Section 17 provides for non-availability of ITC on goods and services

not used for business purpose and

used for exempt supply.

Blocked ITC

It also provides about blocked ITC on some goods and services even used for business purposes on which ITC shall not be available.

If a taxable person is making both taxable and exempt supply, he is

entitled to full credit of input tax on inputs, input services and capital goods exclusively used for taxable supply and

not entitled to credit of input tax on inputs, input services and capital goods exclusively used for exempt supply

entitled to proportionate credit of input tax on inputs, input services and capital goods commonly used for taxable and exempt supply

Section 17(1)

Where the goods^[2(52)] or services^[2(102)] or both are used by the Register Person^[2(94)]

partly for the purpose of any business^[2(17)] and partly for other purposes,

the amount of credit shall be restricted to so much of the input tax^[2(62)] as is attributable to the purposes of his business

ITC is available only on Goods/services used for business purposes.

ITC is not available on Goods/services used for non-business purposes.

Ex

RP is in the business of manufacturing shoes. He gave 50 pairs of shoes for his friends free of cost. ITC attributable to such 50 pair of shoes being used for non-business purposes will not be available.

Section 17(2)

Where the goods or services or both are used by the registered person

partly for effecting taxable supplies^[2(108)] including zero-rated supplies under this Act or IGST Act and partly for effecting exempt supplies under the said Acts,

the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

ITC is available only on goods & services used for taxable & zero rated outward supplies.

ITC is not available on goods & services used for exempt outward supplies.

Ex

RP manufactures a product ‘X’ chargeable to 18% GST, a product ‘Y’ chargeable to NIL rate of tax and a product ‘Z’ which is exported without payment of tax under bond.

All the three products are manufactured from common inputs and input services.

ITC on inputs and input services attributable to product ‘Y’ being an exempt supply, will not be available.

Section 16(2) of IGSTA, 2017

Subject to section 17(5) of CGST Act,

ITC may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

Section 17(3)

The value of exempt supply u/ss (2)

(i) shall be such as may be prescribed u/s 2(47) as supply of goods or services both

which attracts nil rate of tax or

which is wholly exempt from tax u/s 11, or u/s 6 of IGST Act, and

which is non-taxable supply^[S-2(78)]

(ii) and shall includes

supplies on which the recipient^[2(93)] is liable to pay tax on RCB,

transactions in securities^[S-2(101)],

sale of land and subject to para 5(b) of Schedule II, sale of building.

Sale of building shall be considered as exempt supply after completion certificate. Before completion certificate, it is treated as supply of service as per para 5(b) of Sch II.

[1][Explanation to section 17(3)

For the purposes of this sub-section, ‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, [2][except,—

(i) Sale of land & building subject to Para 5(b) of SCh II]

(ii) Supply of warehoused goods to any person before clearance for home consumption [Para 8(a) of Schedule III]

[3][Explanation 1 to Rule 43

For the purpose of rule 42 and this rule, aggregate value of exempt supplies shall exclude:-

[4][(a)***]

(b) value of services by way of accepting deposits, extending loans or advances where consideration is in form of interest or discount,

except in case of a banking company or a financial institution including a NBFC, engaged in supplying services by way of accepting deposits, extending loans or advances; and

[5][(c) ***]

[6][(d) the value of supply of Duty Credit Scrips specified in notification No. 35/2017-Central Tax (Rate), dated 13-10-2017.]

[7][Explanation 2 to Rule 45

For the purposes of this Chapter,-

for determining the value of an exempt supply as referred to in section 17(3) -

(a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

(b) the value of security shall be taken as 1% of the sale value of such security.

[8][Explanation 3 to Rule 43

For the purpose of rule 42 and this rule,

the value of activities or transactions mentioned in para 8(a) of Sch III

which is required to be included in the value of exempt supplies as per explanation to section 17(3)(b)

shall be the value of supply of goods from Duty Free Shops at arrival terminal in international airports to the incoming passengers.

Section 17(6)

Govt. may prescribe manner in which the credit referred to in sub-sections (1) and (2) may be attributed.

Rule 42(1)

ITC on inputs^[2(59)] or input services^[2(60)] [referred as ITC] used

partly for business purposes and partly for other purposes, or

partly for effecting taxable & zero rated supplies and partly for exempt supplies

shall be attributed to business purpose or for taxable supplies in the following manner-

Cl.

Particulars

Term

(a)

Total ITC in a tax period

T

(b)

ITC intended to be used exclusively for the purposes other than business

(-)T1

(c)

ITC intended to be used exclusively for exempt supplies

(-)T2

(d)

Blocked ITC u/ss 17(5)

(-)T3

(e)

ITC to be credited to EcrL of RP [C1 = T-(T1+T2+T3)]

C1

(f)

ITC intended to be used exclusively for taxable + zero rated supplies

(-)T4

(g)

‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be declared by RP at summary level in GSTR-3B

(h)

Common ITC used for all supplies [C2 = C1-T4]

C2

(i)

Common ITC attributable towards exempt supplies

D1= (E÷F) × C2

‘E’ = aggregate value of exempt supplies during the tax period, and

‘F’ = Total turnover in the State^[2(112)] of RP during the tax period

If there is no Turnover in any tax period, E/F of previous period may be taken

2^nd Proviso to clause (i)

where RP does not have any turnover during the said tax period or above information is not available, ‘E/F’ of the last tax period for which details are available, may be used;

Explanation to clause (i) : Aggregate value of exempt supplies & Turnover excludes

For the purpose of this clause, aggregate value of exempt supplies and total turnover shall exclude

the amount of any duty or tax levied under entry 84 ^[9][and entry 92A] of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule;

D1

(j)

ITC attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes [D2 = 5% of C2]

D2

(k)

Remainder common ITC attributable to business purpose + Taxable & zero rated supplies [C3 = C2 -(D1+D2)]

C3

[10][(l)

C3, D1 and D2 shall be computed separately for ITC of CGST, SGST, IGST and declared in GSTR-3B or through GST DRC-03]

(m)

D1 and D2 shall be [11][reversed in GSTR-3B or through GST DRC-03]

Provided that If ITC attributable to non-business purposes + exempt supplies has been identified and segregated at the invoice level, same shall be included in ‘T1’ and ‘T2’ respectively, and the remaining ITC shall be included in ‘T4’.

