Blocked Credit u/s. 17(5) of the CGST Act, 2017 – ITC That Cannot Be Claimed
The fundamental principle of the Goods and Services Tax (GST) is the seamless flow of Input Tax Credit (ITC). However, this flow is not absolute. Section 17(5) of the CGST Act, 2017 specifies certain supplies where ITC is “blocked,” meaning it cannot be claimed even if the goods or services are used for business purposes.
Claiming blocked credit is a serious compliance error that can lead to a demand for reversal, interest @ 18% p.a., and significant penalties. Below is a comprehensive guide to understanding these restrictions.
1. Motor Vehicles and Conveyances [Section 17(5)(a) & (aa)]
ITC is generally blocked on motor vehicles used for transportation of persons having a seating capacity of not more than 13 persons (including the driver).
Exceptions (ITC is Available if used for):
- Further supply of such vehicles.
- Transportation of passengers.
- Imparting training on driving such motor vehicles.
- Transportation of goods.
2. General Insurance, Servicing, and Repairs [Section 17(5)(ab)]
ITC is blocked on services of general insurance, servicing, repair, and maintenance insofar as they relate to the motor vehicles, vessels, or aircraft referred to in point 1 above.
3. Food, Beverages, and Lifestyle Services [Section 17(5)(b)(i)]
ITC is blocked on:
- Food and beverages, outdoor catering, beauty treatment, health services, and cosmetic/plastic surgery.
- Exception: ITC is available if the inward supply is used by a registered person for making an outward taxable supply of the same category (e.g., a restaurant owner claiming ITC on food ingredients).
4. Club Memberships and Fitness Centres [Section 17(5)(b)(ii)]
ITC is blocked on membership fees paid for clubs, health, and fitness centres.
5. Travel Benefits to Employees [Section 17(5)(b)(iii)]
ITC is blocked on travel benefits extended to employees on vacation such as leave or home travel concession.
- Crucial Proviso: ITC is available for all items in point 3, 4, and 5 where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
6. Works Contract Services [Section 17(5)(c)]
ITC is blocked on works contract services when supplied for the construction of an immovable property (other than plant and machinery).
- Exception: ITC is available where it is an input service for further supply of works contract service.
7. Self-Construction of Immovable Property [Section 17(5)(d)]
ITC is blocked on goods or services received by a taxable person for the construction of an immovable property (other than plant or machinery) on his own account, even when used in the course or furtherance of business.
8. Composition Scheme [Section 17(5)(e)]
Tax paid under Section 10 (Composition Levy) is not eligible for ITC.
9. Personal Consumption & Non-Business Use [Section 17(5)(g)]
ITC is not available for goods or services used for personal consumption.
10. Lost, Stolen, or Gifted Goods [Section 17(5)(h)]
ITC must be reversed/cannot be claimed on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
Consequences of Wrongful Availment
Claiming ITC on the above items (even if they appear in GSTR-2B) will result in:
- Compulsory reversal of ITC.
- Interest @ 18% from the date of availment until reversal.
- Penalty which can be equivalent to the tax amount in cases of fraud or willful misstatement.
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