Certain Cases Where ITC Is Not Available In GST Regime :

Input Tax Credit is the pivot of Goods And Services Tax Structure . The Central Goods And Services Tax Act , 2017 ( here-in-after referred to as “the Act” ) spells our various provisions regarding availability and non-availability of Input Tax Credit ( here-in-after referred to as “ITC” ) . Similar provisions are embodied in U.P. Goods And Services Tax Act , 2017. Whereas sub-section (1) of section 16 and sub-section (1) of section 18 of the Act embody significant provisions regarding ITC , sub-section (5) of Section 17 of the Act envisages various provisions describing certain cases where ITC is not admissible and these provisions enjoy precedence over provisions embodied in sub-section (1) of section 16 and sub-section (1) of section 18 of the Act. Before discussing such cases where ITC is not admissible , it is pertinent to go through the provisions of sub-section (5) of section (17) which reads as follows :

17(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18 , input tax credit shall not be available in respect of the following , namely :-

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons ( including driver ) except when they are used for making the following taxable supplies , namely :-

(A) further supply of such motor vehicles ; or

(B) transportation of passengers ;or

(C) imparting training of driving such vehicles ;

(aa) vessels and aircraft except when they are used –

(i) for making the following taxable supplies namely :-

(A) further supply of such vessels or aircraft ; or

(B) transportation of passengers ; or

(C)imparting training or navigating such vessels ; or

(D) imparting training or flying such aircraft ;

(ii) for transportation of goods ;

(ab) services of general insurance , servicing , repair and maintenance in so far as they relate to motor vehicles , vessels or aircraft referred to in clause (a) or clause(aa) :

Provided that the input tax credit in respect of such services shall be available–

(i) where the motor vehicles , vessels or aircrafts referred to in clause (a) or clause(b) or clause (aa ) are used for the purposes specified therein ;

(ii) where received by a taxable person engaged –

(I) in the manufacture of such motor vehicles , vessels or aircraft ; or

(II) in the supply of general insurance services in respect of such motor vehicles , vessels or aircraft insured by him .

(b) the following supply of goods or services or both –

(i) food and beverages , outdoor catering , beauty treatment , health services , cosmetic and plastic surgery , leasing , renting or hiring of motor vehicles , vessels or aircraft referred to in clause (a) or clause(aa) except when used for the purposes specified therein , life insurance and health insurance .

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composit or mixed supply :

(ii) membership of a club , health and fitness centre ; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession ;

Provided that the input tax credit in respect of goods or services or both shall be available , where it is obligatory for an employer to provide the same to its employees under any law for the time being in force .

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for furthe supply of works contract service;

(d) goods or services o r both received by a taxable person for construction of an Immovable property (other than plant or machinery) on his own account including when such good s or services or both are used in the course or furtherance of business.

Explanation.–– For the purposes of clauses (c) and (d) , the expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a nonresident taxable person except on goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i) any tax paid in terms of sections 74, 129 and 130.

It is pertinent to note that for earlier clause (a) and clause (b) of sub-section (5) of section 17, the aforesaid clause (a) , clause(aa) , clause (ab) and clause (b) have been inserted by The Central Goods And Services Tax (Amendment) Act , 2018 ( No. 31 of 2018) and have come into force from Ist February , 2019 .

It is abundantly clear that the provisions of sub-section(5) of section 17 shall have overriding effect on the provisions embodied in sub-section (1) of section 16 and sub-section (1) of section 18 . It is to be noted that these sub-sections embody following provisions :

“16(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

“18 (1) Subject to such conditions and restrictions as may be prescribed–

(a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act;

(b) a person who takes registration under subsection (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration;

(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed;

(d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.”

1- Clause (a) of sub-section (5) of section 17 :

The amended clause (a) of sub-section (5) of section 17 makes it quite evident that it applies only in case of motor vehicles which have approved seating capacity of not more than thirteen persons ( including driver ) . Thus it is amply clear that any vehicle which has approved seating capacity of more than 13 persons ( including driver ) will not attract the provisions of clause (a) of sub-section (5) of section 17 . Thus normal mini buses , buses etc. which have approved seating capacity of more than 13 persons (including driver ) have been kept out of the ambit of clause (a) . However this clause will apply to cars , jeeps , gypsy etc. which have approved seating capacity less than 13 persons (including driver ) .

Aforesaid clause (a) envisages that no ITC shall be available for motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including driver ) . However this clause envisages following three exceptions to this non-availability of ITC in respect of motor vehicles having approved seating capacity of not more than thirteen persons (including driver ) . It envisages that ITC shall be available in respect of such vehicles when they are used for the execution of following taxable supplies :

(i) when such vehicle is further supplied to any other person i.e. a transaction in which such vehicle is supplied to any other person . In such cases the supplier of such vehicle will claim ITC .