ITC attributable to non-busiess purpose [Rule 42(j)]

The credit attributable to non-business purpose will be equal to 5% of Common Credit

Rule 42(2)

[12][Except in case of construction services [Sch-II(5)(b)],

ITC determined u/sr (1) shall be calculated finally for the FY

before the due date for furnishing of the return for the month of Sep following the end of the FY to which such credit relates, in the manner specified in the said sub-rule and-

Reversal of excess ITC availed related to exempt supplies + Interest

(a) If (D1 + D2) finally for whole FY > Sum of (D1 + D2) for each tax period,

such excess shall be [13][reversed in GSTR-3B or through DRC-03]

in the month not later than month of Sep following the end of FY to which such ITC relates and

Interest is payable on such excess amount @18% [specified u/ss 50(1)]

for the period from 1^st Apr of succeeding FY till the date of payment; or

Avail short ITC related to exempt supplies

(b) If (D1 + D2) finally for whole FY < Sum of (D1 + D2) for each tax period,

such short ITC shall be availed in his return for a month not later than month of Sep following the end of FY to which such ITC relates.

Rule 42(1)

Rule 42(1) shall also apply for determining eligible common ITC for each tax period. All the provision specified in para 17.2.1 above shall also apply to construction services except the following different provisions    

(f)

ITC intended to be used exclusively for taxable + zero rated supplies

[14][Explanation: For supply of services covered by Schedule II(5)(b), value of T4 shall be zero during the construction phase because inputs and input services will be commonly used for construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the project, whichever is earlier, and those which are not booked by the said date]

(-)T4

(i)

[15][Proviso to section 42(i)

In case of supply of services covered by Schedule II(5)(b), value of ”E/F‟ for a tax period shall be calculated for each project separately, taking value of E and F as under:-

E = aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the apartments, construction of which is not exempt from tax, but are identified by the promoter to be sold after issue of completion certificate or first occupation, whichever is earlier;

F = aggregate carpet area of the apartments in the project;

Explanation 1: In the tax period in which the issuance of completion certificate or first occupation of the project takes place, value of E shall also include aggregate carpet area of the apartments, which have not been booked till the date of issuance of completion certificate or first occupation of the project, whichever is earlier.

Explanation 2: Carpet area of apartments, tax on construction of which is paid or payable at the rates specified for items (i), (ia), (ib), (ic) or (id), against serial number 3 of the Table in the notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017 as amended, shall be taken into account for calculation of value of ‘E’ in view of Explanation (iv) in paragraph 4 of the notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017, as amended.]

D1

[16][Rule 42(3)

In case of supply of services covered by clause 5(b) of the Schedule II [Construction services]

ITC determined u/sr (1) shall be calculated finally, for

each on-going project or

project which commences on or after 1st April, 2019,

which did not undergo or did not require transition of ITC consequent to change of tax rates on 01/04/2019 as per notification No. 11/2017- CT (R), dated 28/06/2017, as amended

for the entire period

from the commencement of the project or 01/07/2017, whichever is later,

to the completion or first occupation of the project,

whichever is earlier,

before the due date for furnishing of the return for the month of Sep following the end of FY in which the completion certificate is issued or first occupation takes place of the project,

in the manner prescribed in the said sub-rule, with the modification that value of E/F shall be calculated taking value of E and F as under:

E = aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the apartments, construction of which is not exempt from tax, but which have not been booked till the date of issuance of completion certificate or first occupation of the project, whichever is earlier:

F = aggregate carpet area of the apartments in the project; and,-

Reversal of excess ITC availed related to exempt supplies + Interest

(a) If D1 + D2 finally calculated > Sum of D1 + D2 for each tax period u/sr (1),

such excess shall be reversed in GSTR-3B or through GST DRC-03]

in the month not later than the month of Sep following the end of FY in which the completion certificate is issued or first occupation of the project takes place and

Interest is payable on such excess amount @18% [specified u/ss 50(1)]

for the period from 1^st Apr of succeeding FY till the date of payment; or

Avail short ITC related to exempt supplies

(b) If D1 + D2 finally calculated < Sum of D1 + D2 for each tax period,

such short ITC shall be availed in return on for a month not later than the month of Sep following the end of the FY in which the completion certificate is issued or first occupation takes place of the project.]

[17][Rule 42(4)

In case of supply of services covered by clause 5(b) of Schedule II,

ITC determined u/sr (1) shall be calculated finally,

for commercial portion in each project, other than residential real estate project (RREP),

which underwent transition of ITC consequent to change of rates of tax on the 1st April, 2019 as  per notification No. 11/2017- CT (R), dated the 28th June, 2017, as amended

for the entire period

from the commencement of the project or 1st July, 2017, whichever is later,

to the completion or first occupation of the project,

whichever is earlier,

before the due date for furnishing of the return for the month of Sep following the end of FY in which the completion certificate is issued or first occupation takes place of the project,

in the following manner.

(a) aggregate amount of common credit on commercial portion in the project (C3aggregate_comm) shall be calculated as under,

C3aggregate_comm =[aggregate of C3 determined u/sr (1) for the tax periods starting from 01/07/2017 to 31/03/2019 x (AC / AT)] + [aggregate of C3 determined u/sr (1) for the tax periods starting from 01/04/2019 to the date of completion or first occupation of the project, whichever is earlier]

Where, -

AC = total carpet area of the commercial apartments in the project

AT = total carpet area of all apartments in the project

(b) The amount of final eligible common credit on commercial portion in the project (C3final_comm) shall be calculated as under

C3final_comm =C3aggregate_comm x (E/ F)

Where, -

E = total carpet area of commercial apartments which have not been booked till the date of issuance of completion certificate or first occupation of the project, whichever is earlier.

F = AC = total carpet area of the commercial apartments in the project

(c) where, C3aggregate_comm exceeds C3final_comm, such excess shall be reversed by RP in GSTR-3B or through GST DRC-03 in the month not later than the month of Sep following the end of the FY in which the completion certificate is issued or first occupation takes place of the project and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment;

(d) where, C3final_comm exceeds C3aggregate_comm, such excess amount shall be claimed as credit by the registered person in his return for a month not later than the month of September following the end of the financial year in which the completion certificate is issued or first occupation takes place of the project.]

[18][Rule 42(5)

ITC determined u/sr (1) shall not be required to be calculated finally on completion or first occupation of an RREP which underwent transition of ITC consequent to change of tax rates on 01/04/2019 as per notification No. 11/2017- CT(R), dated 28-06-2017, as amended.]

[19][Rule 42(6)

Where any input or input service are used for more than one project, related ITC shall be assigned to each project on a reasonable basis and credit reversal pertaining to each project shall be carried out as per sub-rule (3).

