Impact of Blocked ITC on Industries:
Industries most affected by Section 17(5) of GST
As you know, the revolutionary introduction of the Goods and Services Tax Act on 1st July 2017 was a turning point in the history of India. The GST Act introduced a myriad of changes to the taxation landscape of the country, one of the fundamental features of the regime being the input tax credit mechanism – which allowed taxpayers to claim credit for the tax paid on inputs or purchases, used for the production of goods or services.
With the ongoing GST operations, the implementation of Input Tax Credit also became rapidly popular amongst taxpayers – but it is noteworthy to mention that such ITC is not available on particular goods and services; this came to be known as ‘Blocked Input Tax Credit’ under Section 17(5).
Industries Affected by Section 17(5) >> Implications of the Act:
As mentioned, the ‘Blocked Input Tax Credit’ is a provision that does not allow taxpayers to claim ITC. This means that there is a long list of industries that are affected by this section; Here is a list of those affected by this section, along with the exceptions for the same:
17(5)(a), (aa), (aaa): Conveyance and transportation industries are not eligible for ITC claim but there are exceptions to the section.
17(5)(b): Food, Catering, Vehicle Renting, and Travel; In such industries related to catering and food, club and traveling, vehicles, etc. you cannot claim ITC on purchases. However, exceptions are available wherein you can claim ITC.
17(5)(d): Building Construction: Industries that are in the building construction or job-work expenses and are registered under GST, cannot claim ITC on such GST paid. Such buildings may be used either for commercial or residential purposes and include GST paid for material expenses used for construction. However, exceptions are available.
17(5)(e)(f): Composition Scheme and Non-Residents: Industries opting for composition schemes under Section 10 of the GST Act cannot claim ITC as they pay taxes on their quarterly turnover. The case of non-resident taxable persons who deposit tax in advance also comes under the purview of non-eligibility of ITC claims.
17(5(g): Personal Use: ITC is not available for a claim on purchases that are not used for business use but for personal use. Some examples include beauty treatment services, cosmetic and plastic surgery, etc.
17(5(h): Free Sample and Lost Goods: In cases where goods that are purchased are lost, stolen, damaged, or given away as free samples and gifts – ITC cannot be claimed. If in case it has been claimed, this would have to be reversed in GSTR-3B.
17(5)(i): Fraudulent Claims; In cases where fraudulent claims have taken place, a taxpayer cannot claim ITC under the following circumstances:
Earlier non-payment of tax or short tax paid.
Excess refund of tax paid
Excess ITC utilized may have been availed fraudulently via willful misstatement, suppression of acts, or confiscation of goods.
Blocked ITC under 17(5) vs COVID-19 : A gloomy situation
As you know, certain goods and services are not allowed to claim the input tax credit on the purchase of such, but this doesn’t come without its set of implications. There are certain industries and businesses whose goods are perishable and can deteriorate over time. This implication was especially felt in large volumes during the Covid-19 pandemic – the debate in particular put several taxpayers under section 17(5) in a dilemma.
The implications that led the country into panic mode during the novel Coronavirus period include:
Businesses and industries under 17(5)(h) which deal with free samples and lost goods, were severely affected as the normal economic cycle was disturbed during the lockdown period. This led to a cash flow problem.
Due to the sudden lockdown situation, several businesses could not do the necessary packaging of goods which led to loss due to fragility and delicateness.
Businesses in the food industry, textile and leather industries, pharmaceutical industries, etc. were affected as they had to deal with perishable goods. This led to the expiry and obsolescence of such goods.
Legal Provision and Analysis Thereof:
When considering 17(5), we are aware that some several goods and services are not allowed to claim ITC – however, some of the legal provisions of the section can be understood and reviewed as under:
Non-Obstante Clause: This clause starts with ‘Notwithstanding anything contained in. ’The Non-Obstante Clause means that this clause overrides the effects of any legal provisions contrary to it. By this, we can understand that ITC on certain supplies are restricted although the supply of such goods and services is meant to be used in the course of furtherance of business.
