What is Blocked Credit in GST? A Guide to Section 17(5)

Under the Goods and Services Tax (GST) system, businesses are generally allowed to claim input tax credit under GST on purchases made for business use. However, not all inputs qualify. The Central Goods and Services Tax (CGST) Act outlines situations where certain credits are disallowed, and this is what we refer to as blocked credit in GST.

Blocked credit under section 17(5) GST increases the effective cost of procurement since the GST paid cannot be claimed as credit. This impacts their cash flow, working capital, pricing strategy, as well as overall profitability.

BOOK A FREE DEMO




    Input Tax Credit

    Section 17(5) of the CGST Act: An Overview

    Section 17(5) of the CGST Act specifies that input tax credit under GST cannot be claimed by a taxpayer in cases that are specifically outlined, even when the goods or services are used for business purposes. Such types of credit that are not permitted are referred to under GST as blocked credits.

    This provision overrides the broader eligibility rules under Section 16(1) (which allows ITC when used for business) and Section 18(1) (which deals with ITC in special cases). Instead, Section 17(5) lists 11 specific scenarios where ITC is considered ineligible ITC under GST, commonly referred to as blocked credits.

    This includes goods and services such as motor vehicles, food and drinks, contract services for works, construction inputs, and many more, unless specific exceptions apply.

    Get a Free Trial – Best Accounting Software For Small Business

    Latest Updates on Section 17(5) GST

    The 55th GST Council Meeting recommended the following amendments on Section 17(5) of GST:

    • The government has proposed to limit blocked credit under Section 74 (which covers tax demands due to fraud, misstatement, or suppression of facts) for cases only up to the financial year (FY) 2023–24.
    • It also recommended the removal of references to Sections 129 and 130 from Section 17(5), thereby eliminating blocked credit for tax paid on goods detained, seized, or confiscated in transit.

    These proposed changes will be enforced once officially notified by the CBIC.

    Why Does Blocked Credit Exist Under GST?

    The key reasons why blocked credit under GST exists are:

    1. To prevent misuse of input tax credit for personal or non-business-related expenses.
    2. To ensure only genuine business inputs are eligible for tax benefits, supporting a fair and consistent tax structure.
    3. To reduce ambiguity and legal disputes by clearly defining ineligible credits in section 17(5) of the GST.

    Types of Blocked Credits Under Section 17(5)

    The Act provides a detailed list of items that fall under blocked credit in GST. These include:

    Motor Vehicles and Conveyances

    ITC is blocked on motor vehicles used for passenger transport with a seating capacity of less than or equal to 13 (including the driver). For example, a corporate office purchasing a sedan for executive use cannot claim ITC.

    Exceptions:

    • When used for further supply (e.g., resale by a car dealer)
    • For transporting passengers (e.g., taxi businesses)
    • For training people to drive such vehicles

    Also, ITC on services like insurance, maintenance, or repair of such vehicles is also blocked unless used for the above purposes.

    Get a Free Trial – Best GST Accounting Software For Small Business

    Food, Beverages, and Club Memberships

    ITC is blocked on:

    • Food and beverages
    • Outdoor catering
    • Beauty treatments
    • Health services
    • Cosmetic and plastic surgeries
    • Club and gym memberships
    • Rent-a-cab, life, and health insurance
    • Travel benefits to employees (such as leave travel concessions)

    For instance, a company hosting a team lunch at a restaurant or a firm offering employee gym benefits without legal obligation is not eligible for ITC.

    Exceptions: ITC is allowed only if the employer is legally mandated to offer these services under any law.

    Works Contract Services

    ITC is not allowed on works contract services used for the construction of immovable property (except when the recipient is in the business of providing works contract services).

    • Goods/Services Used for Personal Consumption
      When goods or services are used for personal reasons and not for business, the credit is blocked, even if GST was paid.
    • Construction Services
      When goods or services are used for the construction of buildings or immovable properties on own account (not for resale or plant/machinery setup), ITC cannot be claimed.
    Goods Lost, Stolen, Destroyed, or Given as Gifts

    No ITC is allowed on:

    • Lost or stolen goods
    • Destroyed or written-off items
    • Goods given away as gifts or free samples
    Tax Paid in Certain Situations

    ITC is also blocked on GST paid under the following sections:

    • Section 74: Tax paid due to fraud or suppression of facts
    • Section 129: Tax on seized or detained goods in transit
    • Section 130: Tax paid on confiscated goods

    Exceptions to Blocked Credit Rules

    In certain situations, businesses are allowed to claim ITC even if they fall under blocked categories:

    • If services are legally mandated to be provided by the employer
    • If goods are used for further supply (like vehicle dealerships)
    • If the recipient is a supplier of works contract services

    Consequences of Wrongly Claiming Blocked Credit

    Claiming ineligible ITC under GST can have serious consequences:

    • Interest at 24% per annum on wrongly claimed credit.
    • Mandatory reversal of such ITC.
    • Penalties and legal scrutiny from GST authorities.

    As per the CGST Act, if you violate Section 17(5) provisions, you must reverse the credit and pay interest from the date of claim until reversal.

    Get a Free Demo – Best Billing and Invoicing Softwar

    Where to Find Blocked Credit in GSTR-2B

    The GSTR-2B statement (Auto-drafted ITC Statement) provides a monthly view of both eligible and ineligible ITC. Taxpayers can:

    • Log in to the GST portal.
    • Navigate to the return dashboard.
    • Select the relevant tax period.
    • Download GSTR-2B to check which purchases are ineligible under section 17(5) of the GST.

    It is advisable to match ineligible items in GSTR-2B with your accounting records and ensure such amounts are not included in ITC claims.

    Reporting Blocked Credit in GSTR-3B

    Blocked or ineligible ITC under GST must be reported in Table 4(B) of the GSTR-3B return.

    • If any ineligible ITC is identified after filing, it should be reversed in a future period’s GSTR-3B.
    • As of July 5, 2022, Table 4(D) no longer requires disclosure of ineligible ITC.

    To ensure correct reporting:

    • Compare GSTR-2B data with your books.
    • Reverse ineligible credit with interest, if wrongly claimed.
    • Maintain clear segregation between eligible and blocked credit in GST.

    How to Stay Compliant with Section 17(5)

    To stay compliant with the rules around blocked credit in GST, follow these practices:

    • Maintain clear segregation of eligible vs ineligible ITC under GST
    • Cross-check ITC claims with GSTR-2B regularly
    • Avoid availing credit for any blocked category, even if used for business
    • Reconcile invoices and debit/credit notes in a timely manner
    • Consult a GST expert or use reliable GST software for accurate filings

    Conclusion

    Understanding blocked credit in GST is essential to ensure accurate ITC claims and avoid penalties. While input tax credit under GST is a powerful tool for reducing tax liability, misusing or misinterpreting section 17(5) of GST can lead to unwanted financial consequences. With proper awareness and due diligence, businesses can remain compliant and financially efficient under the GST law.

    Please Wait
    • Home
    • /
    • GST
    • /
    • what is blocked credit in GST a guide to section 175

    BUSY is a simple, yet powerful GST / VAT compliant Business Accounting Software that has everything you need to grow your business.

    phone Sales & Support:

    +91 82 82 82 82 82
    +91 11 - 4096 4096
    Copyright © BUSY Infotech Pvt. Ltd. All Rights Reserved