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

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

Introduction

The Goods and Services Tax (GST) regime in India was implemented with the aim of easing the system of indirect taxation and eliminating the cascading effect of taxes. One of the most essential mechanism through which this is done is the Input Tax Credit (ITC) mechanism. Through this, companies are able to claim the tax incurred on inputs against their tax liability on output. However, GST act also provides some safeguard against abuse of ITC. These are primarily in Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, which stipulates conditions under which ITC would be deemed ineligible. This ineligible value of credit is often termed as Blocked Credit under GST. This article will seek to give an elaborate perspective of Section 17(5), as well as outlining the several conditions making ITC ineligible, and the significance such provisions carry for registered taxpayers.

Knowledge about Input Tax Credit (ITC)

Input Tax Credit (ITC) is the credit that is available to be claimed by a registered taxpayer against the tax charged on the procurement of goods and services utilized in the course or for the progress of business. This credit can be utilized for set-off against the GST payable on outward supplies. Whereas ITC ensures uninterrupted flow of tax and effectiveness in working capital, availability of credit is subject to some restrictions as are provided under the GST law.

What is Blocked Credit in GST?

Blocked Credit, as per the definition of Section 17(5) of the CGST Act, denotes such inputs and input services against which ITC is expressly disallowed, irrespective of their business consumption. These prohibitions are mainly to avoid leakage of revenue and to ensure the correct use of the ITC system is being executed.

Provisions of Section 17(5) – Ineligible ITC under GST

Following is a detailed definition of the heads under which ITC is not allowable under Section 17(5):

1. Motor Vehicles and Conveyances [Section 17(5)(a)]

Credit of input tax is not allowable on motor vehicles for the conveyance of persons having a seating capacity of not more than thirteen persons (including the driver), other than the vehicle is used for:

• Further supply of such motor vehicles,
• Carriage of passengers, or
• Driving training of such vehicles.

Similarly, credit in ships and aircraft also is limited, with specific usage. ITC is not permitted on general insurance, repair and maintenance and servicing in connection with ineligible motor vehicles, ships or aircrafts except in case of such services being used by manufacturer of motor vehicles, ships or aircrafts or general insurance service provider in connection with motor vehicles, ships or aircrafts insured by him.

2. ITC on Certain Services [Section 17(5)(b)]

ITC is not allowable for the following goods and services unless used for making outward taxable supplies of the same nature or pursuant to a statutory requirement:

• Beverages and food
• Outdoor catering of food
• Beauty treatment
• Health care
• Plastic and cosmetic surgery
• Membership of clubs, health and fitness clubs
• Rent-a-cab, life cover, and medical insurance

Illustration: A company is not entitled to ITC on meal services to staff other than when such service is required by law or resupplied as taxable service.

3. Construction Works Contract Services [Section 17(5)(c)]

Input tax credit availing is restricted in case of works contract services if supplied for construction of immovable property (excluding plant and machinery), except where the recipient is making further supply of such works contract services.

Illustration: GST credit on payment made to construct company office buildings cannot be availed, except business itself is used for construction services.

4. Self-Construction of Immovable Property [Section 17(5)(d)]

Goods or services used for self-construction of an immovable property (excluding plant and machinery) on one's own account shall not be eligible for ITC, even if such construction is done in the course of business. This is a head that covers both capital and revenue heads.

5. Goods and Services for Personal Consumption by Owner Himself [Section 17(5)(e)]

All the goods or services availed by the taxpayer or its employees for personal consumption are denied credit entitlement under GST as a whole.

6. Goods Lost, Stolen, Damaged, or Distributed Free as Samples [Section 17(5)(h)]

Input tax credit cannot be claimed on the following goods:

• Lost
• Stolen
• Damaged
• Written off
• Distributed free as gifts or free samples



Example: Promotional samples distributed to customers as part of promotional schemes cannot be attributed under ITC.

7. Tax Paid in Fraught or Penal Conditions [Section 17(5)(i)]

Tax paid under the circumstances of fraud, wilful mis-statement, or withholding of facts cannot be credited under ITC. Penalties, seizures, and allied tax charges are also covered.

Impact on Business Operations

For companies, knowledge and proper implementation of Section 17(5) provisions are critical to:

• Avoiding disallowance and related interest/penalty during GST audits
• Having clean input credit reconciliation
• Having clean audit trails and integrity compliance

Non-adherence to these conditions can lead to denial of credits, resulting in increased tax outgo and reputation loss.

Pitfalls to Avoid

1. Claiming ITC on benefits for employees like staff lunches, health schemes, or gym membership without checking statutory requirements.
2. Interpreting capital construction as qualifying input—usually found in instances pertaining to office refurbishment or establishment of new places.
3. Overlooking documentation requirements while availing exceptions to frozen credits.

Compliance Best Practices

• Have eligible and ineligible credits segregated in the accounting system or ERP.
• Secure all input supplies firmly, particularly those under the jurisdiction of blocked credits.
• Internally audit or review periodically in order to determine exposure to possible disallowances.
• Consult a professional like us in instances of complex construction-related transactions, worker benefits, or high-value acquisitions of capital.