(ii) when such vehicle is used in the transportation of passengers i.e. it is not used for personal purposes but is used for the execution of taxable services of transportation of passengers . Thus cabs , taxies etc will not attract the non-availability provisions regarding ITC as embodied in clause (a) .

(iii) when such vehicle is used for imparting training of driving such vehicle because training of driving vehicle is taxable service under the Act .

Thus the crux of aforesaid exceptions is that whenever the vehicle which has approved seating capacity of not more than 13 persons ( including driver ) , is used to execute any of the aforesaid taxable supplies then the non-availability of ITC as envisaged by aforesaid clause(a) shall not apply .

Illustration : Where any car is purchased by a business entity for the use of its Directors to attend various business seminars and meeting , no ITC shall be available in respect of such car despite the fact that it is to be used in the furtherance of business and as such this use falls in the ambit of sub-section (1) of section 16 . The reason for such non-availability is that the use of such vehicle by the Directors does not fall in the exceptions as mentioned in clause (a) of sub-section (5) of section 17 and this it is abundantly clear that this clause (a) enjoys precedence over provisions embodied in sub-section (1) of section 16.

2- Clause (aa) of sub-section (5) of section 17 :

Clause (aa) of sub-section (5) of section 17 envisages that ITC shall not be normally available in respect of vessels and aircrafts . However this clause envisages following exceptions when ITC shall be available in respect of vessels and aircrafts . These exceptions are –

(i) when such vessels or aircrafts are used –

(a) for making further supply of such vessels or aircrafts . It is to be noted that such supply is taxable under the Act ; or

(b) for transportation of passengers . It is to be noted that such supply is taxable under the Act ; or

(d) for imparting training or flying such aircrafts . It is to be noted that such supply is taxable under the Act .

(ii) when such vessels or aircrafts are used for transportation of goods . It is to be noted that such supplies are taxable under the Act .

3- Clause (ab) of sub-section (5) of section 17 :

Clause (ab) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of –

(i) services of general insurance ,

(ii) servicing ,

(iii) repair , and

(iv) maintenance

if they relate to motor vehicles , vessels or aircraft referred to in clause (a) or clause(aa) .

However the proviso to this clause (ab) also provides exceptions and envisages that ITC in respect of aforesaid services shall be available in following cases –

(i) where such motor vehicles , vessels or aircraft referred to in clause (a) or clause(aa) are used for the taxable supplies specified therein .

(ii) where such services are received by a taxable person who is engaged –

(a) in the manufacture of such vehicles , vessels or aircraft ; or

(b) in the supply of general insurance services in respect of such motor vehicles , vessels or aircraft insured by him .

4- Clause(b) of sub-section(5) of section 17 :

Clause(b)(i) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of following goods and services :

(a) food and beverages ;

(b) outdoor catering ;

(d) health services ;

(e) cosmetic and plastic surgery ;

(f) leasing , renting or hiring of motor vehicles , vessels or aircraft as referred in clause(a) or clause (aa) except when they are used for purposes specified therein ;

(g) life insurance services ; and

(h) health insurance services .

However proviso to Clause(b)(i) of sub-section (5) of section 17 clarifies that ITC in respect of aforesaid goods or services or both shall be available where any registered recipient of such goods and services-

(1) uses them for making outward supply of the same category of goods or services or both ; or

(2) uses them as an element of outward taxable composit or mixed supply .

A-Non-availability of ITC in case of Food & Beverages :

It is pertinent to note that Clause(b)(i) of sub-section (5) of section 17 provides non-availability of ITC in respect of food and beverages with the exception being provided in the proviso to this clause. However it no where denies the availability of ITC in respect of raw materials required to be used in the manufacturing of food and beverages . Thus the registered restaurants , hotels etc which execute the activity of manufacturing food will get ITC in respect of the raw materials used in the manufacturing of such food . Similarly registered persons manufacturing beverages will get ITC in respect of the raw materials used by them in the manufacturing of such beverages .

It is also abundantly clear from the provisions embodied in Clause(b)(i) of sub-section (5) of section 17 that where any recipient registered entity receives the supply of food and beverages for the purpose of distribution of such goods among its employees , such recipient registered entity shall not get any ITC in respect of such food and beverages .

However it is also quite evident from the provisions embodied in Clause(b)(i) of sub-section (5) of section 17 that where any registered recipient person receives the supply of food and beverages for the purposes of outward supply to other persons , such registered recipient person who makes outward supply of such food and beverages will get ITC in respect of such food and beverages .

