• In the part I we discussed in detail regarding the “Concept of Input tax credit” and the “Eligibility to avail Input tax credit as envisaged under Section 16 of the CGST Act 2017. In this part we will be discussing the concept of “Blocked Credits” as laid down under section 17 of the CGST Act 2017. Blocked credit refers to certain situation and cases under the GST laws where the availability of “Input tax credit” (ITC) is restricted. Although under GST, we aim at seamless flow of “ITC”, still due to the provisions of law, there are certain restrictions in force. Let us examine the same.
  • As per the provisions of section 17(1) of the CGST Act 2017 Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
  • Eg: Mr “Siddharth” a proprietor of a “toy shop”, has purchased a stock of toys containing 100 cars. Out of this stock, he has taken 2 cars for his son “Nishant”. The purchase value of the stock of 100 cars is Rs 1,00,000 and IGST paid was @ 12% ie Rs 12,000. In such case the entry passed in the books at the time of purchase of stock and entry which would be passed subsequently would be as follows.
    • 1. Purchases A/c Dr…………… 1,00,000
      Input IGST A/c Dr………….. 12,000
      To Suppliers A/c 1,12,000
      (Purchase of stock of 100 cars recorded in books)
    • 2. Purchases A/c Dr…………….240
      To IGST A/c 240
      (Being IGST credit reversed on goods which were used for the purpose other than business)
    • Thus, it can be observed that where the goods were used for the purpose other than business, the Input tax credit was restricted to only those goods which were used for the purpose of business.

    • (2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

    • (3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. (a) in sub-section (3), the following Explanation shall be inserted, namely:–– ‘Explanation.—For the purposes of this sub-section, the expression ‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule.’;
      • Eg: Saaj Ltd is engaged in manufacture of 5 different types of goods. The goods are manufactured at a common manufacturing facility. The annual rent of the manufacturing facility is Rs 24,00,000. The CGST + SGST levied on the same is @ 18%. Ie Rs 4,32,000. The total turnover of Saaj Ltd for the year was Rs 15,00,00,000. Out of the total turnover, the turnover of exempt supplies is Rs 1,00,00,000. As per rule 42 of the CGST Rules 2017, the ITC in respect of the rent expenses will be liable for reversal to the extent the common services are consumed in making exempt supplies.
      • ITC liable to be reversed = Common ITC x (Turnover of exempt supplies the year/ Total Turnover during the year )
      • Therefore, ITC liable to reversed = 4,32,000 x( 1,00,00,000/ 15,00,00,000)
      • Therefore, ITC to be reversed, on the basis of Rule 42 will be = Rs 28,800

    • (4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse: Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year: Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.
    • The Banking company, Financial Institutions and the Non-Banking Finance Companies are engaged primarily in the activities of “Accepting deposits and lending loans”. Besides this, they are also engaged in providing other services such as “Standing Instruction functions”, “Check book/debit card/ credit card issuances”, “Other assistive services”. Thus, in respect of banks, financial institutions and the NBFC’s, the major activities (accepting deposits and lending loans) are under the category of exempted supplies, whereas remaining supplies are taxable. Thus in their case, they have an option to either avail the ITC in full and reverse to the extent of turnover of exempt supplies as mentioned in illustration above under Section 17(2/3), or to avail only 50% of the eligible ITC and forego the remaining ITC.
    • As per the provisions of Section 17 (5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:
      • “(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely
        • (A) further supply of such motor vehicles; or
        • (B) transportation of passengers; or
        • (C) imparting training on driving such motor vehicles;
      • Post the amendments as per the CGST Amendment Act 2018, the following is the interpretation in respect of the above clause. Input tax credit is not eligible to be claimed in respect of “Motor vehicles” which are meant for transportation of passengers, except when they are used for making the specified supplies as mentioned in (A,B,C) above. However, the meaning of the word “motor vehicle” has been given a specific understanding. Based on the above let us understand the above provisions in terms of under mentioned points.
        • 1. Motor vehicles for transportation of person having seating capacity of not more than 13 persons including the driver, has been considered as ineligible for claiming ITC. Thus one can say that a motor vehicle designed for transportation of persons, with approved seating capacity of more than 13 persons including the driver, will be eligible for claiming ITC even if such motor vehicle is not used for the purposes specified in (A/B/C) above.
        • 2. Motor vehicles for transportation of persons, having seating capacity of up to 13 persons including the driver, if is used for the purpose other than those specified in (A/B/C) above, then in such case the ITC in respect of the same will not be eligible.
          • Eg: A Chartered Accountant purchases a car with seating capacity less than 13 seats including the driver, he would not be entitled for claiming ITC.
          • Eg: A person engaged in providing services of “rent-a-cab”, purchases 5 cars. Out of these 4 cars are to be used in his business of “Rent-a-cab” and 1 will be used for his personal purpose. In such case, he shall be entitled to claim ITC in respect of those 4 cars which are to be used for the purpose of supplying specified service of “Transportation of passengers”.
          • Eg: Mr Keyur owns a car showroom. In such case if he purchases a motor vehicle (with seating capacity of less than 13 persons including the driver) for further supply of such motor vehicle, then he shall be entitled for claiming ITC.
        • (ii) for transportation of goods;
        • Motor vehicles, which are meant for transportation of goods, is entitled for claiming ITC. In respect of this, it does not matter in which type of an outward supply, a registered person is engaged in. Thus, if a registered person is eligible to claim ITC as per the provisions of Section 16, then he shall be entitled to claim the ITC of “Motor vehicles used for transportation of goods”.
        • Eg: Sinewave Computers is engaged in business of supply of computer hardware parts such as monitors, keyboards, CPU etc. In such case, if the company has purchased a “Cargo VAN”, then it shall be eligible for claiming ITC on such Motor vehicle used for transportation of goods.