‘Available in respect of the following’: This expression was examined in a case law by the Supreme Court in the case of State of Madras vs. Ms Swastik Tobacco Factory where it held that the expression ‘in respect of’ would mean to consider goods only. ITC can be restricted only to the goods on which ITC has been availed.
Destroyed: Although there isn’t a legal term to define ‘destroy’ or ‘destroyed’ in the CGST Act, according to the Literal Rule, ‘destroy’ would mean to interpret a literal meaning in the ordinary sense.
Written Off: Similarly, ‘written off’ hasn’t been defined either, and in this case, the Literal Rule of Interpretation will be applied. However, as per general meaning ‘write off’ is meant to cancel or derecognize any asset or liability. Thus an asset/liability with no value is to be written off.
Government’s View on Blocked ITC under 17(5)
The introduction of Blocked ITC under section 17(5) has been met with mixed views across the country, some have taken it very positively whereas some businesses have been affected. In light of this situation, it is noteworthy to mention that the Government’s intention behind taking such drastic steps (whether it is a restriction of the quantum of ITC or claiming of ITC) is to curb and mitigate the practice of claiming input tax credits via fake claims, and invoices – this is rather commendable from the Government’s side as such fake invoicing would lead to fraudulent business transactions.
However, the Indian Government must cross-check and improve the protocol process as curbing ITC ultimately affects bona fide buyers. The entire burden is put on a buyer, without providing them any facility to cross-check whether the supplier of a good or service has paid the taxes or not, and this is unjust towards a bona fide buyer, who has to go through unnecessary hardships just because he has received such goods or services, paid the taxes to the seller, and possesses valid ITC documents.
However, according to Circular No. 72/46/2018-GST, the Government has clarified a procedure that spells relief for pharmaceutical industries- The Government has provided 2 options to the taxpayers:
Such input tax credit may be treated as a reverse supply where the manufacturer of the goods who destroys them, shall reverse ITC on such supply and not on the manufacture of the same or,
It can be returned via a credit note wherein the manufacturer (who destroys the goods) shall reverse the ITC on the manufacture of such goods.
As may be observed, both are diverse views open for some clarification on the reversal of ITC on the manufacture of goods but this leads to confusion and a perpetual dilemma among taxpayers.
Conclusion
According to section 17(5) of the CGST Act, this is a mandatory section that an industry, business, or individual must follow, otherwise, the buyer will have to reverse the wrongfully claimed ITC in Form GSTR-3B.
Furthermore, such a wrongful claim will incur an interest rate of 24% from the date of such claim until the actual reversal.
Taxpayers can access the GSTR-2B (or the Auto-drafted ITC Statement’) to check the list of purchases made during a particular tax period on which ITC is not allowed.
However, In 2019, The Hon’ble High Court of Orissa granted an immense relief to builders under section 17(5)(d) which made taxpayers in this industry heave a huge sigh of relief as the Court allowed input tax credit on goods and services consumed in the process of construction of a building. This judgment came as a boon to the building industry and community. It is a no-brainer that taxpayers and the common man saw a huge wave of litigation relying on this judgment but obviously, the order of the Hon’ble Supreme Court cannot be challenged.
References
Input Tax Credit – ITC (cleartax.in)
GST Section 17(5) – List of Ineligible or Blocked ITC (taxguru.in)
Section 17(5) of CGST Act | Blocked ITC under GST (webtel.in)
Section 17(5) of CGST Act - When ITC cannot be claimed and reporting (cleartax.in)
Section 17(5) of the CGST Act: Understanding the Input Tax Credit Restrictions (margcompusoft.com)
Blocked Credit as per section 17(5) under CGST Act, 2017 AKT Associates
GST – Section 17(5)(h) – a Bermuda Triangle? (taxguru.in)
Legality Status of ITC Block by GST Department (taxguru.in)