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

Updated on: 27 May, 2024 05:58 PM

Section 17(5) of the CGST Act, commonly known as blocked credits, is an important part for those who are regular taxpayer under GST. This provision outlines a set of purchases for which GST has been paid, but Input Tax Credit (ITC) is not allowed. This article provides a comprehensive, clause-by-clause analysis of Section 17(5) of the GST Act.

What is Section 17(5) of the CGST Act?

The CGST Act's Section 17(5) addresses blocked credits or ineligible Input Tax Credit (ITC) within the GST framework. When making purchases listed in this provision, taxpayers are unable to claim ITC while settling output tax. This provision provides 11 clauses under which ITC cannot be claimed.

As per the budget 2-23 update, Section 17(5) is revised to include expenditure on CSR initiatives for corporates under ineligible ITC-

In which case input tax credit is not available?

Conveyance and Transportation - Clause (a), (aa), and (ab)

ITC cannot be claimed on passenger transport vehicles like -

  • Three wheeler auto-rickshaws
  • Four-wheeler motor cars
  • Two-wheeler cycles or motorbikes
  • Buses or Tempo travelers having 13 seats or less
  • Any other vehicle used on the road

However, an ITC claim is still available for purchasing passenger transport vehicles if the buyer is engaged in the following businesses -

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

Clause (a) of section 17(5)

ITC claim is not available on GST paid for the purchase of vessels, ships, and aircraft. However, ITC can be claimed if the buyer is engaged in the following businesses -

  • Reselling of ships, vessels, and aircraft
  • Has training schools for flying aircraft and navigating vessels/ships.
  • Plane service/ cruise service/ boat rental service/ passenger transportation service.
  • Goods transportation service through trillers/trucks and tractors.

Clause (aa) of Section 17(5)

ITC also cannot be claimed for buying insurance or the repair cost of servicing the cabs, tempo travelers/mini buses, ships, vessels, or aircraft. ITC is allowed if the buyer is engaged in the following businesses -

  • Exceptions under clause (a) and (aa)
  • Manufacturers of conveyances listed above
  • Insurance companies selling general insurance for above mentioned conveyances.

Clause (b) - Vehicle Renting, Food, Catering

ITC cannot be claimed on the purchase of the following -

  • Expenses on outdoor food, beverages, or catering.
  • Expenses on cosmetic surgery, beauty treatment, plastic surgery, and health services.
  • Renting or leasing vessels, aircraft, or motor vehicles is permitted.
  • Obtaining life insurance and health insurance
  • Incurring expenses for club memberships or health and fitness centers
  • Expenses related to employee leave or home travel concession during vacations.

Exceptions under clause (b)

ITC can be claimed -

  • On resale of the same goods or services
  • Composite or mixed sale together with other goods.
  • When it is mandatory to provide goods and services to employees for legal compliance

Clause (c) and (d) - Building Construction

If you're registered for GST, you can't get a tax credit for the GST you paid on building construction or job work expenses, whether it's for commercial or residential buildings, including materials.

Also, if you spend money fixing or renovating buildings, even if it's recorded as an asset, you can't claim a tax credit.

However, if you're a construction company, builder, or promoter selling these buildings after construction, you can still claim a tax credit on those expenses. And you can also get a tax credit for buying or building plants and machinery.

Clause (e) and (f) - Non-resident and Composition

Section 10 imposes a restriction on composition taxpayers, disallowing them from claiming Input Tax Credit (ITC) on GST paid for purchases, given their quarterly turnover tax payment. Additionally, Section 17(5) of the CGST Act specifies that ITC is not accessible for composition-taxable persons, regardless of whether they supply goods or services.

For non-resident taxable persons, advance tax deposits are required. They can seek ITC for Integrated GST (IGST) paid on imported goods but are not eligible to claim ITC for any other domestic purchases.

Clause (g) - Personal Use

ITC cannot be claimed on goods purchased and used for personal purposes. If the goods purchased are partly used for personal and partly for business use, then ITC is allowed on the value of goods/services used for business purposes.

Clause (h) - Free Sample and Lost

ITC cannot be claimed if the goods are lost, stolen, written off, damaged, or given away as free gifts.

Clause (i) - Fraudulent ITC Claims

Input Tax Credit (ITC) cannot be claimed for the following -

  • Previous instances of non-payment or insufficient tax payment,
  • Overpayment of tax refunds,
  • Unlawful utilization or fraudulent acquisition of excessive ITC, or
  • Willful misstatements, suppression of facts, or confiscation and seizure of goods.

What is the reversal under section 17 5?

If the individual fails to comply with the provisions of section 17(5) of the CGST Act, the buyer or the recipient has to reverse any ITC that was claimed wrongfully. They might also have to pay interest @24% from the date of making the claim to the date of claim reversal.

Frequently Asked Questions

Q- What is ITC reversal in section 17(5)?

If the taxpayer claims ITC for the goods or services listed under section 17(5) of the GST Act, then such input tax credit has to be reversed.

Q- What does blocked credit mean?

Blocked credit refers to the input tax credit claim on specified goods and services that is prohibited to be availed by the taxpayer.

Q- How do I unblock a blocked credit on GST?

Navigate to Services > Ledgers > Electronic Credit Ledger. You will notice the amount that has been blocked in your Electronic Credit Ledger by your Jurisdictional tax officer. Depending on the nature of the block and the jurisdiction, you may need to file an application or request to unblock the credit. This application typically involves providing details about the blocked credit and explaining the steps you've taken to rectify the issue. Your Jurisdictional Officer may ask for certain clarifications based on the returns/statements you have filed. Provide all the necessary information as may be asked by the Jurisdictional Officer.

Once the credit is unblocked, you should receive confirmation from the tax authorities. Make sure to verify that the blocked credit has been successfully unblocked and is available for use in your GST filings.

It's advisable to consult with a tax expert for personalized guidance tailored to your situation.

Q- Can we claim ITC on Travelling expenses?

ITC on travel can be claimed only if, the same has been used for the business purpose. In other words, you can not claim ITC, in case the travel is for personal purposes.

Q- What is blocked ITC in GST 17 5?

In the context of the Goods and Services Tax (GST) in India, Blocked Input Tax Credit (ITC) refers to input tax credit that cannot be claimed by a registered taxpayer for certain goods or services. Input tax credit is a mechanism that allows businesses to claim a credit for the GST they pay on purchases, which they can then use to offset their GST liability on sales.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.