GST Course

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Background

In GST regime, input tax credit is available to registered person on goods and services used in course of business of making taxable supplies, subject to conditions and restrictions as prescribed. Input tax credit is not available in respect of blocked credit items. The credit attributed to supply of exempted goods/services cannot be availed. However credit related to export of exempted goods/services can be availed.

A taxable person may pay the output tax payable, either in cash or through the input tax credit account. This is paid by way of reducing the output tax payable, by the amount of input tax credit available with him.

The credit pertaining to tax invoices/debit notes pertaining from July 2017 to March 2018 has to be availed by earliest of due date of filing return for the month of Sept 2018 following end of financial year-2017-18 to which such invoice or invoice relating to debit note pertains or date of filing annual return.

In this backdrop in this article, the paper writer has examined the list of restricted credit, prior to and post GST Amendment Act 2018, eligibility of input tax credits on certain specified items herebelow.

Blocked credit

The following is list of blocked credit for period from 1st July 2017 to Aug 29th 2018

Section 17(5): The input tax credit shall not be available in respect of the following, namely:

(a) motor vehicles and other conveyances

(i) Credit is available when motor vehicles/conveyances are used- - for making the following taxable supplies, namely:

(A) further supply of such vehicles or conveyances ; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery.  Note: Such credit is eligible where an inward supply of such goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre;

(iii) rent-a-cab, life insurance and health insurance except where -

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
(B) such inward supply of goods or services or both of a particular category is used for making an outward taxable supply of the same category or as part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;

(c) works contract services[material plus labour contract for construction etc of immoveable property] when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.- - For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10-composition levy credit cannot be availed;

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost[not in possession/custody], stolen[theft], destroyed, written off or disposed of by way of gift[voluntary transfer without consideration] or free samples; and

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

The demand of tax under section 74 of GST Act is issued when the demand arises on account of fraud, suppression of facts and willful mis-statement. Under section 129, when the goods are under detention by the Officers for further investigation. The tax paid u/s.130 when the goods or conveyance are being confiscated.

Note: "Plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes foundation and structural supports but excludes -

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

Impact of changes done wef 30th August 2018

Sec

Old

New

Now (a)/(aa)

All passenger transport motor vehicle - allowed only for specified purpose

Vessel and aircraft-- allowed only for specified purpose

(a) Motor Vehicle upto 13 passengers - only for specified purpose

(A) further supply of such motor vehicles; or
(B) transportation of passengers; or
(C) imparting training on driving such motor vehicles

(aa)Vessel/aircraft-further supply/passenger transport/impart training in navigating vessel or flying aircraft

 bigger vehicle - allowed

(a)(ii) now (aa)(ii)

Goods transportation - allowed

No change

(ab)

Services incidental to MV- eligible but could be disputed

Specifically disallowed for: general insurance, servicing, repair and maintenance

Allow when used for specified purposes given above -in(a)/(aa)

Allowed for manufacturer of Motor Vehicle/vessel/aircraft + to supplier of general insurance services-of Motor Vehicle/vessel/aircraft  insured by him

(b) (i)

Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery:

Except when used for making further outward supply or composite or mixed supply

Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery:

Except when used for making further outward supply or composite or mixed supply

Where obligatory to provide to employee under any Law

(iii)
Now (b) (i)

Rent-a-cab, life insurance and health insurance except where

  • obligatory to provide under any Law or
  • when used for making further outward supply or composite or mixed supply

(does not refer to leasing, renting or hiring)

Leasing, renting or hiring of motor vehicles, vessels or aircraft given in (a)/(aa)above [except when used for specified purposes], life insurance and health insurance except where

  • obligatory to provide under any Law by employer to employee or
  • when used for making further outward supply or composite or mixed supply

(b)(ii) & (iv)
Now (b)(ii) & (iii)

  • membership of a club, health and fitness centre
  • travel benefits extended to employees on vacation such as leave or home travel concession;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession except where obligatory to provide to employee under any Law

Common issues on eligibility of input tax credit

Issue: Eligibility of credit on following expenses:

  • Safety shoes /uniforms used by workers on shop floor of factory
  • Stationery items such as files/clips used in office by manufacturer of final goods/supplier of service
  • Office furniture in office of supplier of service such as in chartered accountants office
  • Membership of an industrial association.

Comments

Credit is available on safety shoes/uniforms used in course of business of making taxable supplies.

Credit is available on the stationery items as it is used in course of business of effecting taxable supplies, by the assessee

Credit can be availed on office furniture such as tables, chairs, cabinets, as it is used in course of business of making taxable supplies.

The credit can be availed on membership fee of an industrial association in absence of any restriction for same.

