Check Out: ITC Ineligibility Terms & Conditions Under GST

Get to know about all the changes made in the ITC (Input Tax Credit) eligibility under GST (Goods and Services Tax) which came into effect on 1st February 2019.

The implied changes in credit limitations are the resultant of the confusion in various possible definitions of the law. The main objective was to clear the doubts and to make sure that the citizens do not face any difficulty because of the law. An analysis has been done which is given below:

Changes in Eligibility of ITC

GST was introduced with the purpose to provide the citizens with easy credits by debarring the cascading effect of taxes which was because of the various state and central indirect tax laws.

The cascading effect, as compared to pre-GST, has been reduced except for the IGST on Imports, GST on TCS, IGST on Import Ocean Freight service, and many more. So we can say that the dream of easy credit is still to achieve. Adding more difficulties to the citizen’s life, a new section has been introduced i.e section 49A in which the ITC eligibility has been changed that will result to more collection of CGST (Central Goods and Services Tax) credit and more payment of SGST (State Goods and Services Tax) liability in cash.

Read Also: Full Procedure to File TDS & TCS Credit Received on GST Portal

ITC is eligible when the use of commercial sanctions under Section 17 (5) of the CGST (Central Goods and Services Tax) Act is used for further processing, the following are:

ITC on Motor Vehicles

The ITC will be applicable only on Motor vehicles which will be approved for the seating capacity of only 13 persons including the driver and not more than that. It will not be applicable if-

• there is the supply of such motor vehicles ahead; or
• the vehicle becomes the transportation of passengers; or
• giving driving training on such motor vehicles.

Analysis:

The motor vehicles that were earlier used for goods transportation will still remain eligible. Only the wordings have been modified in the earlier act to remove the ambiguity in interpretation.

1. The ‘motor vehicle and other conveyance’ has been rephrased as ‘transportation of passengers’.
2. Through the recent modification, the word ‘transport of goods’ has been isolated from the exceptions which are listed as ineligible ITC under the Act.

Motor Vehicle with More Than 13 Seaters is Eligible for ITC

1. Motor Vehicle with more than 13 persons including driving is eligible for ITC if it has approved seating capacity.
2. Physical verification of motor vehicle can be done to confirm the number of available seats
3. For such a vehicle, the verification of the approved seating capacity will be based on RC-smart card (registration certificate).

ITC on Vessels & Aircrafts

(aa) Aircraft and vessels are eligible for ITC and are not eligible when they –

(I) make the taxable supplies such as:

• a further supply of aircraft and vessels; or
• transportation of passengers; or
• providing navigating training on such vessels; or
• Providing flying training on such aircraft;

(II)  transport goods;

Analysis:

In the earlier act, aircraft and vessels were not explicitly covered or mentioned under the restricted credits, However, implicitly they were considered to be a part of ‘other conveyances’.

1. From the recent amendments in ITC eligibility under the GST act, it can be argued that ITC on the same has been restricted. Earlier, from July 2017 to January 2019, ITC was eligible for the same.
2. Section 17(5) (g) of the CSGT act restricts the eligibility of ITC on the goods and/or services that are used for personal consumption. It also explicitly specify the conditions under Section 15(5) (aa), wherein the claim for ITC by businesses can be rejected by the tax department.
3. This particular area mentioned under Section 17(5) for eligibility of ITC could be highly legible with high risk and benefits. If the tax departments consider the ITC for the past period, then the same could also be disputed by other tax departments due to ambiguity in new and old rules. For taxpayers, it is better to perform a cost-benefit analysis before giving consideration to any ITC rule. Taxpayers can also seek an expert legal opinion during the departmental officer’s visit.

ITC on Insurance, Repairs & Maintenance, etc.

(ab) General insurance, repair, servicing, and maintenance services are related to the motor vehicles, aircraft or vessels which are mentioned in clause (a) or clause (aa)

Mandatory Conditions for Claiming the ITC:

• Where motor vehicles, aircraft or vessels specified in clause (a) or clause (aa) are used for the purposes specified in it;
• Where obtained by a taxable person busy-
  • in the making of motor vehicles, aircraft or vessels; or
  • In the providing of services of the general insurance ‘in respect of’ motor vehicles, aircraft or vessels which are insured by him.

Analysis:

The eligibility of ITC on motor vehicles, aircraft and vessels and also the eligibility on the repairs & maintenance and related insurance has been clarified. Given below are the possible categories for the above-mentioned goods:

• Motor vehicles -> transport of goods
• Motor vehicle -> for passengers -> when approved seating capacity is more than 13
• Other Motor vehicles -> for passengers -> satisfies approved conditions only
• Vessels & aircrafts -> satisfies approved conditions only

Formerly, there were many opinions which are given below-

1. Some said that such expenses were not mentioned under section 17(5), so the ITC must be eligible. ITC has been claimed from July 2017 to January 2019.
2. Some said that the words ‘in respect of’ has been included in section 17(5) which means that ITC is ineligible for motor vehicles, i.e. repairs,  maintenance and insurance.

Although, I largely believe that the word ‘namely’ mentioned under the Section 17(5) of CGST act was a confirmation that ITC cannot be claimed for the ones which are mentioned below; hence, it cannot be said that the ITC is directly applicable to other related credits.

Recommended: Input Tax Credit Guide Under GST: Calculation with Examples

Now, after the amendments in Section 17(5) by the department, it is very clear to everyone that the Indian government has restricted ITC on the same under GST. Earlier, ITC was eligible for the mentioned categories from July 2017  to January 2019.

ITC on Various Other Goods & Services

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

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

ITC must be eligible for such goods or services or both in which an inward supply of such goods or services or both can be done by a registered person for making an outward taxable supply of the similar category of goods or services or both or as an element of a taxable composite or mixed supply;

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

(iii) employees got extended travel benefit on vacation such as leave or home travel concession:

ITC must be eligible for such goods or services or both, where it is compulsory for an employer to give its employees for the same time under any law;

The above has been precised in a simple way which is given below:

• Renting, leasing, or hiring of motor vehicles, aircraft or vessels
• Food and beverages
• Outdoor catering
• Beauty treatment
• Health services
• Cosmetic and plastic surgery
• Health Insurance
• Life Insurance
• Membership of club, health & fitness centre
• Travel benefits extended to employees on vacation

Conclusion:

The modification done in the ITC ineligibility under GST (Goods and Services Tax) has some clarity and transparency. Because of the add on of the ITC ineligible, the dream to achieve easy credit has loosen up. So all the ITC mentioned in GSTR-2A (the report filed GSTR 1 by the seller) is not observed as eligible ITC. Under Section 17 (5) of Rule 36 and restriction under documentation requirements, to ensure compliance with GST and to avoid unnecessary burden of interest/fines, it has to be re-verified.

Given the nature and track record of the Indian population, the government has imposed many restrictions in the law. Either we become obedient under Indian law, which will completely reduce our tax liability, or the government should take a leap of faith and enable a large population to simplify the law.