What is Section 17(5) of CGST Act?
Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017 restricts the availability of Input Tax Credit (ITC) in certain cases, even if the goods or services are used in the course or furtherance of business.
This is what is commonly referred to as “Blocked Credit”.
So, even though a taxpayer is otherwise eligible to claim ITC under GST, if the case falls under the purview of Section 17(5), the credit cannot be availed.
But First – What is Input Tax Credit (ITC)?
ITC means the credit of GST paid on purchases (goods or services) that can be used to pay the GST on sales. For example, if you pay ₹1,000 GST on raw materials, and charge ₹1,500 GST on finished goods, you can use the ₹1,000 credit and pay only ₹500 to the government.
This helps avoid the cascading effect of tax — “tax on tax”.
Blocked Credits Under Section 17(5)
Here’s a breakdown of situations where ITC is not allowed:
(a) Motor Vehicles and Conveyances
ITC is blocked for:
- Motor vehicles for passenger transport with seating capacity ≤13 (including driver), except when:
- Used for further supply (e.g., resale or leasing).
- Used for passenger transport.
- Used for training purposes.
- Vessels and aircraft, except when:
- Used for further supply.
- Used for transporting goods or passengers.
- Used for training.
(aa) Services Related to Vehicles
Services such as insurance, servicing, repair, and maintenance of motor vehicles, vessels, and aircraft are not eligible for ITC, except when:
- The vehicles themselves are eligible for ITC (as per clause (a)).
- The services are received by a manufacturer of such vehicles or a provider of insurance services.
(ab) General Insurance Services
ITC is blocked for general insurance services for motor vehicles, vessels, and aircraft, except when:
- Used in the manufacturing or supply of such vehicles or insurance services
(b) Food, Beverages, and Related Services
No ITC is available for:
- Food and beverages.
- Outdoor catering.
- Beauty treatment, health services, and cosmetic/plastic surgery.
Exceptions:
- When inward supplies are used for outward taxable supply of the same category.
- If these services are mandated for employees under law.
Example: A company arranges food and beverages during a board meeting. ITC is not allowed on the catering expenses. However, if a caterer purchases food items to provide catering services, ITC is allowed.
(c) Membership of Clubs, Health and Fitness Centers
ITC is blocked for expenses related to memberships of clubs, health centers, and fitness centers.
Example: If a company takes gym memberships for employees, ITC is blocked unless mandated by law.
(d) Rent-a-Cab, Life Insurance, and Health Insurance
Blocked unless:
- It is mandatory for employers under any law.
- It is used for further supply of such services.
Example: A company provides health insurance to employees as a statutory obligation. ITC is allowed. However, voluntary insurance provided to executives will block ITC.
(e) Works Contract Services
ITC on works contract services for constructing immovable property (excluding plant and machinery) is disallowed, except when:
- The services are used for further supply of works contracts.
Example: If a builder hires a contractor for constructing residential buildings, ITC is blocked. However, if the contractor provides services to another builder, ITC is allowed.
(f) Construction of Immovable Property
ITC is blocked for goods or services used for constructing immovable property (excluding plant and machinery) on own account.
Example: A company constructs a new office building for itself. The ITC on construction materials like cement and steel is not allowed.
(g) Goods Lost, Stolen, Destroyed, or Written Off
No ITC is available for goods:
- Lost, stolen, destroyed, or written off.
- Given as gifts or free samples.
Example: A business gives free promotional items to its customers during a marketing campaign. The ITC on these items is blocked under this clause.
(h) Personal Consumption
ITC is blocked for goods and services used for personal consumption.
Example: A proprietor buys furniture for personal use using the business GSTIN. The ITC on this purchase is not allowed.
(i) Tax Paid in Specific Situations
No ITC is available for tax paid under Sections 74, 129, and 130, which include:
- Tax paid due to fraud or suppression of facts.
- Tax paid for detained or confiscated goods.
Example: A taxpayer pays GST due to a penalty for suppressing taxable turnover. The ITC on such tax is not allowed.
Consequences of Contravening Section 17(5)
Section 17 (5) of CGST Act must be followed mandatorily, otherwise, the recipient or buyer must reverse such wrongfully claimed ITC. Further, they will incur interest at the rate of 24% from the date of such claim until the date of reversal.
Where to Get the List of Ineligible ITC?
The list of ineligible ITC can be obtained from:
- GSTR-2B: A system-generated statement available on the GST portal.
- Books of Accounts: The purchases or expenses recorded in the books must be scrutinized to identify ineligible ITC.
Steps to Reconcile ITC:
- Compare the ineligible ITC mentioned in GSTR-2B with the records in the books of accounts.
- Ensure that ineligible ITC is not booked as “ITC available for claims.”
- Reverse any wrongly claimed ITC in the next GSTR-3B filing.
Reporting Blocked Credit in GSTR-3B
Filing GSTR-3B:
- Table 4(B): Report ineligible ITC that needs to be reversed under Section 17(5).
- From 5th July 2022:
- Do not report ineligible ITC in Table 4(D).
- Only reverse such ITC in Table 4(B).
Procedure:
- Identify ineligible ITC from GSTR-2B and books.
- Reverse the identified ineligible ITC in Table 4(B) of GSTR-3B.
- Adjust any previous claims as needed and ensure accuracy in future filings.
Conclusion
Blocked credits under Section 17(5) of the CGST Act ensure ITC is claimed only for genuine business purposes. Taxpayers must carefully analyze and report ineligible ITC to avoid penalties and interest. Proper reconciliation between GSTR-2B and books of accounts is vital for compliance.
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