The GST article series was started with the basic concepts, now on definition. Next would be the transitional provisions (specified and left out) and ending up with some miscellaneous parts of GST not covered in the series.
GST is likely to be introduced wef 1st April 2017. The understanding of the input tax scheme and its restrictions is imperative to ensure tax optimization for assesses. Representations have been made and among the many thousands of recommendations made, it is hoped the ones for permitting credit on all inputs, input services and capital goods used for business is given effect to in the final GST law.
In this article, the paper writer has sought to give snapshot of the eligible and ineligible input tax credit under GST model law as well as comparison with existing provisions of Cenvat credit Rules.
Capital goods - Section 2(20)
“Capital goods” means: -
(A) the following goods, namely:-
(i) all goods falling within Chapter 82, 84, 85, 90, 6805, grinding wheels and the like, and parts thereof of heading 6804 of the Schedule to this Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof;
(vii) storage tank; and
(viii) motor vehicles other than those falling under 8702, 8703, 8704, 8711 and their chassis but including dumpers and tippers used-
(1) at the place of business for supply of goods; or
(2) outside the place of business for generation of electricity for captive use at the place of business; or
(3) for supply of services,
(B) motor vehicle for transportation of goods including their chassis registered in the name of the supplier of service, when used for
(i) supplying the service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for supply of service; or
(iii) supply of courier agency service;
(C) motor vehicle to carry passengers including their chassis, registered in the name of the supplier of service, when used for supplying the service of-
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills;
(D) Components, spares and accessories of motor vehicles which are capital goods for the taxable person.
- This definition has been cut pasted from the Cenvat Credit Rules 2004. ( not the latest one which was bit relaxed!)
- The old capital goods concept is carried forward into the GST law.
- It could simply have permitted credit on all goods used in business without distinguishing inputs and capital goods.
- The restriction placed on credit on motor vehicles, leads to sticking of taxes. Against the concept of seamless credit.
- The capital goods used for captive use such as in mines/ power located way form the factory may have some dispute unless clarified.
- Where the depreciation is claimed on the tax component of the cost of capital goods under the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component. There is similar restriction in present Cenvat credit rules, which is to ensure double benefit is not taken.
Input - Section 2(54)
Under GST Law, (54) “input” means any goods other than capital goods, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.
- It covers goods to be used for the purpose of outward supply or are intended to be used for the purpose of outward supply.
- Further, similar to the present exclusion in the inputs as defined under Rule 2(k) of CCR, once a good qualifies as capital goods, it will not be considered as inputs.
- Assets with enduring benefit like furniture, work benches, scaffolding equipment etc would now be clearly considered as inputs.
- The inputs need not be used at the place of business. In other words, credit is available on inputs/materials used for providing taxable supply at customer’s site.
Input service - Section 2(55)
Under the GST regime, “input service” means any service, subject to exceptions as may be provided under this Act or the rules made thereunder, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.
- Definition is much wider and seeks to cover any service used or intended to be used by supplier to make outward supply in course of business, subject to exceptions/ restrictions.
- The services which are proposed to be used to make outward supply by business [such as R&D expenses incurred for project for manufacture and supply of specified goods such as energy efficient vehicle engine] in future could also be covered as input service.
Restrictions on credit:
Input tax credit shall not be available on:
(a) Motor vehicles. However credit on motor vehicles is available in following cases
- when they are supplied in the normal course of business or
- are used for providing the following taxable services—
(i) transportation of passengers/goods, or
(ii) training on motor driving skills;
Comment: This restriction is not appropriate when in today's day and age, vehicles are necessarily used in course of business of supply of taxable goods and/or taxable services.
(b) goods and / or services provided in relation to following is not eligible when used mainly for personal use or consumption of employees:
food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession;
Comment: This restriction leads to cascading effect as several organisations have major component of employee related costs incurred in course of business of supply of taxable goods and /or taxable services.
(c) goods and/or services resulting in construction of immoveable property: This restricts credit on goods/services acquired by principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;
The credit on goods/services being denied wrt immoveable property such as building /civil structures which are used by businesses should be removed especially where the GST is being paid on the gross amount on construction.
(d) Goods and/or services resulting in construction of immoveable property: Goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
Comment: Same as above comment
(e) Composition tax credit is restricted: Goods and/or services on which composition tax has been paid; and
Comment: This restriction discourages procurements being done from persons under Composition tax and possibly blow to small businesses who do B2B supplies.
