Blocked Credit Under GST as per Section 17 (5) of the CGST Act

Section 17(5) of the CGST Act is a key rule that every regular GST taxpayer should know about. It lists the purchases on which GST is paid but businesses cannot claim these as Input tax credit (ITC). This article will explain the latest details of Section 17(5) of the CGST Act, with examples of ineligible ITC.

As per the latest Union Budget (23rd July 2024), the Government of India has suggested changes to Section 17(5) of the CGST Act. The proposed changes are:

1. Stop blocking input tax credit for tax paid under Section 74 (fraud or any intentional wrong statement or hiding of facts) for demands up to the financial year 2023-24
2. Remove references to Section 129 (stopping, seizing, and releasing goods and vehicles in transit) and Section 130 (taking away goods or vehicles and adding a penalty)

*This change will be effective once the Central Board of Indirect Taxes and Customs (CBIC) announces it.

Overview of blocked credit in GST

Blocked credit refers to the Input Tax Credit (ITC) that a taxpayer cannot claim under GST means, due to specific restrictions outlined in GST laws. GST on cars includes limitations on ITC for motor vehicles used for personal purposes. Here are the key points:

1. Goods and services excluded: Items such as motor vehicles for personal use, and goods used for personal consumption, do not qualify for ITC.
2. Employee-related expenses: ITC is blocked on expenses like medical insurance, health services, and outdoor catering unless mandated by law.
3. Construction services: Any construction-related ITC, like for works contracts or real estate projects, is blocked unless used for further taxable supply.

Clauses Not Eligible for Input Tax Credit under Section 17(5)

There are several clauses under the GST law that mention the conditions for blocking credit, depending on the types of GST.

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

You cannot claim ITC on passenger transport vehicles like:

1. Auto-rickshaws (three-wheelers)
2. Cars (four-wheelers)
3. Motorbikes or cycles (two-wheelers)
4. Buses or tempo travelers with 13 seats or less, including the driver
5. Any other road vehicles

However, you can still claim ITC when you buy passenger transport vehicles if you are in the following businesses:

1. Passenger transport services, like taxi or bus rentals, or leasing services
2. Automobile shops, manufacturing places, and showrooms
3. Driving schools

Clause (a) of Section 17(5)

You cannot claim ITC on passenger transport vehicles with a seating capacity not exceeding 13, unless they are used for:

1. Selling those vehicles again
2. Transporting passengers
3. Teaching driving skills

You cannot claim ITC on the GST paid for the purchase of vessels, ships, and aircraft. For registering GST and managing compliance, check GST registration for the necessary steps. However, you can claim ITC if you are in the business of:

1. Selling ships, vessels, and aircraft
2. Running schools for flying aircraft and navigating ships
3. Providing plane, cruise, or boat rental services, or passenger transportation services
4. Transporting goods with trailers, trucks, and tractors

To simplify such calculations, use a reliable GST Calculator to determine accurate input tax credits based on your transactions.

Clause (aa) of Section 17(5)

You also cannot claim ITC for buying insurance or repair costs for cabs, tempo travelers, mini buses, ships, vessels, or aircraft. ITC is allowed if you are in the following businesses:

1. The exceptions in clause (a) and (aa) apply here
2. Manufacturing the above-mentioned vehicles
3. Selling general insurance for the above vehicles

Clause (ab) of Section 17(5)

You can claim ITC for general insurance, servicing, repairs, and maintenance of motor vehicles, aircraft, and vessels mentioned in clauses (a) or (aa), only in the following cases:

1. When used for the purposes specified in clauses (a) or (aa)
2. When received by a taxable person engaged in:
   • Manufacturing these vehicles
   • Providing general insurance for these vehicles

Clause (b) - Vehicle renting, food, catering

You cannot claim ITC for:

1. Outdoor food, drinks, or catering expenses
2. Cosmetic surgery, beauty treatment, plastic surgery, and health services
3. Renting or leasing vessels, aircraft, or motor vehicles
4. Buying life insurance and health insurance
5. Club memberships or health and fitness centre expenses
6. Employee leave or home travel concession expenses

Blocked credit also applies to items like food or beverages consumed personally. To know more about applicable rates, refer to the GST rate.

