Section 17(5) of CGST Act: Ineligible or Blocked ITC or Block Credit

Topic Covers:

1. Meaning of Block credit/ITC
2. Provisions of Section 17(5) of CGST Act
3. Clause-wise Explanation of Ineligible ITC
4. List of Ineligible ITC under GST
5. Repercussion on non-compliance
6. Disclosing in GST Return

Meaning of Block Credit/Blocked ITC :

The main objective of the introduction of the Goods and Service Tax in India was the seamless flow of the input tax credit. Tax paid on purchase should be available to claim as a tax credit to pay the liability of output tax.

The law prescribed some conditions and eligibility provisions to claim the input tax credit under Section 16 of the CGST Act. Section 17(5) of the CGST Act, 2017 provides the list of ineligible input tax credit. In other words, the input tax credit on this list of items is blocked. A registered person cannot claim input tax credit on these transactions.                                                           

Provisions of Section 17(5) of the CGST Act:

The provision of the GST section 17(5) applies to all taxpayers. Section 17(5) starts with “notwithstanding” clause which means the provision of this section will prevail over the provision of Section 16(1) and Section 18(1) of the act.

The sections covers blocked credit transactions which include input tax credit on motor vehicle, insurance services, works contracts, membership of a club, and goods or services used for personal consumption etc.

Clause-wise Explanation of Ineligible ITC under section 17(5) of CGST Act:

1. Clause (a) of Section 17(5)

As per this clause input tax credit cannot be claimed on the purchase of motor vehicles with a seating capacity of not more than thirteen persons.

Exceptions to this clause are as follows

• Purchase of vehicles for retail at automobile retail houses and manufacturing establishments.
• A vehicle purchased for transportation of passengers, as in the case of cabs, bus rentals, or lease services.
• A vehicle purchased for providing training on driving such motor vehicles, as in the case of driving schools.

It means in the above cases input tax credit can be claimed.

Example: (a) GST paid on a vehicle purchased for personal use is blocked ITC / ineligible ITC

(b) GST paid on vehicle purchased by driving school to provide training – ITC available as per above exception

(c) GST paid on vehicle purchased by car dealer for sale – ITC available as per above exception

2. Clause (aa) of Section 17(5) :

ITC also cannot be claimed on the purchase of vessels and aircraft except when they are used for the following purposes:

1. For transportation of passengers;
2. For transportation of goods;
3. For further supply of such vessels and aircraft;
4. For providing training on navigating such vessels or flying such aircraft.
   
   3. Clause (ab) of Section 17(5) :

GST paid on services relating to general insurance/ servicing/ repair and maintenance of motor vehicles, vessels or aircraft is ineligible for input tax credit.

However, the input tax credit will be available when such services are received by the taxable person engaged in –

1. Manufacture of such motor vehicles/ vessels/ aircraft;
2. Supply of general insurance services in regards to such motor vehicles/ vessels/ aircraft.
3. The input tax credit on such services will also be available when motor vehicles/ vessels/ aircraft are used for purposes mentioned above in the relevant clause.

Example: (a) Tax paid on General insurance of motor vehicle, purchased for personal use – is ineligible input tax credit.

(b) Repairs and maintenance of vehicle used for driving school – ITC available as per the above exceptions.

4. Clause (b) of Section 17(5) :

For the following supply of goods or services or both, the Input tax credit is blocked:

• Food and beverages;
• Outdoor catering; Beauty treatment;
• Health services;
• Cosmetic and plastic surgery;
• Life insurance and health insurance;
• Membership of club, health and fitness centre;
• Travel benefits are provided to employees on vacation like leave or home travel concession.

However, the Input tax credit will be available where an inward supply of such goods or services is used for making a taxable outward supply of the same category of goods or services or as an element of a taxable composite or mixed supply.

Some examples for better understanding:

(a) R Ltd. allows its employees to book flight tickets for personal under the company’s name – GST paid on flight ticked is a blocked input tax credit as per provision.

(b) GST on flight tickets for sales personnel travel (business) – ITC available as per the above exception

(c) Membership of health centre paid by Mr. S, a registered person – Ineligible ITC / blocked

5. Clause (c) of Section 17(5) :

In the instance of works contract service received for construction of an immovable property (other than plant and machinery).