Rule 43(1)

Subject to section 16(3), [i.e. Depreciation on tax Component]

ITC in respect of Capital goods^[2(19)] which are used,

partly for business and partly for other purposes, or

partly for taxable & zero rated supplies and partly for exempt supplies,

shall be attributed to business purpose or for taxable supplies in the following manner-

Rule 43(1)(a)

ITC in respect of CG used or intended to be used exclusively for

non-business purposes or

exempt supplies

shall be indicated in GSTR 3B

and shall not be credited to his ECrL

Rule 43(1)(b)

ITC in respect of CG used or intended to be used exclusively for supplies other than exempted supplies but including zero-rated supplies

shall be indicated in GSTR 3B

and shall be credited to ECrL

[20][Rule 43(1)(c)

ITC in respect of CG not covered u/c (a) and (b) above shall be credited to ECrL = A

Life of such CG = 5 years

and validity of useful life of such goods shall be 5 years from the date of the invoice:

1st Proviso - Change in use of CG from (Non Business + Exempt) to Taxable purpose

where any CG earlier covered u/c (a) is subsequently covered this clause,

Whole ITC on such CG shall be credited to ECrL = A

Subject to condition that

Ineligible ITC attributable to the period during which such capital goods were covered by clause (a) i.e Tie = 5% for every quarter or part thereof shall be added to Output Tax^[2(82)] liability

2^nd Proviso

Tie shall be computed separately for ITC of central tax, State tax, UT tax and integrated tax and declared in GSTR-3B

Explanation - Section 18(4) does not apply [Reversal of ITC on transition to Composition levy]

CG declared u/c (a) on its receipt shall not attract section 18(4), if it is subsequently covered under this clause.

[21][ (d)

Common credit in respect of CG for a tax period

T_C = Aggregate of ‘A’ credited to ECrL u/c (c) in respect of common CG whose useful life remains during the tax period, shall be the common credit in respect of such capital goods:

Proviso - Change in use of CG from Taxable & zero rated to Common Purpose

where any CG earlier covered u/c (b) is subsequently covered u/c (c),

ITC claimed in respect of such CG(s) shall be added to arrive at the aggregate value “Tc”.

Tc = A + ITC on CG came from (b) to (c)

(e)

Common ITC on such CG for each Tax Period

T_M = ITC attributable to a tax period on common CG during their useful life

T_M= T_C÷60

[22][Explanation.- Useful life of any CG shall be considered as 5 years from the date of invoice and the said formula shall be applicable during the useful life of the said capital goods.]

[23][(f)

***]

(g)

Te = Common ITC attributable to exempted supplies

Te= (E÷ F) x Tr

‘E’ = aggregate value of exempt supplies, made, during the tax period, and

‘F’ = total turnover in the State of RP during the tax period:

If there is no Turnover in tax period

2^nd Proviso to clause (g) provides that

where RP does not have any turnover during the said tax period or above information is not available, ‘E/F’ of the last tax period for which details are available, may be used;

Explanation - Aggregate value of exempt supplies & Turnover excludes

For the purposes of this clause,

aggregate value of exempt supplies and the total turnover shall exclude

any duty or tax levied under entry 84 ^[24][and entry 92A] of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule;

(h)

Te + applicable interest shall, during every tax period of the useful life of the concerned CG, be added to the output tax liability.

[25][ (i)

Te shall be computed separately for ITC of CGST, SGST, UGST and IGST and declared in GSTR-3B.]

In addition to above provisions, following provisions are also applicable to construction services

[26][Explanation to Rule 43(1)(b)

in case of supply of services covered by Schedule II(5)(b),

ITC on capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero rated supplies,

shall be zero during the construction phase because capital goods will be commonly used for construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the project, whichever is earlier, and those which are not booked by the said date]

(g)

[27][1^st Proviso to 43(1)(g)

in case of supply of services covered by Schedule II(5)(b), value of “E/F‟ for a tax period shall be calculated for each project separately, taking value of E and F as under:

E= aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the apartments, construction of which is not exempt from tax, but are identified by the promoter to be sold after issue of completion certificate or first occupation, whichever is earlier;

F= aggregate carpet area of the apartments in the project;

Explanation1: In the tax period in which the issuance of completion certificate or first occupation of the project takes place, value of E shall also include aggregate carpet area of the apartments, which have not been booked till the date of issuance of completion certificate or first occupation of the project, whichever is earlier.

Explanation 2: Carpet area of apartments, tax on construction of which is paid or payable at the rates specified for items (i), (ia), (ib), (ic) or (id), against serial number 3 of the Table in notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 as amended, shall be taken into account for calculation of value of „E‟ in view of Explanation (iv) in paragraph 4 of the notification No. 11/2017-Central Tax (Rate) dated the 28th June, 2017, as amended.]

[28][Rule 43(2)

In case of supply of services covered by schedule II(5)(b), the amount of common credit attributable towards exempted supplies (Te^final) shall be calculated finally for the entire period from the commencement of the project or 1st July, 2017, whichever is later, to the completion or first occupation of the project, whichever is earlier, for each project separately, before the due date for furnishing of the return for the month of Sep following the end of FY in which the completion certificate is issued or first occupation takes place of the project, as under:

Te^final= [(E1 + E2 + E3) /F] x Tc^final ,

Where,-

E1= aggregate carpet area of the apartments, construction of which is exempt from tax

E2= aggregate carpet area of the apartments, supply of which is partly exempt and partly taxable, consequent to change of rates of tax on 1st April, 2019, which shall be calculated as under, -

E2= [Carpet area of such apartments] x [V1/ (V1+V2)],-

Where,-

V1 is the total value of supply of such apartments which was exempt from tax; and

V2 is the total value of supply of such apartments which was taxable

E3 = aggregate carpet area of the apartments, construction of which is not exempt from tax, but have not been booked till the date of issuance of completion certificate or first occupation of the project, whichever is earlier:

F= aggregate carpet area of the apartments in the project;

Tc^final = aggregate of Afinal in respect of all capital goods used in the project and Afinal for each capital goods shall be calculated as under,

A ^final= A x (number of months for which capital goods is used for the project/ 60) and,-

(a) where value of Tefinal exceeds the aggregate of amounts of Te determined for each tax period u/sr (1), such excess shall be reversed in GSTR-3B or through GST DRC-03 in the month not later than the month of Sep following the end of the FY in which the completion certificate is issued or first occupation takes place of the project and the said person shall be liable to pay interest on the said excess amount at the rate specified u/s 50(1) for the period starting from the first day of April of the succeeding financial year till the date of payment; or

(b) where aggregate of amounts of Te determined for each tax period u/sr (1) exceeds Tefinal, such excess amount shall be claimed as credit for a month not later than the month of Sep following the end of the FY in which the completion certificate is issued or first occupation takes place of the project.

