The CGST Act’s Section 17(5) addresses blocked credits or ineligible Input Tax Credit (ITC) within the GST framework. When making purchases listed in this provision, taxpayers are unable to claim ITC while settling output tax. This provision provides 11 clauses under which ITC cannot be claimed.
Budget 2024 Updates
The Government of India has proposed amendments to Section 17(5) of the CGST Act. The proposed changes include:
- Restricting the blockage of input tax credit (ITC) for tax paid under Section 74 (related to fraud, willful misstatement, or suppression of facts) to demands arising up to FY 2023-24.
- Removing references to Section 129 (detention, seizure, and release of goods and conveyances in transit) and Section 130 (confiscation of goods or conveyances and levy of penalty).
What is Section 17(5) of GST?
Section 17(5) deals with blocked credit under GST. Blocked credit refers to an input tax credit that a taxpayer is not allowed to claim. This section highlights a list of purchases where GST is paid, but the business cannot claim these as Input Tax Credit (ITC).
Clauses Ineligible for Input Tax Credit under Section 17(5)
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 travelers 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 travelers/mini buses, 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:
- When the motor vehicles, vessels, or aircraft are used for the purposes specified in clauses (a) or (aa).
- When the services are received by a taxable person engaged in:
- Manufacturing these motor vehicles, vessels, or aircraft, or
- 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
- Willful misstatements, suppression of facts, or confiscation and seizure of goods.
Reporting of Section 17(5) of CGST Act in GSTR-3B
Every buyer or recipient must report ineligible ITC claimed earlier that needs to be reversed, as per Section 17(5) of the CGST Act, while filing GSTR-3B for the relevant month or quarter. This ineligible ITC value must be reported in Table 4(B) of GSTR-3B.
From July 5, 2022, reporting ineligible ITC under Section 17(5) in Table 4(D) of GSTR-3B is no longer required. It is sufficient to disclose such ineligible ITC to be reversed in Table 4(B).
To ensure accuracy, compare the list of ineligible ITCs provided in GSTR-2B with the records maintained in your books of accounts. Ideally, the ITC portion for purchases or expenses should be accounted for correctly in the books and not separately categorized as ITC available for claims.
If any ineligible ITC has been claimed upon comparison with GSTR-2B, you must reverse it in the GSTR-3B of subsequent months or quarters along with applicable interest.
FAQs
What is the reversal under section 17 5?
If the individual fails to comply with the provisions of section 17(5) of the CGST Act, the buyer or the recipient has to reverse any ITC that was claimed wrongfully. They might also have to pay interest @24% from the date of making the claim to the date of claim reversal.
What happens if you break Under ITC u/s 17(5) of CGST Act?
Section 17(5) of CGST Act needs to be mandatorily followed otherwise the wrongfully claimed ITC should be reversed by the recipient or buyer.Furthermore, the penalty includes interest @ 24% from the date of such wrong claim until the date of reversal.