1. Sec 17 of CGST Act 2017 and CGST Rules made thereunder provide for detailed provisions on Apportioned of Credit and Blocked Credits. It deals with the different situations that may arise for making admissible partial credits, a list of ineligible Input Tax Credit and more.

2. Business & Non-Business Purposes – Sec 17(1) of CGST Act: Where the goods and/ or services are used by the registered taxable person partly for his business and partly for other purposes, the amount of input tax credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

2.1 Example: Mr. X, a Chartered Accountant, purchased stationary amounting to Rs 5000 and paid GST of Rs 900/- on it. He used 30% of the stationary items for his child’s studies and 70% used in his office for business purposes. The amount of Input Tax Credit will be restricted to Rs 630 ( 900*70%) as attributable to the purpose of his business/profession.

3. Taxable & Exempted Supplies – Sec 17(2) of CGST Act: Where the goods and/or services are used by the registered person partly for effecting taxable supplies including zero-rated supplies under CGST or IGST Act and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero-rated supplies.

3.1 Taxable supply means a supply of goods or services or both which is leviable to tax under the CGST Act.

3.2 Zero rated supply means export of goods and / or services and supplies of goods or /and services to SEZ unit or SEZ developer – section 16(1) of IGST Act.

3.3 Input tax credit may be availed for making zero-rated supplies, even if such supply is exempted supply – section 16(2) of IGST Act.

3.4 Exempt supply” means the supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11 of the CGST Act or section 6 of IGST Act, and includes non-taxable supply – section 2(47) of CGST Act.

3.5 ‘Non-taxable supply’ means a supply of goods or services or both, which is not leviable to tax under the CGST Act or IGST Act – section 2(78) of the CGST Act.

3.6 Example: Mr. X is a registered person. The details of Input Tax Credit and supplies made for May 2020 are as follows:-

Sl Description Amount ( in Rs)
(a) Input Tax Credit 1,00,000
(b) Taxable supplies 6,00,000
(c) Exports & supplies to SEZ 3,00,000
(d) Nontaxable supplies ( alcohol for human consumption ) 60,000
(e) Nil Rated Tax ( Jiggery etc) 30,000
(f) Exempted Supplies ( fresh fruits ) 10,000

The amount of credit restricted to an amount equal to – Input Tax Credit * taxable supply ( including Zero rated) / total supplies = [ 1,00,000*(6,00,000+3,00,000)/10,00,000] = Rs 90000

3.7 The example above is for input tax credit attributable to exclusive taxable or exempted supplies. There is a concept of common credit where input or input services are used for both the taxable & exempted supplies. In that case, proportionate common credit attributable to exempted supplies is required to be reversed. Rule 42 of CGST Rules prescribes the manner of calculation for reversal of Input Tax Credit. The same has been explained vide article Reversal of Input Tax Credit (ITC) For Input & Input Services dated 04.05.2020

4. Exempt Supplies need to be reversed – Section 17(3) of the CGST Act: Reversal of input tax credit is required where input and input service is used for making exempt supplies. As per section 17(3) of CGST Act, the value of exempt supply shall include followings –

(a) Supply where GST is payable on reverse charge basis – The supplier need to reverse input tax credit as he is not liable to pay tax on outward supplies ( tax is payable by the recipient of such supplies)

(b) Transactions in Securities – Securities’ have been explicitly excluded from the purview of GST, by virtue of its exclusion from the definition of ‘goods’ and ‘services,’ as contained in Section 2(52) and Section 2(102) of the CGST Act respectively

(c) Sale of land & Building: Sale of land and building (except when sold before completion certificate), is neither supply of service, nor supply of goods, as per Schedule III of CGST Act.

Explanation.— For this sub-section, the expression ‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule.

Explanation to sec 17(3) specifically mentioned that transactions specified in Schedule III should not be considered for reversal EXCEPT those specified in Paragraph 5 of the said schedule and Para 5 of schedule III pertains to the sale of land or sale of the building after completion certificate is obtained.

Thus, Proportionate ITC attributable to the sale of land and building after completion certificate is required to be reversed

Detailed analysis and manner of ITC Reversal in case of Real Estate Service are discussed vide article Real Estate Services – ITC Reversal date 06.05.2020.

5. Reversal is not required: For section 17(3) of CGST Act (proportionate reversal of ITC when the taxable person is making both taxable and exempt supply), the expression “value of exempt supply” shall not include the followings:-

(a) Construction of complex( building) where supply is made before obtaining completion certificate. [This exception has been made as, in fact, GST is payable, and hence it is not ‘exempt supply’].

(b) Value of activities or transactions specified in Schedule III of the CGST Act, except those specified in paragraph 5 of the said Schedule.

(c) Schedule III of CGST Act specifies transactions or activities which shall be treated neither as supply of goods nor supply of services… Thus inputs or input services used for making supplies specified in Schedule III need not reversed.

6. Special provisions in respect of Banks, FI, and NBFC – Sec 17(4) of CGST Act: A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2) of CGST Act or avail of, every month, an amount equal to fifty percent of the eligible input tax credit on inputs, capital goods and input services in that month – section 17(4) of CGST Act.

6.1 The option, once exercised, shall not be withdrawn during the remaining part of the financial year – first proviso to section 17(4) of the CGST Act.

6.2 The 50% restriction shall not apply to the tax paid on supplies made by one registered person to another registered person having the same PAN number – second proviso to section 17(4) of the CGST Act. This provision applies when Bank/FI/NBFC in one State provides services (or supplies goods) to its branch in another State.

6.3 In most cases, Bank, FI or NBFC, may find it easy and profitable to avail 50% of an input tax credit instead of availing input tax credit on a proportionate basis as per section 17(2) of CGST Act.

7. Ineligible (Blocked) Credit – Sec 17(5) of CGST Act 2017: Section 17(5) of the CGST Act 2017 specifies certain Goods and Services as Blocked Credit. Detailed analysis and sub-section-wise list of goods and services under blocked credit are discussed vide article Ineligible Input Tax (Blocked) Credit under GST dated 19.04.2020.

8. The Government may prescribe how the credit referred to in sub-section (1) and (2) of Sec 17 may be attributed – Sec 17(6) of CGST Act 2017

9. In view of the Covid-19 outbreak, the Union Government has invoked its powers under the Epidemic Diseases Act, 1897 (EDA) and Disaster Management Act 2005 (DMA). Guidelines and orders have been issued periodically by the Ministry of Home Affairs (MHA) under provisions of DMA.

Businesses need to incurred expenditure for implementing standard operating procedures (SOP) issued by MHA. The nature of such expenditures is broadly classified as Mediclaim insurance; Cab hires for transportation of employees from home to work and vice versa, canteen facilities, expenditure incurred for sanitizer etc . The question arises whether the business can avail Input Tax Credit (ITC) on these expenditure as in normal condition, most of these expenditure falls under blocked credit under sec 17(5).

As per provision to Sec 17(5) of the CGST Act, input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. In view of the above, it can be concluded that the expenditure incurred by the employer to provide face masks, hand wash, sanitization of the workplace, etc. is mandatory for conducting business in today’s scenario. The subject expenses are indeed incurred in the course of business and it is not a ‘personal’ consumption of employee. Hence, ITC should be allowed.

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Part 11 of the series will cover the topic “Availability of Credit in Special Circumstances under sec 18 of CGST Act 2017.

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