Friday, June 23, 2017

Not Really a Seamless Credit Mechanism – The Story of ‘Blocked Credits’

A seamless credit flow is the bedrock of an efficacious GST mechanism whereby cascading effect of taxes is eliminated through a chain of tax credits allowed for set off against output tax liability at each stage. With the introduction of GST regime in India, expectations were high on seamless availability of Input Tax Credits ('ITCs) on various business expenses such as employee insurance, business travel, rent-a-cab etc., that are
currently 'blocked' under the 'existing law'. Strangely enough, expectations were belied as these ITCs continue to be 'blocked' under the imminent GST regime. In brief, the taxpayer cannot avail ITCs on following important categories of expenditure under the GST regime: 

1) Motor vehicles (except for a few taxpayers like transporters, vehicle dealers etc);

2) Food & beverages and outdoor catering etc;

3) Health treatment, membership of fitness club etc;

4) Taxi/cab service, Insurance (except when required by law); and

5) Works contract services;

A perusal of the above list reveals that the situation has remained unchanged or become stricter as regards 'blocked credits' under the GST Regime.

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