Understanding Blocked Credit under GST

One of the primary benefits of the Goods and Services Tax (GST) system is the seamless flow of Input Tax Credit (ITC). However, this credit is not universal. Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, contains specific provisions detailing "blocked credit." Taxpayers must ensure they do not claim ITC on these restricted expenses, as doing so leads to tax demands, interest, and penalties.

Major Categories of Blocked ITC

1. Motor Vehicles and Conveyances

ITC is blocked on motor vehicles used for transportation of persons having an approved seating capacity of not more than 13 persons (including the driver). Claiming ITC on corporate passenger cars is a common compliance error.

Exceptions: Credit is allowed if the vehicles are used for further supply of vehicles, transportation of passengers, or imparting training on driving such vehicles.

2. Food, Beverages, and Hospitality

ITC is generally blocked on expenses incurred for:

  • Food and beverages
  • Outdoor catering
  • Beauty treatment, health services, and cosmetic surgery
  • Club membership, health and fitness centre fees
  • Travel benefits extended to employees on vacation (LTC, home travel)

Exception: ITC is allowed where the inward supply of these services is used by a taxpayer for making an outward taxable supply of the same category (e.g., a catering company purchasing food ingredients), or if it is obligatory for an employer to provide these to its employees under any law (e.g., canteen facilities mandated under the Factories Act).

3. Works Contract for Immovable Property

ITC is blocked on works contract services and purchases of goods/services used for the construction of an immovable property (other than plant and machinery) on the taxpayer's own account. This includes repair and renovation expenses that are capitalized in the books of account.

4. Goods Lost, Stolen, or Given as Gifts

No ITC can be claimed on goods that have been:

  • Lost, stolen, or destroyed
  • Written off in the books of accounts
  • Distributed as free samples or gifts

5. Personal Consumption

Any goods or services purchased for personal consumption, rather than for the furtherance of business, are strictly ineligible for Input Tax Credit.

Impact of Wrongful ITC Claims

If a taxpayer claims blocked credit, it will flag a mismatch during the department's automated audits (DRC-01A or ASMT-10). The taxpayer will have to reverse the credit, pay interest at 18% per annum from the date of claim, and pay penalties. Accurate tax audit and reconciliation are vital. VSB Consultants provides thorough monthly ITC reconciliation services, comparing GSTR-2B with purchase logs to ensure no blocked credit is claimed.