Understanding Blocked ITC Under Section 17(5) of the CGST Act

Input Tax Credit (ITC) serves as the backbone of India's Goods and Services Tax framework, enabling businesses to claim credit for taxes paid on purchases against their output tax liability. However, the legislature has carved out specific categories where ITC remains unavailable, regardless of business use.

Section 17(5) of the Central Goods and Services Tax Act, 2017 delineates these blocked credits — expenditures where businesses cannot claim ITC even when incurred wholly for business purposes. Understanding these provisions is essential for accurate GST compliance and avoiding costly reversals during assessments.

Motor Vehicles and Conveyances

ITC is blocked on motor vehicles used for transportation of persons with a seating capacity of thirteen or fewer (including the driver).

Permissible Exceptions:

• Automobile dealers (further supply of vehicles)
• Taxi operators and tour services (transportation of passengers)
• Driving schools (imparting motor driving skills)
• Logistics and delivery services (transportation of goods)

ITC on general insurance, servicing, repairs, and maintenance relating to motor vehicles follows the same restrictions as applicable to the underlying vehicle.

Food, Beverages, and Related Services

Blocked Categories:

• Food and beverages
• Outdoor catering services
• Beauty treatment and health services
• Cosmetic and plastic surgery
• Leasing, renting, or hiring of motor vehicles, vessels, and aircraft

When ITC is Available:

• The inward supply is used for making outward taxable supply of the same category of goods or services
• The inward supply is an obligatory provision under any law for employers to employees

Example: A hotel providing meals to guests can claim ITC on catering services procured for this purpose, as the output supply falls within the same category.

Works Contract and Construction Services

Blocked Expenditures:

• Works contract services for construction of immovable property (other than plant and machinery)
• Goods or services received for construction of immovable property on own account

For this provision, construction includes re-construction, renovation, additions, alterations, or repairs to the extent capitalised in the books of accounts.

Plant and Machinery — The Exception

ITC remains available for construction of plant and machinery, which specifically includes apparatus, equipment, and machinery fixed to earth by foundation or structural support.

Key Clarification: A foundation specifically designed to support machinery qualifies for ITC. However, a building constructed to house machinery does not.

Composition Scheme Taxpayers

Registered persons opting for the Composition Scheme under Section 10 are completely ineligible for ITC. This is a fundamental trade-off for the simplified compliance and lower tax rates offered under the scheme.

Non-Resident Taxable Persons

Non-resident taxable persons can claim ITC only on goods imported by them. ITC is not available on goods or services procured within India.

Personal Consumption and Distribution

Blocked Items:

• Goods or services used for personal consumption
• Goods or services received for construction of immovable property on own account

Free Supplies and Samples:

When goods are disposed of by way of gift or free samples, the ITC attributable to such goods must be reversed as the supply chain is not completed through a taxable transaction.

Goods Lost, Stolen, Destroyed, or Written Off

ITC must be reversed when goods are:

• Lost
• Stolen
• Destroyed
• Written off
• Disposed by gift or free samples

Tax Paid Due to Fraud or Non-Compliance

ITC is explicitly blocked on tax paid under the following circumstances:

• Section 74 — Tax short-paid due to fraud, wilful misstatement, or suppression of facts
• Section 129 — Detention, seizure, and release of goods and conveyances
• Section 130 — Confiscation of goods or conveyances

CSR Expenditure — Amendment Effective October 2024

A significant amendment introduced Section 17(5)(fa), specifically blocking ITC on goods or services received in relation to obligations under Section 135 of the Companies Act, 2013 (Corporate Social Responsibility).

This clarification settles the earlier ambiguity regarding CSR-related ITC claims.

Quick Reference Summary

Compliance Implications

Risk of Incorrect Claims:

Claiming blocked credit attracts interest at 18% per annum (or 24% in cases of fraud), penalty under Section 73 or 74, and reversal with retrospective effect.

Recommended Practice:

• Maintain a separate ledger for blocked credit items
• Reconcile GSTR-2B with internal records monthly
• Ensure blocked items are moved to the Ineligible ITC column
• Document exceptions with supporting evidence

Conclusion

Section 17(5) represents a critical component of GST compliance that demands careful attention. Businesses must establish robust internal controls to identify and segregate blocked credits, thereby avoiding assessments and maintaining clean compliance records.

For specific situations or complex transactions, professional guidance ensures that legitimate credits are claimed while avoiding inadmissible ones.

This article is for informational purposes only and does not constitute professional advice. For guidance specific to your circumstances, please consult a qualified Chartered Accountant.

Disclaimer: The information contained herein is based on the provisions of the CGST Act, 2017 and related rules as amended up to date. Readers are advised to verify the latest applicable provisions before implementation.