Table of contents:

• An overview of Section 17-5 of the CGST Act
• Clause (a) – Blocked ITC on Vehicle
• Clause (ab) – Vehicle Repairs and Insurance
• Clause (b) – Employee-Related Expenses
• Clause (c) – Construction and Works Contracts
• Clause (d) – Personal Consumption
• Clause (e) – Composition Scheme
• Clause (f) – Non-Residents
• Clause (g) – Personal Goods
• Clause (h) – Loss and Damaged Goods
• Clause (i) – Misconduct and Fraudulent Activities
• CSR Expenditure
• Reversal of ITC
• Practical Implications
• Legal Updates and Amendments
• Access Ineligible ITC Details through GSTR-2B
• FAQs

Blocked credits and ineligible Input Tax Credit (ITC) are pivotal concepts under GST (Goods and Services Tax) in India. For businesses, claiming ITC can significantly reduce tax liabilities. However, Section 17-5 of the CGST Act specifies cases where ITC is blocked, making it crucial for businesses to understand these rules. This section of the CGST Act lists out items where ITC cannot be claimed, impacting the cash flow and financial planning of companies.

Section 17-5 of the CGST Act plays an essential role in preventing ITC misuse by restricting claims on specific goods and services. It’s crucial to know which credits are blocked to ensure compliance. The following sections provide an in-depth explanation of these clauses.

Clause (a) – Blocked ITC on Vehicles

ITC is blocked for motor vehicles, aircraft, ships, and vessels when used for personal purposes. Businesses cannot claim ITC on cars purchased for employees’ travel unless they are in the transportation or vehicle rental business.

• Motor vehicles for personal use: Companies that buy vehicles for personal or employee use are not eligible for ITC claims.
• Aircraft, ships, and aquatic vessels: ITC can only be claimed if the business deals directly with the transport or resale of such assets.

Clause (ab) – Vehicle Repairs and Insurance

Under Section 17-5 of the CGST Act, ITC is blocked on expenses related to vehicle repairs and insurance when these vehicles are used for personal or non-business purposes. However, there are exceptions. Businesses engaged in the manufacturing, selling, or hiring of motor vehicles, aircraft, or vessels can claim ITC on these costs.

• Blocked ITC on Repairs: ITC cannot be claimed on repair costs for vehicles unless used for transportation of goods or passengers as a business activity.
• Insurance Costs: ITC on insurance premiums for vehicles is also ineligible unless the business directly involves vehicle resale or insurance services. In other words, vehicle-related insurance claims are only allowed for businesses dealing in transport or offering insurance policies for such assets.

The purpose of this clause is to limit ITC to genuine business expenses, ensuring that personal or non-business usage doesn’t lead to unfair tax advantages.

Clause (b) – Employee-Related Expenses

Employee welfare expenses are typically excluded from ITC claims. This includes items like health and life insurance, food and catering services, and leisure facilities like gym memberships.

• Health, life, and travel insurance: If a company provides insurance to employees, it generally cannot claim ITC unless required by law.
• Food, beverages, and catering services: Even when these services are provided to employees, ITC cannot be claimed.
• Leisure services: Gym memberships and club fees fall under the category of blocked credits.

Clause (c) – Construction and Works Contracts

• ITC is blocked for expenses related to the construction of immovable property, including buildings and structures fixed to the ground.
• Applies even if the property is used for business purposes.
• Works contracts for construction of immovable property are ineligible for ITC unless used to provide further services.
• Renovation, repairs, and modifications of immovable property do not qualify for ITC unless tied to plant and machinery.
• The goal is to prevent ITC on capital investments, ensuring only consumable inputs benefit.

Clause (d) – Personal Consumption

Under Clause (d) of Section 17-5 of the CGST Act, ITC is blocked for goods and services that are used for personal consumption. The primary purpose of this clause is to ensure that ITC is claimed only on goods and services used exclusively for business purposes. If any goods or services are consumed for personal needs, even if purchased by the business, ITC cannot be claimed on those items.