Explanation.- For the purpose of calculation of Tcfinal , part of the month shall be treated as one complete month.]

[29][Rule 43(3)

The amount Te^final and Tc^final shall be computed separately for ITC of central tax, State tax, Union territory tax and integrated tax.]

[30][Rule 43(4)

Where any capital goods are used for more than one project, ITC with respect to such capital goods shall be assigned to each project on a reasonable basis and credit reversal pertaining to each project shall be carried out as per sub-rule (2).]

[31][43(5)

Where any capital goods used for the project have their useful life remaining on the completion of the project, ITC attributable to the remaining life shall be availed in the project in which the capital goods is further used]

[32][Explanation 2 to rule 43

For rule 42 and this rule,

(i) the term “apartment” shall have the same meaning as assigned to it in clause 2(e) of the Real Estate (Regulation and Development) Act, 2016;

(ii) the term “project” shall mean a real estate project or a residential real estate project;

(iii) the term “Real Estate Project (REP)” shall have the same meaning as assigned to it in in clause 2(zn) of the Real Estate (Regulation and Development) Act, 2016;

(iv) the term “Residential Real Estate Project (RREP)” shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent. of the total carpet area of all the apartments in the REP;

(v) the term “promoter” shall have the same meaning as assigned to it in in clause 2(zk) of the Real Estate (Regulation and Development) Act, 2016;

(vi) “Residential apartment” shall mean an apartment intended for residential use as declared to the Real Estate Regulatory Authority or to competent authority;

(vii) “Commercial apartment” shall mean an apartment other than a residential apartment;

(viii) the term "competent authority” as mentioned in definition of “residential apartment”, means the local authority or any authority created or established under any law for the time being in force by the Central Government or State Government or Union Territory Government, which exercises authority over land under its jurisdiction, and has powers to give permission for development of such immovable property;

(ix) the term “Real Estate Regulatory Authority” shall mean the Authority established u/s 20(1) of the Real Estate (Regulation and Development) Act, 2016 by the Central Government or State Government;

(x) the term “carpet area” shall have the same meaning assigned to it in in clause 2(k) of the Real Estate (Regulation and Development) Act, 2016;

(xi) “an apartment booked on or before the date of issuance of completion certificate or first occupation of the project” shall mean an apartment which meets all the following three conditions, namely-

(a) part of supply of construction of the apartment service has time of supply on or before the said date; and

(b) consideration equal to at least one installment has been credited to the bank account of the registered person on or before the said date; and

(c) an allotment letter or sale agreement or any other similar document evidencing booking of the apartment has been issued on or before the said date.

(xii) The term “ongoing project” shall have the same meaning as assigned to it in notification No. 11/2017- CT (R), dated 28-06-2017, as amended;

(xiii) The term “project which commences on or 01-04-2019” shall have the same meaning as assigned to it in notification No. 11/2017- CT (R), dated 28-06-2017, as amended;”.

Section 17(4)

A banking company, financial institution & NBFC,

supplying services by way of accepting deposits, extending loans or advances

shall have option to

either comply with provision of section 17(2), or

avail of every month 50% of eligible ITC on inputs, capital goods and input services in that month and the rest shall lapse:

1^st Proviso - Option exercised shall remain for whole year

option once exercised shall not be withdrawn during the remaining part of FY.

2^nd Proviso - 100% ITC shall be available for inter branch supply

restriction of 50% shall not apply to the tax paid on supplies made by one RP to another RP having same PAN.

Rule 38

A banking company, financial institution & NBFC,

opting to avail 50% of eligible ITC u/s 17(4), shall follow the following procedure, namely;

(a) said person shall not avail,-

(i) ITC on inputs and input services used for non-business purposes; and

(ii) ITC attributable to blocked supplies specified u/s 17(5),

(b) said person shall avail ITC referred to in 2^nd proviso to section 17(4) and not covered under clause (a); [i.e. 100% ITC on Inter Branch supply]

(c) 50% of the remaining ITC shall be admissible to said person [33][ and the balance of ITC shall be reversed in GSTR-3B];

[34][(d)**]

Blocked ITC means ITC which has been denied wholly. Such ITC cannot be availed.

Section 17(5)

Notwithstanding anything contained in sub-section 16(1) and 18(1),

input tax credit^[2(63)] shall not be available in respect of the following namely:

Section 17(5) overrides section 16(1) and section 18(1) to deny ITC on some supplies.

[35][Section 17(5)(a)

Blocked ITC on motor vehicle of seating capacity upto 13 persons

ITC shall not be available on motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver).

ITC is allowable on ineligible motor vehicle for specified purpose

except when they are used for making the following taxable supplies namely:

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;]

Blocked ITC on Ineligible Motor Vehicle

ITC on ineligible motor vehicles used for any purpose other than the specified purposes is not allowed.

Ex: Cars purchased by a manufacturing company for official use of its employees.

ITC is allowable on ineligible Motor Vehicle for specified purpose

• Cars purchased by a car dealer for sale to customers
• Cars purchased by a company engaged in renting out cars for transportation of passengers
• Cars purchased by a car driving school

ITC is allowable on Eligible Motor Vehicle for all purpose

• Motor vehicles for transportation of persons with seating capacity > 13 persons (including the driver) used for any purpose.
• Buses (seating capacity for 24 persons) purchased by a company for transportation of its employees from their residence to office and back.
• Trucks purchased by a company for transportation of its finished goods.

Section 2(76)

“motor vehicle” shall have the same meaning as assigned to it in section 2(28) of the Motor Vehicles Act, 1988

Section 2(28)

Motor vehicle” or “vehicle” means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source, and includes a chassis to which a body has not been attached and a trailer;

but does not include:

• a vehicle running upon fixed rails; or
• a vehicle of a special type adapted for use only in a factory or in any other enclosed premises; or
• a vehicle having less than four wheels fitted with engine capacity of not exceeding 25 cc.

Meaning of Transportation of Passenger

The person boarding in the motor vehicle for preforming the journey can be considered as passenger under GST. As a result, transportation of passengers from one place to another in any motor vehicle can be considered as transportation of passenger.