B- Non-availability of ITC in respect of leasing , renting or hiring of motor vehicles , vessels or aircraft :

It is also quite evident from the provisions embodied in Clause(b)(i) of sub-section (5) of section 17 that normally ITC shall not be available in respect of leasing , renting or hiring of motor vehicles , vessels or aircraft as referred in clause(a) or clause (aa). However ITC in respect of leasing , renting or hiring of motor vehicles as mentioned in clause(a) shall be available if they are used for the execution of following taxable supplies :

(i) when such vehicle is further supplied to any other person i.e. a transaction in which such vehicle is supplied to any other person . In such cases the supplier of such vehicle will claim ITC .

(iii) when such vehicle is used for imparting training of driving such vehicle because training of driving vehicle are taxable services under the Act .

Similarly ITC in respect of leasing , renting or hiring of motor vehicles as described in clause (aa) shall be available in respect of aforesaid category of vehicles when they are used for the execution of following taxable supplies :

(i) when such vessels or aircrafts are used –

(a) for making further supply of such vessels or aircrafts . It is to be noted that such supply is taxable under the Act ; or

(b) for transportation of passengers . It is to be noted that such supply is taxable under the Act ; or

(d) for imparting training or flying such aircrafts . It is to be noted that such supply is taxable under the Act .

(ii) when such vessels or aircrafts are used for transportation of goods . It is to be noted that such supplies are taxable under the Act .

C- Non-availability of ITC in respect of membership of a club , health and fitness centre :

It is pertinent to note that Clause(b)(ii) of sub-section (5) of section 17 provides non-availability of ITC in respect of membership of a club , health and fitness centre . Thus this clause only denies ITC in respect of membership of a club , health and fitness centre but it does not denies ITC to club or health and fitness centre for their other business activities .

D- Non-availability of ITC in respect of travel benefits :

It is pertinent to note that Clause(b)(iii) of sub-section (5) of section 17 provides non-availability of ITC in respect of travel benefits which are extended to employees on vacation such as leave or home travel concession.

However the proviso to this clause clarifies that where it is obligatory on the part of the employer to provide such facility to its employees under any law for the time being in force , ITC shall not be denied in respect of underlying goods or services or both .

5- Clause(c) of sub-section (5) of section 17 – Non-availability of ITC in respect of works contract services :

It is pertinent to note that clause(c) of sub-section (5) of section 17 provides non-availability of ITC in respect of works contract services when such services are supplied for construction of an immovable property (other than plant and machinery) . However this clause also provides an exception to this non-availability and envisages that ITC shall be available where such works contract service is an input service for further supply of works contract service;

It is pertinent to note that “works contract” has been defined in clause (119) of section 2 of the Act in the following manner :

2(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods is involved in the execution of such contract;

However the term ” works contract ” as defined in clause (119) of section 2 should be understood in its widest perspective . It not only includes a contract for building construction or its improvement or repair or maintenance or renovation etc. in which transfer of property in goods is involved but it includes construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods is involved in the execution of such contract;

To understand the periphery of “works contract ” it is pertinent to go through the Finance Act , 1994 in which works contract has been defined in the following manner :

“(Section 65 (105) (zzzza) of Finance Act, 1994) “Works contract”, for the purposes of section 65(105)(zzzza), means a contract wherein,-

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects; “

It should be again born in mind that by mentioning the words “any immovable property wherein transfer of property in goods is involved in the execution of such contract;” the scope of works contract under the aforesaid clause has been widened to include every immovable property in which transfer of property in goods is involved .

The most significant thing about ‘works contract’ is its nature of composite supply , as has been clarified by Schedule-II to this Act which embodies activities to be treated as supply of goods or supply of services . At serial no. 6 in the heading of “composite supply ” it has been envisaged that-

“6. Composite supply :

The following composite supplies shall be treated as a supply of services, namely:—

(a) works contract as defined in clause (119) of section 2 and

(b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”

Thus it is abundantly clear that works contract as defined in clause(119) of section 2 shall be treated as supply of services .

It is pertinent to note that clause (30) of section 2 defines composite supply in the following manner :

“(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.”

It is also significant to note that in Article 366 of the Constitution clause (29A) has been retained even after the Constitution ( One Hundred And First Amendment ) Act , 2016 thus transfer of property in goods remains a taxable component even in the GST regime .

Thus the combined study of the aforesaid legal provisions makes it quite evident that ‘works contract’ shall be treated as composite supply with principle supply being supply of services but it does not mean that the ancillary component of transfer of property in goods in the execution of works contract shall not be taxed . As a matter of fact the total amount comprising of component of services as well as component of transfer of property in goods shall be taxed treating it as the supply of services for the purposes of this Act .

