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Published on:

September 27, 2024

Shaaransh Sharma

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Basics of GST

Section 17(5) of CGST Act - Blocked Credit under GST

What is Section 17(5) of the CGST Act?

Certain provisions have been provided under the CGST Act for restricting input tax credit (ITC) embodying Section 17(5). Most of these provisions ensure non-misutilization of ITC concerning transactions that are not directly related to the business or for personal consumption. In simpler terms, this section prescribes the situations where ineligible ITC as per section 17(5) is triggered.

Blocked ITC in GST means no availability of input tax credit to the taxpayers even if they have already paid GST in respect of these goods and services. This is done to retain a level of fairness in the tax regime, making only those business-related inputs that are compliant with GST law eligible for credit.

Blocked Credit Under GST: The Concept

The blocked credit under GST is based on the fundamental of classifying business-related expenses vs personal or not covered by GST together with it. Blocked Credit means the ITC on certain goods or services is specifically not allowed as mentioned under section 17(5) of the CGST Act.

Businesses are required to assess whether they can avail of Input Tax Credit (ITC) on their inward supplies. If their purchases are blocked credit, they cannot claim tax credit on them, which in turn impacts their cost and profitability.

Blocked Credit List Under GST: What You Cannot Claim

One must look at the category of goods and services to understand how much input tax credit is blocked in GST. Let's consider the blocked credit list under GST as per section 17(5) of the CGST Act:

1. Motor Vehicles and Conveyances

ITC cannot be claimed on motor vehicles for personal uses So if the vehicles are being used for business purposes such as to transport goods, in making taxable supplies of transportation services etc then ITC can be claimed on those.

2. Food, Beverages, and Outdoor Catering

Ineligible ITC under GST extends to food and beverages, outdoor catering services or similar types of service unless the taxpayer is in the business of providing the same kind of supply (catering companies).

3. Health Services and Life/Health Insurance

The ITC is blocked for health insurance, life insurance (unless required by the law), and services related to employee welfare unless they are provided under a contractual agreement with employees as part of employment conditions.

Speaking of ITC, understand it better with the help of our other blog on Input Tax Credit Under GST: Eligibility and Claim Process

4. Club Memberships, Health and Fitness Centers

We are not able to take the credit because it has been blocked under Section 17(5) CGST Act which is any services in respect of, Health or Athletics service (Health room), Clubs membership/Membership Fee and Fitness centre.

5. Rent-a-Cab, Health Insurance, and Life Insurance

ITC is not available for rent-a-cab, health insurance and life insurance only when taken on an obligatory basis under any law applicable to the employer

6. Works Contract Services

Blocked credit under GST: It consists of works contracts also where supplied for construction of immovable property, other than plant and machinery except when it is an input service for further supply of works contract.

7. Construction of Immovable Property

The ITC is restricted on goods and services used for the construction of an immovable property (other than plant and machinery) when it is received on its account by a taxable person even though they are supplied in the course or furtherance of business.

8. Goods and Services Used for Personal Consumption

You cannot claim ITC on any goods and services for personal use.

9. Tax Paid on Fraudulent Activities

ITC is not allowed if any GST is paid under confiscation, detention or non-payment of tax dues due to fraudulent activities.

Below is a table for a better understanding of the clauses.

Clause

What's It About?

Exceptions (When You Can Still Claim ITC)

(a)

You can't claim ITC on vehicles bought for passenger transport, like cars, auto rickshaws, bikes, or small buses with up to 13 seats.

Recall that you can ITC if you are in a passenger transport business, cab/bus rental or lease, driving school, or even in the automobile sales/ manufacturing business.

(aa)

No ITC on GST paid for related services like insurance, repairs, or maintenance of small buses, cabs, ships, vessels, or aircraft.

ITC is allowed if: (1) You fall under the exceptions in clause (a), (2) You manufacture these vehicles, or (3) You're an insurance company that covers these types of vehicles.

(ab)

You can't claim ITC on costs related to catering, beauty treatments, cosmetic surgery, or renting out vehicles, vessels, or aircraft.

ITC is still possible if you're reselling these services, bundling them with other services, or if it's a legal requirement for you as an employer to provide them.

(b)

ITC is off-limits for expenses like outdoor catering, health services, life insurance, club memberships, or travel perks for employees.

You can claim ITC if you're reselling these services, bundling them with others, or if you're required by law to provide these to employees.

No ITC for GST on building construction or job work, including repairs if these are capitalized in your books.

ITC is allowed if you're in the business of constructing and selling buildings or if you're buying or building plants or machinery.

