GST Audit Case Study 6 - Availment Of ITC On Goods On Goods Used For Construction Of Immovable Property And Capitalized In The Books Of Accounts

Input tax credit of goods or services covered under the provisions of section 17(5) of the Central Goods and Services Tax Act, 2017 is not available.

Aims and objectives of GST Audit

Audit in GST should intend to evaluate the credibility of self-assessed tax liability of a taxpayer based on the twin test of accuracy of their declarations and the accounts maintained by the taxpayer. Thus, Audit in GST should have the following objectives:

• Measurement of compliance levels with reference to compliance strategy of the tax administration.
• Detection of non-compliance and revenue realization
• Prevention of non-compliance in the future.
• Discovering areas of non-compliance to prevent taxpayers from continuing with such deviations from expected compliance behaviour that results in erroneous declaration of self-assessed liability.
• Providing inputs for corrections in/amendments to the legal framework which are being exploited by taxpayers to avoid paying taxes.
• Encouraging voluntary compliance.
• Any other goals deemed worth pursuing by the GST administration.

GST Audit Para

Section 17 (5) stipulates as follows :

Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:%u2014

(a)        ..............

   --------

(ab) 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 clause (aa):

(b)        [The following supply of goods or services or both--

(i)         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 clause (aa) except when used for the purposes specified therein, life insurance and health insurance.

During the course of the audit, it has come to notice that the input tax credits on the following goods are used for construction and later capitalized in the books of accounts. As per Section 17 (5) (d) of the CGST /SGST Act, the input tax credit is blocked on goods or services or both received by a taxable person for the 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. The Explanation there under states that “For the purposes of clauses ? and (d), the expression “construction” includes re-construction, renovation, additions, or alterations, or repairs, to the extent of capitalization, to the said immovable property.

The input tax credits have been availed on the following services which are inadmissible as per the provisions aforementioned:

Accordingly, the availed input tax credits are blocked as per the provisions afore-cited and are thus liable to be reversed along with applicable interest under Section 50 (3) and penalty as applicable:

In view of the above, the ITC availed on the GST paid on the goods used for construction appears to be squarely falling under the scope of Section 17(5)

(d) and hence ineligible. An amount of Rs. 233970/- { Rs. 116985/-(CGST) & Rs. 116985(SGST) - is liable to be reversed along with interest and penalty.

Author’s Note 

Input tax credit of goods or services covered under the provisions of section 17(5) of the Central Goods and Services Tax Act, 2017 is not available.

GST is paid on such goods or services as listed out under section 17(5), however, the buyer/ purchaser cannot claim the input tax credit on the same. Hence, as the input tax credit is not available, the same is termed as ‘Blocked Input Tax Credit’.

Firstly, it is important to note that provisions of section 17(5) of the Central Goods and Services Tax Act, 2017 overrides both the following sections-

1. Section 16(1) which states that the registered person will be entitled to take credit of input tax used/ intended to be used in the course or furtherance of business; and 

2. Section 18(1) which deals with the availability of input tax credit in special circumstances.

Accordingly, overriding both section 16(1) and section 18(1), provisions of section 17(5) simply state that input tax credit shall not be available in respect of listed goods or services or both. The list of said ‘blocked input tax credit’ is detailed below.

List of ‘Blocked Input Tax Credit’ along with exceptions-

The following table provides the list of ‘Blocked Input Tax Credit’ as covered under provisions of section 17(5) of the Central Goods and Services Tax Act, 2017 along with the exceptions to the same.

How to report Section 17(5) of the CGST Act in GSTR 3B

The ineligible ITC claimed but needs to be reversed by the recipient or buyer shall be reported while filing GSTR 3B for the month or the quarter as per Section 17(5) of the CGST Act. These values of ineligible ITC under Section 17(5) must be reversed in Table 4(B) instead of Table 4(D) of GSTR 3B from July 2022.

Author's Suggestion

Input tax credit of goods or services covered under the provisions of section 17(5) is inadmissible as the same is blocked under Section 17 (5) and is hence it is advised don’t take ITC on it  Taxpayer will be liable to reverse claimed ineligible ITC before issuance of notice by the department in GSTR-3B as soon as claim of wrong ITC is detected along with Interest at the rate of 18%  per annum starting from the date of filing of GSTR-3B with wrong ITC till the date of its reversal. If not utilized the claimed ITC then no interest is required.