Circular No. 231/25/2024-GST dated 10-09-2024

4.4

Demo vehicles promote sale of similar type of motor vehicles, they can be considered to be used for making ‘further supply of such motor vehicles’

As demo vehicles that are used by authorized dealers to provide trial run and to demonstrate features of the vehicle to potential buyers, it helps the potential buyers to make a decision to purchase a particular kind of motor vehicle. Therefore, as demo vehicles promote sale of similar type of motor vehicles, they can be considered to be used by the dealer for making ‘further supply of such motor vehicles’.

Accordingly, ITC in respect of demo vehicles is not blocked u/c 17(5)(a) as it is excluded from such blockage in terms of sub-clause (A) of the said clause.

4.5

Where demo vehicles* are used by an authorized dealer for purposes other than for making further supply of such motor vehicles, say for transportation of its staff employees/ management etc.

ITC is not available

4.6

Where the authorized dealer merely acts as an agent or service provider to the vehicle manufacturer for providing marketing service, including providing facility of vehicle test drive to the potential customers of the vehicle on behalf of the manufacturer and is not directly involved in purchase and sale of the vehicles.

In such cases, the sale invoice for the vehicle is directly issued by the vehicle manufacturer to the customer. For providing facility of vehicle test drive to the potential customers of the vehicle, the dealer purchases demo vehicle from the vehicle manufacturer. The dealer may sell the said demo vehicle to a customer after a specified time or kilometres as per agreement with the vehicle manufacturer on payment of applicable GST. In such a case, the authorized dealer is merely providing marketing and/or facilitation services to the vehicle manufacturer and is not making the supply of motor vehicles on his own account. Therefore, the said demo vehicle cannot be said to be used by the dealer for making further supply of such motor vehicles. Accordingly, in such cases, ITC on the same would not be available to the said dealer.

5

Availability of ITC on demo vehicles in cases where such vehicles are capitalized in the books of account by the authorized dealers.

5.1

Reference given for section 16(1); S-2(52) – Meaning of Goods and S-2(19) - Meaning of Capital Goods

5.4

As mentioned in paras above, as the demo vehicles are used by the authorized dealers to promote further sale of motor vehicles of the similar type and therefore, such vehicles appear to be used in the course or furtherance of business of the authorized dealers.

Where such vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of “capital goods” u/s 2(19).

Accordingly, availability of ITC on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorized dealers, subject to other provisions of the Act.

[36][Section 17(5)(aa)

Blocked ITC on vessels and aircraft

ITC shall not be available on vessels and aircraft

ITC is allowable on Vessels and Aircraft for specified Purpose

except when they are used

(i) for making the following taxable supplies, namely:

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;]

Blocked ITC on Vessels and Aircraft

ITC on vessels and aircraft used for any purpose other than the specified purposes is not allowed.

• Aircraft purchased for use by CEO.

ITC is allowable on vessels and aircraft for specified purpose

• Aircraft purchased by an Aviation School providing training on flying aircrafts.

[37][Section 17(5)(ab)

Blocked ITC on general insurance, servicing, repair and maintenance for ineligible motor vehicle/ vessel or aircraft

ITC is not available on services of general insurance, servicing, repair and maintenance

in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or (aa):

Proviso - ITC is available on above services for specified purpose

ITC in respect of such services shall be available—

(i) where motor vehicles, vessels or aircraft referred to in clause (a) or (aa) are used for the purposes specified therein;

(ii) where such services are received by a taxable person^[2(107)] engaged—

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;]

Blocked ITC

• General insurance taken on a car used by employees of a manufacturing company for official purposes.

Allowable ITC

• Maintenance & repair services availed by a company for a truck used for transporting its finished goods.
• General insurance services taken on cars manufactured by a car manufacturing company is allowed.

[38][Section 17(5)(b)(i)

Blocked ITC on supplies generally used for personal purpose

ITC is not available on following supply of goods or services or both

food and beverages, outdoor catering,

beauty treatment, health services, cosmetic and plastic surgery,

leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or (aa) except when used for the purposes specified therein,

life insurance and health insurance

Proviso - ITC is allowable if above supplies are used for making outward taxable supplies

ITC in respect of such goods or/and services shall be available

where an inward supply^[2(67)] of such goods or services or both is used

for making an outward taxable supply of the same category of goods or services or both or

as an element of a taxable composite or mixed supply.

Blocked ITC

• A manufacturing company purchases food items for being served to its customers, free of cost. ITC on such goods is blocked.
• ITC on outdoor catering services availed by a garment exporter for a marketing event organised for its prospective customers, is blocked.

Para 4 of Circular No. 172/04/2022 GST dated 06.07.2022

The term “leasing” referred in above table refers to leasing of motor vehicles, vessels and aircrafts only and not to leasing of any other items.

Accordingly, availment of ITC is not barred in case of leasing, other than leasing of motor vehicles, vessels and aircrafts.

Section 17(5)(b)(ii)

ITC is not available on membership of a club, health and fitness centre

Section 17(5)(b)(iii)

ITC is not available on travel benefits extended to employees on vacation such as leave or home travel concession

Ex

A company avails services of a travel agency for organizing a free vacation for its top performing employees. ITC on such services is blocked.

Proviso to Section 17(5)(b)

ITC in respect of such goods or services or both [i.e. (i), (ii) & (iii)]

shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

3.

Circular No. 172/04/2022-GST

Whether the proviso at the end of clause 17(5)(b) is applicable to the entire clause (b) or the said proviso is applicable only to sub-clause (iii) of clause (b)?

It is clarified that the proviso after sub-clause (iii) of clause (5)(17(b) is applicable to the whole of clause (b).

Section 17(5)(c)

Blocked ITC

ITC is not available on works contract^[2(119)] services when supplied for construction of an immovable property (other than plant and machinery)

Allowable ITC

Except where it is an input service for further supply of works contract service

ITC on works contract services can be availed only by that taxpayer who is in the same line of business, i.e. only a works contractor can avail ITC on works contract services received by him.

Section 17(5)(d)

ITC is not available on goods or services used for construction of an immovable property (other than Plant or Machinery) on his own account

including when such goods or services are used in the course or furtherance of business.

Thus, ITC on goods and/or services used in the construction of an immovable property is blocked only in those cases where the taxable person constructs the immovable property for his own use even if the immovable property being constructed is used in the course or furtherance of his business.

Explanation– For the purpose of clauses (c) and (d)

“construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property

Thus, if re-construction, renovation, additions or alterations or repairs are not capitalized, it would not tantamount to construction under GST law.

hence, ITC on works contract services availed for such construction (which is not capitalized) whether for any immovable property or for any P&M, would be allowed to all the recipients irrespective of their line of business.

