Sub-section (1): Business and Non-Business Use
When goods or services are used partly for business and partly for other purposes, ITC shall be restricted to the portion attributable to business use only.
Sub-section (2): Taxable vs Exempt Supplies
When goods or services are used:
- Partly for taxable supplies (including zero-rated supplies), and
- Partly for exempt supplies under CGST or IGST Acts,
Then, ITC shall be restricted to the portion used for taxable and zero-rated supplies.
Sub-section (3): Value of Exempt Supplies
The value of exempt supplies for apportionment under sub-section (2) shall be as prescribed, and shall include:
- Supplies on which the recipient pays tax under reverse charge,
- Transactions in securities,
- Sale of land, and
- Sale of building, subject to clause (b) of para 5 of Schedule II.
Explanation to Sub-section (3)
The value of exempt supply shall not include activities listed in Schedule III, except:
- (i) Activities under para 5 of Schedule III, and
- (ii) Activities as may be prescribed under clause (a) of para 8 of Schedule III.
Sub-section (4): Option for Banks and NBFCs
A banking company, financial institution, or NBFC providing services like deposits, loans, or advances may:
- Either comply with sub-section (2), or
- Claim 50% of the eligible ITC each month on inputs, capital goods, and input services. The rest shall lapse.
Provisos
- Once this option is exercised, it cannot be withdrawn during the financial year.
- The 50% restriction does not apply to inter-branch supplies between registered persons having the same PAN.
Sub-section (5): Blocked Credits
Notwithstanding Section 16(1) and 18(1), no ITC is allowed on the following:
Clause (a): Motor Vehicles
Motor vehicles (seating ≤ 13 including driver), except when used for:
- Further supply of such vehicles,
- Transportation of passengers,
- Training on driving such vehicles.
Clause (aa): Vessels and Aircraft
Vessels and aircraft, except when used for:
(i) Taxable supplies such as:
(A) Further supply of vessels or aircraft,
(B) Passenger transport,
(C) Navigation or flying training.
(ii) Transportation of goods.
Clause (ab): Insurance & Repairs for Vehicles/Vessels/Aircraft
General insurance, servicing, repair & maintenance of the vehicles/vessels/aircraft in (a) and (aa), except when:
(i) Used as per (a)/(aa),
(ii) Received by a person:
(I) Manufacturing such vehicles/vessels/aircraft,
(II) Supplying insurance services for such vehicles/vessels/aircraft.
Clause (b): Specified Goods/Services
The following goods/services, except when used for outward supply of the same category or as part of a taxable composite/mixed supply:
(i) Food & beverages, outdoor catering, beauty treatment, health services, cosmetic/plastic surgery, leasing/hiring of motor vehicles, vessels, aircraft (as per a/aa), life/health insurance.
(ii) Membership of clubs, health & fitness centres.
(iii) Travel benefits to employees on vacation (e.g., LTC, home travel).
Exception: Allowed if the employer is legally obligated to provide under any law.
Clause (c): Works Contract Services
ITC on works contract services for the construction of immovable property (excluding plant/machinery), except where it's an input for further works contract service.
Clause (d): Construction on Own Account
ITC on goods/services used for construction of immovable property on own account, even if used for business.
Explanation: "Construction" includes:
- Reconstruction,
- Renovation,
- Additions/alterations,
- Repairs (if capitalized).
Clause (e): Composition Scheme
ITC on goods/services taxed under Section 10 (Composition Scheme).
Clause (f): Non-Resident Taxable Person
ITC on goods/services received by non-resident taxable person, except imports.
Clause (fa): CSR Activities
ITC on goods/services used for Corporate Social Responsibility (CSR) obligations under Section 135 of the Companies Act, 2013.
Clause (g): Personal Consumption
ITC on goods/services used for personal consumption.
Clause (h): Lost, Stolen, Gifted, or Sampled Goods
ITC on goods that are:
- Lost,
- Stolen,
- Destroyed,
- Written off,
- Given as gifts or free samples.
Clause (i): Tax Paid under Section 74
ITC of tax paid under Section 74 for any period up to FY 2023-24.
Sub-section (6): Attribution Rules
The Government may prescribe the manner in which credit under sub-sections (1) and (2) is to be attributed to business/exempt use.
Explanation - Definition of Plant and Machinery
"Plant and Machinery" includes:
- Apparatus, equipment, and machinery fixed to earth via foundation or structural support,
- Used for outward supply of goods/services.
Excludes:
- Land and buildings or other civil structures,
- Telecom towers,
- Pipelines laid outside factory premises.
Thank You for Reading
Thank you for taking the time to read this article. I appreciate your attention and interest in the topic. I hope the insights shared here prove valuable in your professional endeavours. Your feedback or perspective is always welcome-please feel free to connect or continue the conversation.
Disclaimer: The author has tried to avoid mistakes, but doesn't promise that the information in this document is complete, correct, or up to date. The author isn't responsible for any problems, losses, or damages caused by using this information. Readers are encouraged to consult with qualified professionals to obtain advice tailored to their individual circumstances.
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