Blocked Credit in GST : Understanding Section 17(5) of CGST Act, 2017

Introduction:

The Goods and Services Tax (GST) regime in India allows registered taxpayers to avail Input Tax Credit (ITC) on the goods and services used in the course or furtherance of their business. This mechanism is crucial for avoiding the cascading effect of taxes. However, the GST law also specifies certain situations where ITC is explicitly blocked. Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, lays down a comprehensive list of such blocked credit in GST. Understanding these provisions is paramount for businesses to ensure accurate tax compliance and avoid potential penalties. This article delves into the intricacies of Section 17(5), providing detailed explanations, relevant examples, and some practical considerations to clarify these crucial aspects of GST.  

Topic Covered in this Article:

• Blocked credit under GST
• Section 17(5) CGST Act
• Ineligible ITC GST
• GST ITC restrictions
• Input tax credit not allowed
• Motor vehicles GST ITC
• Food and beverages GST ITC
• Membership of clubs GST ITC
• Works contract GST ITC
• Goods or services for personal consumption GST ITC

 

Detailed Explanation of Blocked Credits Under Section 17(5):

Section 17(5) enumerates various categories of goods and services where the input tax credit is not available, even if they are used in the course or furtherance of business. Let’s examine each clause in detail:

(a) Motor vehicles and other conveyances except when used for specified purposes:

Generally, ITC on motor vehicles and other conveyances is blocked. However, there are specific exceptions:

• • Further supply of such vehicles or conveyances: If your business is involved in selling motor vehicles (e.g., a car dealership), you can claim ITC on the vehicles purchased for resale.  Example 1: “ABC Motors,” a car dealer, purchases cars from the manufacturer. They can claim ITC on the GST paid on these car purchases as they are meant for further supply.  
  • Transportation of passengers: Businesses involved in passenger transportation services (e.g., bus operators, taxi services) can claim ITC on the motor vehicles used for this purpose.  Example 2: “XYZ Travels,” a bus operator, purchases new buses to expand its fleet. They are eligible to claim ITC on the GST paid on the purchase of these buses.

 

• Imparting training on driving, flying, navigating such vehicles or conveyances: Driving schools, flying schools, and navigation training institutes can claim ITC on the vehicles or conveyances used for providing training.  Example 3: “Learn to Drive Academy” purchases cars for its driving instructors to use for training students. The academy can claim ITC on the GST paid on these cars.

(aa) Vessels and aircraft except when used for specified purposes (similar to motor vehicles):

Similar to motor vehicles, ITC on vessels and aircraft is generally blocked, with exceptions for further supply, transportation of passengers, and imparting training.   Example 4: “Sky High Airlines” purchases new aircraft for its commercial operations. They can claim ITC on the GST paid on the purchase of these aircraft.  

(b) The following supply of goods or services or both:

• Food and beverages: ITC on expenses related to food and beverages for employees or otherwise is generally blocked.

Example 5: “Tech Solutions Ltd.” organizes a team lunch for its employees. The company cannot claim ITC on the GST paid on the restaurant bill.

• Outdoor catering: Similar to food and beverages, ITC on outdoor catering services is generally not allowed.

Example 6: “Event Planners Inc.” hires a catering service for a corporate event they are managing for a client. They generally cannot claim ITC on the catering expenses. However, if providing catering service is their own outward taxable supply, they can claim ITC on the inputs used for providing that service.

• Beauty treatment: ITC on beauty treatment services availed by the business is usually blocked.

Example 7: A company provides a one-time beauty treatment voucher to its top-performing employee as a reward. The company cannot claim ITC on the GST paid for this service.

• Health services: ITC on health services availed by the business is generally not allowed.

Example 8: “Manufacturing Co.” arranges for annual health check-ups for its employees. The company cannot claim ITC on the GST paid for these health services.

• Cosmetic and plastic surgery: ITC on cosmetic and plastic surgery services is generally blocked.

Example 9: A company sponsors cosmetic surgery for one of its executives. The company cannot claim ITC on the GST paid for this surgery.

• Exception to Clause (b): ITC is allowed if these services are used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.

Example 10: “The Pamper Salon” provides beauty treatment services. They can claim ITC on the GST paid on the purchase of beauty products and equipment used in providing these services.

Example 11: A hotel offers a package that includes accommodation, food, and spa services. Since the food and spa services are part of a taxable composite supply, the hotel can likely claim ITC on the inputs used for these services.

 

(c) Membership of a club, health and fitness centre:

ITC on the membership fees of clubs, health, and fitness centers is generally blocked.   Example 12: “Global Enterprises” takes a corporate membership at a golf club for its executives. The company cannot claim ITC on the membership fees paid.  

(d) Rent-a-cab, life insurance and health insurance except where it is obligatory for an employer to provide the same to its employees under any law for the time being in force:

ITC on services like rent-a-cab, life insurance, and health insurance is generally blocked.

Example 13: “Software Solutions Ltd.” hires a cab service for its employees’ daily commute. The company cannot claim ITC on the GST paid to the cab service provider.

Example 14: “Heavy Machinery Corp.” purchases a group life insurance policy for its employees. Generally, they cannot claim ITC on the premium paid.

Exception to Clause (d): If it is mandatory for an employer to provide these services to its employees under any law, then the ITC may be allowed.

Example 15: If a specific labor law mandates that “Factory Workers Union” must provide health insurance to its factory workers, then the ITC on the premium paid for such mandatory health insurance might be allowed (subject to specific notifications and interpretations).

 

(e) Travel benefits extended to employees on vacation such as leave or home travel concession:

ITC on travel benefits provided to employees during their vacation, like leave travel allowance, is generally blocked.

