Section 17(5) of the CGST Act – Blocked Credit under GST

Section 17(5) of the CGST Act, commonly known as blocked credit or ineligible input tax credit (ITC), is an important provision as it directly affects GST cash payments and working capital. It specifies certain purchases on which GST is payable but cannot be claimed as ITC. This article explains the provision with a clause-by-clause breakdown of Section 17(5) along with relevant examples.

Overview of Section 17(5) of the CGST Act, 2017

Section 17(5) outlines the rules regarding blocked credits or ineligible ITC under GST. For purchases mentioned in this section, taxpayers are not permitted to claim ITC while paying their output tax liability.

The provision includes 11 clauses detailing situations where ITC is not available. It takes precedence over Section 16(1), which allows ITC for business use, and Section 18(1), which deals with ITC in special cases.

Clauses (a), (aa) and (ab) – Vehicles and Transportation

ITC cannot be claimed on the purchase of vehicles used for passenger transport, such as:

Four-wheeler cars
Three-wheelers or auto-rickshaws
Two-wheeler motorcycles or scooters
Tempo Travellers (TT) or buses with up to 13 seats including the driver
Any other road transport vehicle

However, ITC is still available if these vehicles are purchased for specific purposes, such as:

Passenger transport services, cab rentals, or bus leasing
Driving training schools
Automobile dealerships, showrooms, or manufacturing units

Clause (a) – Ships, Vessels, and Aircraft

ITC cannot be claimed on GST paid for the purchase of ships, vessels, or aircraft.

However, ITC is permitted if the purchaser is engaged in the following activities:

Trading or reselling ships, vessels, or aircraft
Providing passenger transport services such as airlines, cruises, or boat rental services
Running training institutes for navigation of ships or vessels, or for flying aircraft
Operating a goods transportation business using trucks, trailers, or tractors

Clause (aa) – Related Input Services

ITC is also blocked on GST paid for input services related to certain conveyances. These include expenses such as insurance, repair, servicing, or maintenance of:

Cabs, minibuses, Tempo Travellers, or buses with up to 13 seats
Ships and vessels
Aircraft

Exceptions exist where ITC is still allowed in the following cases:

Situations covered under clause (a) above
Exceptions falling under clause (aa) itself
Manufacturers of these conveyances
General insurance companies issuing policies that cover such conveyances

Clause (ab) – Proviso

Clause (b) – Food, Catering, Vehicle Rentals, Clubs, and Travel

ITC cannot be claimed on GST paid towards:

Outdoor catering, food, or beverages
Health services, beauty treatments, cosmetic or plastic surgery
Renting or leasing vessels, aircraft, or motor vehicles (except where permitted under clauses (a) and (aa))
Life insurance and health insurance
Club memberships, health clubs, or fitness centres
Leave travel allowance, home travel concession, or vacation travel for employees

ITC is still permitted in the following cases:

When the goods or services are resold as such
When supplied together with other goods or services as part of a composite or mixed supply
When it is mandatory under any law for the employer to provide these facilities to employees

Additionally, ITC on club memberships and home travel concessions is available when such benefits are legally required to be provided to employees.

Common Clarifications on ITC for Employers

ITC can be claimed on telephone and broadband bills reimbursed for business use.
ITC is available on airfare paid for employees or directors travelling for business purposes.
Premiums paid for employee accident insurance are eligible for ITC.
ITC is not available on cabs hired for employee commuting. However, if any law requires the employer to provide this facility, ITC is allowed. Similarly, ITC is allowed on rented buses (with more than 13 seats) for employee transport.
ITC cannot be claimed on goods purchased and gifted to employees.
ITC can be claimed for employee boarding and lodging expenses if incurred for business purposes.
Refreshments or canteen services provided to employees are eligible for ITC if required under the Factories Act, 1948 or any other labour law. Perks provided under an employment agreement do not attract GST.

Clauses (c) & (d) – Building Construction

A GST-registered person cannot claim ITC on GST paid towards construction or job work expenses for buildings, whether commercial or residential. This also applies to GST paid on materials used in such construction.

Similarly, ITC is not available on expenses for renovation or repair of buildings if the cost is capitalised in the books of accounts.

However, ITC is allowed in cases where:

Construction companies, builders, or promoters construct buildings for resale
Expenses are related to the purchase or construction of plant and machinery

Clauses (e) & (f) – Composition & Non-Resident Taxpayers

Under Section 10, taxpayers registered under the composition scheme cannot claim ITC on purchases since their tax is paid on a quarterly turnover basis. Section 17(5) reinforces this by disallowing ITC to all composition taxable persons, whether they supply goods or services.

Non-resident taxable persons are also restricted in their ITC claims. They can claim ITC only on IGST paid during the import of goods, but no ITC is available on domestic purchases.

Clause (g) – Personal Use

ITC cannot be claimed on goods or services purchased for personal use and not related to business. In cases where purchases are used partly for business and partly for personal purposes, ITC is restricted only to the proportion attributable to business use, calculated using the common credit formula.

