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Cases Where Input Tax Credit under GST Cannot Be Availed

Updated on:  

08 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

28th May 2021
CGST Rule 36(4) to cumulatively apply for April, May and June 2021 while filing GSTR-3B of June 2021.

1st May 2021
The CGST Rule 36(4) restricting provisional ITC claims to 5% of GSTR-2B in GSTR-3B is relaxed for April 2021. The taxpayer can apply this rule cumulatively for both April and May while GSTR-3B for May 2021.

1st February 2021
Budget 2021 update: Section 16 amended to allow taxpayers’ claim of the input tax credit based on GSTR-2A and GSTR-2B. Henceforth, the input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.

22nd December 2020
Following are the changes in Rule 36(4) from 1st January 2021:
1. The ITC shall be available as per the invoices uploaded by respective suppliers either in their GSTR-1 or by using the Invoice Furnishing Facility (IFF).
2. The recipients can claim provisional input tax credit in GSTR-3B to the extent of 5% instead of earlier 10% of the total ITC available in GSTR-2B for the month.

Certain taxpayers cannot make payment from their electronic credit ledger in excess of 99% of the total tax liability for the tax period as per a new rule 86B.

3rd April 2020
The CBIC has notified that taxpayers can claim input tax credit in the GSTR-3B return from February 2020 to August 2020, without applying the rule of capping provisional ITC claims at 10% of the eligible ITC as per GSTR-2A.

While filing the GSTR-3B of September 2020, the taxpayers must cumulatively adjust ITC as per the above rule from February 2020. 

Motor vehicles & 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.

a) Supply of other vehicles or conveyances, vessels or aircrafts.

If you are in the business of supplying cars then ITC will be available.

For example, a car dealer purchases a car for Rs.50 lakh plus 14 lakh GST (ignoring cess calculations). The same car was later sold for 70 lakhs along with Rs.19.60 lakh GST. Since he is a dealer, he can claim ITC of 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.

For example, Happy Tours purchased a bus for 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.

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).

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

Ineligible ITC

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.

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

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.

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