Blocked Credit Under Section 17(5) of the CGST Act, 2017: Consequences and the Emerging Judicial Landscape
Summary: The input tax credit mechanism is the structural spine of the Goods and Services Tax regime, while Section 17(5) of the CGST Act, 2017 operates as a principal statutory qualification by blocking credit for specified inward supplies despite the general entitlement under Section 16. An incorrect blocked-credit claim can require reversal of credit, payment of interest and potentially penalty, with proceedings arising under Sections 73 or 74 and, in appropriate circumstances, administrative blocking of the electronic credit ledger under Rule 86A. Two significant lines of litigation illustrate the evolving treatment of Section 17(5). In Safari Retreats, the Supreme Court upheld the constitutional validity of Sections 17(5)(c), 17(5)(d) and 16(4), while holding that whether a building qualifies as “plant” under clause (d) could depend on a functionality test. Following dismissal of the review petition, the Finance Act, 2025 retrospectively amended Section 17(5)(d) from 1 July 2017 by replacing “plant or machinery” with “plant and machinery”, thereby materially altering the practical position for construction-related claims. In contrast, litigation concerning telecom towers and passive infrastructure followed a taxpayer-favourable trajectory, with judicial authority treating dismantlable and relocatable towers and shelters as movable rather than immovable property. The Supreme Court dismissed the Revenue’s special leave petitions and subsequently dismissed review petitions in August 2026. The article examines these developments, the consequences of incorrect claims, available procedural and constitutional remedies, and the practical importance of distinguishing construction-related disputes from disputes involving relocatable telecom infrastructure.
Introduction
The input tax credit mechanism is the structural spine of the Goods and Services Tax regime — a seamless chain of credit intended to eliminate the cascading effect of tax on tax. Section 17(5) of the CGST Act, 2017 is the principal statutory qualification to that promise: a non-obstante provision that carves out specified categories of inward supply from the general entitlement to credit conferred by Section 16, irrespective of whether the conditions of Section 16 are otherwise satisfied. For a registered person, a blocked-credit finding is rarely a mere accounting inconvenience; it converts an amount already reflected as credit in the electronic credit ledger into a demand carrying interest and, not infrequently, penalty, and it does so retrospectively over a return period that may span several years. This article examines the structure of Section 17(5), the consequences that flow from an incorrect claim, the remedies available to a taxpayer contesting such a finding, and two significant lines of litigation — one concerning constructed immovable property, the other concerning telecom towers — that between them illustrate both the judicial and the legislative dynamics currently shaping this provision.
The Structure of Section 17(5)
Section 17(5) blocks credit across eleven principal categories, each with its own carve-outs. Motor vehicles for the transport of persons with a seating capacity of thirteen or fewer (including the driver), vessels and aircraft, are blocked under clauses (a) and (aa), save where they are used for further supply of such conveyances, for transportation of passengers, or for imparting driving, navigation or flying training; insurance, servicing and repair of such conveyances is correspondingly blocked under clause (ab), subject to the same exceptions and a further carve-out for manufacturers and general insurers of such conveyances. Clause (b) blocks credit on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing or renting of motor vehicles and conveyances, life and health insurance, membership of clubs and health or fitness centres, and travel benefits extended to employees on leave or home travel concession — subject to a proviso restoring credit where the taxable person is under a statutory obligation to provide the benefit to its employees, or where the inward supply is itself used to make an outward taxable supply of the same category. Clauses (c) and (d) — the provisions at the centre of the first line of litigation discussed below — block credit on works contract services and on goods or services received for construction of an immovable property on the taxable person’s own account, in each case excepting “plant and machinery” and, for works contract, excepting the case where the service is itself an input for further supply of works contract service. Clause (e) blocks credit on supplies on which the composition levy under Section 10 has been discharged; clause (f) blocks credit for non-resident taxable persons save on goods imported by them; clause (g) blocks credit on goods or services used for personal consumption; clause (h) blocks credit on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples; and clause (i) blocks credit in respect of any tax paid pursuant to determination of short payment, excess refund, or wrongly availed credit by reason of fraud, wilful misstatement or suppression of facts under Section 74.