• This clause enforces strict guidelines to differentiate between personal and business-related expenses, preventing misuse of ITC.
• ITC is blocked on items like office supplies or equipment used for personal reasons, even if purchased through business accounts.
• Businesses must maintain transparency and accuracy in their ITC claims.
• Failure to distinguish between business use and personal consumption can result in ITC reversals, interest penalties, and audits.
• The focus is to ensure that only legitimate business expenditures are credited, supporting broader GST compliance.

Clause (e) – Composition Scheme

The Composition Scheme is a tax mechanism under GST, designed to simplify tax compliance for small businesses by allowing them to pay tax at a lower, fixed rate based on turnover. However, businesses opting for the Composition Scheme are not entitled to claim Input Tax Credit (ITC), which could be a disadvantage for those purchasing goods or services.

Key details include:

• Composition taxpayers pay GST at a fixed percentage of turnover.
• They must file a quarterly return instead of monthly.
• They cannot collect tax from customers.
• The scheme is only available to businesses below a specified turnover limit.
• Ineligible for businesses providing services (except for a few exceptions).

Clause (f) – Non-Residents

under Section 17-5 of the CGST Act specifies restrictions on claiming ITC for non-resident taxable persons. These are entities that do not have a permanent place of business in India but supply goods or services within the country. The law imposes limitations on their ability to claim ITC, except in specific circumstances.

• Non-resident taxable persons are not eligible to claim ITC on domestic purchases.
• ITC is only allowed on Integrated GST (IGST) paid on imported goods.
• Other domestic input services or goods are blocked from ITC claims for non-resident taxable persons.

Clause (g) – Personal Goods

Under Section 17-5 of the CGST Act, ITC is blocked on goods and services purchased for personal consumption. This ensures that the benefit of Input Tax Credit is limited only to business-related transactions. Goods used by individuals or employees for personal purposes do not qualify for ITC, even if the business makes the purchase. This restriction is crucial for ensuring the proper distinction between personal and business expenditures in the GST system.

Key Points:

• ITC is disallowed on goods/services solely for personal use.
• Partial ITC may be allowed if the goods are partly used for business.
• The company must demonstrate business use for partial ITC eligibility.
• Documentation and records must substantiate business-related consumption.
• Personal goods cannot be claimed under any circumstances for full ITC.

Clause (h) – Loss and Damaged Goods

under Section 17-5 of the CGST Act restricts Input Tax Credit (ITC) claims on goods that are no longer usable for business purposes. When goods are lost, stolen, destroyed, or written off, the ITC on such goods is considered ineligible. This clause aims to ensure that only goods actively used for business operations can be credited for tax purposes, preventing misuse of ITC claims. The blocked ITC applies under the following scenarios:

• Goods lost due to unforeseen events (e.g., theft).
• Goods written off due to damage or obsolescence.
• Destruction of goods during production or storage.
• Loss of goods due to accidents or disasters.
• Stock discrepancies resulting in written-off goods.
• Goods given away as free samples or promotional items.

Clause (i) – Misconduct and Fraudulent Activities

Clause (i) under Section 17-5 of the CGST Act addresses the ineligibility of ITC claims when related to goods or services involved in misconduct or fraudulent activities. This ensures that businesses do not unfairly benefit from goods or services obtained through illegal means. The CGST law focuses on preventing any misuse of the tax system.

Here are the key points for ineligible ITC related to misconduct and fraud:

• ITC is blocked on goods or services that are seized or confiscated due to tax-related offenses.
• Credits are denied when goods or services are involved in willful misrepresentation or suppression of facts.
• ITC is ineligible when goods are used in violation of GST laws or if they are seized in fraudulent activities.
• Any tax liability that arises from unlawful means or fraudulent claims results in the denial of ITC.
• ITC cannot be claimed on goods or services that have been confiscated by authorities under GST violations.

By clearly listing these conditions, Clause (i) ensures that businesses engaging in misconduct or fraudulent activities are not allowed to claim ITC, upholding the integrity of the GST system.

CSR Expenditure

Under the CGST Act, expenditures related to Corporate Social Responsibility (CSR) are not eligible for Input Tax Credit (ITC). Despite CSR being a statutory obligation under the Companies Act, the GST Council maintains that these expenses fall outside the scope of business-related activities and are thus ineligible for ITC. This distinction stems from the government’s effort to separate business operations from social obligations. As a result, businesses face increased compliance costs since they cannot offset taxes on CSR-related expenses against their GST liability, emphasizing the need for careful tax planning.

