Section 17 (5) of CGST Act, 2017- Blocked Credit

Section 17 (5) of CGST Act mainly defines the blocked credit under GST. According to GST law, it can be considered as a “negative list”. This means businesses cannot claim the input tax credit on particular goods and services. The items can include motor vehicles, food, construction materials, and other related items. So, it is vital to understand these restrictions for GST compliance and to avoid penalties. In this blog, you will know about the Section 17(5) of the CGST Act.

What is Section 17 (5) of CGST Act, 2017?

Section 17 (5) of CGST Act 2017 generally covers the "Blocked credits". This means the goods, services or expenses for which you cannot claim the ITC. The key restricted items can include:

a) Motor Vehicles (With up to 13 seats)

b) Food and Catering

c) Club memberships

d) Construction of immovable property

e) Personal Consumption items and Perks

f) Free samples or Lost Goods

Purpose of Section 17 (5) of CGST Act

Section 17 (5) of CGST Act defines the blocked credits. We can also call it the ineligible input tax credit. So, the purpose of this section is to eliminate the tax leakage. It also focuses on curb misuse of credits for personal consumption, and restricting ITC on certain expenses. This limits the credits on particular goods or services to maintain tax compliance. It also helps to protect tax revenue for businesses.

Clause-Wise Breakdown of Section 17 (5) of CGST Act

Here is a detailed explanation of the clause-wise breakdown of Section 17 (5) of CGST Act:

1) Clause (a) - Motor Vehicles (Passengers)

An input tax credit will not be available to motor vehicles for passenger transport. These vehicles have a seating capacity of up to 13 persons, including drivers. The exceptions can include:

• Further supply (Resale)

• Transportation of Passengers

• Training

2) Clause (aa) - Motor Vehicles (Goods or Other)

ITC is blocked on vessels and aircraft only when used for personal or non-specified purposes.

• Further supply

• Transportation of passengers or goods

• Training

• Fishing

3) Clause (ab) - Services on Vehicles

ITC on insurance/repair/maintenance is allowed if the motor vehicle / vessel / aircraft itself is eligible for ITC.

4) Clause (b) - Food, Catering, Health, and Insurance

In this clause, the ITC is blocked on:

• Food

• Beverages

• Health Services

• Cosmetic surgery

• Outdoor catering

• Beauty Treatment

• Leasing or renting of motor vehicles

• Life or Health Insurance

• Club membership

• Health & fitness Centre

Thus, the law allows ITC if it requires it for employees. This also applies when you use the inward supply to make taxable sales.

5) Clause (c) - Works Contract Services

You will not be able to claim input tax credit for works contract services. It applies to the construction of an immovable property instead of plant and machinery.

6) Clause (d) - Own Construction

There is no ITC on goods or services used for construction of an immovable property for own account. The equipment and machines are considered as the exception.

7) Clause (e) - Composition Scheme

You cannot receive a tax credit on goods or services when you pay tax under the Composition Scheme.

8) Clause (f) - Non-Resident Taxable Person

ITC allowed only on goods imported, not domestic purchases.

9) Clause (g) - Personal Use

An ITC is not applicable to goods or services for personal consumption and not for business.

10) Clause (h) - Lost/Destroyed Goods

An input tax credit is not allowed to goods lost, stolen, destroyed, written off, disposed of as gifts or free samples.

11) Clause (i) - Fraudulent Cases

No ITC on taxes paid due to fraud, willful misstatement, suppression, detention, or seizure.

ITC is not available on tax paid as a result of demand raised due to fraud, willful misstatement, suppression, detention or confiscation. This can happen due to:

• Fraud

• Willful misstatement

• Suppression

• Detention

• Seizure

How to get the list of ineligible ITC under Section 17 (5) of CGST Act?

The following steps to get the list of ineligible ITC:

Step 1: Access GSTR-2B

Firstly, you needs to login to the GST portal to access GSTR 2B. Then, go to the "Returns" option. Download the "Auto-drafted ITC Statement' (GSTR-2B) for the relevant tax period.

Step 2: Filter by Category

You must check the details on the invoice in GSTR-2B. Then, compare them against the 11 specific clauses of Section 17(5).

Step 3: Identify Blocked Categories:

This step needs you to identify blocked categories. The following categories are:

a) Motor Vehicles

b) Food and beverages or catering

c) Membership and travel

d) Construction

e) Personal Use

f) Free Samples or Lost Goods

g) Fraud or penalty Cases

Step 4: Check Exceptions

You must confirm that the expenditure does not comes under the allowed exceptions. For example- if catering is part of a composite supply or legal obligation.

Step 5: Reconcile and Record

Then, you can use the accounting software such as TallyPrime to mark these invoices as "Ineligible". This will help to prevent a wrongful claim in GSTR-3B.

Conclusion

Understanding Section 17 (5) of CGST Act, 2017 is essential for managing GST in India. This section mainly outlines the "blocked credits”. This means the expenses for which you cannot claim Input Tax Credit (ITC). So, you should know the ineligible items. This will avoid penalties and interest. This will help you stay compliant, manage your cash flow, and keep your tax records accurate.

FAQ

Q1. What is Section 17 (5) of CGST Act?

According to GST law, Section 17 (5) of CGST Act lists goods and services that cannot have Input Tax Credit (ITC). Even if the items are used for businesses. This is generally called the Blocked Credit.

Q2. Are motor vehicles considered blocked credit under Section 17 (5) of CGST Act?

Yes, motor vehicles are considered as blocked credit under Section 17 (5) of CGST Act, 2017. This applies to motor vehicles for the transportation of persons with a seating capacity of up to 13 persons (including driver). However, the ITC will be applicable if it is used for further supply (car dealer), passenger transportation (taxi service), or driving training.

Q3. What is meant by the Blocked Credit under GST?

Blocked credit means certain goods, services or expenses under GST that does not allow to claim Input Tax Credit (ITC). These items are specified in the Section 17(5) of the CGST Act, 2017. It can be considered as the "negative list" of input tax credit.

Q4. Can I claim ITC on building construction for rent or leasing?

No, you cannot claim ITC on building construction for rent or leasing. This is outlined as per the Section 17(5) of the CGST Act.

Q5. Is ITC blocked on Corporate Social Responsibility (CSR) expenses?

ITC on CSR is a litigative issue and depends on facts and judicial interpretation.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.