Ineligible ITC: Cases Where Input Tax Credit under GST Cannot Be Claimed
Input Tax Credit (ITC) is a crucial component of the Goods and Services Tax (GST) framework, enabling businesses to lower their tax liability by claiming credit for the tax paid on goods and services used in their operations. However, certain transactions are not eligible for ITC.
This article provides a comprehensive list of ineligible ITC under GST, including examples, legal interpretations, and the latest updates.
Table of content
Latest Updates on Ineligible ITC
In July 2023, new rules were introduced to curb ITC misuse, emphasizing the accurate reporting of eligible claims. Businesses must now meticulously reconcile their ITC claims against the auto-populated data in GST returns (GSTR-2B).
Here are the key updates:
Reconciliation Requirements: Businesses are required to match their ITC claims with GSTR-2B to ensure accuracy and reduce discrepancies.
Supplier Compliance: If suppliers fail to file returns or remit GST, buyers cannot claim ITC, even if they have paid GST on their purchases.
Supreme Court Clarifies ITC on Construction for Rental Services
A landmark ruling by the Supreme Court on 3rd October 2024 has provided significant clarity on the issue of ITC claims related to construction services. Prior to this judgment, the eligibility of ITC on expenses incurred for constructing immovable property was a gray area, especially for businesses involved in leasing or renting out such properties. The general rule under GST law, as per Section 17(5), restricted ITC claims on expenses related to the construction of immovable property, unless the property was intended for further taxable supplies.
However, the Supreme Court’s ruling in October 2024 has clarified that GST input tax credit can now be claimed on the construction of immovable properties if those properties are used for the purpose of rental services. This decision provides much-needed relief to businesses in the real estate and rental sectors, especially those that construct commercial properties and offer them for lease or rent.
Key Categories of Ineligible ITC
Motor Vehicles and Conveyances
The purchase and use of motor vehicles and conveyances is one of the most significant categories where ITC claims are restricted under GST law. Businesses often mistakenly assume that because they paid GST on the purchase of vehicles, they are entitled to ITC. However, unless very specific conditions are met, ITC cannot be claimed on motor vehicles.
Key Restrictions:
Under Section 17(5) of the GST Act, ITC is not available for motor vehicles primarily meant for transporting persons if their seating capacity does not exceed 13 passengers (including the driver), except when:
The vehicle is used for making taxable supplies like further transportation of goods.
The vehicle is used for providing transportation of passengers, i.e., buses, taxis, or ride-hailing services.
The vehicle is used for imparting training on driving, flying, or navigating such vehicles.
Examples of Ineligible ITC on Motor Vehicles:
A company buys cars to provide transportation for employees to and from work. ITC on the purchase of these cars cannot be claimed as this is considered a personal expense.
A business that purchases a fleet of cars for transporting executives between corporate events is also ineligible for ITC unless the cars are used exclusively for further taxable supplies (like a car rental or transport service).
Eligibility of ITC for Motor Vehicles
Vehicle Type | Eligible for ITC? | Conditions |
Passenger cars | No | Unless used for transportation of passengers (e.g., taxi services) |
Goods transport vehicles | Yes | Must be exclusively used for transporting goods |
Training vehicles | Yes | Used for training purposes (e.g., driving schools) |
Employee transport cars | No | Considered personal or non-business-related use |
Food, Beverages, Club Memberships, and Others
Another category where ITC is restricted under GST is the purchase of food, beverages, and services related to club memberships and other personal recreational activities. These are generally viewed as personal or social expenses, which do not contribute directly to the production or sale of taxable goods or services.
For instance, when a business hosts an event and provides food and beverages, or if it purchases memberships for employees to clubs or fitness centers, ITC cannot be claimed on these expenses unless they fall under specific conditions where such expenses are obligatory by law.
