Section 17(5) – Blocked Credits under GST

Last Update Date : April 27, 2019
Estimated Read Time: 6 min

section 17(5)

If you are a manufacturer, wholesaler, supplier, agent, e-commerce operator registered under the GST, then you are eligible to claim the input tax credit for tax paid on your purchases. However, there are a certain set of goods and services on which the Act does not allow any credit. Chapter V of CGST Rules which talks about Input tax credit contains section 17(5) having a comprehensive list of supplies on which Input tax credit is blocked.

What is Input Tax Credit?

Input tax credit means at the time paying the output tax; you can reduce the tax you have already paid on the inputs.

Let us try the following example

Ram charges his clients a total of Rs 6,00,000 in a month. He charges rupees 1,08,000 GST (@18%) on the services provided. He has paid certain expenses for the furtherance of his business which resulted in a total of rupees 5,50,000. Now, the GST paid on these expenses by him i.e. 18% of 5,50,000 = Rs 99,000. This 99,000 is his input tax credit which he can reduce from his output tax liability of rupees 1,08,000. Thus, he has deposit only Rs 9,000.

The input tax credit mechanism under GST is structured as such to avoid double taxation which was one of the biggest flaws of the previous tax system.

What does the Law say?

Let us read what the law has to say about Section 17(5)

Notwithstanding anything that sub-section (1) of section 16 and subsection (1) of section 18 contains, ITC will not be available in respect of the following,
namely:

  • motor vehicles and other conveyances apart from when they are used–
  1. for transporting the goods; or
  2. for making the following taxable supplies, namely:
    1. further supplying such vehicles or conveyances; or
    2. transporting the passengers; or
    3. imparting training on driving, navigating, flying such vehicles or conveyances;
  • the following supply of goods or services or both—
  1. food and beverages, beauty treatment, cosmetic and plastic surgery, health services, outdoor catering, except where an 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;
  2. membership of a club, health and fitness centre;
  3. rent-a-cab, life insurance and health insurance except where––
  1. the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
  2. such inward supply of goods or services or both of particular categories is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
  3. travel benefits extended to employees on vacation such as leave or
    home travel concession;
  • works contract services when supplied for construction of immovable property (other than plant and machinery) except where it is an input service for the further supply of works contract service;
  • goods or services or both received by a taxable person for construction of 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.

Explanation

For clauses third and fourth, the expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

  • goods or services or both on which tax has been paid under section 10;
  • goods or services or both received by a non-resident taxable person except on goods imported by him;
  • goods or services or both used for personal consumption;
  • goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
  • any tax paid by the provisions of sections 74, 129 and 130
  1. Section 74 provides for the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised because of fraud or any wilful misstatement or suppression of fact.
  2. Section 129 deals with the detention, seizure and release of goods and conveyances in transit and the tax paid in this procedure
  3. Section 130 deals with the confiscation of goods or conveyances and levy of penalty

Supplies on which ITC is not applicable

  • Motor cycles and other conveyances
    ITC is available on motor cycles and other conveyances only when they are used for making the following taxable supplies
  1. Further supply of such vehicles or conveyances
  2. Transportation of passengers
  3. Imparting training on driving, flying, navigating such vehicles or conveyances
    So, apart from the exceptions, ITC cannot be availed on purchase of motor cycles and other conveyance. ITC can be availed when these are used for transportation of goods for either self or some other recipient.
  • Specific goods and / or services or both
    ITC will not be available to a registered person for the following receipt of goods or availment of services or both:
  1. Food and beverages
  2. Outdoor catering services
  3. Beauty treatment
  4. Health services
  5. Cosmetic and plastic surgery services
    ITC will be available on the above when an inward supply of goods and / or services or both of the abovementioned categories is used for making an outward taxable supply of goods and/or services or both or as an element of taxable composite or mixed supply
  • Membership of a club, health and fitness centre
    ITC cannot be availed on tax paid for membership of club, health and fitness centre under any circumstances. This restriction is absolute, and there is no exception.
  • Rent cab, health insurance, life insurance: ITC shall not be available to registered persons on renting a cab, life and health insurance supplies received by it. This restriction is not absolute. ITC will be available where the government notifies the services which are obligatory for an employer to provide to his employees for the time being in force. Also, where such an inward supply of goods and services or both of a particular category is used by a registered person to make an outward taxable supply of the same category, or when it is used as a part of composite mixed supply, ITC is allowed. Also, The ITC on the supply of above services is allowed when it is paid on account of travel benefits extended to employees on vacation such as leave travel concession
  • Works contract services when supplied for construction of immovable property: ITC not available to a registered person for the tax paid on the inward supply of works contract services used for the construction of immovable property. This is not applicable to the construction of plant and machinery. Where it is input used for further supplying of a works contract service, ITC is available.
  • Goods and / or services or both on which tax has been paid u/s 10
  • Goods and / or services or both received by a non-resident taxable person except on goods imported by him
  • Goods or services or both used for personal consumption
  • Goods lost, stolen, destroyed, written off or disposed off by way of gift or free samples.
  • ITC shall not be available to a registered person on any tax paid by the provisions of section 74, 129 and 130.

Documents and Conditions for claiming ITC

  • Only a registered person is allowed the input tax credit, including the input service distributor, on the basis of any of the following documents, namely:
  1. An invoice issued by the supplier of goods and services or both by the provisions of section 31
  2. An invoice issued by the provisions of clause (f) of sub-section (3) of section 31, subject to the payment of tax
  3. A debit note issued by a supplier by the provisions of section 34
  4. A bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made there under for the assessment of integrated tax on imports
  5. An input service distributor invoice or input service distributor credit note or any document issued by an input service distributor by the provisions of sub-rule (1) of rule 54
  • Input tax credit shall be availed by a registered person only if all the applicable particular as specified in the provisions of Chapter VI are contained in the said document, and the relevant information, as contained in the said document, is furnished in FORM GSTR-2 by such person.
  • A registered person shall avail no input tax credit in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed or account of any fraud, wilful misstatement or suppression of facts.

How can H&R Block help you?

After implementation of GST, the tax compliance requirements changed drastically. As a result, several businesses find it challenging to focus on their business while trying to be GST compliant. This is where we come into the picture. Our team of in-house GST experts can help you meet all the GST compliance requirements right from registration and filing of returns to handling notices.

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CA Chetan Shinde
CA Chetan Shinde
Chetan is the Lead Tax Advisor at H&R Block (India) with an experience of almost half a decade in audit and taxation. His professional areas of interest are GST advisory and statutory audit. Apart from taxation, he is passionate about social causes and works extensively towards rural school development and literacy.