Significant types of GST credit

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June 2, 2023

Types of GST credit:

Eligible

Non-eligible

Blocked

Introduction:

Under the Goods and Services Tax (GST) in India, input tax credit (ITC) is an essential feature that allows businesses to claim credit for the taxes they have paid on inputs used in the course of their business. However, not all inputs are eligible for ITC. Here are the Different Types of GST credit in which eligible,non-eligible, and blocked ITCs under GST are considered. Every businessman must know what are the eligible credit for them otherwise claiming and utilization of ineligible credits may attract penal provisions under GST. The eligible or ineligible credit may vary from business to business:

List of Eligible Input Tax Credits (ITC) under GST:

Input tax credits on goods and services used for business purposes and acquired from registered suppliers
ITC on inputs (raw materials), including inputs used in the manufacture of goods such as components, ingredients, and packaging materials
ITC on capital goods, including machinery, equipment, and tools, used for business purposes
ITC on input services, such as transportation, logistics, advertising, legal, accounting, and consulting services
ITC on inward supplies received from a supplier located in a Special Economic Zone (SEZ).
ITC on tax paid on reverse charge mechanism (RCM) supplies, where the recipient of goods or services is liable to pay tax
ITC on goods and services used for making taxable supplies, including both goods and services supplied within the same state or across different states
ITC on interstate supplies, including imports, where Integrated Goods and Services Tax (IGST) has been paid
ITC on tax paid under the composition scheme while switching from the composition scheme to the regular scheme.
ITC on tax paid for goods or services used for making exempt supplies if such supplies also fall under the category of “business.”
ITC on tax paid on goods or services used for the furtherance of business, such as employee welfare activities, marketing expenses, office maintenance, etc.
ITC on tax paid on goods or services used for the manufacture or production of goods for export or for supply to Special Economic Zones (SEZs).

Non-Eligible Goods and Services for ITC:

All those purchases or expenses which do not pertain to business are not eligible for taking input tax credit. For example, if you are in the business of selling paints for walls then input tax credit of fabrics purchased cannot be claimed since there is no nexus between purchases made with existing business.
Goods and services used for personal purposes or non-business activities
Goods and services used for exempt supplies or supplies that are not subject to tax
Motor vehicles, unless they are used for certain specified purposes like transportation of goods or providing taxable services.
Goods and services used for the construction of immovable property for personal use
Food, beverages, and catering services, except when used for business-related activities like employee welfare or customer entertainment.
Renting or leasing motor vehicles used for personal purposes.
Goods and services are used for activities that are not within the scope of the taxable person’s business.

Blocked ITC

Motor vehicles: ITC cannot be claimed on the purchase of motor vehicles unless they are used for specific purposes. Such as providing taxable transportation services, renting them out as taxis, or for training purposes.
Food, beverages, and outdoor catering: ITC is not available for goods or services related to food, beverages, and outdoor catering, except when used for further supply. Such items or for providing specified services like restaurants, canteens, and catering services.
Membership in clubs, health clubs, and fitness centers: ITC cannot be claimed on expenses related to membership in clubs, health clubs, and fitness centers. Unless they are specifically required for business purposes like employee welfare.
Travel benefits to employees: ITC is blocked on expenses related to travel benefits provided to employees, such as vacation trips, accommodation, or any other similar benefits.
Works contract for construction of immovable property: ITC cannot be claimed on goods or services used for the construction of an immovable property, except in certain circumstances. Such as when it is an input service for further supply of works contract services.

Specific goods and services

ITC is not available on the purchase of certain goods and services, such as:

Alcohol for human consumption
Tobacco and tobacco products
Supplies made for the construction of an immovable property (except in specified cases)
Works contract for the construction of the immovable property.

Conditions for Availing ITC

Conclusion:

The input tax credit (ITC) is a significant aspect of GST. It promotes the seamless flow of credit and reduces the tax burden on businesses. However, it is crucial to understand the different types of GST credit to avoid unnecessary complications and ensure compliance. By adhering to the regulations, and maintaining proper documentation. Also seeking professional guidance, businesses can effectively manage the impact of types of GST credit and optimize their tax positions.

FAQs

Q: Can I claim the input tax credit on the purchase of a motor vehicle?

A: The input tax credit on motor vehicles is generally not available, except when they are used for specific purposes such as transportation services or renting them out.

Q: Are there any goods on which ITC is completely blocked under GST?

A: Yes, certain goods like alcohol for human consumption, tobacco, and tobacco products are completely blocked from claiming input tax credits.

Q: Can I claim the input tax credit on health insurance premiums for my employees?

A: The input tax credit on health insurance premiums is generally not available unless it is mandated by law or a statutory requirement.

Q: How can I minimize the impact of non-eligible ITC on my business?

A: Maintaining proper documentation, performing regular reconciliations, and seeking professional guidance can help minimize the impact of non-eligible ITC on your business.

Q: Can businesses under the composition scheme claim the input tax credit?

A: No, businesses registered under the composition scheme cannot claim the input tax credit as they pay a fixed percentage of turnover as tax.