Explanation to Section 17 for this Chapter and Chapter VI,

“plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support

that are used for making outward supply^[2(83)] of goods or services

and includes such foundation and structural supports

but excludes—

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

ITC on works contract services for construction of machinery fixed to earth by a foundation, would be allowed.

However, ITC on works contract services for construction of telecommunication tower(s), would be blocked.

It is important to note here that the term used in clause (c) above is “plant AND machinery” whereas the term used in clause (d) above is “plant OR machinery”. The expression “plant AND machinery” used in clause (c) has been defined in explanation to section 17 while expression “plant OR machinery” used in clause (d) has not been defined under the CGST Act.

Property has not been defined under the GST law.

Section 3(26) of the General Clauses Act, 1897, defines immovable property to include

land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

Term “attached to the earth” is defined u/s 3 of the Transfer of Property Act, 1882 to mean:

(a) rooted in the earth, as in the case of trees and shrubs;

[However, term "immovable property" does not cover standing timber, growing crops or grass.]

(b) embedded in the earth, as in the case of walls or buildings.

(c) attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached

ITC is available on following works contract services if works contract service

is an input service for further supply of works contract service

supplied for construction of plant and machinery

is not capitalised

ITC is available on goods/ services used in construction of immovable property

• For construction of plant and machinery
• When the value of goods and/or services is not capitalized

Blocked ITC on works contract services

• availed by a software company for construction of its office.
• availed by an automobile company for construction of a foundation on which a machinery (to be used in the production process) is to be mounted permanently.
• availed by a manufacturing company for construction of pipelines to be laid outside its factory, is blocked.
• availed by Telecommunication company for repair of its office building. The company has capitalized such expenditure.

ITC allowed on following works contract services

• availed by CD & Co., a contractor, services of EF & Co., a local works contractor, for the construction of complex
• availed by consulting firm of a works contractor for repair of its office building. The company has booked such expenditure in its P&L.
• availed for construction of machinery fixed to earth by a foundation.

Blocked ITC on goods & services used in construction of immovable property

• A company buys cement, tiles etc. and avails the services of an architect for construction of its office building.

ITC allowed on goods & services used in construction of immovable property

• MN & Constructions procures cement, paint, iron rods and services of architects and interior designers for construction of a commercial complex for one of its clients.
• A company buys cement, tiles etc. and avails the services of an architect for renovation of its office building. The company has booked such expenditure in its P&L.
• Goods and/or services used by an automobile company for construction of a foundation on which a machinery (to be used in the production process) is to be mounted permanently.

As per Latest AAAR Maharashtra dated: 20.07.2020 Order No. MAH/AAAR/RS-SK/24/2020-21, held that GST ITC shall not be available on Lift.

The AAR said that the erection of lift can be done only inside the building structure as an integral part of the building in which lift is to be installed. The lift when installed in the building makes the building fit for occupation and becomes a permanent fixture of the building itself. Hence, the same will be considered as an immovable property, and ITC is not available on it.

As per another case of MP-AAR concluded that a lift is an integral part of a ‘building’ which is specifically excluded from the definition of ‘plant & machinery’, and thus, ITC on lifts cannot be availed.

Another option is that lift may not be treated as integral part of immovable property, hence ITC may be availed.

Circular No. 219/13/2024-GST dated 26-06-2024

I

Whether ITC credit on the ducts and manholes used in network of optical fiber cables (OFCs) for providing telecommunication services is barred u/c (c) and (d) of section 17(5), read with Explanation to section 17?

SP

Section 17(5) provides that ITC shall not be available, inter alia, in respect of the following:

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; or

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

2. Explanation in section 17 of CGST Act provides that the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes land, building or any other civil structures; telecommunication towers; and pipelines laid outside the factory premises.

C

Ducts and manholes are basic components for the optical fiber cable (OFC) network used in providing telecommunication services. The OFC network is generally laid with the use of PVC ducts/sheaths in which OFCs are housed and service/connectivity manholes, which serve as nodes of the network, and are necessary for not only laying of optical fiber cable but also their upkeep and maintenance.

In view of the Explanation to section 17, it appears that ducts and manholes are covered under the definition of “plant and machinery” as they are used as part of the OFC network for making outward supply of transmission of telecommunication signals from one point to another.

Moreover, ducts and manholes used in network of OFCs have not been specifically excluded from the definition of “plant and machinery”, as they are neither in nature of land, building or civil structures nor are in nature of telecommunication towers or pipelines laid outside the factory premises.

Accordingly, it is clarified that availment of ITC is not restricted in respect of such ducts and manhole used in network of optical fiber cables (OFCs), either u/c (c) or (d) of section 17(5).

Section 17(5)(e)

ITC is not available on goods or services or both on which tax has been paid u/s 10; [Composition Levy]

A supplier registered under composition scheme cannot collect tax from its customers. Thus, such supplier issues bill of supply and not a tax invoice.

Tax paid on goods and/or services under composition scheme is not available as ITC.

Section 17(5)(f)

ITC is not available on goods or services or both received by a non-resident taxable person^[2(77)]

except on goods imported by him

Essentially, a non-resident taxable person has no fixed place of business in India but he sporadically supplies goods or services in India.

Tax paid on goods and/or services received by such non-resident taxable person, is not available as ITC.

However, tax paid by him on imported goods is allowed as ITC.

ITC on goods imported by a non-resident taxable person is allowed, ITC on services imported by him is blocked.

[39][Section 17(5)(fa)

ITC is not available on goods or services or both received by a taxable person,

which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013]

Section 17(5)(g)

ITC is not available on goods or services used for personal consumption;

One of the foremost conditions laid down in section 16 for availing ITC on goods and/or services is that such goods and/or services should be used in the course or furtherance of business.

The term ‘personal consumption’ has not been defined in the GST law. Thus, it may be understood in the general sense which would mean non-business use.

Section 17(5)(h)

ITC is not available on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

Meaning of ‘gift’

The terms gift has not been defined in the GST law.

Section 122 of the Transfer of Property Act, 1882, defines gift as transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.

In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right.

Meaning of ‘sample’

Sample is also not defined in the GST law.

The dictionary meaning of sample is “a small part or quantity intended to show what the whole is like”.

In commercial parlance, samples are given to prospective customers to enable them to test the quality of the item before making a decision to buy the same.

Section 17(5)(i)

ITC is not available of any tax paid [40][u/s 74 in respect of any period up to FY 2023-24.