Key Points:
Food & Beverages: ITC is ineligible when food and beverages are provided to employees or clients for social purposes or hospitality. However, ITC is allowed if the food and beverages are used for making taxable outward supplies (such as restaurants or catering businesses).
Club Memberships: Memberships to clubs, gyms, and fitness centers are ineligible for ITC as they are considered personal and recreational expenses.
Examples of Ineligible ITC for Food and Beverages:
A company offers free lunch to employees as part of its welfare scheme. The GST paid on purchasing food and beverages for this purpose cannot be claimed as ITC.
An organization buys annual memberships to a prestigious club for its executive team. The GST paid on the membership fees is ineligible for ITC.
Eligibility of ITC on Food and Membership
Expense Type | Eligible for ITC? | Conditions |
Food and beverages for employees | No | Unless it is mandatory under law |
Food and beverages for clients | No | Hospitality is considered a non-business-related expense |
Club memberships | No | Personal use, unless tied to specific taxable services |
Services of General Insurance, Servicing, Repair, and Maintenance
ITC on services related to general insurance, servicing, repair, and maintenance is another commonly misunderstood area. GST rules disallow ITC claims on expenses related to these services when they are tied to personal use assets or are not directly used for making taxable supplies. However, there are some exceptions, particularly for goods transport vehicles and machinery that are essential to a company’s business operations.
General Insurance Services:
General insurance services, such as vehicle or property insurance, are not eligible for ITC unless the goods insured are directly linked to the company’s core business activities (such as stock-in-trade or equipment used for manufacturing).
For example, if a company insures its office building, ITC on this insurance premium cannot be claimed as it does not directly contribute to the taxable output of goods or services.
Repair and Maintenance Services:
Similarly, repair and maintenance services for personal assets, such as vehicles used for employee transport or office buildings, are ineligible for ITC.
Exceptions:
ITC is allowed for repairs and maintenance of machinery and vehicles used in the production or transportation of goods.
Insurance premiums paid on assets that are directly involved in taxable business operations (such as factory equipment) may be eligible for ITC.
Eligibility of ITC for General Insurance and Maintenance
Service Type | Eligible for ITC? | Conditions |
Health insurance for employees | No | Unless mandatory under labor laws |
Vehicle maintenance for personal use | No | Ineligible for ITC if used for non-business-related activities |
Property insurance for business assets | Yes | Only if the assets directly contribute to taxable supplies |
Equipment or machinery repair | Yes | If used for taxable goods or services |
Sale of Membership in a Club, Health, Fitness Centre
GST law clearly states that ITC cannot be claimed on the sale or purchase of memberships to clubs, health, and fitness centers. These services are primarily used for personal and recreational purposes, which fall outside the scope of business activities, thus rendering ITC ineligible.
For example, if a company buys gym memberships for its employees as part of their wellness program, it cannot claim ITC on the GST paid for these memberships. The primary reasoning here is that such expenses do not contribute directly to the business's taxable output and are deemed personal in nature.
Key Exceptions:
If the business itself operates a health or fitness center as a taxable service provider, it can claim ITC on inputs used to provide those services, including memberships sold to clients.
Eligibility of ITC on Membership
Membership Type | Eligible for ITC? | Conditions |
Club memberships for employees | No | Considered a personal expense |
Gym memberships | No | Unless the business operates a gym as part of its taxable services |
Health or wellness memberships | No | Ineligible for ITC unless directly tied to taxable outputs |
Rent-a-cab, Life Insurance, Health Insurance
The use of rent-a-cab services, as well as life and health insurance, are commonly used by businesses, but they fall under ITC restrictions due to their personal nature. ITC is only allowed in very limited cases where these services are mandatory by law or directly related to business operations.
For instance, a company that hires a cab service to transport employees between work and home cannot claim ITC on the GST paid for this service. Similarly, life insurance premiums paid for employees are ineligible for ITC, as they are considered personal benefits.
Key Exceptions:
Rent-a-cab services provided by businesses that are in the business of supplying cabs as part of their taxable output are eligible for ITC.