Example 16: “Textile Mills Ltd.” provides its employees with a travel allowance during their annual leave. The company cannot claim ITC on the GST paid on these travel benefits.

 

(f) Works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service:

ITC on works contract services used for the construction of an immovable property is generally blocked. This applies even if the property is used for business purposes. However, “plant and machinery” is specifically excluded from this restriction.

Example 17: “Real Estate Developers Inc.” hires a contractor for the construction of a new office building. They cannot claim ITC on the GST paid to the contractor for the works contract services.

Example 18: “Manufacturing Co.” hires a contractor for the installation of new machinery (which falls under plant and machinery) in their factory. They can claim ITC on the GST paid for this works contract service.

  Understanding “Plant and Machinery”: The term “plant and machinery” is crucial here. Generally, it includes apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes land, building or other civil structures; telecommunications towers; and pipelines laid outside the factory premises. The specific definition and its application can sometimes be complex and may be subject to judicial interpretation.   Exception to Clause (f): If the works contract service is an input service for further supply of works contract service, then ITC is allowed.

Example 19: A main contractor, “ABC Constructions,” subcontracts a part of the construction work to “XYZ Contractors.” “ABC Constructions” can claim ITC on the works contract services received from “XYZ Contractors” as it is an input service for their further supply of works contract service to the ultimate client.

 

(g) Goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account, even when used in the course or furtherance of business:

This clause is similar to (f) but covers goods and services used for self-construction of an immovable property (other than plant and machinery).

Example 20: “Retail Chain Ltd.” purchases cement, steel, and hires labor for constructing its own new warehouse. They cannot claim ITC on the GST paid on these goods and services, even though the warehouse will be used for their business.

 

(h) Goods or services or both in respect of which tax has been paid under section 10 (composition levy):

A registered person paying tax under the composition scheme cannot claim ITC, and similarly, a regular taxpayer cannot claim ITC on goods or services received from a supplier who has opted for the composition scheme.

Example 21: “Small Grocery Store” is registered under the composition scheme. “Big Retailer Ltd.” purchases goods from “Small Grocery Store.” “Big Retailer Ltd.” cannot claim ITC on the GST paid (which would be at a concessional rate) to “Small Grocery Store.”

 

(ha) Goods or services or both received by a non-resident taxable person except on goods imported by him:

A non-resident taxable person is generally not eligible for ITC on goods or services received in India, except for the GST paid on goods imported by them.

Example 22: A foreign company, “Overseas Tech,” provides consultancy services in India and has obtained GST registration as a non-resident taxable person. They cannot claim ITC on the expenses incurred in India, such as hotel stays or local transportation, but they can claim ITC on the GST paid on any goods they imported into India for their business.

 

(i) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples:

ITC that has been availed on goods that are subsequently lost, stolen, destroyed, written off, or given away as gifts or free samples is not allowed and needs to be reversed.

Example 23: “Electronics Manufacturer” had claimed ITC on raw materials used to manufacture certain goods. If these finished goods are later destroyed in a fire, the company will have to reverse the ITC claimed on the raw materials used for those destroyed goods.

Example 24: “Cosmetics Company” gives away free samples of its new product for promotional purposes. They cannot claim ITC on the GST paid on the inputs used to manufacture these free samples.

 

(j) Any tax paid in pursuance of any order where any demand has been confirmed on account of fraud or willful misstatement or suppression of facts:

If a tax demand is confirmed against a taxpayer due to fraud, willful misstatement, or suppression of facts, any tax paid in pursuance of that order will not be available as ITC.

Example 25: The GST department issues a demand notice to “Tax Evaders Inc.” for unpaid taxes due to fraudulent activities. If the demand is confirmed and “Tax Evaders Inc.” pays the tax along with penalties, they cannot claim ITC on this tax payment.

 

Impact on Other Industries (Brief Overview):

Hospitality: Restaurants generally cannot claim ITC on food and beverages purchased for consumption (except when providing the same as an outward supply). Membership fees for clubs or fitness centers, if incurred by a business, will also see blocked ITC. Transportation: While ITC on vehicles for passenger transport is allowed, other transportation-related expenses like certain maintenance or repair costs might fall under general blocked categories if not directly linked to the core service.  

Practical Tips for Businesses:

• Maintain Detailed Records: Ensure proper documentation for all expenses to clearly identify those eligible for ITC and those that fall under the blocked categories of Section 17(5).
• Understand the Nature of Supply: Carefully analyze the nature of goods and services being procured and their intended use in the business to determine ITC eligibility.
• Seek Professional Advice: When in doubt about the applicability of Section 17(5) to specific transactions, it is always advisable to consult with a tax professional.
• Regularly Review Expenses: Periodically review your business expenses to ensure compliance with the latest GST provisions regarding blocked credits.

 

Staying Updated:

The GST laws and regulations are subject to changes and clarifications. Businesses should regularly keep themselves updated on any amendments, circulars, or notifications issued by the government regarding Section 17(5) to ensure continued compliance. It is also recommended to consult relevant legal databases and case laws for the most accurate and up-to-date interpretations of these provisions.  

Conclusion:

Section 17(5) of the CGST Act, 2017, is a crucial provision that restricts the availability of input tax credit in specific scenarios. A thorough understanding of these blocked credits is essential for businesses to ensure compliance and optimize their tax positions. By carefully analyzing their transactions and staying updated with the latest legal pronouncements, businesses can navigate these complexities effectively. Remember to consult with tax professionals for specific guidance related to your business operations. This enhanced article provides a more detailed overview of Section 17(5) with additional insights and practical considerations. Remember to always refer to the official GST Act, Rules, and relevant case laws for definitive interpretations.