Blocked credit- Section 17(5) of CGST Act

Blocked credit- Section 17(5) of CGST Act

Navigating the intricacies of Goods and Services Tax (GST) is essential for any business. It can be a challenging landscape to traverse, but at LogiTax, we understand your concerns and are here to provide clarity and guidance.

We know you’ve encountered terms like “blocked credit under GST,” “Section 17 of CGST Act,” and “ITC blocked credit,” and we’re here to simplify them for you.

Understanding these complex concepts is crucial, as they can significantly impact your tax liabilities and financial well-being.

Are you wondering how to make the most of your Input Tax Credit (ITC)? What exactly is “blocked credit in GST,” and how does “Section 17” affect your business operations?

1. What is Blocked Credit in GST?

Blocked credit, in the context of GST, refers to Input Tax Credit (ITC) that cannot be claimed by a registered person for certain purchases.

These purchases are defined as “ineligible” under Section 17(5) of the CGST Act, 2017.

In essence, a registered person cannot offset their output tax liability with ITC for these specific purchases.

2. Understanding Section 17 of the CGST Act

Section 17(5) of the CGST Act outlines the categories of purchases for which ITC is blocked. Let’s delve into the specifics:

Blocked Credit Categories

1. Motor Vehicles: ITC cannot be claimed for motor vehicles designed to transport up to thirteen persons, including the driver, except when they are used for specific taxable supplies. These include further supply of such vehicles, passenger transport, or driving training.

Note: You can claim ITC if the vehicle’s seating capacity is over 13 persons, including the driver. Also, ITC is available if the person claiming it is in the business of supplying such motor vehicles, passenger transport services, or driving training.

1. Vessels and Aircraft: ITC is blocked for vessels and aircraft, except when used for specific taxable supplies, such as further supply of these vessels or aircraft, passenger transport, or training. ITC is also available for transportation of goods.

Note: If vessels and aircraft are used for further supply, passenger transport, goods transportation, or training, you can claim ITC.

1. General Insurance Services: ITC for services related to motor vehicles, vessels, or aircraft is available only when these are used for specific purposes or if the person claiming ITC is engaged in manufacturing such vehicles or providing general insurance services.

Note: You can claim ITC if the mentioned vehicles are used for the specified purposes and if you are engaged in supplying general insurance services for these vehicles.

1. Specific Services: Various services, including food and beverages, outdoor catering, beauty treatments, health services, cosmetic and plastic surgery, leasing, life insurance, and health insurance, are under blocked credit. However, if you use these services for making taxable outward supplies in the same category, you can claim ITC.
2. Membership of a club, health and fitness center.
3. Travel Benefits: ITC is available for travel benefits extended to employees on vacation, like leave or home travel concession, if it’s a legal obligation for the employer to provide them.
4. Works Contract Services: ITC is blocked when works contract services are supplied for the construction of an immovable property (excluding plant and machinery). But it is available if these services are used for further work contract services.
5. Goods or Services for Construction: ITC is not available for goods or services received for the construction of an immovable property on one’s account, except when they are used in the course of business.
6. Composition Scheme: ITC cannot be claimed for goods or services received from a person registered under the composition scheme.
7. Non-Resident Taxable Person: Goods or services received by a non-resident taxable person also fall under the category of blocked credit.
8. Corporate Social Responsibility (CSR): Goods or services used for activities related to obligations under corporate social responsibility as per Section 135 of the Companies Act, 2013, are not eligible for ITC.
9. Personal Consumption and Losses: ITC is not available for goods used for personal consumption or those that are lost, stolen, destroyed, written off, or disposed of as gifts or free samples.
10. Tax Paid Under Specific Sections: ITC cannot be claimed on tax paid under Sections 74, 129, and 130, which pertain to fraud, detention, and confiscation of goods.

3. Disclosure and Accounting of Blocked Credit

Blocked credit should be reported in Table 4-B-1, “ITC Reversed as per rules 38, 42 & 43 of CGST Rules and Section 17(5).” This amount will be deducted from the total ITC.

Regarding accounting treatment, blocked credit related to purchases of goods or services should be expensed in the Profit and Loss account.

If it pertains to fixed assets, it should be added to the cost of the asset, and depreciation will be calculated on the total value of fixed assets.

4. Conclusion

Identifying blocked credit is crucial when calculating total ITC and tax payable. Claiming ITC that falls under Section 17(5) will lead to interest and penalty provisions.

Therefore, businesses must identify such expenses for which ITC is not admissible and report them separately in GSTR 3B each month.

Regular reconciliation of books of accounts is necessary to ensure compliance with the provisions of blocked credit under Section 17(5).

In conclusion, understanding blocked credit under GST is essential for businesses to optimize their tax credits while staying compliant with the law.

For professional guidance and expert assistance in managing your GST returns and reconciliation, contact LogiTax today.

With LogiTax, you’re in safe hands for all your GST-related needs, ensuring you make the most of your Input Tax Credits.