Sec 17 – Apportionment of credit and blocked credits

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Sec 17 – Apportionment of credit and blocked credits 2017-04-14T11:49:43+00:00

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  • Ashish BadalaCA Ashish Badala
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    (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.
    (4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:
    Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year:
    Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.
    (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 and other conveyances except when they are used–
    (i) for making the following taxable supplies, namely:-
    (A) further supply of such vehicles or conveyances ; or
    (B) transportation of passengers; or
    (C) imparting training on driving, flying, navigating such vehicles or conveyances;
    (ii) for transportation of goods;

    (b) the following supply of goods or services or both-
    (i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category 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 composite or mixed supply;
    (ii) membership of a club, health and fitness centre;
    (iii) rent-a-cab, life insurance and health insurance except where–
    (A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
    (B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
    (iv) travel benefits extended to employees on vacation such as leave or home travel concession;
    (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 further supply of works contract service;
    (d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods 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 re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, 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 non-resident 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 accordance with the provisions of sections 74, 129 and 130.
    (6) The Government may prescribe the manner in which the credit referred to in sub-sections (1) and (2) may be attributed.
    Explanation.–For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-
    (i) land, building or any other civil structures;
    (ii) telecommunication towers; and
    (iii) pipelines laid outside the factory premises.

    Priya MadrechaPriya Madrecha
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    17.1    Introduction
    The input tax credit eligibility is based on whether the same is used for taxable supplies or zero rated supplies. Where the goods or service is used for both taxable and exempted supplies, only proportionate credit is eligible for registered person, Further, a list of ineligible input tax credit is also Provided.
    17.2    Analysis
    (a)     Proportionate credit:
    ITC based ON usage in business

    ITC based ON use of Inputs

    The value of exempt supplies shall include supply on which tax is paid under Reverse Charge, transaction in securities, sale of land and sale of building subject to clause (b) of Paragraph 5 of Schedule II. Please note that supplies in respect of which the outward supplier is not liable to pay tax but the recipient is made liable to pay the tax, then due to section 17(3), for the limited purpose of restricting input tax credit to the supplier (who is not made responsible to pay tax due to RCM provisions) the value of these supplies will be regarded as ‘exempt supplies’ while arriving at the net available input tax credit. Doubts have been raised whether such supplies should be included as exempt supplies by the recipient who pays the tax (on RCM basis). This is not the case, as the recipient has not made such supply.
    In case, goods or services or both are partly used in taxable supplies and partly in non-taxable supplies, then amount of credit shall be restricted to the taxable supplies. Taxable supplies include zero rated supplies and exempt supplies shall include non-taxable supplies.
    Provisions in respect of SEZ developers/units in GST contrasts with the current VAT laws where certain States allow input tax credit to SEZ developers / units, only if such goods or services or both qualify as inputs or input services (used or intended to be used in the course or furtherance of business). And in certain other States, SEZ developers and units are allowed credit (refund) without examining the end use of the goods purchased.
    (b) Banking Company or financial institution including NBFC engaged in accepting deposits, extending loans or advances: There is an option allowed as detailed in Rule 3 as follows:
    (i)    Refrain from availing input tax credit relatable to ‘non-business purposes’ and not avail any credit restricted u/s 17(5) (discussed in detail below) and make this election known in FORM-GSTR 2 or
    (ii)    Avail full extent of credit on inter-branch supply of services of the banking or NBFC company and also avail 50% of ‘all other’ input tax credits. ‘All other’ credits refer to input tax credit that would have been available u/s 16 before administering the restriction in this section.
    6. Ineligible input tax credit: input tax credit shall not be available in respect of the following
    (i)    Motor vehicle and other conveyance except when they are used for making the
    following taxable supplies , namely-
    (a)    Further supply of such vehicles or conveyances or
    (b)    Transportation of passenger or
    (c)    Imparting training on driving, flying, navigating such vehicles or conveyances;
    (ii)    Motor vehicle and other conveyance except used for transportation of goods (iii)     Supply of goods and/or services such as –
    (a)    food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such supply of goods or services of each category is used for making an outward taxable supply of the particular category of goods or services or both or as an element of a taxable composite or mixed supply
    (b)    membership of a club, health and fitness centre
    (c)    rent-a-cab, life insurance, health insurance except where it is notified by the Government as obligatory for an employer to provide to its employees under any law for the time being in force; or such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
    (d)    travel benefits to employees on vacation i.e. leave or home travel concession.
    (iv)    Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is for further supply of works contract service;
    It is important to note that credit of GST paid on works contract services will be allowed only if the output is also works contract services.
    (v)    Goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even though it is used in course or furtherance of business;
    “Construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property. Please note that ‘alterations’ and ‘repairs’ are also included in this definition.
    (vi)    Goods or services or both on which the tax paid under composition scheme
    (vii)    goods or services or both received by a non-resident taxable person except on goods imported by him
    (viii)    Goods or services or both used for personal consumption
    (ix)    Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
    (x)    Tax paid in terms of sections 74, 129 and 130
    7. Plant and machinery: means apparatus, equipment, machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes land, building or any other civil structures, telecommunication towers; and pipelines laid outside the factory premises.
    The analysis of above provision in a pictorial form is summarised as follows:
    Restrictions on ITC: Sec 17(5)
    Blocked credits

    Note: Where any amount has been paid on goods or services or both, in lieu of tax, under composition scheme, no credit on such amount would be allowed.
    (b)    Supply of goods and services being:

    (c)    Construction of Immovable Property (other than plant & machinery)

    17.3    Comparative review:
    Aspect     Credit under present system     Input tax credit under GST
    Proportionate credit     No explicit distinction made between goods or services used for business and nonbusiness     Specific distinction made between goods or services used for business and nonbusiness
    Works contract credit     Restriction to inputs only     Credit Allowed when used for further supply of works
    contract
    Credit on inputs used for construction of immovable property     Input or Input Service used for civil construction not eligible.      Restriction to both inputs and input services.
    Credit related to works contract and construction w.r.t plant and machinery     Plant and machinery not excluded from restriction of credit     Plant and machinery is excluded from restriction of credit
    17.4    FAQ
    Q1. Where goods or services or both is received, which is used for both taxable and nontaxable supplies, what would be the input tax credit entitlement for the registered person?
    Ans. The input tax credit of goods or service or both used in taxable supplies can only be taken by registered person.
    17.5    MCQ
    Q1. Which of the following is included for computation of taxable supplies for the purpose of availing credit:?
    (a)    Zero-rated supplies
    (b)    Exempt supplies
    (c)    Both
    Ans. (a) Zero Rated supplies

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