Consequences of an Incorrect Claim
Where credit falling within Section 17(5) has been availed and utilised, the consequences unfold on several tracks simultaneously. The credit itself must be reversed, typically through Table 4(B) of Form GSTR-3B or, where detected on reconciliation, through voluntary payment in Form GST DRC-03; interest under Section 50 runs on the wrongly availed and utilised amount, at the higher rate of 24% per annum where the credit was both availed and utilised, as against the standard rate otherwise applicable. Where the department detects the claim rather than the taxpayer, the matter typically proceeds by way of a notice under Section 73 (where the claim is regarded as an inadvertent or interpretational error) or Section 74 (where the department alleges fraud, wilful misstatement or suppression), with the accompanying penalty exposure discussed in the preceding article in this series. A pattern of blocked-credit claims flagged in an audit or in GSTR-9/9C reconciliation can also trigger action under Rule 86A, empowering the proper officer to block the electronic credit ledger to the extent of the credit considered ineligible where there is reason to believe it was fraudulently availed or is otherwise ineligible — a power exercised administratively, without prior notice, and consequently one of the more frequently challenged instruments in current GST litigation on grounds of want of recorded reasons or absence of application of mind.
The Construction Saga: Safari Retreats and its Legislative Reversal
The most consequential recent development under clauses (c) and (d) arose from the case of a taxpayer constructing a shopping mall intended for leasing rather than for its own occupation. The Odisha High Court, in 2019, had accepted the taxpayer’s contention that denial of credit under Section 17(5)(d) was unwarranted where the constructed property generated a fresh stream of GST-taxable rental income rather than being put to the taxpayer’s own non-taxable use. On appeal, the Supreme Court, in its judgment dated 3 October 2024, upheld the constitutional validity of Sections 17(5)(c), 17(5)(d) and 16(4), finding an intelligible classification with a rational nexus to the legislative object — but on the interpretive question, held that the word “plant” appearing in the bracketed exclusion “(other than plant or machinery)” in clause (d) need not be read as confined to the definition of “plant and machinery” in the Explanation to Section 17, which expressly excludes land, buildings and other civil structures. The Court accordingly directed that whether a mall, warehouse or other building (other than a hotel or cinema theatre) qualifies as a “plant” — and thereby escapes the block — is to be determined by a functionality test, applied on a case-by-case factual inquiry into the role the building plays in the particular taxpayer’s business. The Revenue’s review petition against this judgment was dismissed by the Supreme Court on 21 May 2025, leaving the functionality test formally intact.
The legislature’s response, however, arrived before the ink on that dismissal had dried. The 55th GST Council meeting had already recommended, and clause 119 of the Finance Bill, 2025 duly enacted, an amendment to Section 17(5)(d) replacing the phrase “plant or machinery” with “plant and machinery” — aligning the wording of clause (d) with clause (c) and with the Explanation’s definition, which excludes buildings and civil structures altogether. Critically, the amendment was made retrospective to 1 July 2017, the date GST itself commenced. The stated rationale was the elimination of interpretive ambiguity; the practical effect, as commentators have noted, is to overrule the substantive benefit of the Safari Retreats judgment retrospectively while leaving the Court’s separate finding on constitutional validity undisturbed. For a developer or lessor presently structuring a claim on functionality-test lines for construction undertaken at any point since 2017, the amendment now stands as the operative bar, and any claim inconsistent with it is likely to be met, and sustained, on the strength of the amended text rather than the judgment that inspired it. Whether a retrospective legislative amendment that removes the practical fruit of a judicial interpretation, without disturbing the interpretive method itself, is open to constitutional challenge on grounds of arbitrariness or of impermissibly legislating to overturn a judicial decision on the same facts, remains, at the time of writing, an open question that has not yet been authoritatively tested before the higher judiciary in this specific context.
The Telecom Tower Saga: A Contrasting Trajectory
A second, and more taxpayer-favourable, line of authority concerns whether telecom towers and associated passive infrastructure — shelters, diesel generator sets, battery banks, air-conditioning units — constitute “immovable property” for the purposes of Section 17(5)(d), or movable capital goods eligible for credit. The question has a long history: the Bombay High Court, in the Cenvat-credit era in 2014, had ruled against Bharti Airtel, holding that towers and shelters become immovable upon being fixed to the earth. The Delhi High Court took the contrary view in 2018 in relation to Vodafone. The Supreme Court resolved the conflict in the Cenvat context by applying tests of permanency, intendment, functionality and marketability, holding that towers and shelters remain movable because they can be dismantled and relocated without damage, and that their attachment to the earth serves only to stabilise the antenna’s function rather than to benefit the land itself. The Delhi High Court subsequently applied the same functionality-based reasoning to the GST regime, holding that since towers and shelters are movable, they fall outside the immovable-property exclusion in Section 17(5)(d) altogether.
