Eligible and Ineligible Input Tax Credit: A Complete GST Guide

Are you uncertain about whether to claim Input Tax Credit (ITC) on business expenses? If so, this article will provide you with essential insights. By the end of this discussion, you will have a clear understanding of the eligible and ineligible input tax credit under GST.

You might have seen reports in newspapers or on television stating that GST reduces prices by allowing manufacturers and suppliers to claim ITC on procured goods or services. However, ITC comes with specific conditions, and the law explicitly disallows it for certain goods and services.

The GST Act restricts ITC claims on specific goods and services. Before reviewing the list of eligible and ineligible input tax credit, understand that ITC applies only when businesses use inputs to produce taxable goods or services.

Key Considerations Before Claiming ITC

Before claiming ITC, determine whether your business produces a taxable product or provides a taxable service. If it does, you are engaging in the “furtherance of business,” and the law generally allows ITC unless explicitly prohibited. A similar condition applied previously to Central Excise credit and VAT.

Eligible and Ineligible Input Tax Credit (Section 17(5) of the CGST Act)

Under Section 17(5) of the CGST Act, ITC eligibility is determined based on the nature of goods and services. Below is the list of eligible and ineligible input tax credit items:

Eligible Input Tax Credit (ITC Allowed)

1. Motor Vehicles and Conveyances – ITC is allowed when used for:
   • Further supply of such vehicles or conveyances
   • Passenger transportation services
   • Training on driving, flying, or navigating such vehicles
   • Transportation of goods
2. Works Contract Services – ITC is allowed when used as an input service for the further supply of works contract services.
3. Tax Paid on Goods and Services for Business Use – ITC is allowed when goods or services are directly related to taxable business operations.

Ineligible Input Tax Credit (ITC Not Allowed)

1. Certain Goods and Services – ITC is not available for:
   • Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, unless used for making outward taxable supplies of the same category
   • Membership in clubs, health, and fitness centers
   • Rent-a-cab, life insurance, and health insurance (except where mandated by law or used for making outward taxable supplies of the same category)
   • Travel benefits provided to employees for vacations (e.g., leave or home travel concession)
2. Construction of Immovable Property – ITC is not available for goods or services received for constructing immovable property (other than plant or machinery) on a business’s own account.
3. Tax Paid Under Composition Scheme: Tax paid under the composition scheme does not qualify for ITC when businesses pay tax under Section 10 of the CGST Act.
4. Goods or Services Procured by a Non-Resident Taxable Person – ITC is not available, except on imported goods.
5. Personal Consumption: Personal consumption expenses do not qualify for ITC, as the law restricts claims on goods or services used for non-business purposes.
6. Goods Lost, Stolen, or Destroyed: Lost, stolen, destroyed, or written-off goods, including those given as gifts or free samples, are ineligible for ITC.
7. Tax Paid Due to Non-Compliance: Tax paid due to non-compliance, such as fraud, detention, or confiscation under Sections 74, 129, and 130, does not qualify for ITC.

Conclusion

This article clarifies key aspects of eligible and ineligible input tax credit under GST. Ensure you do not claim ITC on restricted goods and services, even if they seem eligible on the GST portal. If you have wrongly claimed ITC, reverse it along with applicable interest to avoid penalties.

By adhering to these guidelines, businesses can ensure compliance with GST regulations and avoid unnecessary legal complications.

Related Articles

What is GST Input Tax Credit?

Under the Input Tax credit system in GST, the taxpayers can reduce their tax liability by claiming credit to the extent of GST paid on the purchases. more

Interest on Reversal of Input tax credit

If the taxpayer has availed wrong input tax credit under GST then he needs to reverse it by paying Interest on it.  Similarly, this is applicable even if he has availed excess ITC under Goods and Service Tax. more

Refund of Input Tax credit

A taxpayer can ask for a refund of taxes (GST) & ITC paid under certain circumstances. Check out the scenarios for Refund of accumulated/unutilized ITC under GST. more

How to check Input Tax credit on the GST portal?

In order to check the input tax credit available on the GST portal, you need to download GSTR 2A from the GST website. more