Blocked Credit Under GST as per Section 17 (5) of the CGST Act

Blocked Credit Under GST as per Section 17 (5) of the CGST Act. Under the Goods and Services Tax (GST) regime, businesses can claim Input Tax Credit (ITC) for the tax paid on purchases used in the course or furtherance of business. However, Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017 lists specific instances where ITC is blocked, i.e., not allowed. These provisions are known as Blocked Credits under GST. In this article, we will discuss the concept, conditions, applicability, and exceptions associated with blocked ITC in a simple, comprehensive manner.
What is Blocked Credit under GST?
Blocked credit refers to the ineligible Input Tax Credit that cannot be availed by a taxpayer, even if the goods or services are used for business purposes. Section 17(5) of the CGST Act provides a list of such items or scenarios where ITC is not allowed, irrespective of its business utility. The government introduced these restrictions to prevent misuse of credit and ensure that only legitimate credits are claimed.
Legal Provision: Section 17(5) of CGST Act, 2017
Section 17(5) of the CGST Act, 2017, explicitly mentions various goods and services or uses for which Input Tax Credit shall not be available. This section acts as a restrictive clause that overrides the general eligibility rule for ITC provided under Section 16 of the Act. Businesses must carefully evaluate whether their expenses fall under these blocked categories to ensure compliance.
List of Blocked Credits under GST as per Section 17(5)
Let’s understand each category of blocked credit in detail.
Motor Vehicles and Conveyances
Input tax credit is not allowed on motor vehicles and other conveyances used for transporting persons having a seating capacity of not more than 13 persons (including the driver). However, there are exceptions:

When such vehicles are used for further supply (sale) of vehicles,

Used for transportation of passengers,

Used for imparting training on driving such vehicles.

For example, if a driving school purchases a car to train learners, it can claim ITC. But if a regular company buys a car for its director's use, ITC is blocked.
Services of General Insurance, Servicing, Repair, and Maintenance of Vehicles
ITC is not available on insurance, servicing, and repair expenses of motor vehicles, except under the following conditions:

If the vehicle is used in the business of transport of passengers, training, or vehicle sale,

When such services are mandatorily required under any law, such as third-party insurance for commercial vehicles.

This ensures that only essential or law-compelled expenses are eligible for ITC.
Food and Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic and Plastic Surgery
Businesses cannot claim ITC on such services because they are personal in nature and not directly connected to business operations. However, exceptions are:

If the service is used to provide the same category of service as an output service (e.g., a hotel providing catering services can claim ITC on food purchases).

When it is mandated under any law, such as employee health checkups under the Factories Act.

Membership of a Club, Health and Fitness Centre
Input tax credit on any membership fees for clubs, gyms, or fitness centers is blocked, as these are considered personal expenses. Even if paid by a company on behalf of its employees, the credit cannot be claimed because it is not considered directly related to the business.
Rent-a-Cab, Life Insurance and Health Insurance
The GST law blocks ITC on cab rentals and insurance unless:

The services are obligatory under law (e.g., insurance for factory workers as per labor law),

The inward supply of such services is used to provide outward taxable supplies of the same category (e.g., an insurance company can claim ITC on health insurance provided to customers).

Travel Benefits to Employees on Vacation (Leave or Home Travel Concession)
Travel expenses incurred by a company for employee vacation, whether domestic or international, do not qualify for ITC. These are considered personal expenses, even if borne by the company.
Works Contract Services for Construction of Immovable Property
Input tax credit is not allowed for works contract services when used for construction of immovable property (except plant and machinery). This includes buildings, warehouses, etc., even if used for business purposes.
However, ITC is allowed if:

The taxpayer is in the business of providing works contract services to others.

This ensures that only service providers in the same line of work benefit from such credit.
Construction of Immovable Property on Own Account
ITC is disallowed on goods or services used for the construction of an immovable property on one’s own account, even when used in business. This applies to capitalized assets. The logic is to avoid credit benefit on assets that will not be sold but used.
Goods or Services Received by a Non-Resident Taxable Person
Input tax credit is not available to a non-resident taxable person except for goods imported by them. This restriction prevents misuse by persons who do not maintain a physical or taxable presence in India.
Goods Lost, Stolen, Destroyed, Written Off or Disposed of by Way of Gift or Free Samples
If goods are lost, stolen, destroyed in fire or accident, or disposed of as gifts or free samples, no input tax credit is allowed. Even though these goods may have been intended for business use, the actual utilization did not happen, and hence ITC is blocked.
Blocked Credit and Capitalization
It is important to note that if the cost of goods or services is capitalized in the books of accounts, and ITC is not claimed, depreciation under the Income Tax Act can be claimed on the full cost. However, if ITC is claimed, depreciation must be restricted to the net amount. This dual treatment should be planned carefully during accounting.
Exceptions to Blocked Credit
While most of the blocked credit rules are strictly enforced, the law also provides clear exceptions:

When goods or services are used to provide outward taxable supplies of the same nature.

