The Goods and Services Tax (GST) regime in India, while beneficial, specifies certain restrictions on the availability of Input Tax Credit (ITC). Section 17(5) of the GST Act outlines scenarios where ITC is blocked, meaning taxpayers cannot claim credit for certain inputs. Understanding these provisions is crucial for compliance and effective tax planning.
Reasons for Blocking ITC
- Administrative Ease: Prevents the burden of controlling the actual use of goods/services, which may be easily used for dual purposes (business/private).
- Fraud Prevention: Reduces the risk of fraudulent claims.
- Consumption Element: Certain supplies inherently involve personal consumption (e.g., entertainment in restaurants).
Detailed Provisions and Illustrations
1. Motor Vehicles and Conveyances
Provision: ITC is not available for motor vehicles used for transporting persons with seating capacity ≤ 13 (including the driver), except when used for:
- Further supply of such vehicles.
- Passenger transportation.
- Driving training.
- Goods transportation.
Examples:
- Allowed ITC: A car rental service purchasing vehicles for its fleet.
- Blocked ITC: A company buying a sedan for its director’s use.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Car Dealer | Sale of car | Purchase of car | Yes |
| Taxi Operator | Passenger transportation | Purchase of car | Yes |
| Airline | Passenger transportation | Purchase of aircraft | Yes |
| Driving School | Training | Purchase of car | Yes |
| Call Center | Business support | Purchase of car | No |
2. Vessels and Aircraft
Provision: ITC on vessels and aircraft is blocked, except when used for:
- Further supply of such vessels or aircraft.
- Passenger transportation.
- Training on navigating such vessels or flying such aircraft.
- Goods transportation.
Examples:
- Allowed ITC: A shipping company purchasing a cargo ship for transporting goods.
- Blocked ITC: An airline buying a jet for private executive travel.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Shipping Company | Goods transportation | Purchase of vessel | Yes |
| Private Airline | Executive travel | Purchase of aircraft | No |
3. Services Related to Motor Vehicles, Vessels, and Aircraft
Provision: ITC on general insurance, servicing, repair, and maintenance is blocked, except:
- When used for specified purposes.
- When received by manufacturers or insurers of such vehicles, vessels, or aircraft.
Examples:
- Allowed ITC: A car manufacturer insuring vehicles before delivery to dealers.
- Blocked ITC: A business insuring its company car for executive use.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Car Manufacturer | Vehicle supply | Vehicle insurance | Yes |
| Business | Business services | Vehicle insurance | No |
4. Food and Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic and Plastic Surgery
Provision: ITC on these services is blocked, except when used to make an outward taxable supply of the same category or as part of a composite/mixed supply.
Examples:
- Allowed ITC: A restaurant providing outdoor catering services.
- Blocked ITC: A company providing meals to employees during meetings.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Restaurant | Restaurant service | Purchase of beverages | Yes |
| Company | Business services | Purchase of meals for employees | No |
5. Club Membership and Health/Fitness Center Fees
Provision: ITC on membership of clubs, health, and fitness centers is blocked.
Examples:
- Blocked ITC: A corporation paying for gym memberships for its employees.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Company | Business services | Club membership | No |
| Gym Trainer | Training services | Fitness center fees | No |
6. Travel Benefits for Employees
Provision: ITC on travel benefits extended to employees on vacation, such as leave or home travel concession, is blocked, unless it is mandatory under any law.
Examples:
- Blocked ITC: A company reimbursing travel expenses for an employee’s holiday trip.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Company | Business services | Travel benefits | No |
7. Works Contract Services for Immovable Property
Provision: ITC on works contract services for constructing an immovable property (other than plant and machinery) is blocked, except when used for further supply of works contract services.
Examples:
- Allowed ITC: A contractor providing construction services to another company.
- Blocked ITC: A business building a new office.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Contractor | Construction service | Works contract service | Yes |
| Business | Business services | Construction services for own office | No |
8. Goods and Services for Immovable Property
Provision: ITC on goods/services received for constructing an immovable property on one’s own account is blocked, except for plant and machinery.
Examples:
- Blocked ITC: A company constructing a warehouse for its own use.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Builder | Construction service | Building materials | No |
9. Composition Scheme Goods/Services
Provision: ITC is blocked on goods/services on which tax has been paid under the composition scheme (Section 10).
Examples:
- Blocked ITC: A retailer under the composition scheme buys goods from a supplier.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Retailer | Business services | Goods from supplier | No |
10. Goods/Services Received by Non-Resident Taxable Persons
Provision: ITC on goods/services received by non-resident taxable persons is blocked, except on imported goods.
Examples:
- Blocked ITC: A non-resident businessperson attending a conference in India.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Non-Resident Business | Business services | Local purchases | No |
11. Corporate Social Responsibility (CSR) Activities
Provision: ITC on goods/services used for CSR activities is blocked.
Examples:
- Blocked ITC: A company donating educational materials as part of its CSR initiative.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Company | CSR activities | Educational materials | No |
12. Personal Consumption
Provision: ITC on goods/services used for personal consumption is blocked.
Examples:
- Blocked ITC: An employee using office supplies for personal use.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Business | Business services | Office supplies used personally | No |
13. Lost, Stolen, Destroyed, or Disposed Goods
Provision: ITC on goods lost, stolen, destroyed, written off, or disposed of as gifts/free samples is blocked.
Examples:
- Blocked ITC: A retailer writing off damaged inventory.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Retailer | Business services | Written off goods | No |
14. Taxes Paid Under Certain Provisions
Provision: ITC on tax paid under Sections 74 (fraud, willful misstatement), 129 (detention, seizure, release of goods), and 130 (confiscation) is blocked.
Examples:
- Blocked ITC: A business paying a penalty for tax evasion.
| Supplier | Outward Supply | Inward Supply | ITC Admissibility |
|---|---|---|---|
| Business | Business services | Tax penalty under fraud | No |
Conclusion
Understanding the blocked ITC provisions under Section 17(5) of the GST Act is essential for businesses to ensure compliance and avoid penalties. By knowing which expenses are ineligible for ITC, businesses can better manage their finances and ensure they only claim credit where permitted. This clarity helps maintain transparency and efficiency in the GST system.
Visit www.cagurujiclasses.com for practical courses
