Blocked Credit Under GST Section 17(5): A Complete Overview

 

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Blocked Credit Under GST: A Complete Overview

Blocked credit, also referred to as blocked ITC, is a tax concept under India’s GST system. While businesses can generally claim Input Tax Credit (ITC) on goods and services used for business, certain categories of purchases are explicitly disallowed. This article will explain what is blocked credit in GST, the list of blocked credits under Section 17(5), and how to avoid non-compliance.

What is Blocked Credit Under GST?

Under the Goods and Services Tax (GST), Input Tax Credit (ITC) is meant to ensure that the tax is levied only on the value addition. However, Section 17(5) of the CGST Act restricts or blocks certain credits to prevent misuse and ensure that only business-related expenses qualify for credit.

In simple terms, blocked credit refers to the ITC you cannot claim, even if you paid GST on those purchases.

Overview of Section 17(5): The Core of Blocked ITC

Section 17(5) of the CGST Act outlines the items on which ITC is blocked, typically involving:

• Personal or non-business consumption
• Goods or services with an inherently private nature (e.g., personal vehicles)
• Certain types of expenses (e.g., club memberships, health services, etc.)

Key Categories of Blocked Credit Under GST

1. Motor Vehicles & Conveyances

• If you buy a car for personal or office use (with capacity under 13 seats), the ITC is blocked.
• Exception: If your business deals with selling or renting motor vehicles or uses them for passenger transport (e.g., a taxi service), you can claim ITC.

2. Food, Beverages & Employee Welfare

• Items like food, beverages, club memberships, beauty treatments, etc., are blocked unless they are legally mandatory (e.g., providing canteen facilities if required by law).

3. Construction Services

• ITC on building construction or renovation is blocked if the final product is an immovable property (not including plant and machinery).

4. Composition Scheme & Non-Resident Taxable Persons

• Composition dealers cannot claim ITC since they pay tax at a fixed rate on turnover.
• Non-resident taxable persons generally cannot claim ITC on goods and services they purchase in India, except in specific cases.

5. Goods Lost, Stolen, or Distributed as Gifts

• ITC is blocked if goods are lost, stolen, destroyed, written off, or given as free samples or gifts.

6. Personal Use

• If goods or services are partially for business and partially for personal use, the personal portion of ITC must be reversed or not claimed.

Why Does Blocked Credit Exist?

The main reasons for blocked credit under GST are:

• Preventing misuse of ITC for non-business or personal expenses
• Maintaining a fair system where only legitimate business-related inputs qualify for credit
• Minimizing litigation by clearly defining the scope of allowable and disallowed credits

Examples of Blocked Credit Under GST

1. Office Car

• A company buys a sedan for directors’ personal commute. The GST on the car purchase is blocked credit because the vehicle is not used exclusively for taxable supplies.

2. Employee Vacation

• If a business pays for employees’ vacation trips, the GST paid on such services is blocked since it’s a personal consumption benefit, not a direct business input.

3. Renovating a Residential Flat

• If a builder buys materials for renovating a residential flat (not for resale but for own use), the ITC is blocked because it forms part of immovable property for personal or non-resale purposes.

How to Handle Blocked ITC: Reporting & Reversal

Identify Blocked Items

• Keep a separate record of purchases that fall under the blocked categories.

Reversal in Returns

• If you inadvertently claim ITC on blocked items, reverse it in GSTR-3B to avoid interest and penalties.

Disclose Correctly

• The disallowed credit should be reported under the “ineligible ITC” section in your monthly return.

Consequences of Claiming Blocked Credit

Claiming blocked credit can lead to:

• Interest on the wrongly availed ITC
• Penalties for incorrect claims
• Potential legal disputes or scrutiny from tax authorities, increasing the overall tax effect

FAQ: Blocked Credit Under GST

What is blocked credit in GST?

Blocked credit is the Input Tax Credit (ITC) you cannot claim due to the restrictions under Section 17(5) of the CGST Act.

What is blocked GST?

This term refers to GST paid on goods and services that the law does not allow you to credit against your tax liability.

Why are some ITCs blocked under GST?

To ensure ITC is claimed only for legitimate business purposes and prevent misuse for personal or non-taxable activities.

Where do I report blocked credit in GSTR-3B?

You should report ineligible or blocked ITC in the “ineligible ITC” field in GSTR-3B.

Are personal cars always blocked for ITC?

Yes, unless you are in the business of selling, renting, or transporting passengers using motor vehicles.

What happens if I claim blocked credit by mistake?

You must reverse it and pay interest for the period of wrongful claim.

Can I claim ITC on food and beverages for office events?

Generally no, unless it is mandatory under law or part of an outward supply (e.g., catering services).

Is ITC blocked on building construction?

Yes, if it’s for immovable property not meant for resale or further supply of works contract services.

Do composition taxpayers get any ITC?

No, composition dealers cannot claim any ITC as they pay tax at a simplified rate on turnover.

How to avoid claiming blocked credit?

Keep clear records, consult the blocked credit list under Section 17(5), and reconcile your ITC claims regularly.

Conclusion

Understanding blocked credit under GST is crucial for maintaining accurate tax records and avoiding penalties. By knowing what is blocked credit in GST and following the list of blocked credit items, businesses can stay compliant and minimize the “tax effect.” Always review the categories in Section 17(5), reverse any ineligible claims promptly, and consult a tax professional if you have doubts.