Section 17 – Apportionment of Credits and Blocked Credits

Last Update Date : April 29, 2019
Estimated Read Time: 6 min

section 17

Goods and Services Tax is said to be the biggest indirect tax reform made in last 70 years of independence. The genesis of GST was in the historic speech of 28th February 2006 which marked the 14 years long journey of framing the GST reforms and rules. The rulebook giving the central GST rules has been updated several times, the last update being on 23rd of March, 2018. The Central Board of Excise and Customs has published the CGST rules, 2017.

One of the most remarkable changes brought in by GST is undoubtedly the input tax credit mechanism. The structure of ITC under GST is such that it has overcome the tax-on-tax nature of the previous system.

Thus, it is important to study about the input tax credit, and section 17 of the GST act talks about the various aspects about credits.

Section 17 of GST Act

Section 17 of the GST Act has 5 sub-sections as explained below:

Section 17(1)

ITC restricted to supplies availed about business activity:
Section 17 subsection 1 says that where the goods and / or services are used by the registered tax payer partly for utilisation in his / her business activities and partly for any other purposes, then the input tax credit will be restricted to an amount which is attributable for business purposes.

Section 17(2)

ITC restricted to taxable supplies

Section 17 subsection 2 says that where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero rated supplies.

Note – For section 17(2), exempt supplies shall include supplies on which recipient is liable to pay tax on reverse charge basis u/s 9(3).

Section 17(3)

The value of exempt supply under subsection (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transaction in securities, sale of land and, subject to clause(b) of paragraph (5) of schedule II, sale of building.

Section 17(4)

Input tax credit for the banking sector
Two options are available under this subsection. A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advance shall have the option to either:

  • Comply with the provisions of section 17(2), or
  • Avail every month an amount equal to 50% of the available ITC on inputs, capital goods and input services in that month.

Note – The option once exercised shall not be withdrawn during the remaining part of the year.

Section 17(5)

Blocked Credits Under ITC

Subsection (5) of section 17 gives a detailed list of the transactions not eligible for input tax credit. It goes as follows:

  • ITC cannot be availed on motor vehicles and other conveyances except when they are used for:
  1. further supplies of such vehicles and conveyances or
  2. transportation of passengers or
  3. imparting training on driving, flying and navigating such vehicles and conveyances or
  4. transportation of goods
  • ITC will not be available on supply of food and beverages, and services like catering (outdoor), beauty treatment, health services, cosmetic and plastic surgery unless all of these are used as an inward supply for making an outward supply of the same category of goods or services or both or provided in a bundled fashion as a composite or mixed supply.
  • ITC will not be allowed on tax paid for membership of club, health and fitness centre under any circumstances.
  • ITC shall not be available to registered persons on renting a cab, life and health insurance supplies received by it, except where the government notifies that the employer is obligated to provide these services to the employee in force or such supplies are procured for further providing the similar category of services.
  • ITC on tax paid on travel benefits extended to employees for a vacation or home travel concession is not allowed.
  • ITC not available to a registered person for the tax paid on the inward supply of works contract which is used for immovable property except where it is used to further provide a similar category of service.
  • Goods or services or both on which tax has been paid u/s 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 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.

Input Tax Credit

Input tax credit means the tax paid while purchasing / availing any goods / services or both which, at the time of payment of the output tax can be reduced while computing the final liability. 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. There will be no tax-on-tax charged under the input tax regime of GST.

Documents Required

A registered person in the GST act including an input service distributor can avail ITC on the basis of any of the following document:

  • An invoice issued by the supplier of goods and services or both by the provisions of section 31
  • Invoice issued by the recipient (receiving goods and / or services from the unregistered supplier) along with proof of payment of tax (in case of reverse charge
  • A debit note issued by a supplier in accordance with the provisions of section 34
  • A bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for the assessment of integrated tax on imports
  • An input service distributor invoice or input service distributor credit note or any document issued by an input service distributor in accordance with the provisions of sub-rule (1) of rule 54

Conditions for Claiming ITC

Procedure of ITC essentially involves the fulfilment of certain conditions. A registered person will be eligible to claim ITC on the fulfilment of ALL the following conditions:

  • Possession of a tax invoice or debit note or document evidencing payment as discussed above
  • Receipt of goods and / or services
  • Tax leviable has actually been paid to the government
  • Furnishing of a return

Things to be kept in mind while Claiming Credit

  • Input tax credit shall be availed by a registered person only if all the applicable particulars 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.
  • No input tax credit shall be availed by a registered person 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, willful misstatement or suppression of facts.
  • Where goods are received in lots or instalments, ITC will be availed when the last lot or instalment is received.
  • Failure to the supplier towards the supply of goods and/or services within 180 days from the date of invoice, ITC already claimed will be reversed. On making the payment, ITC will again be allowed.
  • No ITC if depreciation has been claimed on tax component of capital goods

Transfer of Credit

On Sale, Merger, Amalgamation, Lease or Transfer

  • In the event of the above mentioned, a registered person shall furnish the details of the same in form GST ITC-02 electronically on the common portal, along with a request for transfer of unutilized ITC lying in his electronic credit ledger to the transferee.
  • The transferor shall also submit a copy of the certificate issued by participating CA or Cost Accountant certifying that the sale, merger, lease, amalgamation or transfer has been made with a specific provision for transfer of liabilities.
  • The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilised credit specified in form GST ITC-02 shall be credited to his electronic credit ledger.
  • The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of accounts.

Input tax credit being the backbone of GST has benefited a lot to the government as well as the tax payers. A registered person is eligible to claim ITC subject to certain conditions and exceptions. However, to claim input tax credit, you and all your vendors need to file returns accurately. Reconciling your returns with your vendors can be a daunting task, but you can outsource it to earlyGST so that you can claim your rightful input tax credit hassle-free.

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CA Ankita Mathur
CA Ankita Mathur
Ankita, a Big 4 alumna, is a tax expert at H&R Block (India) with vast experience in managing GST-related business services. An avid traveller, Ankita is a regular contributor to the CAclubindia and loves helping people understand about GST and helping companies be GST compliant.