Understanding Blocked Input Tax Credit (ITC) Under GST
The Goods and Services Tax (GST) regime allows businesses to claim credit for the GST paid on their inputs, which is known as Input Tax Credit (ITC). This mechanism prevents the cascading effect of taxes and ensures a smooth flow of credit throughout the supply chain. Still, not all GST paid on inputs is eligible for ITC. Certain categories of goods and services are in particular excluded, leading to what is termed 'blocked ITC'. This article provides a detailed analysis of blocked ITC under GST, highlighting the key provisions and offering practical guidance for businesses.
Why is ITC Blocked?
You see, The concept of blocked ITC is designed to prevent misuse of the ITC mechanism and to make sure that ITC is only claimed on inputs directly related to the furtherance of business. Blocking ITC on certain items aims to keep fairness and prevent leakages in the tax system. The specific provisions related to blocked ITC are outlined in Section 17(5) of the CGST Act, 2017.
Detailed Analysis of Section 17(5) of the CGST Act
Section 17(5) of the CGST Act lists different categories of goods and services on which ITC is in particular disallowed. Understanding these provisions is key for businesses to accurately figure out their ITC eligibility.
1. Motor Vehicles and Conveyances
ITC on motor vehicles and conveyances is most of the time blocked, except when they are used for:
- Further supply of such vehicles or conveyances.
- Transportation of passengers.
- Imparting training on driving, flying, handling such vehicles or conveyances.
You see, For instance, a car dealership can claim ITC on the cars it purchases for resale. Similarly, a transport company can claim ITC on buses used for transporting passengers. But, a company purchasing a car for its employees' use cannot claim ITC.
Data and Ideas:
Many businesses incorrectly claim ITC on vehicles used for personal or employee use. Careful documentation and segregation of vehicle usage are essential to avoid penalties. According to a recent survey by a leading tax consultancy, incorrect ITC claims on motor vehicles are a significant source of GST audit findings.
2. Food and Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic and Plastic Surgery
ITC is blocked on these items when they are used for personal consumption or provided to employees. But, an exception exists when these services are obligatory for an employer to provide to its employees under any law. For instance, if a factory is legally required to provide food to its workers, the ITC on the food supplied would be allowed.
Data and Understanding:
The interpretation of 'obligatory under any law' is often debated. Businesses should keep clear records and legal opinions to justify ITC claims on these items. A case study analysis of recent GST rulings reveals varying interpretations by different appellate authorities.
3. Membership of a Club, Health and Fitness Centre
ITC on membership fees for clubs, health. Also, fitness centers is blocked. This is because these expenses are most of the time considered personal in nature and not directly related to business operations.
4. Travel Benefits Extended to Employees on Vacation such as Leave or Home Travel Concession
ITC is not allowed on travel benefits extended to employees for personal vacations. This includes leave travel concession (LTC) or home travel concession (HTC).
5. Works Contract Services When Supplied for Construction of an Immovable Property (Other than Plant and Machinery)
ITC on works contract services is blocked when used for the construction of an immovable property (other than plant and machinery), even when it is used in the course or furtherance of business. Still, if the works contract service is an input service for further supply of works contract service, then ITC is allowed.
Data and Ideas:
The definition of 'plant and machinery' is critical here. It most of the time includes apparatus, equipment. Also, machinery fixed to earth by foundation or structural support. Even so, excludes land, building, or any other civil structures. Careful classification of assets is essential for accurate ITC claims. Recent court cases have clarified the scope of 'plant and machinery' in specific industries.
6. Goods or Services or Both Received by a Non-Resident Taxable Person
ITC is blocked on goods or services or both received by a non-resident taxable person, except on goods imported by him.
7. Goods Lost, Stolen, Destroyed, Written Off or Disposed Of by Way of Gift or Free Samples
So, ITC is not allowed on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. This is because these goods are not used for making taxable supplies.
Data and Understanding:
You see, Proper documentation of losses, theft. Also, destruction is important. Businesses should keep records of insurance claims and write-off procedures to support their ITC position. A comparative analysis of different accounting standards for inventory write-offs is relevant here.
8. Any Tax Paid Under Composition Scheme
Businesses opting for the composition scheme cannot claim ITC on their purchases. This is because the composition scheme is a simplified tax regime with a lower tax rate. Also, ITC is not allowed to continue its simplicity.
9. Any Tax Paid Under Sections 74, 129 and 130
ITC is blocked on any tax paid under sections related to decision of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud, suppression etc. (Section 74), detention, seizure and release of goods and conveyances in transit (Section 129) and confiscation of goods or conveyances and levy of penalty (Section 130).
Practical Implications and Mitigation Strategies
You see, Understanding the nuances of blocked ITC is vital for businesses to avoid penalties and fix their tax liabilities. Here are some practical implications and mitigation strategies:
- Keep Detailed Records: Accurate and detailed records of all purchases and sales are essential for determining ITC eligibility.
- Regular Reconciliation: Regularly reconcile purchase invoices with GSTR-2B to identify any discrepancies and make sure accurate ITC claims.
- Seek Expert Advice: Consult with tax professionals to clarify any doubts regarding ITC eligibility and make sure compliance with the GST laws.
- Employee Training: Conduct training sessions for employees involved in procurement and accounting to educate them about the provisions related to blocked ITC.
- Review Contracts: Carefully review contracts with suppliers and customers to make sure that ITC is not inadvertently blocked due to unclear terms and conditions.
- Make use of Technology: Use GST compliance software to automate ITC reconciliation and identify potential issues related to blocked ITC.
Conclusion
Blocked ITC is a critical aspect of GST that businesses must understand to make sure compliance and make better their tax positions. By carefully analyzing the provisions of Section 17(5) of the CGST Act and using effective mitigation strategies, businesses can cut down the risk of penalties and get the most out of their ITC claims. Regular monitoring of GST updates and looking for expert advice are essential for handling the complexities of the GST regime and ensuring accurate ITC reporting.