One of the pillars of GST is free flow of credits in order to eliminate cascading of taxes and thus under GST, input tax credit in respect of GST paid on inputs, input services and capital goods used for business purposes / taxable supplies can freely be taken. However this freedom is subject to Section 17(5) of the CGST Act,2017 wherein input tax credit (ITC) is not available / blocked in respect of certain inward supply of goods or services.
It is important to note here that clause (a) and (b) of Section 17(5) were substituted for clauses (a), (aa), (ab) and (b) by CGST (Amendment) Act, 2018 which has been made effective from 01-02-2019.
The updated provisions of Section 17(5) of the CGST Act, 2017 is tabulated below:
| Clause of Section 17(5) | Blocked Credit | When ITC is available and NOT blocked | Remarks |
| (a), b(i)) & (ab) | Motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver) including leasing, renting or hiring thereof. Services of general insurance, servicing, repair and maintenance of aforesaid motor vehicles | When such motor vehicles are used for i) further supply of such vehicles or ii) transportation of passengers or iii) imparting training on driving of such motor vehicles. ITC would further be admissible for leasing, renting or hiring of motor vehicles when such motor vehicles are used for above said purposes or where the recipient is engaged in the manufacture of such motor vehicles or in the supply of general insurance services in respect of such motor vehicles insured by him. | Earlier ITC was prohibited for all motor vehicles and now seating capacity criteria has been inserted in new clause. Further specific prohibition for ITC on services of general insurance, servicing, repair and maintenance of motor vehicles was not there in old clause and in new clause it has specifically been prohibited to avoid disputes in this regard. Although normally tax payers were not availing ITC on such services. For detailed discussion on ITC on motor vehicles please Click Here |
| (aa) , b(i)) & (ab) | Vessels and Aircraft including leasing, renting or hiring thereof. Services of general insurance, servicing, repair and maintenance of aforesaid vessels and aircrafts. | When such Vessels and Aircraft are used for i) further supply of such Vessels and Aircraft or ii) transportation of passengers or iii) imparting training on navigating / flying such vessels / aircraft. iv) transportation of goods. ITC would be admissible for leasing, renting or hiring of vessels or aircraft when when such vessels or aircraft are used for above said purposes or where the recipient is engaged in the manufacture of such vessels or aircraft or in the supply of general insurance services in respect of such vessels or aircraft insured by him. | Specific prohibition for ITC on services of general insurance, servicing, repair and maintenance of vessels and aircraft was not there in old clause and in new clause it has specifically been prohibited to avoid disputes in this regard. Although normally tax payers were not availing ITC on such services. |
| b(i) | Supply of food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance and health insurance | ITC would be available when inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply; | ITC would be admissible where it is obligatory for an employer to provide such supplies to its employees under any law for the time being in force. |
| b(ii) | membership of a club, health and fitness centre; | – | ITC would be admissible where it is obligatory for an employer to provide such supplies to its employees under any law for the time being in force. |
| b(iii) | travel benefits extended to employees on vacation such as leave or home travel concession; | – | ITC would be admissible where it is obligatory for an employer to provide such supplies to its employees under any law for the time being in force. |
| (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. Thus credit of works credit will only be available to a builder / contractor who himself is undertaking works contract service. | – | The term “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property; Further the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises |
| (d) | Goods or services or both received by a taxable person 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 of business. | – | Same as above. |
| (e) | Goods or services or both on which tax has been paid under section 10 i.e. Composition Scheme | – | It may noted here that under composition scheme the tax cannot be charged by supplier from the recipient and accordingly question ITC availment by recipient does not arise. |
| (f) | Goods or services or both received by a non-resident taxable person except on goods imported by him; | – | – |
| (g) | Goods or services or both used for personal consumption; | – | ITC is admissible only in respect of supplies taken for business purposes. Thus supplies received for personal purposes are blocked and cannot be availed. |
| (h) | Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; | – | Such goods being not used for providing taxable supplies , the ITC thereon is blocked u/s 17(5). |
| (i) | Any tax paid in accordance with the provisions of section 74 (Tax not / short paid due to fraud etc), section 129 (Detention , seizure and release of goods and conveyance in transit) and section 130 (confiscation of goods or conveyance and levy of penalty). | – | As in such cases tax was not paid with intention to evade tax the ITC thereon has been prohibited in order to penalize such assessees. Same provision is also mandated in Rule 36(3) of the CGST Rules,2017. In such cases, if the supplier issues tax invoice at a later stage , it should be clearly marked as ‘INPUT TAX CREDIT NOT ADMISSABLE’ (Rule 53(3) of the CGST Rules, 2017). |
The taxpayers should be extra cautious while availing of input tax credit and any credit which falls under any of the above stated situations mandated under Section 17(5) of the CGST Act, 2017 should not be availed.
It may be noted that as per newly inserted clause (e) to Rule 21 of the CGST Rules, 2017 vide Notification No. 94/2020-Central Tax, dated 22-12-2020 an officer can proceed for cancellation of GSTIN where a taxpayer avails Input Tax Credit (ITC) exceeding the permissible amount of ITC,which is in violation of the provisions of section 16 of the CGST Act and rules made thereunder. Therefore availing of any blocked credit may lead to cancellation of GST registration.
***
[rainbow]Don’t miss FREE GST BOOKS and the next GST Update / Article / Judicial pronouncement[/rainbow]
Subscribe to our newsletter from FREE to stay updated on GST Law
Resolve your GST queries from national level experts on GST free of cost.
Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
