Section 17 (5) of CGST ACT, also referred to as blocked credits, is a very important provision for every regular taxpayer under GST. It defines a list of purchases on which GST is paid but businesses cannot claim these as the Input Tax Credit (ITC). In this article, we take you through the latest clause-by-clause
analysis of Section 17(5) of CGST Act or ineligible ITC with examples.
Clauses (a), (aa) and (ab) – Conveyance & Transportation
You cannot claim ITC on vehicles purchased for passenger transportation
such as-
- Four-wheeler motor cars or
- Three-wheelers or auto rickshaws or
- Two-wheeler motorbikes or cycles or
- Tempo travelers (TT) or buses having less than or equal to 13 seats, including
the driver. - Or any other vehicle used on the road
However, ITC claims are still allowed for the purchase of a passenger transportation vehicle where you (buyer) conduct the following businesses-
- Passenger transportation service or cab or bus rental or lease service
- Driving schools
- Automobile retail shops, showrooms, or manufacturing establishments
Clause (a) of Section 17(5) is reproduced below-
2(a) motor vehicles for transportation of persons having seating capacity of not
more than thirteen persons (including the driver), except when they are used for
making the following taxable supplies namely:-
(A) Further supply of passengers; or
(B) Transportation of passengers; or
(C) Imparting training on driving such motor vehicles
You cannot claim ITC on GST paid for the purchase of ships, vessels and
aircraft.
However, ITC claims are still allowed if the buyer is into the following businesses-
- Resale of ships, vessels or aircraft
- Passengers transportation service or plane service or cruise or boat rental service
- Training schools for navigating vessels or ships and flying aircraft or planes
- Engaged in goods transportation business in trucks or trailers or tractors.
Clause (aa) of Section 17(5) is reproduced below-
(aa) vessels and aircrafts except when they are used-
(i) For making the following taxable supplies, namely-
(A) Further supply of such vessels or aircraft; or
(B) Transportation of passengers; or
(C) Imparting training on navigating such vessels; or
(D) Imparting training on flying such aircraft;
(ii) For transportation of goods;
Also, you cannot claim ITC on GST paid for some related input services. These include buying insurance or expense of repairing or maintenance or servicing the cabs, mini-buses or Tempo Traveller (TT) or buses of up to 13 seats, ships, vessels and aircraft.
However, ITC will still be allowed on insurance premium paid or repairs and maintenance of the above conveyance if you (buyer) are into the following businesses-
- Exceptions under clause (a) above
- Exceptions under clause (aa) above
- For manufacture of the above listed conveyances
- Insurance companies selling general insurance policies covering such above-listed conveyances
Clause (ab) of Section 17(5) with its proviso is reproduced below-
(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):
Provided that the input tax credit in respect of such services shall be available-
(i) Where the motor vehicle, vessels or aircraft referred to in clause (a) or clause (a a) are used for the purposes specified therein;
(ii) Where received by a taxable person engaged-
(I) in the manufacture of such motor vehicles, vessels or aircraft; or (II) In the supply of general insurance
(II) In the supply of general insurance services in respect of such motor vehicles,
vessels or aircraft insured by him.
Clause (b) – Food, Catering, Vehicle Renting, Club, & Travel
You cannot claim ITC on the purchase of the following-
Expense paid for outdoor catering of food or beverages
Spending on health services, beauty treatment, plastic surgery and cosmetic surgery
Giving vessels or aircraft or motor vehicles for rent or lease or hire. However, ITC claims may be allowed for exceptional cases given under clauses (a) and (aa) above.
Obtaining life insurance and health insurance
Incurring expenses to obtain club membership or towards health and fitness centres
Expense of leave or home travel concession or travel benefits for employees on vacation
You can still claim ITC on food expenses, health service costs, renting of conveyances and insurance if –
You are reselling the same goods or services
You are reselling these together with other goods or services as a composite or
mixed sale
It’s mandatory for the employer to provide the above services or goods to its
employees to comply with any law.
You can still claim ITC on club membership and home travel concession
Wherever it’s mandated for the employer to supply the above to its employees to comply under any law
Clause (b) of Section 17(5) with its provisos are reproduced below-
(b) The following supply of goods or services or both-
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein life insurance and health insurance.
Provided that the input tax credit in respect of such goods or services or both shall
be available where an inward supply of the same category of goods or services or
both or as an element of a taxable composite or mixed supply.