That position was tested squarely when the Directorate General of GST Intelligence, Ghaziabad, issued a show cause notice to Indus Towers under Section 74 disallowing input tax credit on passive telecom infrastructure for financial years 2018 to 2024, aggregating approximately ₹5,454.6 crore — a notice the Delhi High Court quashed. The Revenue’s special leave petitions against that view were dismissed by the Supreme Court on 8th August 2025, and the Union’s review petitions against that dismissal were themselves dismissed on 19th August 2026 by a bench of Justices Vikram Nath and Prasanna B. Varale, the Court finding no error apparent on the face of the record. Unlike the construction saga, no legislative reversal has followed, and the industry now treats the position as settled: telecom towers and comparable dismantlable, relocatable infrastructure fall outside the immovable-property block, and credit already denied on this basis in past assessments is a live candidate for refund or rectification.
Legal Remedies Available to the Taxpayer
Where credit is denied on a Section 17(5) ground, the taxpayer’s remedies follow a familiar sequence, though the substance of the defence will differ sharply depending on which clause is invoked. Where the department relies on clause (d) in a construction context for a period after the Finance Act, 2025 amendment took retrospective effect, the functionality-test argument that succeeded in Safari Retreats is no longer available as a matter of the amended text, and the more productive line of defence — where the facts support it — lies in characterising the disputed asset as “plant and machinery” properly so called (equipment, machinery or apparatus fixed to earth by foundation for functional necessity, excluding land, buildings and civil structures) rather than as a building or civil structure in substance. Where the dispute concerns towers, transmission equipment or comparable installed but relocatable assets, the Bharti Airtel line of authority now provides strong, recently reaffirmed support, and a reply to notice should be built around contemporaneous engineering and design documentation establishing dismantlability and the functional (rather than structural) purpose of any foundation or fixing. In either case, the ordinary procedural remedies remain available: a reply in Form GST DRC-06 addressing the factual basis for the claimed exclusion, payment of any genuinely admitted portion to limit interest exposure, a request for personal hearing, appeal to the Appellate Authority under Section 107 within three months of an adverse order (subject to the 10% pre-deposit, capped at ₹20 crore for CGST and equally for SGST/IGST), and further appeal to the GST Appellate Tribunal under Section 112. Where the dispute turns on a pure question of statutory interpretation or the vires of a provision — as it did in Safari Retreats itself — a writ petition under Article 226 invoking the High Court’s jurisdiction may be the more appropriate route than working through the tiered appellate hierarchy, particularly where the assessing authority has no discretion to depart from a departmental circular or a retrospective amendment.
Concluding Observations
The two sagas traced in this article point to a broader lesson for practice: a favourable interpretive ruling under Section 17(5) is not, without more, a durable entitlement, since the same legislature that enacted the block retains the power to redefine its scope retrospectively where a judicial interpretation is found administratively unpalatable — as the construction industry has now learned at some cost. Where no such legislative response has followed a taxpayer-favourable ruling, as with telecom towers, the litigation risk correspondingly diminishes, and the recently concluded review proceedings in the Bharti Airtel matter should now be treated as settled law for materially similar passive infrastructure. Counsel advising on a Section 17(5) exposure would therefore be well served to identify, at the outset, which of these two trajectories the fact pattern more closely resembles, since the strength of the available defence — and indeed whether contemporaneous documentation of the asset’s functional and physical characteristics should be generated now, in anticipation of future scrutiny — turns substantially on that distinction.
References
- “Supreme Court’s Landmark Verdict in Safari Retreats Case: A Ray of Hope for Developers and Infrastructure Sectors,” ELP Law
- “SC rejects review plea in Safari Retreats case, upholds ITC for leasing,” Business Standard, 21 May 2025
- “Safari Saga: Finance Act 2025 Amends GST ITC Rules for Construction,” TaxGuru
- “SC dismisses Centre’s review plea in GST ITC case vs Airtel, Indus,” Business Standard, 19 August 2026
- Yogendra Aldak & Yatharth Tripathi, “Bharti Airtel Judgment: Analysis, Implications and Way Forward,” SCC Online Blog, 24 January 2025
- “Section 17(5) of CGST Act – Blocked Credit Under GST,” ClearTax
