Input Tax Credit on RCM Paid for Transportation of Gifts

[Ramanathan Seshan]

Dear Experts,

Company A purchases gifts to distribute to its dealers during festive occasions. The GST paid on the procurement of these gifts is not eligible for input tax credit (ITC), as they are considered gifts under GST law.

However, for transporting these gifts from one location to another, the company hires a transporter and pays GST under the Reverse Charge Mechanism (RCM).

My question is: Can Company A claim ITC on the GST paid under RCM for the transportation of these gifts, even though the gifts themselves are ineligible for ITC?

Regards,

S Ram

AI Summary

Transportation services for gifts eligible for ITC despite Section 17(5)(h) blocking gift ITC claims A company purchases gifts for dealers during festivals and pays GST under Reverse Charge Mechanism for transporting these gifts. While ITC on gifts is blocked under Section 17(5)(h) of CGST Act, the query concerns whether ITC can be claimed on transportation services paid under RCM. Expert opinions are divided. One view holds that transportation of gifts is ineligible for ITC per Section 16(1) read with Section 17(5)(h). However, another perspective argues that transportation is a business expense for making taxable supplies, making it eligible for ITC since only goods given as gifts are blocked, not associated services. The Gujarat AAAR ruling in Aristo Bullion establishes that GST law does not require one-to-one correlation between inputs and outputs for ITC utilization. Transportation services can be considered business-related expenses used in furtherance of business operations. The consensus leans toward allowing ITC on transportation services despite the gifts themselves being ineligible, as these represent separate supplies with distinct treatment under GST provisions.