Life or health insurance services mandated by law (e.g., under labor welfare regulations) may allow businesses to claim ITC.
Examples of Ineligible ITC:
A corporation rents cabs for executives’ daily commute to work. The GST paid on this service is not eligible for ITC.
A company purchases life insurance policies for its employees as part of a benefits package. The GST paid on the insurance premiums cannot be claimed as ITC.
Eligibility of ITC on Rent-a-Cab and Insurance Services
Service Type | Eligible for ITC? | Conditions |
Rent-a-cab services | No | Unless used for providing taxable cab services |
Health insurance for employees | No | Unless mandated by labor laws |
Life insurance for employees | No | Considered a personal benefit |
Travel
Travel expenses incurred by businesses are generally ineligible for ITC, especially when they pertain to personal travel or employee commuting. However, travel related to business operations, such as for client meetings, supplier visits, or business development, may allow for ITC claims.
For example, the GST paid on airfares and hotel accommodations for a business meeting in another city is eligible for ITC. However, if an employee travels for a personal vacation, ITC cannot be claimed on such expenses, even if the company reimburses the employee.
Business-Related Travel Expenses Eligible for ITC:
Airfare for client meetings or project-related travel.
Hotel accommodations for employees attending business conferences.
Transportation costs for shipping goods to customers.
Ineligible Travel Expenses:
Daily commuting expenses for employees (e.g., bus or train passes).
Personal vacation travel costs covered by the employer.
Eligibility of ITC for Travel
Travel Type | Eligible for ITC? | Conditions |
Employee commuting | No | Considered personal use |
Business travel (e.g., client meetings) | Yes | Only if directly related to taxable business operations |
Personal travel reimbursed by employer | No | Ineligible for ITC as it is a personal benefit |
Works Contract
Works contracts refer to contracts that involve both the supply of goods and services for constructing or renovating immovable property. Under GST, ITC is restricted for works contracts related to the construction of immovable property, unless the immovable property is used for making taxable supplies.
Key Restrictions:
ITC is not available for works contracts related to the construction of buildings, complexes, or other immovable properties unless they are used for further taxable supplies.
ITC is allowed for works contracts related to the construction of plant and machinery.
For instance, if a business constructs an office building for its own use, the GST paid on materials and labor for the construction cannot be claimed as ITC. However, if the building is being constructed for sale or lease, and the sale/lease is subject to GST, ITC may be claimed.
Eligibility of ITC for Works Contract
Contract Type | Eligible for ITC? | Conditions |
Office building construction | No | Unless the building is used for further taxable supplies |
Factory or warehouse construction | Yes | Only if used for producing taxable goods or services |
Plant and machinery installation | Yes | Provided they are directly used in taxable production |
Constructing an Immovable Property on Own Account
When a business constructs immovable property on its own account, such as an office building, factory, or warehouse, it cannot claim ITC on the goods and services used for the construction. The reasoning is that the GST paid on these inputs is not used for generating taxable output but is instead tied to capital assets, which do not qualify for ITC.
However, if the construction involves plant and machinery used for producing taxable goods or services, ITC can be claimed on the inputs used for the construction.
Exceptions:
ITC is allowed for plant and machinery used for business operations, such as manufacturing or processing equipment.
Eligibility of ITC for Immovable Property Construction
Construction Type | Eligible for ITC? | Conditions |
Office or factory building | No | Ineligible for ITC if constructed on the business's own account |
Plant and machinery construction | Yes | ITC allowed for equipment used in taxable production |
Composition Scheme
The Composition Scheme under GST is designed to simplify tax payments for small businesses by allowing them to pay a fixed percentage of their turnover as tax, rather than the regular GST rates. However, businesses that opt for the Composition Scheme are not allowed to claim ITC.
Key Points:
The Composition Scheme is typically chosen by small businesses with turnover below a certain threshold (e.g., ₹1.5 crores in India).
