Understanding Blocked Input Tax Credit under GST: A Deep Dive into Section 17(5) of the CGST Act

Section 17(5) of the Central Goods and Services Tax (CGST) Act outlines specific categories of Input Tax Credit (ITC) that are 'blocked' or deemed ineligible. This provision is vital for businesses, as it directly influences GST cash flow and working capital. It details purchases where GST is paid but cannot be claimed as ITC. This article provides a clause-by-clause analysis of Section 17(5), explaining these ineligible credits with practical examples.

Recent Amendments to Section 17(5) of CGST Act (Latest Update)

The 55th GST Council meeting, held on December 21, 2024, proposed changes to Section 17(5) concerning blocked ITC. Key recommendations include:

• Amendment to Section 17(5)(d): The phrase "plant or machinery" is to be retrospectively replaced with "plant and machinery," effective from July 1, 2017. This change ensures consistency with the explanation provided at the end of Section 17.

Additionally, the Government of India proposed further amendments on July 23, 2024:

• ITC Restriction: Blockage of Input Tax Credit for tax paid under Section 74 (cases involving fraud, willful misstatement, or suppression of facts) will be restricted to demands up to Financial Year 2023-24.
• Removal of References: References to Section 129 (detention, seizure, and release of goods/conveyances in transit) and Section 130 (confiscation of goods/conveyances and penalty levy) are to be removed.

These proposed changes will become effective upon official notification by the CBIC.

Overview of Blocked Credits under CGST Act Section 17(5)

Section 17(5) of the CGST Act specifically addresses blocked credits, also known as ineligible Input Tax Credit (ITC). This means that a taxpayer cannot utilize ITC for specific purchases detailed within this section when settling their output tax liability. The provision enumerates 11 distinct clauses where ITC claims are disallowed. It effectively takes precedence over the general ITC availability outlined in Section 16(1) (general business use) and Section 18(1) (special circumstances).

Clauses (a), (aa), and (ab) – Restrictions on Conveyance and Transportation ITC

Clause (a): Motor Vehicles for Passenger Transport

Input Tax Credit cannot be claimed on motor vehicles specifically purchased for transporting passengers, including:

• Four-wheeled cars, three-wheeled auto-rickshaws, or two-wheeled motorcycles/cycles.
• Tempo Travellers or buses with a seating capacity of 13 passengers or less (including the driver).
• Any other road vehicles used for passenger transport.

Exceptions: ITC is permissible if the buyer's business operations fall into these categories:

• Providing passenger transportation services, such as cab, bus rental, or leasing.
• Operating driving schools.
• Engaging in automobile retail, showroom operations, or manufacturing.

Clause (aa): Ships, Vessels, and Aircraft

ITC is also not allowed on GST paid for acquiring ships, vessels, and aircraft.

Exceptions: ITC claims are valid if the buyer is involved in:

• Reselling ships, vessels, or aircraft.
• Offering passenger transportation services via planes, cruises, or boat rentals.
• Running training schools for navigation or aviation.
• Businesses primarily involved in transporting goods using trucks, trailers, or tractors.

Clause (ab): Services Related to Conveyances

ITC cannot be claimed on GST paid for associated input services such as insurance, repair, maintenance, or servicing of the conveyances mentioned in clauses (a) and (aa) (cabs, mini-buses, Tempo Travellers, buses up to 13 seats, ships, vessels, and aircraft).

Exceptions: ITC is allowed on these services if the buyer's business aligns with:

• The exceptions listed under clause (a) for motor vehicles.
• The exceptions listed under clause (aa) for ships, vessels, and aircraft.
• Manufacturers of the specified conveyances.
• General insurance companies offering policies for these conveyances.

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

Input Tax Credit cannot be claimed on the following expenses:

• Outdoor catering, food, or beverages.
• Health services, beauty treatments, plastic surgery, and cosmetic surgery.
• Renting, leasing, or hiring vessels, aircraft, or motor vehicles, except for specific exceptions mentioned in clauses (a) and (aa).
• Life insurance and health insurance premiums.
• Club memberships, health, and fitness center charges.
• Leave travel concessions or other travel benefits provided to employees for vacations.

When ITC can still be claimed for food, health services, conveyance rentals, and insurance if:

If the business is engaged in reselling these identical goods or services.

If these items are resold as part of a composite or mixed supply with other goods or services.

If providing these services or goods to employees is a mandatory requirement under any applicable law.

When ITC can still be claimed for club membership and home travel concession if:

If the employer is legally obligated to provide these benefits to employees under any prevailing law.

Clarifications on Employer-Related ITC Claims:

Input tax credit is available on telephone bills and broadband that is reimbursed in the course of business.

