Section 17(5) of CGST Act

Section 17(5) of CGST Act-Blocked Credits

Overview

ITC of tax paid on almost every inputs and input services used for supply of taxable goods and/or services is allowed under GST except a small list of items provided under section 17(5) of CGST Act.

Thus, ITC on such items is not allowed even though the same may qualify as inputs, input services or capital goods and are used in the course or furtherance of business.

The negative list covers mainly items of personal consumption, inputs and input services use of which results into formation of an immovable property (except plant and machinery), telecommunication towers, pipelines laid outside the factory premises, etc. and taxes paid as a result of detection of evasion of taxes.

The various goods and/or services on which credit is blocked are discussed hereunder:

Motor vehicles and other conveyances and related services (insurance, servicing and repair and maintenance)

Motor vehicles and conveyances have been defined in the CGST Act. Motor vehicles exclude:-

  • vehicle running upon fixed rails.
  • special purpose vehicles for being used in a factory or any enclosed premises.
  • vehicle with less than 4 wheels fitted with engine capacity of upto 25cc.

Thus, railways, two/three wheelers with engine capacity of upto 25cc, bicycle etc. do not fall in the definition of motor vehicle.

Broadly, ITC is blocked on motor vehicles, vessels and aircrafts used for passenger transportation with certain exceptions.

Further, ITC is also blocked on certain services relating to motor vehicles, vessels and aircrafts namely, insurance, servicing and repair and maintenance. The basic principle here is that the motor vehicles, aircrafts and vessels on which ITC is blocked, the ITC on services of insurance, servicing and repair and maintenance pertaining to such motor vehicles, vessels and aircrafts is also blocked.

Goods and/or services on which credit is blocked:

1.Motor vehicles for transportation of persons with seating capacity ≤ 13 persons (including the driver).

2.Vessels and aircrafts.

3.General insurance, servicing, repair and maintenance relating to:

  • Ineligible motor vehicles
  • Vessels
  • Aircraft

4.Leasing, renting or hiring of motor vehicles, vessels or aircraft on which ITC is not allowed.

Exceptions to goods and/or services mentioned above on which credit is allowed:

1.Ineligible motor vehicles when used for any of the following eligible purposes:

  • making further taxable supply of such motor vehicles;
  • making taxable supply of transportation of passengers;
  • making taxable supply of imparting training on driving such motor vehicles.

2.Vessels and aircraft when used for any of the following eligible purposes:

  • making further taxable supply of such vessels or aircraft;
  • making taxable supply of transportation of passengers;
  • making taxable supply of imparting training on navigating such vessels;
  • making taxable supply of imparting training on flying such aircrafts;
  • transportation of goods.

3.General insurance, servicing, repair and maintenance services relating to ineligible motor vehicles, vessels or aircraft when used for eligible purposes.

4.General insurance, servicing, repair and maintenance services when received by-

  • Manufacturer of ineligible motor vehicles, vessels or aircraft; or
  • Supplier of general insurance services in respect of ineligible motor vehicles, vessels or aircraft insured by him.

5.Leasing, renting or hiring of motor vehicles, vessels or aircraft services when used for making an outward taxable supply of the same category of services or as an element of a taxable composite or mixed supply.

6.Leasing, renting or hiring of motor vehicles, vessels or aircraft services when provided by an employer to its employees under a statutory obligation.

Examples:

1.Mr. Bharat a school van driver and also registered person under GST law. He purchased Omni vehicle for Rs. 8 lacs plus GST 28%. Mr. Ram is eligible for ITC on this vehicle. Explain.

Ans. Since, Mr. Bharat is a registered person supplying taxable services in the nature of transportation of passengers, he is eligible to avail the ITC on motor vehicle.

2.A flying school imports an aircraft for use in its training activity, and takes ITC of the IGST paid on the import. The departmental audit raises an objection that aircrafts fall within the definition of “conveyance” in section 2(34) of the Act and that ITC is not allowed on conveyances. Offer your comments.

Ans. Under section 17(5) of the CGST Act, ITC is blocked for conveyances, but ITC is allowed on aircraft if they are used to make the taxable supply of imparting training on flying an aircraft. Therefore, the credit is correctly taken.

Food & beverages, outdoor catering, health services and other services

Goods and/or services on which credit is blocked:

  • Food and beverages
  • Outdoor catering
  • Beauty treatment
  • Health services
  • Cosmetic and plastic surgery
  • Life insurance and health insurance

2.Membership of a club, health and fitness centre.

3.Travel benefits extended to employees on vacation such as leave or home travel concession.

Exceptions to goods and/or services mentioned above on which credit is allowed:

1.Food and beverages, Outdoor catering, Beauty treatment, Health services, Cosmetic and plastic surgery, Life insurance and health insurance services when used by a registered person for making an outward taxable supply of the same category of goods and/or services or as an element of a taxable composite or mixed supply.

