Input Tax Credit is the bedrock of the GST structure. Input Tax Credit makes the GST a justiciable tax structure in India and thus helps eliminate the earlier ‘tax on tax’ effect as was in the pre-GST era.
Though Input Tax Credit is an integral part of the GST, specific scenarios exist where ITC cannot be claimed. In case if you claim ITC in these cases, it will be treated as ineligible ITC claim and you will have to reverse it.
In this dedicated article, we will be looking at some of the scenarios where you will not be allowed to claim Input Tax Credit.
Some cases in GST where Input Tax Credit Under GST remains unavailable
Input Tax Credit under GST cannot be claimed on certain goods and services. This section will describe all the possible scenarios where claiming of Input tax Credit remains unavailable.
However, there are some exceptions to these cases, and we will be mentioning them wherever required.
Supply of Food, Beverages, Club Memberships
However, there is an exception:
A taxpayer can avail of Input Tax Credit under GST if both the inward & outward supply belongs to the same category.
It simply means that if the taxpayer consumes the inward supplies to make the outward taxable supplies of the same category of goods or services.
Motor vehicles to transport people & conveyances
Input Tax Credit under GST will not be allowed if:
Following are some of the exceptions in this case:
Input Tax Credit will be allowed to claim if:
Insurance of vehicles, servicing, repairing & maintenance
Availing of Input Tax Credit under GST will not be allowed on availing the services of general insurances of the vehicles.
ITC will also not be allowed for servicing, repairing & maintenance of motor vehicles (for example GST on cars), vessels, and aircraft.
However, there are certain exceptions to this:
Travelling other than business travel
A taxable person cannot claim any Input Tax Credit for the GST paid on his personal travelling.
A taxable person also cannot claim any ITC for the GST paid on the travel benefits extended to the group of employees of a company.
There is one exception in this scenario:
When business travel is involved, the taxable person can claim ITC on the GST paid on these travel expenditures.
However, the travel must be for the furtherance of business or business activities.
Work contract services
Input Tax Credit cannot be claimed on the work contract services provided for the construction of immovable properties.
In addition to this, Input Tax Credit will also not be available to the taxpayers for constructing an immovable property on his account.
Even if the goods & services are used for business purposes, ITC will NOT be allowed.
This rule holds for only the construction of immovable property. However, this rule does NOT fit for plants or machinery used for the business.
ITC will be available in the following cases:
- On the inputs used in the manufacturing plant or the machinery used in the manufacturing processes.
- Jethalal Textiles build a storage house for their final products. As this is an immovable property, the Input Tax Credit on the GST paid on building this depot, and all the inputs used in the construction will NOT be allowed.
- On the contrary, if the Jethalal Textile buys some goods to set up a ‘weaving plant machinery'. Then this will be counted as the goods used for the furtherance of business via extending the machinery.
Hence, Input Tax Credit will be availed on the GST paid on the input goods for this machinery.
Fraudulent ITC claims
Needless to say, availing of Input Tax Credit will NOT be available if the tax paid has resulted into:
Recently, mega ITC frauds have come to light which sums up as high as Rs. 35,000 Crore.
It is essential that the businesses stay away from ITC frauds and scrutinize their ITC claims before availing of the final ITC.
For this purpose, ITC reconciliation has become more essential than ever to stay compliant with the GST laws and stay away from the radar of the GST department & departmental audit.
In no circumstances will the taxable person be allowed to avail of the Input Tax Credit on the input goods or services used for personal consumption.
However, if a person uses common goods for business and personal use, then the person can take the common credit for the goods used for the business furtherance part.
ITC for non-resident citizens
ITC will not be available for the inputs of goods or services or both by a taxable non-resident Indian citizen.
A non-resident taxable person will not be able to claim any refunds. However, this non-resident taxable person will be allowed only to claim ITC on those goods he imports.
In a nutshell
Input Tax Credit is the most lucrative feature of the GST structure, making it a justiciable tax system over its predecessors.
However, there are certain cases discussed in this article on which the ITC claim is NOT available.
The businesses must have a robust ITC reconciliation system to claim only the eligible ITC and stay protected against ITC frauds.
GSTHero’s ITC reconciliation solution is an entirely automated solution that gives you a comprehensive ITC reconciliation report generated based on your GSTR-2A & GSTR-2B.
This report is scrutinized at a macro level, allowing you to claim about 100% of Input Tax Credit under GST. It also manages & tracks your defaulting suppliers by sending them frequent reminders about the error.
For all your GST needs, GSTHero has got you covered with outstanding & automated solutions.
We currently cater to about 5,000+ businesses pan India.
In GST compliance, you can trust us!