Section 74: Show cause notice issued in case of fraud, to recover the GST.

Circular No. 92/11/2019 - GST dated 07-03-2019

2A.

A. Free samples/gifts without consideration are not supply u/s 7(1)(a)

i. It is a common practice among certain trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration.

As per section 7(1)(a), the expression “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as “supply‟ under GST (except in case of activities mentioned in Schedule I of the said Act).

Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as “supply‟ under GST, except where the activity falls within the ambit of Schedule I of the said Act.

ITC is not available on goods supplied free of cost

ii. Section 17(5)(h) provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Thus, it is clarified that ITC shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.

However, where the activity of distribution of gifts or free samples falls within the scope of “supply‟ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.

B

Buy one get one free offer is a mixed or composite supply and ITC is available on same

i. Sometimes, companies announce offers like ‘Buy One, Get One free‟

For example, “buy one soap and get one soap free‟ or “Get one tooth brush free along with the purchase of tooth paste‟.

As per section 7(1)(a), goods or services which are supplied free of cost (without any consideration) shall not be treated as “supply‟ under GST (except in case of activities mentioned in Schedule I of the said Act).

It may appear at first glance that in case of offers like “Buy One, Get One Free‟, one item is being “supplied free of cost‟ without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one

Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per section 8.

It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

C

Discounts including ‘Buy more, save more’ offers:

i. Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume).

For example- Get 10 % discount for purchases above Rs. 5000/-, 20% discount for purchases above Rs. 10,000/- and 30% discount for purchases above Rs. 20,000/-. Such discounts are shown on the invoice itself.

ii. Some suppliers also offer periodic / year ending discounts to their stockists, etc.

For example- Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of 2% if you purchase 15000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end. In commercial parlance, such discounts are colloquially referred to as “volume discounts”. Such discounts are passed on by the supplier through credit notes.

iii. It is clarified that discounts offered by the suppliers to customers (including staggered discount under “Buy more, save more‟ scheme and post supply / volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in section 15(3), including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.

iv. It is further clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

D.

Secondary Discounts

i. These are the discounts which are not known at the time of supply or are offered after the supply is already over.

For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet.

ii. The provisions of section 34(1) provides as under: “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, RP, who has supplied such goods or services or both, may issue to the recipient one or more CN for supplies made in a FN containing such particulars as may be prescribed.”

iii. whether CN(s) u/s 34(1) can be issued in such cases even if the conditions laid down in section 15(3)(b) are not satisfied.

It is hereby clarified that financial / commercial CN(s) can be issued by the supplier even if the conditions mentioned in section 15(3)(b) are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.

iv. It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in section 15(3)(b) are not satisfied.

v. In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in section 15(3)(b) of the said Act are satisfied.

vi. There is no impact on availability or otherwise of ITC in the hands of supplier in this case.

Circular No. 72/46/2018-GST dt. 26-10-2018

Clarification on the procedure to be followed in respect of return of time expired drugs or medicines under the GST laws.

2.

The common trade practice in the pharmaceutical sector is that the drugs or medicines (“goods”) are sold by the manufacturer to the wholesaler and by the wholesaler to the retailer on the basis of an invoice/bill of supply as case may be.

Such goods have a defined life term known as date of expiry. Such goods which have crossed their date of expiry are returned back to the manufacturer through the supply chain.

3.

It is clarified that the retailer/ wholesaler can follow either of the below mentioned procedures for the return of the time expired goods:

(A) Return of time expired goods to be treated as fresh supply:

a) In case the person returning the time expired goods is RP (other than a composition taxpayer), he may, at his option, return the said goods by treating it is as a fresh supply and thereby issuing an invoice for the same (“return supply”).

The value of the said goods as shown in the invoice on the basis of which the goods were supplied earlier may be taken as the value of such return supply.

The wholesaler or manufacturer, who is the recipient of such return supply, shall be eligible to avail ITC of the tax levied on the said return supply subject to the fulfilment of the conditions specified in Section 16.

b) In case the person returning the time expired goods is a composition taxpayer, he may return the said goods by issuing a bill of supply and pay tax at the rate applicable to a composition taxpayer. In this scenario there will not be any availability of ITC to the recipient of return supply.

c) In case the person returning the time expired goods is an URP, he may return the said goods by issuing any commercial document without charging any tax on the same.

d) Where the time expired goods which have been returned by the retailer/wholesaler are destroyed by the manufacturer, he/she is required to reverse the ITC availed on the return supply in terms of the provisions of section 17(5)(h). ITC which is required to be reversed in such scenario is the ITC availed on the return supply and not the ITC that is attributable to the manufacture of such time expired goods.

Illustration: Supposedly, manufacturer has availed ITC of Rs. 10/- at the time of manufacture of medicines valued at Rs. 100/-. At the time of return of such medicine on the account of expiry, the ITC available to the manufacturer on the basis of fresh invoice issued by wholesaler is Rs. 15/-. So, when the time expired goods are destroyed by the manufacturer he would be required to reverse ITC of Rs. 15/- and not of Rs. 10/-.

(B) Return of time expired goods by issuing Credit Note:

a) As per section 34(1), supplier can issue CN where the goods are returned back by the recipient. Thus, the manufacturer or the wholesaler who has supplied the goods to the wholesaler or retailer, has the option to issue a CN in relation to the time expired goods returned by the wholesaler or retailer.

In such a scenario, the retailer or wholesaler may return the time expired goods by issuing a delivery challan. It may be noted that there is no time limit for the issuance of a CN in the law except with regard to the adjustment of the tax liability in case of the CN issued prior to the month of September following the end of the FY and those issued after it.

b) If CN is issued within the time limit specified in section 34(2), tax liability may be adjusted by the supplier, subject to the condition that the person returning the time expired goods has either not availed the ITC or if availed has reversed the ITC so availed against the goods being returned.

c) However, if the time limit specified in section 34(2) has lapsed, a CN may still be issued by the supplier for such return of goods but the tax liability cannot be adjusted by him in his hands. It may further be noted that in case time expired goods are returned beyond the time period specified in the section 34(2) and a CN is issued consequently, there is no requirement to declare such CN on the common portal by the supplier (i.e. by the person who has issued the credit note) as tax liability cannot be adjusted in this case.

d) Further, where the time expired goods, which have been returned by the retailer/wholesaler, are destroyed by the manufacturer, he/she is required to reverse the ITC attributable to the manufacture of such goods, u/s 17(5)(h). This has been illustrated in table below:

.

3.

