Apportionments of Credit and Blocked Credits

In the Goods and Services Tax (GST) system, businesses often deal with diverse transactions involving both taxable and exempt supplies. Managing Input Tax Credit (ITC) in such scenarios requires a nuanced understanding of apportionment rules and recognition of blocked credits. The apportionment of credit and understanding blocked credits are critical aspects of managing Input Tax Credit (ITC) under the GST system. Businesses operating in diverse sectors or engaging in mixed supplies need to navigate these complexities to optimize their tax positions and ensure compliance with regulatory requirements. Leveraging technology solutions, maintaining accurate documentation, and staying informed about updates to the GST framework are essential for businesses to effectively manage their indirect tax obligations related to apportionment and blocked credits. Seeking professional advice can also provide valuable insights tailored to the specific circumstances of the business, aiding in prudent decision-making and compliance.

Apportionment of Credit in GST:

The apportionment of credit becomes relevant when a business engages in both taxable and exempt supplies. It ensures that the Input Tax Credit (ITC) claimed is appropriately allocated between taxable and exempt supplies, preventing any unintended benefit or loss.

1. Mixed Supplies:

When a business makes mixed supplies (a combination of taxable and exempt supplies), the ITC on inputs, input services, and capital goods must be apportioned based on the use for taxable and exempt supplies.

2. Common Input Services:

In scenarios where certain input services are used commonly for both taxable and exempt supplies, an apportionment mechanism is applied to determine the eligible ITC.

3. Turnover-based Apportionment:

One common method for apportionment is based on the turnover of taxable and exempt supplies. The credit is distributed in proportion to the turnover of taxable supplies to the total turnover.

4. Floor Area Ratio (FAR) Method:

In the case of services, such as renting of immovable property, the FAR method may be used. This involves determining the proportionate credit based on the ratio of taxable and exempt floor areas.

5. Specific Allocation Method:

Businesses may also adopt a specific allocation method if it accurately reflects the actual consumption of inputs for taxable and exempt supplies.

Challenges in Apportionment:

1. Complex Business Structures:

Businesses with intricate structures involving multiple units, diverse activities, and various product or service lines may find it challenging to devise a precise apportionment strategy.

2. Changing Business Dynamics:

Frequent changes in business dynamics, such as alterations in the product mix or shifts in the nature of supplies, pose challenges in maintaining accurate and up-to-date apportionment mechanisms.

3. IT Systems and Technology:

Utilizing appropriate IT systems and technology solutions becomes crucial for businesses to automate and streamline the apportionment process, minimizing the risk of errors.

Blocked Credits in GST:

While the GST framework allows businesses to claim Input Tax Credit (ITC) on most inputs, input services, and capital goods, there are specific categories known as “blocked credits” for which ITC cannot be claimed. Understanding these restrictions is vital for businesses to ensure accurate compliance with GST regulations.

Categories of Blocked Credits:

1. Motor Vehicles:

ITC is generally blocked for motor vehicles, except when they are used for specific purposes such as transportation of goods, providing taxable services of transportation, or training.

2. Food and Beverages:

Credits for goods or services used for food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery are typically blocked.

3. Membership of a Club, Health, and Fitness Centre:

ITC is not available for expenses related to membership of a club, health and fitness centre, and rent-a-cab services, except for certain cases.

4. Travel Benefits to Employees:

Credits related to travel benefits extended to employees on vacation, such as leave or home travel concession, are generally blocked.

5. Works Contract Services for Immovable Property:

ITC is restricted for works contract services when used for the construction of an immovable property, other than plant and machinery.

6. Construction of Immovable Property:

In cases where the taxpayer is engaged in the construction of an immovable property for their own use, ITC is blocked.

Compliance Challenges with Blocked Credits:

• Clarity in Classification:

Properly classifying expenses to identify whether they fall under blocked credits requires a clear understanding of the nature of the goods or services.

• Documentation:

Maintaining accurate documentation that clearly outlines the purpose and usage of goods and services becomes crucial for compliance.

• Education and Awareness:

Ensuring that the finance and procurement teams are educated and aware of the blocked credit categories is essential to avoid inadvertent claims.