(e) & (f)

If you're a composition taxpayer or a non-resident taxable person, you generally can't claim ITC, except for IGST on imported goods.

No special exceptions here.

(g)

ITC isn't available for things you buy for personal use.

You can only claim ITC for the part used for business purposes.

(h)

If goods are lost, stolen, damaged, written off, or given away as free samples or gifts, you can't claim ITC.

No exceptions here either.

(i)

You can't claim ITC for tax paid because of non-payment, short payment, excess refunds, or fraudulent claims.

Again, no exceptions.

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Understanding Ineligible ITC as per Section 17(5)

Ineligible ITC under GST: The term ‘ineligible ITC under GST’ implies some strep of tax credit that taxpayers cannot claim as it is prohibited by a law (Section 17(5)). The fundamental intent of this section is to guarantee that ITCs are allowed for all the costs received only upon making taxable supplies (goods and services). ITC does not apply to anything personal or unrelated business operations.

The law intends to avoid situations where businesses take ITC on expenses in which the tax should be paid by consumers, thus misusing the provision of taking credit.

Key Impacts of Blocked ITC in GST on Businesses

For businesses, blocked credit under GST can significantly impact their financial planning and cost management. Here are a few key effects:

1. Increased Costs

Not all expenses can be offset as ITC. In such cases, the business must spend money out of its pocket on GST paid over procedures and compliance, which further raises its operational cost

2. Compliance Challenges

Maintaining correct records is essential for a business entity to correctly determine their eligible ITC and, accordingly, file for the offset. Not determining an exact amount before filing for a refund can lead to facing a penalty.

3. Complexity in Accounting

As a result of careful accounting, companies must keep track of how much they can claim as ITC. This requires good accounting and filing the right taxes.

4. Impact on Cash Flow

The inability to claim ITC on certain transactions means that businesses must allocate additional funds to cover these costs, potentially affecting cash flow.

Conclusion: Navigating Blocked Credit Under GST

Section 17 (5) of the CGST Act is an essential section to be acquainted with for any business operating under the GST regime. Blocked credit — A major determinant of ITC available to a taxpayer or held as ineligible under GST It is important for businessmen to comply with their business practices over ineligible ITC under section 17(5) and blocked credit list of GST while moving output vigorously, this will help them in one way (Compliance with Law) or another (Optimize Tax Liability).

Companies need to be very careful in planning and implementing the respective provisions since blocked ITC can create a cash flow problem, which could affect their bottom line adversely. Due to the complexities of GST in India, it would be better for any business that is claiming ITC to consult tax professionals to effortfully comply with GST provisions on credit and this way you can also know about ineligible input tax credits under GST.

In a nutshell, the idea of blocked credit under the GST context is a protection against tax leakage and it equally said that ITclaminant could not ask for more than genuine business expenses. A detailed and thorough understanding of section 17(5) CGST Act can help you to ethically navigate through this crucial part of the compliance process in GST, without getting into any traps that might enhance your tax liability unnecessarily.

Tax laws are hard to remember which makes it even harder for businesses to remain compliant. Legal troubles and court cases are the last thing any business would want. To avoid such complications, try Swipe - a one-stop solution for all your GST related needs.

FAQs

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

According to Section 17 (5) of the CGST Act, there are certain goods and services on which no input tax credit is available. It provides details regarding that items are included in Blocked Credit under GST whilst also explaining the fact, that no matter if, taxpayers have paid a corrrect amount of GST they cannot claim ITC on those goods.

2. What is blocked credit under GST?

Blocked credit does not even include the blocked input tax credit which is earlier provided under section 17(5). These would be stuff big ticket items and things you either consume or use personally, such as a car or luxury purse etc that do not directly contribute to the business.

3. What is ineligible ITC under GST?

Ineligible ITC under GST entitles the Input Tax Credit that a taxpayer is disallowed to claim according to control of section 17(5) of the CGST Act. This section enumerates goods/services which are not eligible to take ITC.

4. Can ITC be claimed on motor vehicles under Section 17(5) of the CGST Act?

Whenever such a vehicle is used for personal use, ITC will be blocked u/s 17(5) of the CGST Act to that extent. But ITC is allowable when the motor vehicles are used for business purposes such as providing services of transportation to carry goods or passengers; in driving training schools, and flying training institutes.

5. What are the main items included in the blocked credit list under GST?

The Blocked credit under the GST list comprises motor vehicles for personal use, food and beverages etc., life or health insurance (unless obligatory by law), works contracts related to immovable property, services/goods used in the course of human consumption, ITC about unlawful activities/ non-payment of tax & so forth.

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