Businesses under this scheme pay a lower rate of tax but are ineligible for ITC on their inputs.
For example, a small restaurant opting for the Composition Scheme would pay a fixed percentage of its turnover as GST but cannot claim ITC on the raw materials and other inputs used to run the restaurant.
Eligibility of ITC for Composition Scheme Businesses
Business Type | Eligible for ITC? | Conditions |
Small restaurant under Composition Scheme | No | Ineligible for ITC due to fixed tax rate scheme |
Retail store under Composition Scheme | No | No ITC allowed for inputs under the scheme |
No ITC for Non-residents
Non-resident taxable persons (NRTPs) in India are not allowed to claim ITC for goods and services purchased in the country, except in cases where they relate to imported goods. NRTPs are typically foreign businesses or individuals who register for GST in India to conduct short-term business activities, such as participating in trade fairs or exhibitions.
Key Restrictions:
NRTPs cannot claim ITC on local purchases made during their stay in India.
ITC is allowed only for goods imported into India by the non-resident business for further taxable supplies.
For instance, if a foreign company sets up a stall at an Indian trade fair and purchases materials locally, the GST paid on those materials is not eligible for ITC. However, if they import goods for sale at the fair, ITC can be claimed on the imported goods.
Eligibility of ITC for Non-Residents
Activity Type | Eligible for ITC? | Conditions |
Local purchases by NRTPs | No | Non-residents cannot claim ITC on local purchases |
Imported goods for business activities | Yes | ITC allowed for imported goods used for further taxable supplies |
No ITC for Personal Use
Goods and services purchased for personal use are outside the scope of ITC. GST law explicitly prohibits claiming ITC on goods or services used for personal consumption, even if the purchase is made by a business.
Examples:
A business buys gifts for employees or clients. The GST paid on these gifts cannot be claimed as ITC, as they are considered personal or social in nature.
A company purchases electronic devices for the personal use of its executives. ITC cannot be claimed on these purchases.
Eligibility of ITC for Personal Use
Expense Type | Eligible for ITC? | Conditions |
Employee gifts | No | Considered a personal or social expense |
Personal use items (e.g., electronics) | No | Ineligible for ITC due to personal nature |
Free Samples and Destroyed Goods
Goods distributed as free samples, or those that are lost, stolen, or destroyed, are not eligible for ITC. GST law restricts ITC claims on such goods because they do not contribute to the production or sale of taxable goods or services.
For instance, if a company distributes free samples of its products to promote sales, the GST paid on the inputs used for those samples cannot be claimed as ITC.
Key Restrictions:
Free samples are considered promotional activities, and since no revenue is generated from their distribution, ITC is not allowed.
Goods that are lost, stolen, or destroyed are also ineligible for ITC as they are no longer part of the business’s taxable inventory.
ITC Eligibility for Free Samples and Destroyed Goods
Scenario | Eligible for ITC? | Conditions |
Free samples distributed to customers | No | Ineligible as they do not generate taxable output |
Destroyed goods (e.g., fire, theft) | No | ITC not allowed as the goods no longer contribute to taxable supply |
No ITC in Fraud Cases
Fraudulent activities, such as misrepresentation or deliberate suppression of facts, can lead to disqualification from claiming ITC. If a business is found to have engaged in fraudulent practices to avail ITC, the government can deny the claim, impose penalties, and take legal action.
For example, if a company falsifies invoices or inflates the value of purchases to claim higher ITC, it will not only lose the right to claim ITC but also face penalties.
ITC Ineligibility Due to Fraud
Fraudulent Activity | ITC Allowed? | Consequences |
Inflating purchase invoices | No | Penalties, interest, and possible legal action |
Misrepresentation of goods or services | No | Denial of ITC and potential prosecution |
No ITC on Restaurants
Restaurants that charge 5% GST under the Composition Scheme cannot claim ITC on their inputs. This applies to all purchases made by the restaurant, including raw materials, equipment, and services. However, restaurants that charge the standard 18% GST rate and are not under the Composition Scheme can claim ITC.