Issue: Whether credit can be availed on truck used for transport of finished taxable goods from factory to customer site?

Comment: Yes such credit can be availed when it is used in business of making taxable supplies of goods by manufacturer.

Issue: Whether credit can be availed on research expense for new product development?

Comment: Yes such credit can be availed as such goods/services are used in course of business.

Issue: Whether credit can be availed on Corporate Social Responsibility(CSR) expenses?

Comments: Yes such credit maybe availed, but maybe frivolously disputed by dept that it has no direct nexus with the activity of supply of goods/services done by company.

Issue: Whether credit is eligible on air travel and hotel accommodation for business travel and stay by company employees?

Comment: Yes such credit can be availed provided it is used in furtherance of the business of company. Example: business trip- air travel and hotel accommodation.

Issue: Whether credit can be availed of 5% tax paid under Reverse charge on GTA service of outward transport of goods from factory to customer, by transporter issuing consignment note?

Comments: Yes such credit can be availed when such input service of goods transportation it is used in course of business of making taxable supply.

Issue: Whether credit can be availed on supply and installation of AC and other office equipments such as computers?

Comments: Yes such credit can be availed.

Issue: Whether credit has to be reversed on production rejects, sold later as scrap for consideration?

Comment: No credit reversal is not required as it is only final products which are rejected as being substandard.  Credit need not be reversed as it is not goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Issue: Whether credit on canteen contractor invoice is eligible to be availed, when co pays GST on amount of recovery done from employees for canteen facility?

Comment: GST is applicable on food/drink served at canteen at 5%. The condition for the concessional rate is that the input tax credit of goods and services used in supply of services should not be taken. Hence, employer cannot take the ITC on the contractor services received.

Accordingly when company is paying output GST at 5%, it cannot avail credit of tax charged at 5% by canteen contractor.

Issue: Whether credit on project management consultant, interior design, landscaping, architect for construction of new building which is meant for use by landlord for renting as commercial shops on which output GST paid on rentals?

Comments: No. Such credit is specifically restricted as these are the services which are used for construction of building meant for own use in course of business by landlord.

Issue: Whether credit on the following input services is available?

 Comment

Service

Comment about eligibility

Accounting Expenses

Eligible

Advertisement (may be for recruitment, tenders, sales promotion, legal notices etc. as no restriction)

Eligible

Auditing Service

Eligible

Banking and other financial services

Eligible

Commercial Coaching and training

Eligible

Computer networking

Eligible

Construction of a building

Not eligible if used for construction of a building, when building is meant for own use, say as factory.

Bank charges

Eligible

Foundation or support of capital goods such as support for machinery in factory

Specifically eligible 

Legal Consultancy

Eligible

Market Research

Eligible

Outward transportation

Eligible 

Personal Insurance of employees family

Not eligible

Quality Control

Eligible

Recruitment

Eligible

Renovation of factory or office building

Renovation of a factory, premises of provider of output service or an office relating to such factory or premises is eligible, provided it is not capitalized in books of account

Renting of immovable property

Eligible if in used in business of supply of taxable goods/services

In parting

An issue that arises is whether the credit of input tax is a right to the assessee, a benefit allowed under the law, or a privilege. The credit is an indefeasible right of the assessee, as observed by the Supreme Court in C.C.Ex, Pune vs Dai Ichi Karkaria Ltd reported in 1999 (112) E.L.T. 353 (S.C.) in the context of the Modvat scheme.  In Eicher Motors Ltd. v. Union of India in (1999 (106) E.L.T. 3 (S.C.), under Modvat provisions, said that the credit is as good as tax paid.

The Hon'ble Supreme Court in case of Formica India Division v. CCE, reported in 1995 (77) ELT 511 had taken this view. The Supreme Court allowed the credit in this case, even after considering the fact that the prescribed procedure for availment of credit was not followed.

Under the GST Law, since the statute itself provides for the time limit and other conditions, it is doubtful whether the credit would be allowed in a case, without any objections, where the procedure was not followed and say eligible input tax credit of GST was not availed pertaining to 2017-18 at earliest.

We highlight in this context that the last chance to avail missed out eligible credit pertaining to 2017-18 maybe before filing the GST return for month of Sept 2018. The assessee would do well to get a review done with special focus on the maximization of credit on the list of expenses/procurements. This could ensure all eligible credit of 2017-18 is availed.

In this article the paper writer, has looked to examine the eligibility of input tax credit after recent changes. This could be useful to many suppliers of goods/services who are NOT availing the credit as well as those who are. It could also avoid unnecessary disputes by reversing/ not availing when not admissible.

The author can also be reached at roopa@hiregange.com.


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Category GST, Other Articles by - CA Roopa Nayak 



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