It may be noted that though this circular discusses the scenarios in relation to return of goods on account of expiry of the same, it may be applicable to such other scenarios where the goods are returned on account of reasons other than the one detailed above

Example: Manufacturer has availed ITC of Rs.10,000 at the time of purchase of inputs to manufacture of medicines. At the time of return of such medicine on the account of expiry, the ITC available to the manufacturer on the basis of fresh invoice issued by the retailer/wholesaler is Rs.15,000.

If so, how much ITC is required to reverse, at the time expired medicines are destroyed by the manufacturer?

Answer: Manufacturer would be required to reverse ITC of Rs.15,000 and not of Rs.10,000.

. Circular No. 195/07/2023-GST dated 17-07-2023

I-2

Whether the manufacturer is required to reverse ITC in respect of replacement of parts or supply of repair services as part of warranty, in respect of which no additional consideration is charged from the customer?

C

In such cases, the value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and/ or repair services to be incurred during the warranty period.

Therefore, these supplies cannot be considered as exempt supply and accordingly, the manufacturer, who provides replacement of parts and/ or repair services to the customer during the warranty period, is not required to reverse the ITC in respect of the said replacement parts or on the repair services provided.

I-4

Where the distributor provides replacement of parts to the customer as part of warranty on behalf of the manufacturer, whether any supply is involved between the distributor and the manufacturer and whether the distributor would be required to reverse the ITC in respect of such replacement of parts?

C

(a) where the distributor replaces the part(s) to the customer under warranty either by using his stock or by purchasing from a third party and charges the consideration for the part(s) so replaced from the manufacturer, by issuance of a tax invoice, for the said supply made by him to the manufacturer. In such a case, GST would be payable by the distributor on the said supply by him to the manufacturer and the manufacturer would be entitled to avail the ITC of the same, subject to other conditions of CGST Act. In such case, no reversal of ITC by the distributor is required in respect of the same.

(b) Where the distributor raises a requisition to the manufacturer for the part(s) to be replaced by him under warranty and the manufacturer then provides the said part(s) to the distributor for the purpose of such replacement to the customer as part of warranty. In such a case, where the manufacturer is providing such part(s) to the distributor for replacement to the customer during the warranty period, without separately charging any consideration at the time of such replacement, no GST is payable on such replacement of parts by the manufacturer. Further, no reversal of ITC is required to be made by the manufacturer in respect of the parts so replaced by the distributor under warranty.

(c) Where the distributor replaces the part(s) to the customer under warranty out of the supply already received by him from the manufacturer and the manufacturer issues a credit note in respect of the parts so replaced subject to provisions of sub-section (2) of section 34 of the CGST Act. Accordingly, the tax liability may be adjusted by the manufacturer, subject to the condition that the said distributor has reversed the ITC availed against the parts so replaced

Refer Circular No. 214/8/2024-GST dated 26-06-2024

It is clarified that the amount of the premium for taxable life insurance policies, not included in the taxable value under rule 32(4), cannot be considered as pertaining to non-taxable/exempt supply & therefore, no reversal of ITC is required as per provisions of Rule 42/43, read with section 17(1) & 17(2), in respect of the said amount.

Circular No. 217/11/2024-GST dated 26-06-2024

1

The insurance companies, which are engaged in providing general insurance services in respect of insurance of motor vehicles, insure the cost of repairs/ damages of motor vehicles incurred by the policyholders and settle the claims in two modes i.e., Cashless or Reimbursement.

Whether ITC is available to insurance companies in respect of repair expenses reimbursed by the insurance company in case of reimbursement mode of claim settlement.

Clarification

Under reimbursement mode of claim settlement, the insured avails repair services from non-network garages with which the insurance companies do not have routine business relationship. The said garages issue the invoice in the name of the insurance company while not extending credit facility for the repair costs. Accordingly, the policy holder/ insured makes payment of such repair services, and subsequently, the insurance company reimburses the approved claim cost to the insured.

Section 17(5) provides that ITC in respect of services of repair of motor vehicles shall be available where received by a taxable person engaged in the supply of general insurance services in respect of motor vehicles insured by him.

Section 2(93) defines “recipient" of supply of goods or services or both, as the person who is liable to pay the consideration, where such consideration is payable for the said supply of goods or services or both.

Section 2(31) of CGST Act, “consideration” includes any payment made or to be made in relation to supply of the goods or services or both, whether by the recipient or by any other person.

In reimbursement mode of claim settlement, the payment is made by the insurance company for the approved cost of repair services through reimbursement to the insured. Further, irrespective of the fact that the payment of the repair services to the garage is first made by the insured, which is then reimbursed by the insurance company to the insured to the extent of the approved claim cost, the liability to pay for the repair service for the approved claim cost lies with the insurance company, and thus, the insurance company is covered in the definition of “recipient” in respect of the said supply of services of vehicle repair provided by the garage under section 2(93) of CGST Act, to the extent of approved repair liability. Moreover, availment of credit in respect of input tax paid on motor vehicle repair services received by the insurance company for outward supply of insurance services for such motor vehicles is not barred under section 17(5) of CGST Act.

Accordingly, it is clarified that ITC is available to Insurance Companies in respect of motor vehicle repair expenses incurred by them in case of reimbursement mode of claim settlement.

2

Where the invoice raised by the garage also includes an amount in excess of the approved claim cost, the insurance company only reimburses the approved claim cost to the garage after considering the standard deductions viz. the compulsory deductibles to be borne by the insured, depreciation, improvements outside the coverage, value of salvage of the damaged parts of the motor vehicles, etc. The remaining amount is to be paid by the insured to the garage.

What is the extent of ITC available to the insurer in such cases?

Clarification

In cases where the garage issues two separate invoices in respect of the repair services, one to the insurance company in respect of approved claim cost and second to the customer for the amount of repair service in excess of the approved claim cost, ITC may be available to the insurance company on the said invoice issued to the insurance company subject to reimbursement of said amount by insurance company to the customer.

However, if the invoice for full amount for repair services is issued to the insurance company while the insurance company makes reimbursement to the insured only for the approved claim cost, then, the ITC may be available to the insurance company only to the extent of reimbursement of the approved claim cost to the insured, and not on the full invoice value.

3

Whether ITC is available to the insurer where the invoice for the repair of the vehicle is not in name of the insurance company.

Clarification

In such a case, condition of clause (a) and (aa) of section 16(2) of CGST Act is not satisfied and accordingly, ITC will not be available to the insurance company in respect of such an invoice.

Refer Circular No. 170/02/2022-GST dated 06-07-2022