(f) Credit on goods and/or services used for personal consumption.
The restriction on goods/services used for personal consumption is appropriate. However when provided as a perk for better performance should be allowed.
Analysis in light of present provisions under Central and State Indirect tax laws:
Restrictions in place, including of credit related to motor vehicles/ immoveable property/works contract and goods/services used mainly for personal use of employees are c/f from present definitions of inputs and input services in Cenvat credit rules.
The restriction on availment of credit on composition tax is borrowed from State VAT laws which may not be fair to small businesses.
Eligibility to credit on capital goods under existing Cenvat Credit Rules: Credit on construction of tanks and pollution control equipment :In Commissioner v. SLR Steels Limited (2014 (302) E.L.T. A29 (Kar.)] held that cement, Tor Steel, TMT bars, MS Plates, channel plates, MS Angles and Joists used in construction of iron ore, gas and water storage tanks as well as pollution control equipment. Actual use verified by visit of Assistant Commissioner to factory. Held: Assessee entitled to credit on these items. Department’s plea that they were used in manufacture of immovable properties /non-excisable items, and hence not entitled to credit rejected..
Raw materials: In the case of Vikram Cement v. CCE [2006 (194) E.L.T. 3 (S.C.)] where inputs used in mines. Explosives, lubricating oils etc. used in mines entitled to Cenvat credit Appeals allowed.
Credit on specific input services under Cenvat Credit scheme:
Credit on outward freight: In C.C.E., Rothak vs. Haryana Sheet Glass Ltd. (2015 (39) S.T.R 392 (P&H) credit of ST paid by manufacturer for delivery up to buyers premises where ownership and property of goods transferred at customer’s doorstep. Held credit admissible
Sales promotion: In decision of Punjab and Harayana High Court in CCE vs Ambika Overseas 2012 (025) STR 348 (P&H) it was held that canvassing and procuring orders were in relation to sales promotion and would fall under sales promotion activities. Hence respondent is eligible for cenvat credit on the commission paid
Employee group insurance: In Stanzen Toyotetsu India Pvt. Ltd. Vs C. C. Ex., Bangalore-III [2009 (14) S.T.R. 316 (Tri. - Bang.)] credit on Group Insurance Health Policy for which assessee paid Service tax eligible to avail the credit of Service tax paid by service provider. Affirmed in 2011 (23) STR 444 (Karnataka High Court).
Outdoor catering: Held in Resil Chemicals Pvt. Ltd. Vs C.C. Ex., Bangalore-I 2014 (36) S.T.R. 1260 (Kar.) Outdoor catering service for factory. Obligation to run canteen under Factories Act is neither necessary nor number of employees required to exceed 250. The canteen is run for welfare of employees so they get best food and are able to perform well in factory premises, which has direct nexus with production of goods. Hence, service tax availed is eligible for credit.
Pest control: Pest control services used at factory premises is eligible as input service credit. Similarly held in Hindustan Coca Cola Beverages vs C.C.Ex Hyd (2010 (19) S.T.R. 93 (Tri. - Bang.).
In a recent decision in Reliance Industries Ltd vs C.C.Ex.& ST LTU (Mum)(2016-TIOL-2392-CESTAT-MUM) held that exclusion of certain input services in rule 2(l) of CCR, 2004 by the amendment after 01.04.2011 indicates that such services when used purely for personal use or consumption of any employee, credit is not admissible. Appellant have taken a consistent stand that in their case Outdoor Catering, Club or Association Services, Health and Fitness services are utilized for business meeting held at various places Revenue has not dispelled the claim of the appellant by proving that the services were used for personal consumption of employees in the absence of such evidence, credit admissible even after 01.04.2011.
Please note the decisions referred above at (c) and (d) were in context of earlier input service definition applicable till 31.3.2011 where there was no restriction in place for availment of credit on employee related costs.
The credit under GST was expected to be available as long as goods/ services used in or in relation to business. The carrying forward of the old restrictions in the GST law means that to some extent the old case laws would all be revisited.
It is advisable that manufacturers, service providers ensure eligible credit which were missed out to be availed in past is availed now ( before 31st March 2017) without fail. This is to take advantage of a facility given for c/f of the eligible credit availed in last return filed before April 2017 as opening balance of credit under GST law.
In this article the paper writer has analysed the definitions of inputs, input services and capital goods along with its restrictions.
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