Blocked Credit under GST

Blocked Credit under GST

"Blocked credit" under the Goods and Services Tax (GST) refers to the Input Tax Credit (ITC) that a registered business is legally ineligible to claim on certain goods or services, as specified in Section 17(5) of the CGST Act, 2017. This provision overrides the general rule that allows businesses to claim ITC on purchases made in the course or furtherance of business. 

Purpose

The main objectives of blocking certain credits are to:

• Prevent misuse of ITC for personal consumption or non-business expenses.

• Avoid cascading effects selectively, primarily on items deemed to have an element of personal consumption (e.g., certain employee benefits, food).

• Ensure only genuine business inputs that directly relate to taxable outputs are eligible for tax benefits. 

Key Categories of Blocked Credits (Section 17(5) of the CGST Act)

Under Section 17(5) of the CGST Act, ITC is generally not available for several categories of goods and services, including: 

• Motor Vehicles and Conveyances: ITC is blocked for motor vehicles with a seating capacity of up to 13 persons, as well as vessels and aircraft, with specific exceptions. Exceptions apply if these are used for further supply, passenger transport, or training.

• Related Services: General insurance, servicing, repair, and maintenance for the blocked vehicles, vessels, or aircraft are also generally blocked, with the same exceptions.

• Personal Consumption Items: ITC is blocked on food, beverages, outdoor catering, beauty treatments, health services, and cosmetic/plastic surgery. An exception exists if these are used for making a taxable supply of the same category or are part of a composite/mixed supply.

• Club Memberships and Travel Benefits: Membership fees for clubs, health, and fitness centers are blocked, as are travel benefits like Leave Travel Concession for employees. An exception applies if providing these to employees is legally mandated.

• Works Contracts and Construction: ITC is blocked on works contract services for constructing immovable property (excluding plant and machinery). An exception is made for suppliers who further supply works contract services. ITC is also blocked on goods or services used by a registered person for constructing immovable property on their own account, again with the exception of plant and machinery.

• Other Blocked Items: This includes goods/services taxed under the Composition Scheme, those used for personal consumption, goods lost, stolen, destroyed, written off, or given as gifts/free samples, and tax paid due to fraud-related demand orders (Sections 74, 129, and 130). 

Compliance and Reporting

Businesses must ensure that blocked credits are not claimed in GST returns. The GSTR-2B statement available on the GST portal can help identify eligible and ineligible ITC. Any wrongly claimed blocked credit must be reversed and reported in Table 4(B) of GSTR-3B with applicable interest, as claiming ineligible ITC can lead to penalties. 

Conveyance and Transportation - Clause (a), (aa), and (ab)

ITC cannot be claimed on passenger transport vehicles like -

• Three-wheeler auto-rickshaws

• Four-wheeler motor cars

• Two-wheeler cycles or motorbikes

• Buses or Tempo travellers having 13 seats or less, including the driver

• Any other vehicle used on the road

However, an ITC claim is still available for purchasing passenger transport vehicles if the buyer is engaged in the following businesses -

• Passenger transportation service/ cab service/ bus rental service/ lease service

• Automobile retail shops, manufacturing establishments, and showrooms.

• Driving schools

Clause (a) of section 17(5)

Passenger transport vehicles having a seating capacity not exceeding 13, except when they are used for the following taxable supplies -

• Further supply of such motor vehicles.

• Transportation of passengers

• Imparting training for driving such vehicles

ITC claim is not available on GST paid for the purchase of vessels, ships, and aircraft. However, ITC can be claimed if the buyer is engaged in the following businesses -

• Reselling of ships, vessels, and aircraft

• Has training schools for flying aircraft and navigating vessels/ships.

• Plane service/ cruise service/ boat rental service/ passenger transportation service.

• Goods transportation service through trillers/trucks and tractors.

Clause (aa) of Section 17(5)

ITC also cannot be claimed for buying insurance or the repair cost of servicing the cabs, tempo travellers/minibuses, ships, vessels, or aircraft. ITC is allowed if the buyer is engaged in the following businesses -

• Exceptions under clause (a) and (aa)

• Manufacturers of conveyances listed above

• Insurance companies selling general insurance for the above-mentioned conveyances.

Clause (ab) of Section 17(5)

Services of general insurance, servicing, repair, and maintenance related to motor vehicles, aircraft, and vessels mentioned in clauses (a) or (aa) is allowed in the following cases:

1. When the motor vehicles, vessels, or aircraft are used for the purposes specified in clauses (a) or (aa).

2. When the services are received by a taxable person engaged in:

1. Manufacturing these motor vehicles, vessels, or aircraft, or

2. Supplying general insurance services for these motor vehicles, vessels, or aircraft insured by them.

Clause (b) - Vehicle Renting, Food, Catering

ITC cannot be claimed on the purchase of the following -

• Expenses on outdoor food, beverages, or catering.

• Expenses on cosmetic surgery, beauty treatment, plastic surgery, and health services.

• Renting or leasing vessels, aircraft, or motor vehicles is permitted.

• Obtaining life insurance and health insurance

• Incurring expenses for club memberships or health and fitness centers

• Expenses related to employee leave or home travel concession during vacations.

Exceptions under clause (b)

ITC can be claimed -

• On resale of the same goods or services

• Composite or mixed sale together with other goods.

• When it is mandatory to provide goods and services to employees for legal compliance

Clause (c) and (d) - Building Construction

If you're registered for GST, you can't get a tax credit for the GST you paid on building construction or job work expenses, whether it's for commercial or residential buildings, including materials.

Also, if you spend money fixing or renovating buildings, even if it's recorded as an asset, you can't claim a tax credit.

However, if you're a construction company, builder, or promoter selling these buildings after construction, you can still claim a tax credit on those expenses. And you can also get a tax credit for buying or building plants and machinery.

Clause (e) and (f) - Non-resident and Composition

Section 10 imposes a restriction on composition taxpayers, disallowing them from claiming Input Tax Credit (ITC) on GST paid for purchases, given their quarterly turnover tax payment. Additionally, Section 17(5) of the CGST Act specifies that ITC is not accessible for composition-taxable persons, regardless of whether they supply goods or services.

For non-resident taxable persons, advance tax deposits are required. They can seek ITC for Integrated GST (IGST) paid on imported goods but are not eligible to claim ITC for any other domestic purchases.

Clause (g) - Personal Use

ITC cannot be claimed on goods purchased and used for personal purposes. If the goods purchased are partly used for personal and partly for business use, then ITC is allowed on the value of goods/services used for business purposes.

Clause (h) - Free Sample and Lost

ITC cannot be claimed if the goods are lost, stolen, written off, damaged, or given away as free gifts.

Clause (i) - Fraudulent ITC Claims

Input Tax Credit (ITC) cannot be claimed for the following -

• Previous instances of non-payment or insufficient tax payment,

• Overpayment of tax refunds,

• Unlawful utilization or fraudulent acquisition of excessive ITC, or

• Wilful misstatements, suppression of facts, or confiscation and seizure of goods.