Exceptions under Clause (b)

You can claim ITC for:

1. Reselling the same goods or services
2. Composite or mixed sale together with other goods
3. Providing goods and services to employees as a legal requirement

Clause (c) and (d) - Building construction

You cannot claim ITC on GST paid for building construction costs or job work, whether for commercial or residential buildings, including materials.

Even if you spend money fixing or renovating buildings and record it as an asset, you cannot claim ITC for it.

If you are a construction company, builder, or promoter selling buildings after construction, you can claim ITC on those expenses. You can also get ITC for buying or building plants and machinery. Ensure compliance with the GST state code for accurate reporting.

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

Under Section 10, composition taxpayers cannot claim ITC on GST paid for purchases due to their quarterly turnover tax payments. For accurate submission, follow the GST return guidelines and use the correct format when filing your returns. Section 17(5) of the CGST Act also specifies that composition-taxable persons cannot access ITC, whether they supply goods or services.

For non-resident taxable persons, they need to make advance tax deposits. They can claim ITC for Integrated GST (IGST) paid on imported goods but cannot claim ITC for any other domestic purchases.

Clause (g) - Personal Use

You cannot claim ITC on goods bought for personal use. If goods are used partly for personal and partly for businss purposes, you can claim ITC on the value used for business purposes.

Clause (h) - Free samples and lost goods

You cannot claim ITC if goods are lost, stolen, written off, damaged, or given as free gifts.

Clause (i) - Fraudulent ITC claims

You cannot claim ITC for:

1. Past non-payment or underpayment of taxes
2. Overpayment of tax refunds
3. Fraudulently obtained excessive ITC
4. Intentional misstatements, suppression of facts, or confiscation and seizure of goods

Blocked credit in GST: Clauses

Various clauses under the GST law specify conditions for blocking credit, based on types of GST.

Section 17(5): Lists items and services ineligible for ITC, including motor vehicles, personal goods, and services.

Employee welfare: Clause (b) prohibits credit for employee benefits like travel and health insurance unless legally required.

Construction and real estate: Under clause (d), credits for construction services are blocked, affecting real estate businesses that deal in works contracts.

Objectives of blocked credit under GST

The objective of blocked credit under GST includes clarifying the CGST meaning and limiting certain input tax claims:

1. Avoidance of misuse: It prevents claiming credits on personal or non-business-related goods and services.
2. Encourage compliance: Promotes the use of taxable supplies and compliance with tax norms.
3. Regulation of specific industries: Ensures sectors like construction, real estate, and personal consumption services do not misuse ITC claims.

What is the reversal under section 17(5)?

Section 17(5) of GST mandates the reversal of ITC under certain circumstances:

1. Blocked credit: ITC on items listed in Section 17(5), like motor vehicles and employee benefits, must be reversed.
2. Non-business use: Any ITC claimed for non-business purposes, including personal use, should be reversed.
3. Ineligible ITC: Any unqualified ITC claimed on exempted or personal consumption items must be reversed as per the rules.

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

Every buyer or recipient must report any ineligible ITC claimed earlier that needs to be reversed, as per Section 17(5) of the CGST Act, while filing their GST returns using GSTR-3B for the relevant month or quarter. This ineligible ITC amount should be shown in Table 4(B) of the GSTR-3B form.

From 5th July 2022, it is not required to report ineligible ITC under Section 17(5) in Table 4(D) of GSTR-3B. Instead, it is enough to show this ineligible ITC to be reversed in Table 4(B).

To ensure accuracy in your GST returns, compare the list of ineligible ITCs provided in GSTR-2B with your own accounting records. The ITC for purchases or expenses should be correctly recorded in your books and not separately listed as ITC available for claims.

If, after comparison with GSTR-2B, any ineligible ITC has been claimed, you must reverse it in the GSTR-3B of the coming months or quarters, along with any applicable interest.

Conclusion

Blocked credit in GST affects businesses by restricting specific ITC claims on non-business expenses. Businesses should comply with these regulations to avoid penalties and maintain smooth operations. Opt for a business loan to manage working capital and meet financial obligations.