When input services are mandatorily required under any law.

ITC is allowed on motor vehicles used for transportation of goods, irrespective of their seating capacity.

Taxpayers should evaluate each case as per the eligibility clauses to determine whether credit can be claimed.
Practical Impact of Blocked Credit
Blocked credit directly affects the working capital and tax liability of businesses. Companies must ensure that ineligible credits are not claimed to avoid interest and penalties under GST audit or scrutiny.
Businesses should:

Identify blocked credit items monthly,

Review vendor invoices before claiming ITC,

Maintain separate records for blocked credits for audit purposes.

Consequences of Wrongly Availing Blocked Credit
If a taxpayer claims ITC on blocked items, the GST department can issue a Show Cause Notice under Section 73 or 74 of the CGST Act. If found guilty:

ITC will be reversed,

Interest at 18% per annum will be charged from the date of claim,

Penalty may be imposed up to 100% of the tax involved in case of fraud.

Hence, businesses should be cautious and cross-check every credit claimed.
Conclusion
Blocked Credit under GST is important for maintaining accurate compliance. Section 17(5) may seem restrictive, but it aims to ensure ITC is claimed only for genuine business expenses. Businesses must keep a close eye on such ineligible credits while filing GSTR-3B and matching ITC in GSTR-2B. Proper documentation, clarity in classification, and awareness of exceptions will help in managing input tax credit efficiently.
FAQs on Blocked Credit under GST
Q1. What is blocked credit in GST?
Ans. Blocked credit refers to input tax credit that a registered person is not allowed to claim under Section 17(5) of the CGST Act.
Q2. Can ITC be claimed on cars purchased for business use?
Ans. No, unless the car is used for passenger transport, further supply, or driver training. Otherwise, ITC on cars is blocked.
Q3. Is ITC allowed on health insurance provided to employees?
Ans. Only if health insurance is mandatory under any law. Otherwise, ITC is blocked.
Q4. What if a company gives free samples to dealers? Can it claim ITC?
Ans. No, ITC is not allowed on goods given away as free samples or gifts.
Q5. Is input tax credit available on construction of office building?
Ans. No, ITC is not available for immovable property construction unless the taxpayer is in the business of providing construction services.
Q6. Can a non-resident person claim ITC in India?
Ans. Only for goods imported by them. Other inward supplies are not eligible for ITC.
Q7. Are repair expenses on company cars eligible for ITC?
Ans. No, unless the car is used for transport of passengers, training, or resale purposes.
Q8. Can we claim ITC on club or gym membership fees paid for employees?
Ans. No, ITC on such personal expenses is blocked even if paid by the employer.
Q9. Is ITC allowed on travel packages given to employees?
Ans. No, travel benefits provided on vacation or home travel concession are ineligible for ITC.
Q10. What happens if ITC is wrongly claimed on blocked items?
Ans. The credit will be reversed, interest will be payable, and penalties may be levied during GST audit or assessment.

Under the Goods and Services Tax (GST) regime, businesses can claim Input Tax Credit (ITC) for the tax paid on purchases used in the course or furtherance of business. However, Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017 lists specific instances where ITC is blocked, i.e., not allowed. These provisions are known as Blocked Credits under GST. In this article, we will discuss the concept, conditions, applicability, and exceptions associated with blocked ITC in a simple, comprehensive manner.

What is Blocked Credit under GST?

Blocked credit refers to the ineligible Input Tax Credit that cannot be availed by a taxpayer, even if the goods or services are used for business purposes. Section 17(5) of the CGST Act provides a list of such items or scenarios where ITC is not allowed, irrespective of its business utility. The government introduced these restrictions to prevent misuse of credit and ensure that only legitimate credits are claimed.

Legal Provision: Section 17(5) of CGST Act, 2017

Section 17(5) of the CGST Act, 2017, explicitly mentions various goods and services or uses for which Input Tax Credit shall not be available. This section acts as a restrictive clause that overrides the general eligibility rule for ITC provided under Section 16 of the Act. Businesses must carefully evaluate whether their expenses fall under these blocked categories to ensure compliance.

List of Blocked Credits under GST as per Section 17(5)

Let’s understand each category of blocked credit in detail.

Motor Vehicles and Conveyances

Input tax credit is not allowed on motor vehicles and other conveyances used for transporting persons having a seating capacity of not more than 13 persons (including the driver). However, there are exceptions:

When such vehicles are used for further supply (sale) of vehicles,
Used for transportation of passengers,
Used for imparting training on driving such vehicles.

