What is blocked ITC?
Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017 outlines the scenarios under which Input Tax Credit (ITC) is blocked and not available to a taxpayer. This provision restricts the claim of ITC on certain inputs, goods, and services. The exhaustive list of cases where ITC is blocked under Section 17(5) includes:
Motor Vehicles and Conveyances: ITC is not available for motor vehicles and other conveyances, except in specific situations as outlined in the section.
Food and Beverages, Outdoor Catering, Beauty Treatment, Health Services: ITC cannot be claimed on goods and services related to food and beverages, outdoor catering, beauty treatment, health services, cosmetic surgery, etc., when provided to employees.
Membership of Clubs, Health, and Fitness Centers: ITC is blocked on expenses related to membership of clubs, health and fitness centers, unless mandated by law for employees.
Travel Benefits to Employees: ITC is not available on travel benefits provided to employees on vacation, such as leave or home travel concession.
Works Contract for Immovable Property: ITC is blocked on works contract services when they pertain to the construction of immovable property (other than plant and machinery) on the supplier’s or recipient’s premises.
Goods or Services Used for Personal Consumption: ITC cannot be claimed on goods or services used for personal consumption.
Goods Lost, Stolen, Destroyed: ITC is blocked on goods lost, stolen, destroyed, written off, or disposed of as gifts or free samples.
Taxable Person is Required to Compulsorily Register: ITC is not available if the taxable person is required to register under GST but has opted for voluntary registration.
Non-Resident Taxable Person: ITC is blocked for a non-resident taxable person.
Composition Scheme: ITC cannot be claimed by a person opting for the composition scheme.
Goods/Services Used for Non-Business Purpose: ITC is not available on goods or services used for non-business purposes.
Tax Paid Under Composition Scheme: ITC is blocked on tax paid on inputs or capital goods on which the supplier has opted for composition scheme.
Zero rated ITC rules under GST?
The ITC rules for zero-rated supplies are as follows:
Claiming ITC: Registered taxpayers making zero-rated supplies can claim a refund of the GST paid on inputs, input services, and capital goods used in the course of making such supplies. The ITC can be claimed through the electronic refund application.
Export of goods or services: If the taxpayer exports goods or services, either with or without payment of IGST (Integrated GST), they can claim a refund of accumulated ITC. The refund can be claimed through a separate refund application, providing the necessary supporting documents.
Deemed exports: Supplies made under deemed export category, where the goods do not leave the country but are intended for specific purposes, are also eligible for zero-rated benefits. The supplier can either claim a refund of accumulated ITC or supply the goods without payment of GST by utilizing the ITC.
Bond/LUT requirement: To claim zero-rated benefits, exporters are required to furnish a bond or Letter of Undertaking (LUT) to the authorities, ensuring compliance with the export requirements. This eliminates the need for upfront payment of tax and facilitates the smooth flow of goods or services.
Timeframe for refund: The refund of accumulated ITC for zero-rated supplies must be processed within a specified time limit, usually 60 days from the date of filing the refund application. If the refund is not processed within the stipulated timeframe, interest may be applicable.
Provision for section 80JJAA?
Section 80JJAA of the Income Tax Act, 1961 is a provision that allows eligible businesses to claim a deduction for additional employee cost incurred for the purpose of promoting employment. Here are the key details of this provision:
Eligible Businesses: Section 80JJAA applies to Indian companies and partnership firms engaged in the manufacturing sector.
Deduction Amount: Businesses can claim a deduction of 30% of additional employee cost incurred during the previous year.
Additional Employee Cost: The additional employee cost refers to the cost of wages paid to new employees (additional workforce) employed during the previous year. It excludes the cost of employees whose employment has been terminated.
Minimum Employment Criteria: To claim the deduction, businesses need to fulfill certain employment criteria. They must employ a minimum number of 10 employees if they were in operation for the entire previous year. If the business was set up during the previous year, it should employ a minimum of 30 employees.
Duration of Deduction: The deduction under Section 80JJAA can be claimed for a period of 3 consecutive assessment years starting from the year in which the additional workforce was employed.
What is related party as per various laws? – Companies Act, Ind AS, GST, Income Tax
As per 2(76) of Companies Act:
a. a director or his relative;
b. a key managerial personnel or his relative;
c. a firm, in which a director, manager or his relative is a partner;
d. a private company in which a director or manager or his relative is a member or director;
e. a public company in which a director or manager is a director or and holds along with his relatives, more than two per cent of its paid-up share capital;
f. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
g. any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity.
(viii) any body corporate which is
a. a holding, subsidiary or an associate company of such company,
b. a subsidiary of a holding company to which it is also a subsidiary: or
c. an investment company or the the venturer of the company.
(ix) such other person as may be prescribed.
As per IND AS 24
A related party’s (i) a person or (ii) an entity that is related to the reporting entity. [A reporting entity in this Standard is an entity that is preparing its financial statements.]
i. A person or a close member of that person’s family is related to a reporting entity if
that person:
(a) has control or joint control over the reporting entity;
(b) has significant influence over the reporting entity; or
(c) is a member of the key management personnel of
• the reporting entity or
• a parent of the reporting entity
ii. An entity is related to a reporting entity if any of the following conditions apply:
(a) The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
(b) One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).
(c) Both entities are joint ventures of the same third party.
(d) One entity is a joint venture of a third entity and the other entity is an associate of the
third entity.
(e) The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself
such a plan, the sponsoring employers are also related to the reporting entity.
(f) The entity is controlled or jointly controlled by a person identified in (i) above.
(g) A person identified in (i)(a) above has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the entity).
(h) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity.
As per Section 2(41) of Income Tax Act, 1961
unless the context otherwise requires, the term “relative”, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
Furthermore, for the purpose of exempting certain gifts received from relatives under Section 56(2)(v), the term “relative” has been defined in the Explanation to the said clause to include:
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi).
Summing up, the related parties for the company shall be the directors themselves and their relatives such as the spouse, father, stepfather, mother, stepmother, son, son’s wife, stepson , daughter, stepdaughter , brother, stepbrother , sister, stepsister , daughter’s husband etc.
Related persons are defined u/s 2(84) of the GST Act.
Persons shall be deemed to related if they fall under any of the categories below:
a) Officer or director of one business is the officer/director of another business
b) Businesses legally recognised as partners
c) An employer and an employee
d) Any person who holds at least 25% of shares in another company , either directly or indirectly
e) One of them controls the other directly or indirectly f) They are under common control or management
g) The entities together control another entity
h) The promoters or managerial persons are members of the same family
GST law wrt M&A, Demergers, effect of ITC on such case.
Section 18 (3) of the CGST Act as well as rule 41 of the CGST Rules stipulates that in case of change of constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of business, the registered person would be allowed to transfer the unutilized input tax credit to transferor.
How would you advise the client on whether to go in for Litigation or settle the matter?
I would advice the client for settlement or litigation based on what the matter is about. Does it really amount to non-compliance? Are there interpretation issues involved? I would refer other case laws with similar matter. I will see the materiality of the amount and case. I will look at the cost of litigation. There is actually a limited scope for settlement in GST – settlement involves agreeing to the demand raised by the AO. There are some provisions where compounding is available.