• CSR expenses are treated as non-business expenses, disqualifying them from ITC eligibility.
• ITC on goods and services used solely for CSR purposes remains blocked under Section 17-5 of the CGST Act.
• Recent GST clarifications have confirmed that ITC on CSR-related expenses continues to be restricted, despite evolving CSR obligations.

Reversal of ITC

Reversal of ITC refers to the process of reversing incorrectly claimed Input Tax Credit (ITC) in compliance with GST regulations. If ITC has been availed for ineligible goods or services, it is mandatory for businesses to reverse the credit along with applicable interest. This typically occurs when businesses claim ITC on blocked credits under Section 17-5 of the CGST Act, either by mistake or due to changes in eligibility status. Reversing ITC ensures compliance and avoids penalties under GST laws.

Key circumstances when ITC reversal is necessary:

• When goods or services no longer qualify for ITC after availing the credit.
• When goods are written off, destroyed, or lost, making them ineligible for ITC.
• If ITC was claimed on blocked credits, such as personal goods or employee benefits, that don’t qualify under GST rules.

Practical Implications

The practical implications of Section 17-5 of the CGST Act are substantial, particularly for businesses that regularly deal with blocked credits. Along with Section 16 of the CGST Act, which outlines eligibility for claiming ITC, Section 17-5 imposes further restrictions, limiting input tax credit on specific items like vehicles for personal use, employee benefits, or construction of immovable property. Businesses need to align their financial strategies with these restrictions to avoid financial strain caused by unexpected tax liabilities, impacting cash flow when key expenses like vehicle repairs or employee benefits are ineligible for ITC.

For SMEs, blocked credits could mean limited opportunities to optimize their tax liabilities, leading to higher costs. Large businesses, especially in industries like construction, transportation, or hospitality, may face even more significant impacts. Understanding these restrictions helps in better financial planning and ensuring compliance with GST laws.

• Impact on cash flow due to blocked credits for business-critical expenses like employee benefits or vehicle use.
• Challenges for SMEs and large enterprises in managing costs related to personal-use goods and immovable property.
• Legal and compliance risks if businesses fail to adhere to the specific clauses of Section 17-5.

Legal Updates and Amendments

• July 2017: Introduction of Section 17-5 – during the rollout of GST. This section clearly defined blocked credits, including restrictions on ITC for motor vehicles and employee benefits.
• December 2018: Clarification on CSR Activities – The CSR activities cost cannot be claimed.
• January 2021: Amendment on ITC Reversal – Introduction of guidelines specifying that any incorrect or overclaimed ITC must be reversed with applicable interest rates to avoid penalties.
• March 2022: Vehicle Repairs and Insurance Update – Expanded restrictions on ITC claims for vehicle repairs and insurance costs, with limited exceptions for transport businesses.

This timeline ensures businesses stay compliant with the latest changes under Section 17-5 of the CGST Act. Keeping track of these updates is crucial for managing ineligible ITC claims and avoiding legal complications.

How to Access Ineligible ITC Details under Section 17(5) through GSTR-2B

Taxpayers can review their list of ineligible ITC under Section 17 (5) of the CGST Act by checking the GSTR-2B Auto-drafted ITC Statement. This statement highlights both eligible and ineligible ITC for purchases made during the tax period. To access it, log in to the GST portal, navigate to the return dashboard, select the relevant month and year, and follow the prompts to download and view the GSTR-2B report. This resource provides a comprehensive breakdown of ITC eligibility for each transaction.

*This is for information only. All are requested to visit the official GST portal or consult with a GST practitioner, CA or relevant professional for more details on the GST.  

FAQs

Author: Anirban Sinha

A product manager with a writer’s heart, Anirban leverages his 6 years of experience to empower MSMEs in the business and technology sectors. His time at Tata nexarc honed his skills in crafting informative content tailored to MSME needs. Whether wielding words for business or developing innovative products for both Tata Nexarc and MSMEs, his passion for clear communication and a deep understanding of their challenges shine through.