2.Such goods and/or services when provided by an employer to its employees under a statutory obligation.

3.Membership of a club, health and fitness centre services when provided by an employer to its employees under a statutory obligation.

4.Travel benefits services when provided by an employer to its employees under a statutory obligation.

Examples:

1.XYZ Ltd. conducted its 50th Annual General meeting at its head office in New Delhi and availed services of Delicious caterers on that occasion. Delicious caterers charged Rs. 15,00,000 plus GST @18% for the supply of outdoor catering services. You are required to advice XYZ Ltd., can they avail Input tax credit of the GST paid on outdoor catering service.

Ans. As per Section 17(5), input tax credit shall not be available in respect of supply of outdoor catering service. Hence, XYZ Ltd. is not entitled to avail Input Tax credit of GST paid on outdoor catering services availed from Delicious caterers.

2.Mr. D a director of company PQR Ltd. obtains a membership of a club located in Maharashtra. Mr. D is there for the business promotion activity of his company. PQR Ltd. pays 10,00,000/annum to such club for the membership of Mr. D in such club. Whether PQR Ltd. will be eligible for the input tax credit of GST paid on membership fees?

Ans. The input tax credit of the same will not be eligible to PQR Ltd. in terms of Section 17(5) of the CGST Act.

Works contract services for construction of immovable property

Works contract has been defined in the CGST Act. Essentially works contract is a composite supply involving both goods and services.

Under the erstwhile laws, definition of works contract included work in relation to both movable and immovable properties. However, under GST law, the ambit of works contract has been confined only to immovable property.

Under GST law, a composite supply of works contract is treated as supply of services in terms of para 6(a) of Schedule II to the CGST Act.

ITC on works contract services for construction of an immovable property is blocked Except When

  • It is an input service for further supply of works contract service (sub-contracting); (ITC on works contract services can be availed only by that taxpayer who is in the same line of business, i.e. only a works contractor can avail ITC on works contract services received by him.)
  • Immovable property is plant and machinery(Plant and machinery affixed permanently to the earth constitutes an immovable property. However, ITC on works contract services used for construction of such plant and machinery is allowed as an exception.)

ITC on works contract services for construction of immovable property is available only in the following three situations:

(i) When the works contract service is availed by a works contractor for being used in providing the works contract service.

(ii) For construction of plant and machinery. In this case, ITC is allowed to all recipients irrespective of their line of business.

(iii) When the value of works contract service is not capitalized. In this case, ITC is allowed to all recipients irrespective of their line of business.

Examples:

1.Can a registered person get ITC in respect of goods or services used for construction of a building for business purposes?

Ans. No. As per Section 17(5), input tax credit shall not be available in respect of works contract services when supplied for construction of an immovable property (other than plant and machinery).

2.M/s A Ltd. being a manufacturer of laptops registered under GST. M/s A Ltd. appointed M/s B Ltd. for construction of factory building in the factory premises. Contract price is Rs. 120 lacs plus GST 18%. M/s B Ltd., supplied cement, steel and labour while executing the contract. Whether M/s A Ltd is eligible to avail the input tax credit on such works contract service.

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Ans. GST paid on works contract services which is used for land, building or any other civil structures specifically excluded from availing input tax credit under section 17(5) read with explanation of the CGST Act, 2017. Therefore, in the given case M/s A Ltd. is not eligible for input tax credit.

Self-Construction of Immovable Property

So now we know that ITC on works contract services availed by a taxpayer, other than a works contractor, for construction of immovable property (other than plant and machinery) is not available.

But what happens if a taxpayer procures goods and services and constructs an immovable property, for being used in the course or furtherance of business, without availing services of a works contractor? Will ITC be allowed in such a case?

The answer is No. ITC is not allowed on goods and/or services received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account even though such goods and/or services are used in the course or furtherance of business.

Thus, ITC on goods and/or services used in the construction of an immovable property is blocked only in those cases where the taxable person constructs the immovable property for his own use even if the immovable property being constructed is used in the course or furtherance of his business.

ITC on goods and/or services used in construction of immovable property is available only in the following three situations:

(i) For construction of plant and machinery

(ii) When the value of goods and/or services is not capitalized

(iii) When the construction is not on own account

Inward Supplies Charged to Tax under Composition Levy

A supplier registered under composition scheme cannot collect tax from its customers. Thus, such supplier issues bill of supply and not a tax invoice. A composition supplier pays a lumpsum tax at a specified rate on its quarterly turnover.

Tax paid on goods and/or services under composition scheme is not available as ITC.