Input tax credit can be claimed on air travel fares expensed on directors or employees for business purposes.

Input tax credit is available for claims where GST is paid on the premium incurred for employee accident insurance.

ITC is not available for renting out cabs for employee commute. However, if there is any law or rule defining such requirement by the employer, ITC shall be allowed. Also, ITC is allowed where buses (more than 13 seats) are rented by employers for employee pick-up and drop.

If goods bought are gifted by an employer to employees, ITC is not available on the same.

ITC can be claimed for expenses towards boarding or lodging of employees incurred for business purposes.

ITC is available on refreshments or canteen services provided to employees if laid down as per the Factories Act, 1948 or any similar labour law is in force. Also, any perks as per the employment agreement do not attract GST.

Clauses (c) and (d) – ITC Restrictions on Building Construction

A GST-registered entity cannot claim ITC on GST paid for building construction or related job work expenses. This restriction applies whether the buildings are intended for commercial or residential use and extends to GST paid on construction materials.

Furthermore, ITC is disallowed for expenses related to the renovation or repair of buildings if these costs are capitalized in the company's accounts.

Exceptions: ITC on these expenses is permissible for construction companies, builders, and promoters whose business involves the resale of such constructed buildings. Additionally, ITC remains available for the purchase or construction of plant and machinery.

Clauses (e) and (f) – ITC for Composition Dealers and Non-Resident Taxpayers

Clause (e): Composition Scheme Taxpayers

As per Section 10, taxpayers registered under the Composition Scheme are prohibited from claiming ITC on GST paid for their purchases, given that they pay tax based on their quarterly turnover. Section 17(5) of the CGST Act explicitly reiterates this, stating that ITC is unavailable to composition taxable persons, regardless of whether they supply goods or services.

Clause (f): Non-Resident Taxable Persons

Non-resident taxable persons are required to deposit tax in advance. While they are permitted to claim ITC on Integrated Goods and Services Tax (IGST) paid on the importation of goods, they cannot claim ITC on any other domestic purchases.

Clause (g) – Personal Use

Input Tax Credit is not available for purchases that are utilized for personal purposes rather than business operations. If goods or services are partially used for business and partially for personal consumption, ITC will only be permitted for the business portion, calculated according to the rules for common credits.

Clause (h) – Free Samples, Lost, Stolen, or Damaged Goods

Input Tax Credit cannot be claimed for purchased goods that are lost, stolen, damaged, written off, or distributed as free samples or gifts. In situations where ITC has already been claimed at the time of purchase, it must subsequently be reversed in GSTR-3B if any of these events occur.

Clause (i) – Fraudulent ITC Claims

Input Tax Credit is disallowed for any tax payments resulting from:

• Previous non-payment or underpayment of tax.
• Excessive tax refunds received.
• Fraudulent utilization or availment of excess ITC, or claims based on willful misstatements or suppression of facts, specifically applicable up to Financial Year 2023-24.

Consequences of Violating Section 17(5) of the CGST Act

Adherence to Section 17(5) of the CGST Act is mandatory. Non-compliance requires the recipient or buyer to reverse any wrongfully claimed ITC. Additionally, an interest rate of 24% will be levied on the incorrectly claimed amount, calculated from the date of the claim until its reversal. Taxpayers risk receiving notices from tax authorities for improper ITC claims.

Accessing the List of Ineligible ITC under CGST Act Section 17(5)

Taxpayers can review their auto-drafted Input Tax Credit (ITC) statement, GSTR-2B, to identify purchases during a specific tax period for which ITC is unavailable under Section 17(5) of the CGST Act. GSTR-2B presents details for both eligible and ineligible ITC. To access this information, log in to the GST portal, navigate to the return dashboard, and select the appropriate month and year. A detailed guide for GSTR-2B access is available to assist users in viewing and downloading these details.

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

Buyers or recipients are required to declare any ineligible ITC previously claimed but now subject to reversal under Section 17(5) of the CGST Act when filing their monthly or quarterly GSTR-3B. This reversal value must be reported in Table 4(B) of GSTR-3B. Effective July 5, 2022, it is no longer necessary to report ineligible ITC under Table 4(D) of GSTR-3B; reporting in Table 4(B) is sufficient.

It is advisable to reconcile the ineligible ITC identified in your accounting records with the list provided in GSTR-2B. Ideally, the ITC component for purchases or expenses should be recorded as part of the total cost in the books, rather than separately as available ITC. If a comparison reveals any ineligible ITC that was erroneously claimed, it must be reversed in the subsequent GSTR-3B filing, along with applicable interest.

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