Section 17(5) of CGST Act - Blocked Credit Under GST

Section 17(5) of CGST Act, also referred to as blocked credits, is a very important provision for every regular taxpayer under GST. It defines a list of purchases on which GST is paid but businesses cannot claim these as the Input Tax Credit (ITC). In this article, we take you through the latest clause-by-clause analysis of Section 17(5) of CGST Act or ineligible ITC with examples.

Union Budget 2024 Outcome
23rd July 2024:
The Government of India proposed to amend section 17(5) of the CGST Act, which deals with block credits and proposed following changes

1. Restrict blockage of input tax credit for tax paid under Section 74 (fraud or any willful- misstatement or suppression of facts) for demands pertaining up to FY 2023-24.
2. Remove the reference to sections 129 (Detention, seizure and release of goods and conveyances in transit) and section 130 (Confiscation of goods or conveyances and levy of penalty). 

*This will come into force once notified by the CBIC.

Overview of Section 17(5) of CGST Act 2017

Section 17(5) of CGST Act refers to a specific provision under GST covering blocked credits or ineligible ITC. The taxpayer cannot claim ITC while paying output tax when they make purchases listed in this provision. 

This provision provides a list of 11 clauses on which ITC is not available for claims. Section 17 (5) of CGST Act overrides provisions of Section 16(1) “Availability of ITC in general when used for business” and Section 18(1) “ITC availability in special cases”.

Clauses (a), (aa) and (ab) – Conveyance & Transportation

You cannot claim ITC on vehicles purchased for passenger transportation such as-

• Four-wheeler motor cars or 
• Three-wheelers or auto rickshaws or
• Two-wheeler motorbikes or cycles or 
• Tempo Travellers (TT) or buses having less than or equal to 13 seats, including the driver.
• Or any other vehicle used on the road

However, ITC claims are still allowed for the purchase of a passenger transportation vehicle where you (buyer) conduct the following businesses-

• Passenger transportation service or cab or bus rental or lease service
• Driving schools
• Automobile retail shops, showrooms, or manufacturing establishments

Clause (a) of Section 17(5) is reproduced below-

You cannot claim ITC on GST paid for the purchase of ships, vessels and aircraft. 

However, ITC claims are still allowed if the buyer is into the following businesses-

• Resale of ships, vessels or aircraft
• Passenger transportation service or plane service or cruise or boat rental service
• Training schools for navigating vessels or ships and flying aircraft or planes
• Engaged in the goods transportation business in trucks or trillers or tractors. 

Clause (aa) of Section 17(5) is reproduced below-

Also, you cannot claim ITC on GST paid for some related input services. These include buying insurance or expense of repairing or maintenance or servicing the cabs, mini-buses or Tempo Traveller (TT) or buses of up to 13 seats, ships, vessels and aircraft.

However, ITC will still be allowed on insurance premium paid or repairs and maintenance of the above conveyances if you (buyer) are into following the following businesses-

• Exceptions under clause (a) above
• Exceptions under clause (aa) above
• For manufacturers of the above-listed conveyances
• Insurance companies selling general insurance policies covering such above-listed conveyances

Clause (ab) of Section 17(5) with its proviso is reproduced below-

Clause (b) – Food, Catering, Vehicle Renting, Club, & Travel

You cannot claim ITC on the purchase of the following-

• Expense paid for outdoor catering or food or beverages
• Spending on health services, beauty treatment, plastic surgery and cosmetic surgery
• Giving vessels or aircraft or motor vehicles for rent or lease or hire. However, ITC claims may be allowed for exceptional cases given under clauses (a) and (aa) above.
• Obtaining life insurance and health insurance
• Incurring expenses to obtain club membership or towards health and fitness centres
• Expense of leave or home travel concession or travel benefits for employees on vacation

You can still claim ITC on food expenses, health service costs, renting of conveyances and insurance if-

• You are reselling the same goods or services
• You are reselling these together with other goods or services as a composite or mixed sale
• It’s mandatory for the employer to provide the above services or goods to its employees to comply with any law

You can still claim ITC on club membership and home travel concession 

• Wherever it’s mandated for the employer to supply the above to its employees to comply under any law

Commonly asked FAQs on ITC availability for employers are clarified below-

• 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.

