ services used for personal purposes and not for business purposes. Find out more on how to calculate the amount of common credit applicable for business if you use the same input for both business and personal uses.

Free samples and destroyed goods

No ITC is available for goods lost, stolen, destroyed, written off or given off as gift or free samples.

No ITC in fraud cases

ITC will not be available for any tax paid due to fraud cases which has resulted into –

Non or short tax payment or
Excessive refund or
ITC utilised

Fraud cases include fraud or willful misstatements or suppression of facts or confiscation and seizure of goods.

No ITC on restaurants

As per Notification No. 46/2017-Central Tax (Rate), dated 14th November 2017, standalone restaurants will charge only 5% GST but cannot enjoy any ITC on the inputs.

However, restaurants as part of hotels with room tariffs exceeding Rs. 7,500 still continue to pay 18% GST and enjoy ITC. McDonald’s charges 5% GST and cannot claim any ITC. Taj’s Grill by the Pool restaurant in Kolkata is a part of the Taj Bengal hotel and so it will charge 18% GST while enjoying ITC.

Frequently Asked Questions

What is ineligible ITC under GST?

The GST law specifies certain cases where taxpayers are not eligible to claim input tax credit (ITC) on the GST paid on certain goods and services. This could be because the input goods/service does directly relate to the output service, amongst other reasons. Such ITC is disallowed under the GST law and hence referred to as ineligible ITC.

How do I record an ineligible ITC?

To record purchases that do not qualify for input tax credit, you can enable the option to set ineligible input credit in the relevant ledger or for the particular group/item in your ERP settings. If previously eligible input tax credit later becomes ineligible or vice versa, you can manually create a journal entry to record the same.

What is ineligible ITC under section 17(5)?

Section 17(5) under the Central Goods and Services Tax (CGST) Act, 2017, specifies the list of goods and services on which input tax credit (ITC) cannot be claimed. The ITC is ineligible due to reasons such as the input goods/services not directly relating to the production of the output goods/services, or other similar reasons.

Is ITC under RCM ineligible?

A supplier cannot take the GST paid under the RCM as ITC. The recipient can avail the ITC on the GST amount paid under RCM on receipt of goods or services only if such goods or services are used or will be used for business purposes.

How to find ineligible ITC under Section 17(5)?

Taxpayers can log in to the GST portal and access the GSTR-2B ‘Auto-drafted ITC Statement’ to find out the list of purchases during a tax period on which ITC is ineligible under Section 17(5) of CGST Act.

Which expenses are typically considered ineligible for ITC?

The GST law disallows ITC under several sub-sections to Section 17(5) of the CGST Act. The expenses relate to motor vehicles (with certain exceptions), food, beverages, club memberships, etc. For the full list of expenses on which ITC is ineligible, please refer to our detailed article here.

How does the reversal of ITC work in case of ineligible credit?

In the case of ineligible ITC, the previously utilised input credit is added to the output tax liability in the tax period in which the ITC becomes ineligible. This effectively cancels or reverses the ITC claimed earlier.

What are the common mistakes leading to claiming ineligible ITC?

The common mistakes leading to claiming ineligible ITC include not undertaking a thorough examination of the GST law in regards to ineligible CGST Sections such as Section 17(5), 16(4), and ineligible CGST Rules such as Rule 37, 38, 42, 43, etc.

Another common mistake in regards to ineligible ITC claims is when taxpayers do not undertake a proper reconciliation between the GSTR-2A/2B and the GSTR-3B before filing the GSTR-3B return to determine the eligible and ineligible ITC for a particular tax period.

What are the consequences of claiming ineligible ITC under GST?

Claiming ineligible ITC may lead to notices due to discrepancies between the GSTR-2B and GSTR-3B, potentially resulting in notices from the GST department, as well as the levy of interest and penalties for wrongful claims and utilisation.

About the Author

Annapoorna

Assistant Manager - Content

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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