Now coming to clause (c) of sub-section (5) of section 17 , this clause envisages that normally no ITC shall be available in case of works contract services for the construction of an immovable property other than plant and machinery . Thus this clause clarifies that ITC shall be available in case of works contract services for the construction of plant and machinery .

This clause further provides an exception and envisages that in case of works contract services for the construction of immovable property other than plant and machinery , ITC shall be available if such services are of the nature of input services for further supply of works contract services .

Illustration-1 : Where any person / builder receives works contract services for the construction of a certain flats for the prospective buyers , ITC shall be available to such person/builder as in this case such person / builder is receiving such services as input services for their further supply to prospective buyers .

Illustration-2 : Where any person/ builder receives works contract services for the construction of flats and after construction of such flats he supplies such constructed flats on the auction basis to different recipients , no ITC shall be available to such person / builder because in this case the works contract services have not been received as input services for further supply of such services .

6- Clause (d) of sub-section (5) of section 17 : Non-availability of ITC in case of own account purchases for construction of an immovable property :

Clause (d) of sub-section (5) of section 17 envisages that ITC shall not be available to a taxable person in respect of goods or services or both received by him in his own account for the construction of an immovable property other than plant or machinery even if such goods or services or both are to be used in the course or furtherance of business .

Thus where any person receives any goods or services or both in his own account for the construction of his business premises or his own building , no ITC shall be available in respect of such goods or services or both to such person .

Similarly where any person engages any contractor for the construction of his business premises and provides him certain goods purchased by him in his own account , he will not get any ITC in respect of such goods purchased by him for the construction of such business premises and also no ITC shall be available to him in respect of the services provided by the contractor relating to such construction . However the contractor shall get ITC in respect of inputs purchased by him on behalf of aforesaid person in the execution of such construction because such inputs are for the construction of business premises of aforesaid person and are purchased by the contractor for this purpose only .

The explanation after clause (d) of sub-section (5) of section 17 clarifies that for the purposes of clauses (c) and (d) , the expression “construction ” includes reconstruction , renovation , additions or alterations or repairs , to the extent of capitalization , to the said immovable property .

7- Clause (e) of sub-section (5) of section 17 :

Clause (e) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of goods and services or both on which tax has been paid under section 10 of the Act. It is pertinent to note that section 10 of the Act embodies provisions relating to composition levy . Thus whosoever will receive the supplies of goods or services or both from a person who has opted for composition levy , shall not get ITC in respect of such goods or services or both .

8- Clause (f) of sub-section (5) of section 17 :

Clause (f) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of goods or services or both received by a non-resident taxable person except where such non-resident person has imported the goods . Thus in respect of goods imported by him , ITC shall be available .

It is pertinent to note that clause (77) of section 2 defines “non-resident taxable person” in the following manner :

“(77) “non-resident taxable person ” means any person who occasionally undertakes transactions involving supply of goods or services or both , whether as principal or agent or in any other capacity , but who has no fixed place of business or residence in India . “

9- Clause (g) of sub-section (5) of section 17 :

Clause (g) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of goods or services or both which are used for person consumption . It is quite obvious that once goods or services or both are personally utilized by the consumer , the ITC chain shall culminate at that point and as such ITC shall not be available to such consumer in respect of such receipts of goods or services or both .

10- Clause (h) of sub-section (5) of section 17 :

Clause (h) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of goods lost , stolen , destroyed , written off or disposed of by way of gift or free samples . It should be born in mind that ITC is available in respect of only taxable supplies and zero-rated supplies and clause (h) specifically mentions with overriding effect the aforesaid goods in respect of which no ITC shall be available .

11- Clause (i) of sub-section (5) of section 17 :

Clause (i) of sub-section (5) of section 17 envisages that no ITC shall be available in respect of any tax paid in terms of sections 74, 129 and 130 .

It is pertinent to note that under section 74 , the tax is paid as a result of determination of tax not paid or short paid or erroneously paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful miss-statement or suppression of facts .

Under section 129 , the tax is paid as a result of order passed by the proper officer under sub-section (3) of section 129 because of detention and seizure of goods and conveyances in transit .

Under section 130 , the tax is paid as a result of confiscation of goods or conveyances .

Thus sub-section (5) of section 17 envisages various provisions in respect of goods or services or both , with certain exceptions , where ITC shall not be available irrespective of the fact that such a denial may not be in consonance with the provisions embodied in sub-section (1) of section 16 or sub-section (1) of section 18 .

Yogendra Kumar

Retd. Additional Commissioner (Law )

Commercial Taxes , Uttar Pradesh