• In the previous part, we have discussed in depth the provisions of restricted and blocked credits under GST Law. In this part, we will continue the discussion, and further discuss the concept of “Availability of Input tax credit under special circumstances.
  • Section 17(5)(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
    • Eg: BH constructions, is a firm which undertakes civil contracts of construction of immovable properties. Under the following two scenarios, let us examine the availability of Input tax credit.

  Scenario I:-

  • “BH” construction provides works contract services of construction of “warehouse (immovable property), to “FZ” Ltd. “FZ” Ltd is engaged in business of manufacturing motors and pipes. “BH” constructions has levied GST on the “Works contract services” provided. In such case as per the provisions of Section 17(5)(c), “FZ” Ltd will not be able to avail ITC in respect of the works contract services as it did not use the “Input works contract services”, for providing “output works contract services”.

  Scenario II:-

  • “BH” construction provides works contract services of construction of “warehouse (immovable property), to “CZ” Ltd. “CZ” Ltd is engaged in business of civil constructions of immovable property as well. Currently a part of civil work (construction of warehouse), undertaken by CZ Ltd has been sub-contracted to “BH” constructions. “BH” constructions has levied GST on the “Works contract services” provided. In such case as per the provisions of Section 17(5)(c), “CZ” Ltd will be able to avail ITC in respect of the works contract services as it would be using the “works contract services” received, for providing “output works contract services”.
  • (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. Where any registered person has received any goods or services which are to be used in construction of immovable property, then the ITC in respect of the same is not eligible. However, where a person is engaged in the outward supply of construction services, he shall be eligible to claim ITC.
  • Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
  • By virtue of this explanation, an interpretation can be drawn that any expense incurred on construction, which is not capitalized in the books, can be considered not getting envisaged under the category of “blocked credits”. However it is not so the case, the allowability of ITC on inward supplies which can be under either segment of “construction”, will depend not only on the accounting methodology but also on the fact that with respect to certain sector of industry, if some expenditure is of a repetitive nature and is not capitalized. Eg: In case of aviation maintenance company, it performs its repairs and maintenance works in a place called as “hanger”. The surface of this hanger is to be kept completely smooth which facilitates the smooth movement of the aircrafts and choppers on during rendering of such services. In such cases the floor of the hanger needs a refurbishment at least once in two years. In such cases the inward supply of works contract services or construction services would be consumed. It can be argued however such refurbishment does not amount of “construction” as per the explanation provided above.

  • (e) goods or services or both on which tax has been paid under section 10; Input tax credit cannot be claimed in respect of supplies received from a supplier who has opted to pay tax under the provisions of “Composition levy”. Inward supplies from a service provider who has opted to pay tax @ 6% as mentioned under the notification 2/2019, would not be eligible for claiming ITC.

  • (f) goods or services or both received by a non-resident taxable person except on goods imported by him.
  • A person who has opted registration as a “Non-resident taxable person”, is eligible to claim ITC only in respect of those goods which have been imported and on which IGST (levied under Section 3(7) of the Customs Tariff Act read with provisions of Section 5 of the IGST Act.

  • (g) goods or services or both used for personal consumption
    • It is really a matter of fact check as to what can be called as personal consumption. Let us assume a scenario where a proprietor is engaged manufacture of “cosmetics”. If he consumes 5 bottles per month for his domestic usage, in such case it can be said that the goods are used for personal consumption. In such case the ITC already availed, to the extent attributable towards the 5 bottles will be liable for reversal.

  • (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and (i) any tax paid in accordance with the provisions of sections 74, 129 and 130.
    • Eg: Often pharmaceutical companies follow the practice of giving “free samples” to the physicians. In such case the ITC availed, which is attributable towards such “free samples” would be liable for reversal. Likewise any other goods on which ITC has been availed, if are disposed from the business, then the ITC in respect of the same is liable for reversal.

  • (6) The Government may prescribe the manner in which the credit referred to in sub-sections (1) and (2) may be attributed. Explanation.––For the purposes of this Chapter and Chapter VI, 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.

  Section 18: “Availability of Input tax credit under special circumstances”

  • As per provisions of Section 18(1) Subject to such conditions and restrictions as may be prescribed
    • (a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.
      • Eg: Mandar Private Limited was incorporated on 1/4/2018. The registered office of the company is in Mumbai. The company had not sought a GST registration till the time the turnover had not crossed Rs 20 Lakhs. On 4/9/2018, the company crossed the turnover of Rs 20 lakhs. In such case, the registration under GST will have to be sought within 30 days from 4/9/2018. In such case, as per the provisions of Section 18(1), Mandar Private Limited would be entitled in respect of “inputs held in RM, WIP of FG” as on 3/9/2018 (ie the day immediately before it became liable to seek a registration.
    • (b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration;
    • (c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed
      • Eg: Mr Vijay, had opted to pay tax under the composition levy. As on 25/11/2018, he opted out of the composition levy and was to pay GST under regular category of taxpayer. In such case, Mr Vijay would be entitled to claim ITC in respect of inputs held in RM, WIP and FG as on 24/11/2018. In addition to this he will also be entitled to claim ITC in respect of “Capital Goods”. However, in case of Capital Goods, the ITC will be allowed after considering the percentage reduction on proportionate basis. The manner of calculation has been prescribed in the CGST Rules 2017
    • (d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed
      • Eg: Mr Tanay was engaged in the manufacture of exempt product till 28/7/2018. Thus was not availing any Input tax credit. However, with effect from 29/7/2018, the goods manufactured by him became taxable. As a result of this, he would be entitled to claim ITC in respect of Inputs lying in “RM,WIP and FG”. In case of capital goods, the ITC will be allowed, but not the entire amount of ITC, it would be calculated, based on percentage reduction as prescribed under the CGST Rules 2017.
  • (2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.
    • The provisions of this subsection are often misinterpreted. The provisions of this subsection are applicable only in cases envisaged under the ambit of Section 18(1). That means, where the ITC is available on account of registration being sought or opting out of composition levy or supplies becoming taxable, in such case the ITC can be availed in respect of Inward supplies, the invoice of which pertains to a period “within 1 year before the date of change.
  • (3) Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.
    • The provisions of this subsection are applicable in case of any arrangement of change in constitution of business. The method of transfer of the ITC has been prescribed under the CGST Rules. The transfer of ITC is effectively noted where the “Electronic credit ledger” of the recipient is given an effect of the transferred ITC.
  • (4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption: Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
  • In case where a person has been availing ITC, opts to pay tax under the composition levy, or where the goods manufactured by him became wholly exempt, in such case the right over the Input tax credit balance is to be foregone. Thus the ITC already availed in respect of Inputs lying in “RM, WIP and FG” will have to be reversed. Similarly, in respect of Capital Goods, the ITC will be liable to be reversed and the amount to be reversed in respect of Capital Goods will be determined on the basis of percentage reduction basis.
  • (5) The amount of credit under sub-section (1) and the amount payable under sub-section (4) shall be calculated in such manner as may be prescribed.
  • (6) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher: Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.


  • Disclaimer: The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above