(ii) Membership of a club, health and fitness centre, and
(iii) Travel benefits extended to employees on vacation such as leave or home travel concession:
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
Clauses (c) & (d) – Building Construction
Any GST registered person cannot claim ITC on GST paid on the building construction or job work expense. Such buildings could be used either for commercial or residential purposes. It also includes any GST paid on materials used
for construction.
You cannot claim ITC if you incur money on renovation or repair of buildings, wherever it is capitalized in accounts.
However, ITC on the above expenses will be allowed for construction companies, builders and promoters who are into the resale of such buildings once constructed. ITC will still be allowed for the purchase or construction of plants or machinery. Contd.
Clauses (c) & (d) of Section 17(5) are reproduced below-
(c) Works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) Goods or services when supplied for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance business.
Explanation – for the purpose of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immoveable property.
Clauses (e) & (f) – Composition & Non-resident
Section 10 puts a condition that a composition taxpayer cannot claim ITC on GST paid on purchases as they pay tax on their quarterly turnover.
Accordingly, Section 17(5) of CGST Act states that ITC is not available for composition taxable persons, whether or not supplying goods or services. Non-resident taxable person deposits tax in advance. They can claim ITC on IGST paid on import of goods, but cannot claim ITC on any other domestic purchases.
Clauses (e) and (f) of Section 17(5) are reproduced below-
(e) Goods or services or both on which tax has been paid under Section 10;
(f) Goods or services or both received by a non- resident taxable person except on goods imported by him.
Clause (g) – Personal use
ITC is not available on purchases that are not used in business but used forpersonal purposes. If part of goods or services purchased is consumed for both business and personal use, then ITC will be allowed only to the extent of business use as per the formula of common credits.
Clause (g) of Section 17(5) is reproduced below-
(g) Goods or services or both used for personal consumption.
Clause (h) – Free sample & lost
ITC is not available if the purchased goods are lost or stolen or damaged or written off or given away as free samples or gifts. Sometimes, ITC would already be claimed upon purchase but might later have to be reversed in GSTR-3B when any of the above scenarios happen.
Clause (h) of Section 17(5) is reproduced below-
(h) Goods lost, stolen, destroyed, written off or disposed of by way of Gift or free samples; and
Clause (i) – Fraudulent ITC claims
ITC cannot be claimed for any tax paid now due to-
Earlier non-payment or short tax payment,
Excess refund of tax
Excess ITC utilized or availed fraudulently or willful misstatements orsuppression of facts or confiscation and upon seizure of goods
Clause (i) of section 17(5) is reproduced below-
(i) Any tax paid in accordance with the provisions of sections 74, 129 and 130.
What happens if you contravene ITC u/s 17(5) of CGST Act?
Section 17 (5) of CGST Act must be followed mandatorily, otherwise, the recipient or buyer must reverse such wrongfully claimed ITC. Further, they will incur interest at the rate of 24% from the date of such claim until the date of reversal.
Where to get the list of ineligible ITC u/s 17(5) of CGST ACT?
Taxpayers can access GSTR-2B or the “Auto-drafted ITC Statement” to check out the list of their purchase during a tax period on which ITC is not available under Section 17(5) of CGST Act.
GSTR-2B statement provides information about both eligible and ineligible ITC.
Login to GST portal and navigate to the return dashboard. Select the relevant month and year. Follow the steps given on our GSTR-2B access guide for further details. You can view and download the details in GSTR-2B.
Reporting of Section 17(5) of CGST Act in GSTR-3B
Every buyer or recipient must report the ineligible ITC earlier claimed but to be reversed as per Section 17(5) of CGST Act while filing GSTR-3B for the month or quarter, as the case may be. You must report such ineligible ITC value to be reversed in Table 4(B) of the GSTR-3B. From 5 th July 2022, ineligible ITC under Section 17(5) of CGST Act need not be reported under Table 4(D) of the GSTR- 3B.
It is enough if you report such figure of ineligible ITC that must be reversed inTable 4(B).
Compare the list of ineligible ITC given on GSTR-2B with the list you have identified from the books of accounts, the ITC portion must be booked for purchase or expenses, as the case may be, and not booked separately under ITC available for claims. If any ineligible ITC is claimed upon a comparison of Books with GSTR- 2B, then you must reverse it in GSTR-3B of the following months / quarters with interest
