GST – Ineligible Input Tax Credit under Section 17(5)
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Within the framework of a Goods and Services Tax (GST) system, Input Tax Credit (ITC) serves as a mechanism enabling businesses to offset the taxes paid on their inputs (purchases) against the taxes they accrue from their outputs (sales). However, there are certain situations in which GST input tax credit cannot be claimed for goods or services falling within the purview of Section 17(5) of the Central Goods and Services Tax Act, 2017.
Credits that are restricted or ineligible under Section 17(5):
Section 17(5) of the Central Goods and Services Tax (CGST) Act specifies certain inputs and input services on which ITC cannot be claimed. This provision outlines 11 clauses for which the claiming of Input Tax Credit (ITC) is not available.
Clause (a) of section 17(5) Conveyance & Transportation
ITC cannot be availed on vehicles acquired for the transportation of persons, including:
- Four-wheeler motorcars
- Three-wheelers or auto rickshaws
- Two-wheeler motorbikes or cycles
- Tempo Travellers (TT) or buses with a seating capacity of 13 or fewer, including the driver.
- Any other road-used vehicle.
Sub-clause (aa) of Section 17(5) specifies that input tax credit cannot be availed for the acquisition of vessels and aircraft.
However, there are exceptions to these restrictions in certain circumstances, hence in the following cases, ITC can be claimed when used for specific taxable supplies or transportation of goods such as:
- Further supply of such vehicles
- Transportation of passengers
- Imparting training on driving, flying, and navigating such vehicles.
ITC cannot be claimed in case of purchase of ships, vessels or aircraft. However, an exception is given if the buyer is involved in the business of reselling the ships, vessels or aircraft.
Sub-clause (ab) of Section 17(5) specifies the Services related to general insurance, as well as the servicing, repair, and maintenance of motor vehicles, vessels, or aircraft mentioned in clause (a) or clause (aa), are included by this provision.
Subject to the condition that input tax credit for such services will be accessible-
- In cases where the motor vehicles, vessels, or aircraft mentioned in clause (a) or clause (aa) are employed for the designated purposes as outlined therein;
- Where acquired by a taxable entity involved- (I) in the production of said motor vehicles, vessels, or aircraft; or (II) in providing general insurance services for such motor vehicles, vessels or aircrafts insured by him.
Clause (b) of section 17(5) Acquisition of food, catering, vehicle rental, club services, and travel
You are not eligible to avail of Input Tax Credit (ITC) on the procurement of the following:
- Expenditure incurred for outdoor catering, food, or beverages.
- Payments for health services, beauty treatment, plastic surgery, and cosmetic surgery.
- Providing vessels, aircraft, or motor vehicles for rent, lease, or hire. However, ITC claims may be permitted for exceptional cases as specified in clauses (a) and (aa) above.
- Expenditure on life insurance and health insurance.
- Costs related to obtaining club memberships or expenses for health and fitness centres.
- Expenses associated with leave, home travel concession, or travel benefits for employees on vacation.
You remain eligible to avail of Input Tax Credit (ITC) on expenses related to food, health services, renting of conveyances, and insurance if:
- The goods or services are used by a registered person for making an outward taxable supply of the same category of goods or services or both (termed as reselling of the goods or services), or as an element of a taxable composite or mixed supply.
- Employer is providing the facility of Membership of a club, or health and fitness centre to its employees,
- Travel benefits are extended to employees on vacation, including leave or home travel concession.
In the case of (ii) and (iii), The input tax credit for such goods or services, or both, is accessible when an employer is obligated to provide its employees under any prevailing law.
Clause (c) and (d) – Construction of Immovable Property (Other than Plant & Machinery)
A GST-registered individual is ineligible to assert Input Tax Credit (ITC) for GST paid on building construction or job work expenses, whether the buildings are intended for commercial or residential use. This restriction also encompasses any GST paid on construction materials.
ITC cannot be claimed for renovation or repair expenses related to buildings, provided they are capitalized in the accounts.
Nevertheless, construction companies, builders, and promoters engaged in the resale of such constructed buildings are permitted to claim ITC on the mentioned expenses. Additionally, ITC remains applicable for the purchase or construction of plants or machinery.
Clause (e) – Composition Scheme
Businesses registered under the composition scheme are not eligible to claim ITC. Section 10 requires that a composition taxpayer is not eligible to avail of Input Tax Credit (ITC) on GST paid for purchases since they are taxed based on their quarterly turnover. Correspondingly, Section 17(5) of the CGST Act specifies that ITC is not accessible for composition-taxable individuals, irrespective of whether they supply goods or services.
Clause (f) – Non-Resident Taxable Person
A non-resident taxable person is required to prepay taxes. They have the option to seek Input Tax Credit (ITC) for Integrated Goods and Services Tax (IGST) paid on imported goods but are ineligible to claim ITC for any other domestic purchases.
Clause (g) – Personal Use
Claiming Input Tax Credit (ITC) is not permitted for purchases intended for personal use instead of business purposes. In instances where purchases are utilized both for business and personal purposes, the Input Tax Credit will only be granted for the portion used in business, employing the common credit formula
Clause (h) – Free Samples or Gifts
Input Tax Credit (ITC) cannot be claimed if acquired goods are lost, stolen, damaged, written off, or provided as free samples or gifts.
Clause (i) – Fraudulent case of Input Tax Credit
Input Tax Credit (ITC) cannot be asserted for taxes paid in the following circumstances:
- Previous instances of non-payment or underpayment of tax,
- Overpayment of tax leading to excess refunds,
- Fraudulent utilization or availing of excess ITC,
- Wilful misstatements or suppression of facts,
- Confiscation of goods and seizure.
Businesses must have robust systems and processes in place to ensure accurate and compliant claiming of Input Tax Credit. Regular internal audits, adherence to tax regulations, and staying informed about changes in tax laws can help mitigate the risks associated with ineligible ITC claims. Our tax professionals help you to ensure compliance with tax laws and regulations and mitigate the risks associated with non-compliance.