Since a composition supplier cannot collect any tax on its supplies, from the recipient of its supplies, it is obvious that no ITC can be availed in respect of such supplies by the recipients. Nevertheless, section 17(5)(e) specifically blocks the ITC on inward supplies received by a taxable person from a composition supplier.

Inward supplies received by a Non-Resident Taxable Person(NRTP)

Essentially, a non-resident taxable person has no fixed place of business in India but he supplies goods or services in India.

Tax paid on goods and/or services received by such non-resident taxable person, is not available as ITC. However, tax paid by him on imported goods is allowed as ITC.

Examples:

Mr. A of USA being technician came to India to assemble parts of machinery. He also imported goods worth Rs. 10,00,000 and paid following customs duties:

(i) Basic customs duty is Rs. 1,00,000.

(ii) Integrated Goods and Services Tax (IGST) of Rs. 1,98,540.

In India Mr. A wants to register as non-resident taxable person and his estimated liability is Rs. 2,50,000. How much Mr. A is liable to pay as advance tax?

Ans. Mr A is Non-resident taxable person. NRTP needs to pay tax in advance before he is granted registration certificate. NRTP is entitled to book credit of goods imported by him.

However, only IGST paid on imported goods is eligible ‘input tax’. Thus, ITC admissible to him is Rs 1,98,540. Considering the admissible amount of ITC, Mr. A of USA is liable to pay advance tax of Rs. 51,460. (i.e. Rs. 2,50,000 – 1,98,540)

Inward Supplies used for Personal Consumption

One of the foremost conditions laid down in section 16 for availing ITC on goods and/or services is that such goods and/or services should be used in the course or furtherance of business. Further, where goods and/or services are used partly for the purpose of any business and partly for other purposes, section 17(1) restricts the credit to so much of the ITC as is attributable to business purposes.

Furthermore, section 17(5)(g) also specifically blocks the ITC on goods and/or service used for personal consumption.

The term ‘personal consumption’ has not been defined in the GST law. Thus, it may be understood in the general sense which would mean non-business use.

Free Samples, Gifts, Goods lost/stolen etc.

ITC is blocked in case when goods are distributed as free samples or lost/stolen.

Circular No. 92/11/2019 GST dated 07.03.2019 has clarified the entitlement of ITC in the hands of supplier in respect of various sales promotional schemes.

Examples:

1.Sometimes goods are destroyed or lost due to various reasons? Can a person take ITC to the extent of such goods?

Ans. No, a person cannot take ITC with respect to goods lost, stolen, destroyed or written off. In addition, ITC with respect of goods given as gifts or free samples are also not allowed.

2.XYZ Ltd., a manufacturer, which is engaged in supply of taxable goods has purchased 10,000 kg of inputs for Rs. 10,00,000 (exclusive of CGST @6% and SGST @6%) on which input tax credit has been taken. Due to technical changes in manufacturing process, the said inputs became obsolete and their value has been written off in the books of accounts. Explain Input tax credit treatment in above case.

Ans. As per Section 17(5) of the CGST Act, 2017, if the value of any goods is written off in the books of account, then no input tax credit shall be allowed in respect of the said input. Where input tax credit has been taken in respect of the said goods, the same has to be paid by recipient of input goods.

Since in the given case, XYZ Ltd. has availed input tax credit, thus it has to pay Rs. 60,000 (Rs. 10,00,000 @6%) towards CGST and Rs. 60,000 towards SGST liability.

3.A club has given a car as a prize money to a member on winning of a game completion organised by the club. Whether GST will be applicable on the same?

Ans. There will not be any GST implication in the hands of club except, the credit of such prize, if availed by the club, has to be reversed.

Tax paid in fraud cases, detention, confiscation etc.

Tax paid under sections 74, 129 and 130 is not available as ITC. These sections prescribe the provisions relating to tax paid as a result of evasion of taxes, or upon detention of goods or conveyances in transit, or towards redemption of confiscated goods/conveyances.

Examples:

1.M/s. X Ltd. supplied taxable goods from the factory after manufacture in the month of Oct 20XX for sale to a distributor for Rs. 8,00,000. M/s X Ltd has suppressed this transaction. However, he deposited the GST @12% on these goods on 10-1-20X1 against show cause notice issued under Section 74 (when there is fraud) of the CGST Act, 2017 by the Central Tax Officer and passed the order accordingly. Whether distributor namely recipient of these goods is eligible to take input tax credit.

Ans. As per Sec 17(5) of the CGST Act 2017, No credit on payment of tax due to fraud, willful-misstatement or suppression of fact etc. shall be allowed.

In the given case no input tax credit was available to registered person if the supplier has paid tax in pursuance of order where any demand has been confirmed on account of any fraud, willful-misstatement or suppression of facts and so on under Sec. 74 of the CGST Act, 2017.

Hence, input tax credit is not allowed to recipient of these goods (i.e. distributor in the given case).

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