Clause (b) of Section 17(5) with its provisos are reproduced below-

Clauses (c) & (d) – Building Construction

Any GST registered person cannot claim ITC on GST paid on the building construction or job work expense. Such buildings could be used either for commercial or residential purposes. It also includes any GST paid on materials used for construction. 

You cannot claim ITC if you incur money on renovation or repair of buildings, wherever it is capitalised in accounts.

However, ITC on the above expense will be allowed for construction companies, builders and promoters who are into the resale of such buildings once constructed. ITC will still be allowed for the purchase or construction of plants or machinery.

Clauses (c) and (d) of Section 17(5) are reproduced below-

Clauses (e) & (f) – Composition & Non-resident

Section 10 puts a condition that a composition taxpayer cannot claim ITC on GST paid on purchases as they pay tax on their quarterly turnover. Accordingly, Section 17(5) of CGST Act states that ITC is not available for composition taxable persons, whether or not supplying goods or services.

Non-resident taxable person deposits tax in advance. They can claim ITC on IGST paid on import of goods, but cannot claim ITC on any other domestic purchases. 

Clauses (e) and (f) of Section 17(5) are reproduced below-

Clause (g) – Personal use

ITC is not available on purchases that are not used in business but used for personal purposes. If part of goods or services purchased is consumed for both business and personal use, then ITC will be allowed only to the extent of business use as per the formula of common credits. 

Clause (g) of Section 17(5) is reproduced below-

Clause (h) – Free sample & lost

ITC is not available if the purchased goods are lost or stolen or damaged or written off or given away as free samples or gifts. Sometimes, ITC would already be claimed upon purchase but might later have to be reversed in GSTR-3B when any of the above scenarios happen.

Clause (h) of Section 17(5) is reproduced below-

Clause (i) – Fraudulent ITC claims

ITC cannot be claimed for any tax paid now due to-

• Earlier non-payment or short tax payment, 
• Excess refund of tax
• Excess ITC utilised or availed fraudulently or willful misstatements or suppression of facts upto Financial Year 2023-24.

*This will come into force once notified by the CBIC.

Clause (i) of Section 17(5) is reproduced below-

What happens if you contravene ITC u/s 17(5) of CGST Act?

Section 17 (5) of CGST Act must be followed mandatorily, otherwise, the recipient or buyer must reverse such wrongfully claimed ITC. Further, they will incur interest at the rate of 24% from the date of such claim until the date of reversal. 

Where to get the list of ineligible ITC u/s 17(5) of CGST Act?

Taxpayers can access GSTR-2B or the “Auto-drafted ITC Statement” to check out the list of their purchases during a tax period on which ITC is not available under Section 17(5) of CGST Act. 

GSTR-2B statement provides information about both eligible and ineligible ITC. Login to the GST portal and navigate to the return dashboard. Select the relevant month and year. Follow the steps given on our GSTR-2B access guide for further details. You can view and download the details in GSTR-2B. 

Below is a screenshot of the window while viewing GSTR-2B on the GST portal-

Reporting of Section 17(5) of CGST Act in GSTR-3B 

Every buyer or recipient must report the ineligible ITC earlier claimed but to be reversed as per Section 17(5) of CGST Act while filing GSTR-3B for the month or quarter, as the case may be. You must report such ineligible ITC value to be reversed in Table 4(B) of the GSTR-3B. From 5th July 2022, ineligible ITC under Section 17(5) of CGST Act need not be reported under Table 4(D) of the GSTR-3B. It is enough if you report such figure of ineligible ITC that must be reversed in Table 4(B).

Compare the list of ineligible ITC given on GSTR-2B with the list you have identified from the books of accounts. Ideally, in the books of accounts, the ITC portion must be booked for purchases or expenses, as the case may be, and not booked separately under ITC available for claims. If any ineligible ITC is claimed upon a comparison of books with GSTR-2B, then you must reverse it in GSTR-3B of the following months/quarters with interest.