Cascading Effect Continues under GST

GST is replacing the existing indirect taxes with the promise that there will be no taxes on taxes. In other words, the cascading effect of taxes will vanish once the GST is implemented and thereby resulting in lowering of prices across the board. The Government is riding on this dream and the country has great expectations from this new tax regime. However, there are some Goods & Services, credit of which cannot be claimed even if they are in relation to business.

The credit which cannot be claimed is also termed as blocked input tax credits. According to Section 17(5) of the CGST Act, following credits cannot be claimed. Input tax credit shall not be available in respect of the motor vehicles and other conveyances except when they are used for transportation of goods of for making the following taxable supplies, namely:— (i) further supply of such vehicles or conveyances; or (ii) transportation of passengers; or (iii) imparting training on driving, flying, navigating such vehicles or conveyances. 

The credit of following supply of goods or services— (i) food and beverages, (ii) outdoor catering, (ii) beauty treatment, (iii) health services, (iv) cosmetic and plastic surgery will be available only when a particular category is used by a registered person for making an outward taxable supply of the same category. Further, A membership of a club, health and fitness centre, rent-a-cab, life insurance and health insurance is available only when either the Government notifies the services which are obligatory for an employer to provide to its employees or such inward supply of goods or services of a particular category is used by a registered person for making an outward taxable supply of the same category.

When it comes to the construction sector the credit of works contract services is not available except it is used for plant and machinery or where it is an input service for further supply of works contract service. If 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 the credit will not be available.

If a person has received goods from a supplier who has availed composition scheme, then the input tax credit will not be available on such goods or services. The goods or services received by a non-resident taxable person are not available to him towards credit. The non-resident person cannot claim credit unless goods are imported by him. Further, when any person uses goods or services or both for personal consumption the input tax credit cannot be taken.

Credit is also not available in respect of goods which are lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Further when any tax is paid by way of recovery in contravention of GST provisions the credit will not be available.

The above restriction and blocks are contrast to the promised environment of seamless credit. Thus, cascading effect of taxes continues under GST.

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