Blocked or Ineligible credit under Section 17(5) of CGST Act

Input Tax Credit

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs. Input Tax Credit is the backbone of GST. GST was implemented to remove the cascading effect of taxes i.e. to make seamless flow of credit available at every stage of supply chain. In GST, it is the provisions of ITC which essentially make GST a value added tax i.e. collection of tax at all points of supply chain after allowing credit of tax paid at earlier points. This seamless chain of credit is broken in case of supplies charged to Composition scheme, Supply of exempted goods or services or both, Ineligible ITC on certain goods or services or both (as provided in Section 17(5) of CGST Act, 2017).

Detailed analysis of Section 17(5) of CGST Act, 2017

ITC on Motor Vehicles

Motor vehicle* for	Used for which purpose	Eligible or not?
Transportation of Goods	Any Purpose	Yes
Transportation of passenger having approved seating capacity of more than 13 persons (including driver)	Any Purpose	Yes
Transportation of passenger having approved seating capacity of 13  or less than persons ( including driver)	1.Further supply of such motor vehicle2.Transportation of passengers3.Imparting training on Driving	Yes
Transportation of passenger having approved seating capacity of 13 or less than persons (including driver)	Any Purpose except above 3	No

Further, ITC of general insurance, servicing, repair and maintenance in respect of motor vehicles shall not be allowed except as permitted above. Further, in two more cases ITC of general insurance, servicing, repair and maintenance shall be available, which are as follows:

1. Where above services are received by a person engaged in manufacture of such motor vehicles
2. Where above services are received by a person engaged in supply of general insurance of such motor vehicles insured by him.

“Motor vehicle” or “Vehicle” means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed  premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five cubic centimeters.

Thus, it can be inferred that followings are not motor vehicles as per above definition and credit shall be allowed in respect of them:

1. Vehicle running upon fixed rails
2. Vehicles adapted for use only in a factory or enclosed premises
3. Two-wheeler or three wheelers with engine capacity of 25 CC or less.

ITC is not available for 

1. Food and beverages, outdoor catering, beauty treatment, health services, Life insurance, health insurance, cosmetic and plastic surgery, leasing and hiring of vehicles, vessels, aircraft as referred above,except where an inward supply of goods or services or both of a particular category is used 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. 2. Membership of club, Health and fitness center. 3. Travel benefits extended to employees such as leave or home travel concessionHowever, in case (1), (2), (3), ITC shall be available if it is obligatory for employer to provide the goods or services under any law for the time being in force.

4. Works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service. 5. Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. Note: Here, the term “Construction” includes reconstruction, renovation, additions, alterations, repairs to the extent of capitalization. So if any expense is incurred in nature of reconstruction, renovation, additions, alterations, repairs and it is not capitalized in books of account, then ITC on such expenditure shall be available. Note: The term “Plant and Machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply (that includes both taxable as well as exempt supply) of goods or services or both and includes such foundation and structural support but excludesLand, Building or any other civil structureTelecommunication towerPipeline laid outside the factory premises

6. Goods or services or both on which tax has paid under composition scheme. 7. Goods or services or both received by a non-resident taxable person except on goods imported by him,

8. ITC paid on goods or services purchased for personal consumption. 9. ITC paid on goods lost, stolen, destroyed, written off or disposed of by way of gifts or free samples.

10. GST paid after detention of fraud or suppression or contravention of GST act under section 74, Section 129 and Section 130

Consequences of availing Ineligible ITC

Taxpayer will be liable to reverse claimed ineligible ITC in GSTR-3B as soon as claim of wrong ITC is detected along with Interest at the rate of 18%  per annum starting from the date of filing of GSTR-3B with wrong ITC till the date of its reversal.

Frequently Asked Questions

Q. How should I show ineligible ITC in GSTR-3B? A. Ineligible ITC should be deducted from total ITC to be claimed under “All other ITC” (Table 4(A5)) and it should be added in the head “Ineligible ITC” (Table 4(D1)) of GSTR-3B.

Q. How should I show ineligible ITC in books of accounts? A: It is suggested that ineligible ITC should be expensed out in books of accounts along with its taxable value so that benefit of the same can be claimed in Income tax act.

Q. I have mistakenly claimed ineligible ITC in FY 2018-19. How should I adjust the same? A: For FY 2018-19, GST return of September 2019 was last month for all adjustments and rectifications. It is suggested that you should reverse wrongly claimed ITC in Form DRC-03 along with applicable interest thereon and it is suggested to report correct ITC in annual return of FY 2018-19.

Q. I have paid ITC on purchase of goods to be used for both personal as well as business purposes? How should I reverse the ITC? A: It is suggested to identify proportion of personal usage of goods.  For example, 60% goods are used for business purpose and 40% goods are used for personal use then it is suggested to claim 60% ITC and if full amount of ITC has already been claimed then you should reverse 40% ITC along with applicable interest thereon.

Q. I have received repair and maintenance services of office building.  Should I claim ITC on the same? A: If the amount of repair and maintenance has been capitalized in books of accounts then it will be considered as Ineligible ITC.  If you claim it as an expense in profit and loss account, then you can claim ITC on the same.

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