Clause (h) – Free Samples and Lost Goods

ITC is not available if goods are lost, stolen, destroyed, written off, or distributed as free samples or gifts. If ITC was already claimed at the time of purchase, it must be reversed in GSTR-3B once any of these situations occur.

Clause (i) – Fraudulent ITC Claims

ITC cannot be claimed for any tax amount paid due to:

Earlier non-payment or short payment of tax
Excess refund of tax received
Wrongful or excess ITC claimed or utilised through fraud, willful misstatements, or suppression of facts (up to FY 2023–24)

Consequences of Violating Section 17(5)

The conditions under Section 17(5) are mandatory. If a recipient wrongfully claims ITC, it must be reversed. Additionally, interest at 24% per annum will be charged from the date of wrongful availment until the date of reversal. In such cases, tax officers may issue notices for recovery of the ineligible ITC.

Where to Find the List of Ineligible ITC under Section 17(5) of the CGST Act

Taxpayers can refer to GSTR-2B, also known as the auto-drafted ITC statement, to check purchases for a tax period where ITC is not available under Section 17(5).

The GSTR-2B statement provides details of both eligible and ineligible ITC. To access it, log in to the GST portal, go to the return dashboard, select the relevant month and year, and follow the steps outlined in the GSTR-2B access guide. You can view as well as download the statement from the portal.

Reporting Section 17(5) ITC in GSTR-3B

Every recipient is required to report ITC that is ineligible under Section 17(5) and must be reversed while filing GSTR-3B for the respective tax period (monthly or quarterly).

Such ineligible ITC must be shown in Table 4(B) of GSTR-3B. From 5th July 2022, reporting of ineligible ITC in Table 4(D) is no longer necessary. It is sufficient to declare the figure of ITC to be reversed in Table 4(B).

Cross-Checking Books with GSTR-2B

The list of ineligible ITC in GSTR-2B should be matched with the taxpayer’s books of accounts. Ideally, in the books, the ITC portion relating to purchases or expenses should be recorded directly, rather than being grouped under ITC available for claims.

If any ineligible ITC has been wrongly claimed after comparison of books with GSTR-2B, the taxpayer must reverse it in the GSTR-3B of subsequent months or quarters, along with the applicable interest.

GST Services

FAQs on Section 17(5) of the CGST Act – Blocked Credit Under GST

Q1. What have courts held regarding Section 17(5) of the CGST Act?
Courts have largely upheld the restrictions under Section 17(5). Later amendments clarified that the term “plant or machinery” should be read as “plant and machinery”, applicable retrospectively, even overriding earlier court decisions.

Q2. What is meant by blocked credit under GST?
Blocked credit refers to input tax credit (ITC) that businesses cannot claim due to the restrictions listed in Section 17(5) of the CGST Act.

Q3. What does Section 17(5) of the CGST Act cover?
Section 17(5) specifies the goods and services on which ITC is not available, such as motor vehicles, food and beverages, club memberships, personal use expenses, construction of immovable property, and more.

Q4. How does Section 17(5) affect GST compliance and return filing?
Businesses must carefully segregate eligible and ineligible ITC before filing GST returns. Wrong ITC claims have to be reversed with 24% interest, and such errors may invite penalties or notices from the department.

Q5. Can ITC be claimed on motor vehicles?
ITC is not allowed on passenger vehicles with up to 13 seats (including the driver). However, it is available if the taxpayer is in the business of passenger transport, driving training, or selling such vehicles.

Q6. Is ITC available on insurance, repair, or maintenance of vehicles?
No, ITC on insurance, servicing, or repair of vehicles is not allowed, except where the taxpayer is engaged in passenger transport, vehicle manufacturing, or where insurance companies issue policies for such vehicles.

Q7. Can ITC be claimed on food, beverages, and catering expenses?
Generally, ITC is not allowed on food and catering expenses. However, it is permitted if these services are supplied further (resale, composite supply, etc.) or if it is legally mandatory for the employer to provide canteen facilities to employees.

Q8. Is ITC available on club memberships or health and fitness centres?
No, ITC cannot be claimed on membership fees of clubs, health clubs, or fitness centres unless required by law for employees.

Q9. Can employers claim ITC on employee-related expenses?
ITC is not allowed on travel benefits, gifts, or leave travel concessions provided to employees. But ITC is available on accident insurance premiums, business travel expenses, or canteen facilities if mandated under the Factories Act or other labour laws.

Q10. Can ITC be claimed on construction of buildings or renovation expenses?
ITC is blocked on construction, renovation, or repair of buildings where such expenses are capitalised. It is allowed only for builders, developers, or for construction of plant and machinery.

Q11. Can composition dealers claim ITC under GST?
No, composition scheme taxpayers cannot claim ITC on any purchases, since they pay tax at a fixed rate on turnover.

Q12. Can non-resident taxpayers claim ITC?
Non-resident taxpayers can claim ITC only on IGST paid for imports of goods. They cannot claim ITC on domestic purchases.

Q13. What happens if ITC is wrongly claimed on ineligible items?
If ITC is claimed on blocked items under Section 17(5), it must be reversed in GSTR-3B. Interest at 24% per annum is payable from the date of claim until the date of reversal, along with the possibility of penalties and notices.