Blocked Credits Under GST: Section 17(5) of the CGST Act

Blocked Credits Under GST: Section 17(5) of the CGST Act

For businesses registered under the Goods and Services Tax (GST), navigating input tax credit (ITC) claims can be a complex affair. Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, plays a crucial role in this process by outlining specific scenarios where ITC cannot be claimed – these are commonly referred to as blocked credits. Understanding these restrictions is essential for businesses to ensure they comply with GST regulations and avoid penalties.

This comprehensive guide delves into Section 17(5) of the CGST Act, providing a clause-by-clause analysis along with clear explanations and relevant examples. We’ll also explore how to identify blocked credits and the reporting requirements associated with them.

Understanding Blocked Credits u/s 17(5) of the CGST Act

Section 17(5) of the CGST Act outlines a list of situations where a taxpayer cannot claim ITC on the GST paid for purchases or expenses. This provision overrides Sections 16(1) (availability of ITC in general) and 18(1) (ITC availability in special cases) of the CGST Act.

Due to the complexities of GST, particularly regarding ITC claims and blocked credits, seeking guidance from qualified GST Consultancy Services is highly recommended.

Clause-by-Clause Analysis of Blocked Credits

1. Clauses (a), (aa), and (ab): Conveyance & Transportation

Blocked Credits: These clauses restrict ITC claims on motor vehicles used for passenger transportation, including:

• Four-wheeler motor cars
• Three-wheeler motorbikes or auto rickshaws
• Two-wheeler motorbikes or cycles
• Tempo travellers (TT) or buses with 13 seats or less (including the driver)
• Any other vehicle used on public roads

Exceptions: ITC can still be claimed on these vehicles if the business is involved in:

• Passenger transportation services (cabs, bus rentals, lease services)
• Driving schools
• Automobile retail shops, showrooms, or manufacturing establishments

• Clause (aa): Additionally, ITC is not available for related input services like insurance, repairs, or maintenance of these ineligible vehicles. However, ITC can be claimed for such services if the business falls under the exceptions mentioned above or manufactures the listed vehicles.
• Clause (ab): This clause disallows ITC on rentals used for passenger transportation purposes, with exceptions mirroring clauses (a) and (aa).

2. Clause (b): Food, Catering, Vehicle Renting, Club & Travel
   • Blocked Credits: ITC cannot be claimed on:
     • Expenses related to outdoor catering, food, or beverages
     • Health services, beauty treatments, plastic surgery, and cosmetic surgery
     • Renting or leasing of vessels, aircraft, or motor vehicles (exceptions under clauses (a) and (aa) apply)
     • Life and health insurance
     • Club memberships, health and fitness centers
     • Employee travel benefits like leave or home travel concessions
   • Exceptions: ITC can be claimed on these expenses if:
     • The business resells the same goods or services
     • The goods or services are part of a composite or mixed sale
     • It’s mandatory for the employer to provide these benefits to comply with any law
3. Clauses (c) & (d): Building Construction
   • Blocked Credits: ITC is not available for:
     • GST paid on building construction or renovation expenses (commercial or residential)
     • GST paid on materials used for construction
     • Renovation or repair costs if capitalized in accounts
   • Exceptions: Construction companies, builders, and promoters who intend to resell constructed buildings are eligible for ITC on these expenses. ITC remains available for the purchase or construction of plant and machinery.
4. Clauses (e) & (f): Composition & Non-resident Taxable Person

• Clause (e): Composition taxpayers, as defined under Section 10 of the CGST Act, cannot claim ITC on purchases. This is because they pay tax on their quarterly turnover instead of claiming ITC on individual purchases.
• Clause (f): Non-resident taxable persons who deposit tax in advance can claim ITC only on IGST paid on imported goods. They are not eligible for ITC on any other domestic purchases made within India.

5. Clause (g): Personal Use

• Blocked Credits: ITC cannot be claimed on purchases used for personal purposes. If goods or services are used for both business and personal purposes, a proportionate ITC claim can be made using the ‘common credit’ formula.

6. Clause (h): Free Samples & Lost Goods

• Blocked Credits: ITC cannot be claimed on:
  • Lost, stolen, damaged, or written-off goods
  • Free samples or gifts
• In such cases, if ITC was already claimed upon purchase, it needs to be reversed in the GSTR-3B return.

7. Clause (i): Fraudulent ITC Claims

• Blocked Credits: ITC cannot be claimed for any tax paid due to:
  • Earlier non-payment or short payment of tax
  • Excess refund of tax
  • Excess ITC claimed fraudulently
  • Willful misstatements or suppression of facts
  • Confiscation or seizure of goods

Consequences of Contravening Section 17(5):

Failing to comply with Section 17(5) of the CGST Act can lead to penalties. The recipient or buyer must reverse any wrongly claimed ITC and incur interest at a rate of 24% from the date of claim until the reversal date.

Identifying Blocked Credits:

Taxpayers can utilize two resources to identify blocked credits:

1. GSTR-2B (Auto-drafted ITC Statement): This document provides details of purchases made during a tax period, highlighting those where ITC is not available under Section 17(5).
2. Comparison with Books of Accounts: Businesses should compare the list of ineligible ITC provided in GSTR-2B with their accounting records. Any discrepancies can indicate potential errors in ITC claims.

Reporting Blocked Credits:

Every taxpayer must report the ineligible ITC claimed earlier but reversed as per Section 17(5) in their GSTR-3B return for the relevant month or quarter. This information is reported in Table 4(B) of the GSTR-3B form.

Importance of GST Consultants and Consultancy Services

These professionals possess in-depth knowledge of GST laws and procedures, enabling them to assist businesses in:

• Understanding Blocked Credits: GST consultants can explain the various clauses under Section 17(5) and how they apply to specific business scenarios.
• Identifying Ineligible ITC: They can help businesses identify purchases or expenses that fall under blocked credit categories, ensuring accurate ITC claims.
• GSTR-2B and GSTR-3B Reporting: GST consultants can guide businesses on effectively utilizing GSTR-2B (auto-drafted ITC statement) to identify blocked credits and accurately reporting them in GSTR-3B return filings.
• Compliance Management: By staying updated on GST regulations, GST consultancy services can help businesses maintain compliance and avoid potential tax liabilities arising from incorrect ITC claims.

Conclusion:

Understanding blocked credits under Section 17(5) of the CGST Act is crucial for GST compliance. Businesses can ensure accurate ITC claims and avoid penalties by seeking guidance from qualified GST consultants or consultancy services. These professionals can provide valuable insights into GST regulations and assist with navigating the complexities of blocked credits.