Restriction on Input Tax Credit in GST draft

Revised draft of Model GST Law has been on public domain now. There are some changes in the provisions of ITC. New restrictions are there on input tax credit in GST revised draft. The main reason for emergence of GST was free flow of Input tax credit (ITC). It is not going to be that smooth although we can say that it is better then what we had earlier. Here in this article we will discuss the main restrictions for Input Tax Credit  in  GST law:

Section 16:  Input tax credit in GST is covered by section 16 to section 22, chapter V.

• Pipelines and Telecommunication Towers: credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto shall not exceed:

Year of receipt: One third of total input tax credit

Next financial year: Two third of the total input tax credit in GST.

Any next financial year: balance of total input tax credit in GST.

• Basic conditions for entitlement of credit by recipient
  1. He is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying document(s) as may be prescribed;
  2. he has received the goods and/or services;
  3. the tax charged in respect of such supply has been actually paid to the account of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
  4. he has furnished the return under section 34

• Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or instalment.

• Payment by recipient of services within three months (New Provisions): where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in the manner as may be prescribed.

• If depreciation is claimed on value of GST: Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961(43 of 1961), the input tax credit shall not be allowed on the said tax component.

• No ITC after filing of return for the month of September: A taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services after furnishing of the return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Section 17: Apportionment of credit and blocked credit

No ITC in respect of following goods/services:

• Motor Vehicle: 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.

• Availability of ITC only if supply is used in outward supply of same nature: In respect of following items the ITC will be available only if the input supply is used for making the outward supply of same nature:
  1. food and beverages
  2. outdoor catering
  3. beauty treatment
  4. health services
  5. cosmetic and plastic surgery
• Membership of a club, health and fitness centre, rent-a-cab, life insurance, health insurance except where 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; and
• travel benefits extended to employees on vacation such as leave or home travel concession.
• works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service. There is a minor change in this provision. If the works contract services are received as input services to provide the works contract services then the ITC will be available. In case of sub-letting of works contract credit will be available. Restriction of
• goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business.