    • (aa) vessels and aircraft except when they are used–– (i) for making the following taxable supplies, namely
      • (A) further supply of such vessels or aircraft; or
      • (B) transportation of passengers; or
      • (C) imparting training on navigating such vessels; or
      • (D) imparting training on flying such aircraft;
    • Eg: Indido Airlines purchases, Aircraft, for using it for the purpose of transportation of passengers, in such case the company will be eligible for claiming ITC.
    • Eg: Mr Manan, MD of a company has purchased a private jet for his own travel purpose. He would be using it for business as well as personal usage. In this case, since Mr Manan will not be using the jet for any of the purpose mentioned in the points (A/B/C/D) to clause (aa), he shall not be entitled to claim ITC in respect of the private jet.

    • (ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa). Any person, who is eligible to claim ITC in respect of “Motor vehicle for transportation of persons or goods” as discussed above, is also eligible to claim ITC in respect of services of “general insurance and repairs and maintenance in respect of such Motor vehicle”. Thus it would also mean that, if in cases as discussed above, a registered person is not able to claim the ITC of motor vehicles, then he shall not be entitled to claim the ITC in respect of “general insurance and repairs and maintenance” of such motor vehicles. On the same basis even in case of Aircraft, where the registered person is eligible to claim ITC of aircraft, he shall be entitled to claim ITC of services of “general insurance and repair and maintenance in respect of such aircraft”.
    • Provided that the input tax credit in respect of such services shall be available— (i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

    • (ii) where received by a taxable person engaged
      • (I) in the manufacture of such motor vehicles, vessels or aircraft; or
      • Eg: Maruti Suzuki Limited, is engaged in the manufacture or motor vehicles, so if such company has undertaken services of “General Insurance and repairs and maintenance” of motor vehicles manufactured by it, then it shall be eligible for claiming ITC in respect of the such services.
      • Eg: Boeing Ltd, is engaged in manufacture of “Aircrafts”, thus if such company has availed services of “General Insurance and repairs and maintenance” of such aircrafts. In such case Boeing Ltd will be eligible to claim ITC in respect of such services.

    • (II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;
      • Eg: MGM Insurance Ltd has insured a vehicle. There is a repairs maintenance service received in respect of such vehicle, when the damage claim was filed by the owner of the insured vehicle. In such case when the repairs bill is received by “MGM Insurance Ltd”, it will be eligible to claim the ITC in respect of such motor vehicle.

    • (b) the following supply of goods or services or both— (i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
    • Under usual circumstances, Input tax credit in respect of the above inward supplies is not eligible to be claimed. However, let us consider the following proviso
    • Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
    • Eg: An outdoor caterer Mr Shailesh, has a dinner order where he has to serve “Indian food” as well as “Continental food”. He does not have the “Continental food cook available for the day”. Thus, he has procured services of a cook and his team who is a specialist in making “Continental dishes”. In such case, services of “outdoor catering” procured by Mr Shailesh, would be eligible for claiming ITC, because Mr Shailesh has procured these services to provide the “outdoor catering services as an outward supply”.
    • Eg: ABC Ltd has procured, “food and beverages” for its employees and the supplier has charged GST @ 5%. In such case, ABC Ltd will not be eligible to claim ITC.
    • ABC LTD is an outdoor catering and has procured “food and beverages” to be used in its order of outdoor catering, in such case, ABC Ltd will be eligible for claiming ITC in respect of food and beverages which are used for providing “outdoor catering services”.
    • Thus, in respect of specified categories of supplies as mentioned in clause(b) above, are used for providing specified categories of outward supply or as a part of composite or mixed supply, only then the ITC on the same is eligible.

    • (ii) membership of a club, health and fitness centre
    • In no situation the membership of club or fitness centre is eligible for claiming ITC.

    • (iii) travel benefits extended to employees on vacation such as leave or home travel concession.
    • Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”.
    • Eg: If an employer has taken health insurance policy of his employees, where he does not have any legal obligation to do so, in such case the employer would not be eligible to claim ITC. However, as envisaged under the “ESIC Act”, an employer is under an obligation to provide health insurance cover to its employees, in such case, the premiums paid by employer is to meet the statutory obligations, thus he shall be entitled for claiming ITC.
    • In this part, we have so far discussed the provisions of Section 17 up to provisions of Section 17(5)(c). The discussion in respect of clauses of “Works contracts” and subsequent clauses along with Section 18, shall be covered in Part III


  • Disclaimer: The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above