Eligible and ineligible Input tax credit
Eligible Input tax credit
“Input Tax” in relation to a taxable person, means the Goods and Services Tax charged on him for any supply of goods and/or services to him, which are used or are intended to be used, for the furtherance of his business. Input Tax Credit under GST Conditions to Claim ITC must be fulfilled and forms one of the most critical activity for every business to settle its tax liability.
ITC is the backbone of GST and a major matter of concern for the registered persons. The conditions for eligibility to ITC and eligible ITC have been prescribed which is more or less in line with pre-GST regime. These rules are also quite particular and stringent in its approach.
Input Tax Credit under GST: Conditions to Claim
A registered person will be eligible to claim Input Tax Credit (ITC) on the fullfilment of the following conditions:
- Possession of a tax invoice or debit note or document evidencing payment
- Receipt of goods and/or services
- Goods delivered by supplier to other person on the direction of a registered person against a document of transfer of title of goods
- Furnishing of a return
- Where goods are received in lots or installments ITC will be allowed to be availed when the last lot or installment is received
- Failure of the supplier towards supply of goods and/or services within 180 days from the date of invoice, ITC already claimed by recipient will be added to output tax liability and interest to paid on such tax involved. On payment to supplier, ITC will be again allowed to be claimed
- No ITC will be allowed if depreciation has been claimed on the tax component of a capital good
- Time limit to claim ITC against an Invoice or Debit Note is earlier of below dates:
The due date of filing GST Return for September of next financial year
Date of filing the Annual Returns relevant for that financial year
For instance, XY Corp, a buyer has a Purchase Invoice was dated 8th July 2017( FY 2017-18), wants to claim GST paid on that purchase. As per the criteria laid down to reckon the time limit:
The Due date of filing GST return for September 2018( belonging to FY 2018-19) is 20th October 2018 and the Date of filing GST Annual Return for FY 2017-18 is 31st December 2018, whichever is earlier will be the time period within which XY Corp has to claim ITC. Therefore, the date is 20th October 2018 and XY Corp can claim this ITC in any of the months between July 2017 to September 2018.
Note: For Debit Notes, above condition must be considered with respect to Original Invoice Date.
- Common credit of ITC used commonly for
- Effecting exempt and taxable supplies
- Business and non-business activity
- Since 9 October 2019, a regular taxpayer can claim provisional ITC in GSTR-3B only to the extent of 20% of the ITC available in GSTR-2A. It means the amount of ITC reported in GSTR-3B from 9 October 2019 will be a total of Actual ITC in GSTR-2A and provisional ITC being 20% of actual ITC in GSTR-2A. Hence, matching purchase register or expense ledger with GSTR-2A becomes crucial.
Ineligible Input tax credit
Cases when ITC is not available under GST
- Motor vehicles & conveyances
ITC is not available for Motor vehicles used to transport persons, having a seating capacity of less than or equal to 13 persons (including the driver).
Further, ITC is not available on vessels and aircraft.
For example, XYZ & Co. buys a car for their business. They cannot claim ITC on the same.
Exceptions to ITC on motor vehicles/vessels/aircrafts
ITC will be available when the vehicle is used for making taxable supplies by the following.
a) Supply of other vehicles or conveyances, vessels or aircrafts.
If you are in the business of supplying cars then ITC will be available.
For example, a car dealer purchases a car for Rs.50 lakh plus 14 lakh GST (ignoring cess calculations). The same car was later sold for 70 lakhs along with Rs.19.60 lakh GST. Since he is a dealer, he can claim ITC of 14 lakhs and pay only Rs.5.60 lakh (19.60 – 14).
b) Transportation of passengers
If you are providing transportation of passengers then ITC will be allowed on the vehicle purchased.
For example, Happy Tours purchased a bus for inter-city transport of passengers. ITC is available.
c) Imparting training on driving, flying, navigating such vehicle or conveyances or vessels or aircrafts, respectively.
A driving school purchases a car to give training to students. The school can claim ITC on the GST paid on the car.
d) Transportation of goods
ITC will be allowed on motor vehicles (and other conveyances) used to transport goods from one place to another. However, this is concerning other transporters and not goods transport agencies (GTA).
- Food, beverages, club memberships and others
ITC is not for the supply of following goods or services or both:
Food and beverages
Cosmetic and plastic surgery
However, ITC will be available if the category of inward and outward supply is same or the component belongs to a mixed or composite supply under GST.
- Services of general insurance, servicing, repair and maintenance
No ITC is allowed on services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in (1).
Exceptions to ITC on insurance, repair or maintenance
Same as expections mentioned for motor vehicles/vessels/aircrafts where received by a taxable person engaged:
(I) In the manufacture of such motor vehicles, vessels or aircraft
(II) In the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him
- Sale of membership in a club, health, fitness centre
No ITC will be allowed on any membership fees for gyms, clubs etc.
X, a Managing Director has taken membership of a club and the company pays the membership fees. ITC will not be available to the company or Mr. X.
- Rent-a-cab, life insurance, health insurance
ITC is not available for rent-a-cab, health insurance and life insurance.
However, the following are exceptions, i.e., ITC is available for:
Any services which are made obligatory for an employer to provide its employee by the Indian Government under any current law in force
For example, assuming the government passes a rule for all employers to provide mandatory cab services to female staff in night shifts. ABC Ltd. hires a rent-a-cab to provide to transportation to its female staff on night shifts. Then ITC will be available to ABC Ltd. on the GST paid to the rent-a-cab service.
If the category is same for the inward supply and outward supply or it is a part of the mixed or composite supply
For example, ABC Travels lends out a car to XYZ Travels. Then XYZ Travels can claim ITC on the same.
leasing, renting or hiring of motor vehicles, vessels or aircraft with exceptions same as those mentioned for (1).
ITC is not available in the case of travel, benefits extended to employees on vacation such as leave or home travel concession.
7. Works contract
ITC shall not be available for any work contract services. ITC for the construction of an immovable property cannot be availed, except where the input service is used for further work contract services.
For example, XYZ Contractors are constructing an immovable property. They cannot claim any ITC on the works contract. However, XYZ hires ABC Contractors for a portion of the works contract. XYZ can claim ITC on the GST charged by ABC Contractors.
8. Composition Scheme
No ITC would be available to the person who has made the payment of tax under composition scheme in GST law.
- No ITC for Non-residents
ITC cannot be availed on goods/services received by a non-resident taxable person. ITC is only available on any goods imported by him.
- No ITC for personal use
No ITC will be available for the goods/ services used for personal purposed and not for business purposes.
- Free samples and destroyed goods
No ITC is available for goods lost, stolen, destroyed, written off or given off as gift or free samples.
- No ITC in fraud cases
ITC will not be available for any tax paid due to fraud cases which has resulted into:
- Non or short tax payment
- Excessive refund
- ITC utilised
Fraud cases include fraud or willful misstatements or suppression of facts or confiscation and seizure of goods.
- No ITC on restaurants
As per Notification No. 46/2017-Central Tax (Rate), dated 14th November 2017, standalone restaurants will charge only 5% GST but cannot enjoy any ITC on the inputs.
However, restaurants as part of hotels with room tariffs exceeding Rs. 7,500 still continue pay 18% GST and enjoy ITC.