Input Tax Credit is the pivot of GST Regime . As a matter of fact it is the all important ingredient of this innovative taxation system . There have been some important issues regarding admissibility of input tax credit ( hereinafter referred to as ITC ) which need clarification . However various concepts need to be examined before arriving at any conclusion in respect of such issues . Sub-section (1) to sub-section (3) of section 17 of the CGST Act , 2017 ( hereinafter referred to as the Act ) ( similar provisions have been embodied in UPGST Act , 2017 ) , deal with the situations of partial admissibility of ITC. These sub-sections are to be examined in details to rule out any confusion in respect of admissibility of ITC according to the provisions envisaged by these sub-sections .

            Sub-section (1) to sub-section (3) embody following provisions :

    1. Apportionment of credit and blocked credits :

(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2), shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building;

(1) ITC Restricted To Purposes of Business :

              Sub-section (1) of section 17 of the Act envisages that where the goods or services or both are used by the registered person partly for the purpose of any business and partly for purposes other than business , only that amount of input tax credit shall be allowed which is attributable to the purposes of the business of such registered  person and such amount of ITC which is not attributable to the purposes of business shall be denied . Meaning thereby that if any person uses any goods or services or both for purposes other than the business, no ITC shall be admissible in their respect .

              It is pertinent to note that the word “business ” finds expression in clause (17) of section 2 of the Act which reads as follows :

(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to  sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club ; ( as amended by the Act No. 31 of 2018 ) and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

Now it is abundantly clear that ITC shall be admissible only in such cases where it is attributable to any of the activities mentioned in clause(17) of section 2. Where it is attributable  to any other activity which does not fall in the ambit of aforesaid clause , then no ITC shall be admissible .

(2) ITC Restricted to Taxable and Zero Rated Supplies :

          Sub-section (2) of section 17 envisages that where any person executes taxable supplies , zero rated supplies and exempted supplies under the Act or Integrated Goods and Services Act , 2017 ( hereinafter referred to as IGST Act ) then ITC shall be admissible only in respect of taxable supplies and zero rated supplies and no ITC shall be admissible which is attributable to exempted supplies . The construction of this sub-section nowhere embodies that any of the components relating to taxable supplies or zero rated supplies or exempted supplies may be considered twice for the purposes of admissibility of ITC .

            It is pertinent to note that clause (108) of section 2 of the Act defines taxable supply in the following manner :

2(108) : “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act .

              Thus it is quite evident that any supply on which tax is not leviable under the Act shall not be treated as taxable supply .

              It is significant to note that zero rated supply is defined in section 16 of the IGST Act  in the following manner :

    1. Zero rated supply :

(1) “zero rated supply” means any of the following supplies of goods or services or both, namely:––

(a) export of goods or services or both; or

(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

              Thus exports and supplies to SEZ developers and SEZ units have been classified as zero-rated supplies under the IGST Act .

              Sub-section (2) of section 16 of the IGST Act  clarifies that subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, the input tax credit shall be available in respect of zero-rated supplies, irrespective of the fact  that such supplies are exempt supplies.

              It is pertinent to note that sub-section (5) of section 17 of the CGST Act  envisages various exceptions in which ITC shall not be available .

            Thus there should not be any confusion in respect of  admissibility of ITC in respect of exempt supplies . ITC is available in respect of exempt supplies if and only if such supplies fall in the ambit of zero rated supplies i.e. either they are export supplies or supplies to SEZ developers and SEZ units because then they shall be termed as zero rated supplies for the purposes of this sub-section . However , it is abundantly clear that ITC shall not be available in respect of such exempt supplies which do not fall in the ambit of zero rated supplies i.e. which are other than zero rated supplies .

         Thus the fall out of this sub-section is very significant and makes it quite evident that –

  • the input tax credit can only be claimed by any registered person and as such an unregistered person is not eligible to claim any input tax credit .
  • input tax credit can only be claimed by any registered person in respect of taxable supplies and zero-rated supplies as defined under section 16 of the IGST Act and no ITC shall be available in respect of exempt supplies .

            Sub-section (3) of section 17 of the Act envisages that the value of exempt supply under sub-section (2), shall be such as may be prescribed, and shall include

(i) supplies on which the recipient is liable to pay tax on reverse charge basis,

(ii) transactions in securities,

(iii) sale of land and,

(iv) subject to clause (b) of paragraph 5 of Schedule II, sale of building;

            It is to be noted that clause (47) of section 2 of the Act embodies following provisions :

“exempt supply” means supply of goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11 (of this Act )  and under section 6 of the Integrated Goods and Services Tax Act , and includes non-taxable  supply .

           It should also be borne in mind that as per clause (78) of the Act non-taxable supply means supply of goods or services or both which is not leviable to tax under this Act or under Integrated goods and Services tax Act .

            Also section (11) of the Act ( similar provisions are embodied in IGST Act , 2017) embodies following provisions :

    1. Power to grant exemption from tax :

(1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.

(2) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax, any goods or services or both on which tax is leviable.

(3) The Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.

Explanation.––For the purposes of this section, where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, in excess of the effective rate, on such supply of goods or services or both.

          Thus as per the provisions of sub-section (1) of section 11 of the Act the Government may by notification declare in the public interest certain goods exempt generally or exempt with certain conditions from such date as may be specified in such notification .

              Hence by going through all the aforesaid provisions the exempted goods may be classified into following four categories :

  • goods nil rated under the Act .
  • goods non-taxable under the Act
  • goods exempted absolutely by the Government by notification and
  • goods exempted conditionally by the Government by notification . This category of goods will include such taxable goods , which under certain specified conditions , have been declared exempt by notification issued by the Government .

         However it should also be noted that in the ambit of exempt supplies for the purposes of sub-section (2) of section 17 as per the provisions of sub-section (3) of section 17 the value of following supplies shall also be included :

 (i) supplies on which the recipient is liable to pay tax on reverse charge basis,

(ii) transactions in securities,

(iii) sale of land and,

(iv) subject to clause (b) of paragraph 5 of Schedule II, sale of building;

        It is pertinent to note that clause (b) of paragraph 5 of Schedule-II embodies following provisions :

    1. Supply of services :

The following shall be treated as supply of service, namely:-

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or  after its first occupation, whichever is earlier.

Explanation.––For the purposes of this clause––

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972  ( Act No.20 of 1972); or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure;

 

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