Input tax credit (ITC) is one of the key features of the Goods and Services Tax (GST) regime in India. It allows the registered taxpayers to claim the credit of GST paid on the purchase of goods or services or both, which are used for providing taxable supplies. However, not all purchases are eligible for ITC. There are certain goods and services, which are specified under section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, on which ITC is not available. These are called as ineligible or blocked ITC.
In this blog post, we will discuss the list of ineligible or blocked ITCs under GST section 17(5), along with the exceptions and the rationale behind them.
List of Ineligible or Blocked ITC under GST Section 17(5)
The following table provides the list of goods or services or both, on which ITC is not available under GST section 17(5), along with the exceptions, if any.
| List of Blocked ITC | Exceptions |
|---|---|
| Motor vehicles, vessels and aircraft | ITC is available if they are used for: - Transportation of passengers - Transportation of goods - Further supply of such vehicles, vessels or aircraft - Imparting training on driving, flying, navigating, etc. |
| Services of general insurance, servicing, repair and maintenance of motor vehicles, vessels and aircraft | ITC is available if they are used for the purposes mentioned above |
| Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery | ITC is available if they are used for: - Making an outward supply of the same category of goods or services or both - As an element of a taxable composite or mixed supply |
| Rent-a-cab, life insurance and health insurance | ITC is available if they are used for: - Making an outward supply of the same category of goods or services or both - As an element of a taxable composite or mixed supply - Obligation under any law to provide such services to employees |
| Travel benefits extended to employees on vacation such as leave or home travel concession | No exception |
| Works contract services for construction of an immovable property (other than plant and machinery) | ITC is available if they are used for: - Further supply of works contract service - Construction of plant and machinery |
| Goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account | ITC is available if they are used for: - Further supply of such goods or services or both - Construction of plant and machinery |
| Goods or services or both on which tax has been paid under composition scheme | No exception |
| Goods or services or both received by a non-resident taxable person | ITC is available if they are used for: - Further supply of such goods or services or both - Export of goods or services or both |
| Goods or services or both used for personal consumption | No exception |
| Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples | No exception |
| Any tax paid under the provisions of sections 74, 129 and 130 of the CGST Act, 2017 | No exception |
The Rationale Behind Ineligible or Blocked ITC under GST Section 17(5)
The main reason behind blocking the ITC on certain goods or services is to prevent the leakage of revenue and to avoid the misuse of ITC. Some of the goods or services are blocked because they are either used for personal consumption or non-business purposes, or they are not directly related to the output supply.
- For example, food and beverages, cosmetic surgery, travel benefits, etc. are generally considered personal or non-business expenses, and hence, ITC is not available for them.
However, there are some exceptions to the blocked ITC, where the ITC is allowed if the goods or services or both are used for making an outward supply of the same category or as an element of a taxable composite or mixed supply.
- For example, ITC is available for food and beverages if they are used for providing catering service or as a part of a hotel package.
- Similarly, ITC is available on rent-a-cab service if it is used for providing cab service or as a part of a tour package. The rationale behind these - exceptions is to avoid the cascading effect of taxes and to ensure the seamless flow of ITC in the supply chain.
Another reason for blocking the ITC on certain goods or services is to maintain the distinction between goods and services and to avoid the double benefit of ITC.
- For example, works contract service and construction of immovable property are treated as a supply of services under GST, and hence, ITC is not available on them.
- However, if they are used for further supply of works contract service or construction of plant and machinery, which are treated as supply of goods under GST, then ITC is available on them. The rationale behind this is to avoid the double benefit of ITC on both goods and services components of the works contract or construction service.
Also Read: Reversal of ITC under Rule 42 of CGST Rules: What, Why, and How?
Easy Identification of Blocked ITC
One of the ways to identify the blocked ITC is to use the following formula:
ITC = GST paid on inputs - GST payable on output supply
If the result of the formula is negative, it means that the input tax credit is more than the output tax liability, and hence, there is no blocked ITC.
However, if the result of the formula is positive, it means that the input tax credit is less than the output tax liability, and hence, there is some blocked ITC.
The amount of blocked ITC can be calculated by subtracting the input tax credit from the output tax liability.
For example, suppose a taxpayer has purchased goods worth Rs. 1,00,000 on which GST of Rs. 18,000 is paid.
The taxpayer has sold the goods for Rs. 1,50,000 on which GST of Rs. 27,000 is payable. The input tax credit available to the taxpayer is Rs. 18,000. Applying the formula, we get:
ITC = GST paid on inputs - GST payable on output supply ITC = 18,000 - 27,000 ITC = -9,000
Since the result is negative, there is no blocked ITC in this case.
However, if the taxpayer has purchased goods worth Rs. 1,00,000 on which GST of Rs. 18,000 is paid, and the goods are used for personal consumption, then the input tax credit available to the taxpayer is zero. Applying the formula, we get:
ITC = GST paid on inputs - GST payable on output supply ITC = 0 - 0 ITC = 0
Since the result is zero, there is no input tax credit in this case, and the entire GST paid on inputs is blocked.
Reflection of Blocked ITC in Form GSTR-3B
Form GSTR-3B is a monthly summary return that every registered taxpayer has to file under GST. It contains the details of the outward supplies, inward supplies, tax liability, input tax credit, and payment of tax.
The blocked ITC has to be reported under Table 4(D)(2) of Form GSTR-3B as an ineligible ITC. The amount of ineligible ITC has to be bifurcated into CGST, SGST, UTGST, and IGST and entered in the respective columns. The ineligible ITC will not be added to the total ITC available for the month, and hence, it will not be used for paying the tax liability.
For example, suppose a taxpayer has purchased a motor vehicle worth Rs. 10,00,000 on which GST of Rs. 1,80,000 is paid. The motor vehicle is used for personal use and not for any business purpose. Therefore, the input tax credit on the motor vehicle is blocked and ineligible.
The taxpayer has to report the GST of Rs. 1,80,000 under Table 4(D)(2) of Form GSTR-3B as ineligible ITC. Assuming that the GST is equally divided into CGST and SGST, the taxpayer has to enter Rs. 90,000 in the CGST column and Rs. 90,000 in the SGST column.
The ineligible ITC will not be added to the total ITC available for the month, and hence, it will not be used for paying the tax liability.
Also Read: GST Reconciliation in TallyPrime: A Step-by-Step Guide
In a Nutshell
ITC is a crucial aspect of the GST regime, as it helps in reducing the tax burden and improving the cash flow of businesses. However, ITC is not available on all purchases, and there are some goods or services or both, which are blocked or ineligible for ITC under GST section 17(5).
The taxpayers should be aware of the list of blocked ITC and the exceptions to them, and claim the ITC accordingly. This will help them avoid any disputes or penalties from the tax authorities and also optimize their tax liability.