For example, if a driving school purchases a car to train learners, it can claim ITC. But if a regular company buys a car for its director's use, ITC is blocked.

Services of General Insurance, Servicing, Repair, and Maintenance of Vehicles

ITC is not available on insurance, servicing, and repair expenses of motor vehicles, except under the following conditions:

If the vehicle is used in the business of transport of passengers, training, or vehicle sale,
When such services are mandatorily required under any law, such as third-party insurance for commercial vehicles.

This ensures that only essential or law-compelled expenses are eligible for ITC.

Food and Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic and Plastic Surgery

Businesses cannot claim ITC on such services because they are personal in nature and not directly connected to business operations. However, exceptions are:

If the service is used to provide the same category of service as an output service (e.g., a hotel providing catering services can claim ITC on food purchases).
When it is mandated under any law, such as employee health checkups under the Factories Act.

Membership of a Club, Health and Fitness Centre

Input tax credit on any membership fees for clubs, gyms, or fitness centers is blocked, as these are considered personal expenses. Even if paid by a company on behalf of its employees, the credit cannot be claimed because it is not considered directly related to the business.

Rent-a-Cab, Life Insurance and Health Insurance

The GST law blocks ITC on cab rentals and insurance unless:

The services are obligatory under law (e.g., insurance for factory workers as per labor law),
The inward supply of such services is used to provide outward taxable supplies of the same category (e.g., an insurance company can claim ITC on health insurance provided to customers).

Travel Benefits to Employees on Vacation (Leave or Home Travel Concession)

Travel expenses incurred by a company for employee vacation, whether domestic or international, do not qualify for ITC. These are considered personal expenses, even if borne by the company.

Works Contract Services for Construction of Immovable Property

Input tax credit is not allowed for works contract services when used for construction of immovable property (except plant and machinery). This includes buildings, warehouses, etc., even if used for business purposes.

However, ITC is allowed if:

The taxpayer is in the business of providing works contract services to others.

This ensures that only service providers in the same line of work benefit from such credit.

Construction of Immovable Property on Own Account

ITC is disallowed on goods or services used for the construction of an immovable property on one’s own account, even when used in business. This applies to capitalized assets. The logic is to avoid credit benefit on assets that will not be sold but used.

Goods or Services Received by a Non-Resident Taxable Person

Input tax credit is not available to a non-resident taxable person except for goods imported by them. This restriction prevents misuse by persons who do not maintain a physical or taxable presence in India.

Goods Lost, Stolen, Destroyed, Written Off or Disposed of by Way of Gift or Free Samples

If goods are lost, stolen, destroyed in fire or accident, or disposed of as gifts or free samples, no input tax credit is allowed. Even though these goods may have been intended for business use, the actual utilization did not happen, and hence ITC is blocked.

Blocked Credit and Capitalization

It is important to note that if the cost of goods or services is capitalized in the books of accounts, and ITC is not claimed, depreciation under the Income Tax Act can be claimed on the full cost. However, if ITC is claimed, depreciation must be restricted to the net amount. This dual treatment should be planned carefully during accounting.

Exceptions to Blocked Credit

While most of the blocked credit rules are strictly enforced, the law also provides clear exceptions:

When goods or services are used to provide outward taxable supplies of the same nature.
When input services are mandatorily required under any law.
ITC is allowed on motor vehicles used for transportation of goods, irrespective of their seating capacity.

Taxpayers should evaluate each case as per the eligibility clauses to determine whether credit can be claimed.

Practical Impact of Blocked Credit

Blocked credit directly affects the working capital and tax liability of businesses. Companies must ensure that ineligible credits are not claimed to avoid interest and penalties under GST audit or scrutiny.

Businesses should:

Identify blocked credit items monthly,
Review vendor invoices before claiming ITC,
Maintain separate records for blocked credits for audit purposes.

Consequences of Wrongly Availing Blocked Credit

If a taxpayer claims ITC on blocked items, the GST department can issue a Show Cause Notice under Section 73 or 74 of the CGST Act. If found guilty:

ITC will be reversed,
Interest at 18% per annum will be charged from the date of claim,
Penalty may be imposed up to 100% of the tax involved in case of fraud.

Hence, businesses should be cautious and cross-check every credit claimed.

Conclusion

Blocked Credit under GST is important for maintaining accurate compliance. Section 17(5) may seem restrictive, but it aims to ensure ITC is claimed only for genuine business expenses. Businesses must keep a close eye on such ineligible credits while filing GSTR-3B and matching ITC in GSTR-2B. Proper documentation, clarity in classification, and awareness of exceptions will help in managing input tax credit efficiently.