The Central Goods and Services Tax (CGST) Act governs India’s taxation and input tax credit system. Section 17(5) of the CGST Act is one of the most critical aspects, as it lists certain transactions and purchases for which you cannot claim Input Tax Credit (ITC). These specific ineligible transactions are called “blocked credits.” For businesses operating under GST, understanding when you cannot avail of ITC is vital to ensure compliance and avoid penalties.
This article will explain Section 17(5) of the CGST Act and detail the various situations where businesses are blocked from claiming ITC. Levy and collection of, the central government
Section 17(5) of the Central Goods and Services Tax Act specifies the conditions under which the levy and collection of GST disallows Input Tax Credit (ITC) in certain situations. While ITC allows businesses to offset the tax paid on purchases against the tax collected on sales, this section restricts businesses from claiming ITC for specific expenditures, even if they paid tax on those transactions. These restrictions ensure compliance and proper taxation under the central government’s GST framework.
Input Tax Credit (ITC) refers to the tax that a business pays on goods or services procured for its operations. ITC plays a vital role in reducing the GST payable on sales by allowing businesses to claim credit for the tax paid on purchases. However, the central government imposes conditions for the levy and collection of GST that businesses must fulfill to claim ITC, and Section 17(5) outlines instances where it blocks or restricts ITC.
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Businesses cannot claim input tax credit for the purchase or use of aircraft, ships, or vessels, except for those engaged in:
Businesses cannot claim ITC on insurance, repairs, or maintenance costs related to aircraft, ships, and other modes of transport. However, this restriction does not apply if the business is:
Businesses are restricted from claiming ITC on the following employee-related expenses:
Exceptions to this clause include cases where:
You cannot claim ITC on the construction of immovable properties, whether for commercial or residential purposes, including the cost of materials used for repairs or renovations. This applies even if you take the property as an asset. However, businesses in the construction industry or real estate may claim ITC on expenses incurred for their business activities.
Taxpayers under the Composition Scheme are ineligible for ITC. They are required to pay a lower, fixed GST rate but cannot claim ITC on purchases.
Additionally, non-resident taxpayers can claim ITC on integrated GST (IGST) for imports but cannot avail of ITC for domestic purchases.
You cannot claim ITC for goods or services used for personal consumption. However, if you use a purchase partly for personal use and partly for business, you can claim ITC only on the portion used for business purposes.
If goods are lost, stolen, destroyed, or written off, businesses cannot claim ITC on these items. Additionally, goods given away as gifts or free samples are also ineligible for ITC claims.
ITC is not available in cases involving:
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Section 17(5) of the Central Goods and Services Tax Act 2017 clearly defines situations where businesses cannot claim ITC, commonly referred to as “blocked credits.” Understanding these blocked credits is essential for businesses to stay compliant and avoid misclaims. While GST offers significant benefits through ITC, businesses need to be aware of the specific scenarios where ITC is not applicable to avoid unnecessary penalties or financial loss.
Blocked credit refers to transactions or purchases where a business is not allowed to claim Input Tax Credit (ITC) under the provisions of Section 17(5) of the CGST Act.
No, businesses cannot claim ITC on the purchase of motor vehicles, aircraft, or vessels unless they are directly involved in the transportation, sale, or leasing of such vehicles.
No, ITC is blocked for most employee welfare expenses such as food and beverages, health insurance, and travel benefits, unless they are provided as a legal obligation.
No, businesses cannot claim ITC on goods that are lost, stolen, damaged, or given away as gifts or free samples.
ITC cannot be claimed on the construction of immovable property unless the business is involved in the construction industry or real estate development.
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