Key Points:
Restaurants charging 5% GST must forgo ITC as part of the simplified Composition Scheme.
Restaurants paying 18% GST can claim ITC on inputs used for preparing and serving food and beverages.
For instance, a small restaurant that opts for the 5% GST rate will not be able to claim ITC on the food items or kitchen equipment it purchases. Conversely, a high-end restaurant charging 18% GST on its meals can claim ITC on all its inputs, as it is not under the Composition Scheme.
ITC Eligibility for Restaurants
Restaurant Type | Eligible for ITC? | Conditions |
5% GST rate restaurant | No | Ineligible for ITC due to Composition Scheme |
18% GST rate restaurant | Yes | ITC allowed for inputs used in taxable supplies |
FAQ
Q1. What is Input Tax Credit (ITC) under GST?
Input Tax Credit (ITC) allows businesses to reduce their GST liability by claiming credit for the tax paid on inputs used for providing taxable goods and services. However, not all inputs qualify for ITC.
Q2. Can ITC be claimed on motor vehicles used for business?
ITC on motor vehicles is restricted unless they are used for specific purposes like transportation of goods, passengers, or for imparting training on driving, flying, or navigating.
Q3. Is ITC available on health insurance provided to employees?
No, ITC is not available on health insurance unless it is mandatory by law, such as under the Employee Compensation Act.
Q4. Are food and beverages provided to employees eligible for ITC?
No, food and beverages supplied to employees for free or at a discounted rate are not eligible for ITC as they are considered personal expenses.
Q5. Can businesses claim ITC on travel expenses for client meetings?
Yes, ITC can be claimed on travel expenses directly related to business operations, such as travel for client meetings, conferences, or business projects.
Q6. Is ITC allowed on the construction of an office building?
No, ITC is not allowed on the construction of an office building unless it is intended for making taxable supplies (e.g., leasing or selling the building subject to GST).
Q7. Can ITC be claimed on goods lost, stolen, or destroyed?
No, ITC cannot be claimed on goods that are lost, stolen, or destroyed as these goods are no longer used for providing taxable supplies.
Q8. Is ITC available on rent-a-cab services provided to employees?
ITC on rent-a-cab services is not available unless the business itself is in the business of providing such services or it is mandated by law.
Q9. Can businesses claim ITC on capital goods?
Yes, ITC can be claimed on capital goods as long as they are used for providing taxable supplies. However, if the capital goods are used for exempt supplies, ITC is not available.
Q10. Is ITC allowed on personal use items purchased by businesses?
No, ITC cannot be claimed on goods or services used for personal consumption, even if purchased by the business.
Q11. Can ITC be claimed on membership fees for clubs or fitness centers?
No, ITC is not available for membership fees to clubs, gyms, or fitness centers as these are considered personal expenses.
Q12. Is ITC available for services used to build residential property?
No, ITC is not allowed on services or materials used to construct residential properties, as they are exempt from GST unless they are used for providing taxable supplies.
Q13. Can a business claim ITC on samples distributed for free?
No, ITC cannot be claimed on goods distributed as free samples since no revenue is generated from such activities.
Q14. Can ITC be claimed by non-resident taxpayers?
Non-resident taxable persons (NRTPs) cannot claim ITC on goods or services purchased in India, except in cases of goods imported for taxable business activities.
Q15. Is ITC allowed on services related to corporate social responsibility (CSR)?
No, ITC is not allowed on expenses incurred for fulfilling corporate social responsibility (CSR) obligations as they are not directly linked to providing taxable supplies.
Q16. Can ITC be claimed on expenses incurred for staff welfare?
No, ITC cannot be claimed on goods or services used for staff welfare, such as medical insurance, food, and beverages unless these are mandated by law.
