Input Tax Credit (ITC) is one of the most beneficial features of the Goods and Services Tax (GST) regime in India.
It enables registered taxpayers to claim credit for GST paid on purchases used to provide taxable supplies.
However, ITC isn't a free pass for all purchases. Specific goods and services are classified as ineligible for ITC under Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017. These are often referred to as "blocked ITC."
In this blog, we’ll break down the blocked ITC list, exceptions, the rationale behind these restrictions, and practical tips for managing ITC effectively.
What is Blocked ITC under GST Section 17(5)?
Blocked ITC refers to goods and services for which ITC cannot be claimed, as explicitly stated in Section 17(5) of the CGST Act.
These restrictions are intended to ensure that ITC is only used for legitimate business purposes and to prevent misuse.
Here’s a detailed table of blocked ITC items, along with the exceptions where ITC is allowed:
List of Ineligible or Blocked ITC under GST Section 17(5)
The following table provides the list of goods or services or both, on which ITC is not available under GST section 17(5), along with the exceptions, if any.
| Blocked ITC Items | Exceptions Where ITC is Allowed |
|---|---|
| Motor vehicles, vessels, and aircraft | If used for: - Transportation of passengers - Transportation of goods - Further supply of such vehicles - Imparting training on driving, flying, navigating, etc. |
| General insurance, servicing, repair, and maintenance of motor vehicles, vessels, and aircraft | Allowed for vehicles used in the above exceptions. |
| Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery | Allowed if: - Used for outward supply of the same services - Part of a taxable composite/mixed supply. |
| Rent-a-cab, life insurance, and health insurance | Allowed if: - Used for outward supply of the same services - Mandatory under law to provide to employees. |
| Travel benefits to employees (leave/home travel concession) | No exceptions. |
| Works contract services for immovable property construction (excluding plant and machinery) | Allowed for: - Further supply of works contract services - Construction of plant and machinery. |
| Goods/services for construction of immovable property on own account (excluding plant and machinery) | Allowed for plant and machinery construction. |
| Goods/services purchased under the composition scheme | No exceptions. |
| Goods/services received by a non-resident taxable person | Allowed for further supply or export. |
| Goods/services for personal consumptio | No exceptions. |
| GGoods lost, stolen, destroyed, written off, or gifted/free samples | No exceptions. |
| Taxes paid under sections 74, 129, or 130 (penalties, confiscation, or detention) | No exceptions. |
Why is ITC Blocked for Certain Goods and Services?
The government blocks ITC for specific reasons:
-
Prevent Revenue Leakage: Blocking ITC reduces the risk of fraudulent claims and misuse.
-
Avoid Personal Use Benefits: Items like food, beverages, and cosmetic services are often for personal consumption.
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Maintain Distinction Between Goods and Services: For example, works contract services for immovable property construction are treated as services, not goods, under GST.
Exceptions That Allow ITC
Despite the blocked list, there are exceptions. For instance:
- ITC on rent-a-cab services is permitted if the service is used to provide a similar outward supply or is part of a tour package.
- Food and beverages used in catering services are eligible for ITC to avoid cascading taxes.
How to Manage Blocked ITC
1. Easy Calculation Formula:
Blocked ITC can be calculated using:
Blocked ITC= GST Paid on Inputs−GST Payable on Outputs
If the result is negative, you can utilize the ITC fully. If it’s positive, there’s a portion of blocked ITC.
2. Reporting in GSTR-3B:
Report ineligible ITC under Table 4(D)(2) of Form GSTR-3B. Ensure accurate bifurcation into CGST, SGST, and IGST to avoid discrepancies during audits.
3. Practical Example
Suppose you purchase a motor vehicle for personal use worth ₹10,00,000, with GST paid of ₹1,80,000. Since it’s for personal use, the entire ₹1,80,000 is blocked ITC. This amount should be reported in GSTR-3B as ineligible.
Key Takeaways
- Blocked ITC ensures fair tax practices and discourages misuse.
- Understand the exceptions to avoid losing legitimate ITC claims.
- Maintain accurate records and report correctly in GSTR-3B to prevent disputes.
By keeping these points in mind, businesses can better navigate the complexities of ITC under GST.
For any queries, consult a tax professional or leverage automated tools like Suvit, which simplifies GST reconciliation and ITC calculations for you.
Try Suvit for free for a week!
FAQs
1. What happens if I wrongly claim blocked ITC?
Incorrect ITC claims can lead to penalties, interest, and even legal action.
2. Is ITC on employee travel benefits ever allowed?
No, ITC on travel benefits provided to employees (e.g., home travel) is explicitly blocked under Section 17(5).
3. How can I ensure proper ITC compliance?
Keep detailed records, review GST laws periodically, and use automated solutions to simplify compliance.