The exception is available in this clause that Input Tax Credit can be availed if such works contract service is used as input service for further supply of works contract service.

Example:

(a) PQR Contractors constructing a building (immovable property) by availing work contract service – ITC not available/blocked input tax credit.

(b) PQR Contractors hires RSM Contractors for works contract (an input service) – ITC available as per above exception.

6. Clause (d) of Section 17(5) :

The registered person cannot avail ITC on goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his account including when such goods or services or both are used in the course or furtherance of business.

It is to be noted that the expression "construction" includes re-construction, renovation, additions or alterations, or repairs, to the extent of capitalization, to the said immovable property. The same applies to clause (b) above in the case of works contract services.

Example:

(a) Raj Ltd hires RSM Contractors for construction of a building (immovable property) – ITC not available/blocked credit.

(b) XYZ Ltd. hires RSM Contractors for construction of plant and machinery – ITC available as per exception

7. Clause (e) of Section 17(5) :

ITC on purchase of goods or services or both on which tax has been paid under section 10 of the CGST Act, 2017 is not allowed to be claimed. Section 10 of the CGST deals with taxpayers who opted for a composition scheme under GST.

8. Clause (f) of Section 17(5) :

In case, goods or services or both received by a non-resident taxable person except on goods imported by him.

9. Clause (g) of Section 17(5) :

If goods or services or both are purchased for personal consumption a registered person cannot claim the ITC on it.

• Clause (h) of Section 17(5) :

In the instance of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples, ITC is not allowed to be claimed.

Example:

Raj Ltd distributed goods as free samples for sales promotion – ITC is not available on such goods.

• Clause (i) of Section 17(5) :

Any tax paid in accordance with the provisions of sections 74, 129, and 130 of the act is not available to claim as ITC.

Section 74 deals with Tax not paid or short paid, because of fraud or wilful misstatement or suppression of facts, section 129 is about Detention, seizure, and release of goods/ conveyance; and section 130 is regarding Confiscation of goods/ conveyance.

Summary list of blocked credit under GST:

Here is a list of goods and services on which ITC is not available, in other words, blocked Credit under Section 17 (5) of the CGST Act 2017-

1. ITC on purchase of Motor vehicles and conveyances (for personal use, a motor vehicle with seating capacity upto 13 persons, purchase of aircraft and vessels.
2. General insurance, servicing, repairs, and maintenance of vehicles and vessels
3. Vessels and Aircraft, however, there are a few exceptions where ITC is allowed for the same.
4. Food, beverages, club memberships, beauty treatment, surgery, etc. not used for further supply of the same.
5. Membership of a club, Gym, Beauty club, health, and fitness centre.
6. Life and Health insurance
7. Travel for personal or business purposes, vacations, holidays, etc. where LTA is provided to the employees (unless obligated)
8. Leasing, Renting, and Hiring Vehicles for other than specified purposes.
9. Working Contract (for construction of properties)
10. Construction of immovable property (other than plant and machinery)
11. Purchase from Composition Scheme
12. Goods and Services received by a Non-resident
13. Goods and Services for Personal Consumption
14. Free Samples, gifts, lost stolen, and destroyed goods
15. Tax paid under section 74 of the CGST Act 2017.
16. Goods and Services purchased for exempted supplies.
17. No ITC on account of detention, seizure, and release of goods and conveyances in transit. (Under Section 129)
18. No ITC allowed on payment of late fees, penalties, interests, etc.
19. No ITC on tax paid on account of confiscation of goods or conveyances and levy of penalty (Under Section -130)

Repercussion on non-compliance:

If the registered person claimed ineligible ITC or Blocked credit as per Section 17 (5) of CGST Act the registered person must reverse such ITC which is claimed wrongfully. Further, interest at the rate of 18% is also required to be paid from the date of such claim until the date of reversal.

Disclosing in GST Return:

It is the responsibility of a registered person to report the ineligible ITC claimed earlier and liable to be reversed as per Section 17(5) of the CGST Act. The reporting of ineligible ITC or Blocked Input Tax Credit shall be done at the time of filing GSTR-3B for the month or quarter, as the case may be. The ineligible ITC needs to be reversed in Table 4(B) of the GSTR-3B.

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