Summary: Input Tax Credit (ITC) is an important feature of the Goods and Services Tax (GST) system, but credit is not available for every purchase on which GST has been paid. Section 16 of the CGST Act, 2017 prescribes the general eligibility conditions, while Section 17(5) specifically restricts credit on certain goods and services. These restrictions are commonly referred to as blocked ITC. The principal categories include specified motor vehicles, food and catering services, insurance and employee benefits, works contract services, construction of immovable property, CSR expenditure, personal consumption, lost or destroyed goods, gifts and free samples. However, several restrictions contain statutory exceptions. Consequently, eligibility depends on the nature of the inward supply, its actual use, the taxpayer’s business activities and the applicable statutory conditions. Construction-related ITC requires particular attention following the retrospective amendment to Section 17(5)(d) through the Finance Act, 2025, which substituted the expression “plant or machinery” with “plant and machinery” with effect from 1 July 2017. Businesses must consider this amendment while evaluating construction-related credit claims. Taxpayers should examine invoices, supporting documents, the business purpose of expenditure and the relevant statutory restrictions before availing ITC. Proper classification, reconciliation and documentation can help prevent incorrect claims, subsequent reversals, interest, penalties and avoidable GST disputes.
Introduction
Input Tax Credit (ITC) is an important part of GST. A registered person pays GST on purchases and, subject to the conditions of the Act, can claim credit of that tax against his output tax liability. However, every GST amount paid on a purchase cannot be claimed as ITC.
Section 16 of the CGST Act, 2017 provides the general conditions for claiming credit. Section 17(5) puts restrictions on certain goods and services. These restrictions are commonly known as blocked credit.
In GST work, it is important to check the nature of the purchase and its actual use before claiming ITC. Merely having a tax invoice and making payment to the supplier does not mean that credit is automatically available.
1. Motor Vehicles
Section 17(5)(a) restricts ITC on motor vehicles used for transportation of persons where the approved seating capacity is not more than thirteen persons, including the driver. The restriction does not apply in the specified cases, such as further supply of those vehicles, transportation of passengers and imparting driving training.
For example, if a trader purchases a car for the personal use of the proprietor, the ITC cannot ordinarily be claimed. However, where a motor vehicle is purchased by a dealer for further taxable sale, the position is different, subject to the applicable conditions.
Therefore, the nature of the business and the use of the vehicle must be checked before deciding the eligibility of credit.
2. Food, Insurance and Employee Expenses
Section 17(5)(b) covers specified expenses such as food and beverages, outdoor catering, beauty treatment, health services, membership of clubs and health and fitness centres, life insurance and health insurance, subject to the statutory exceptions.
Many businesses provide food facilities, insurance or other benefits to employees. The question of ITC should be decided by examining the particular expense and the exceptions provided in the law.
The section permits credit in specified circumstances, including where the inward supply is used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply. It also contains an exception for specified goods or services that an employer is legally required to provide to employees.
It is not correct to treat every employee-related expense in the same manner. The relevant clause and its conditions must be examined.
3. Works Contract and Construction
Construction-related ITC is another important area of dispute. Section 17(5)(c) restricts credit on works contract services supplied for construction of immovable property, other than plant and machinery, except where the service is an input service for further supply of works contract service.
Section 17(5)(d) deals with goods or services received for construction of immovable property on the taxpayer’s own account, including where the property is used in the course or furtherance of business. The statutory exception for plant and machinery is important.
For example, a company constructing its own office building cannot claim ITC merely because the building is used for business. The legal treatment of plant and machinery must be examined separately under the definition and explanation contained in the Act.
The law also explains what is included in construction and contains exclusions from the definition of plant and machinery. Therefore, the nature of the property, the work undertaken and the relevant statutory wording must be considered.
Retrospective Amendment to Section 17(5)(d)
The Finance Act, 2025 retrospectively substituted “plant or machinery” with “plant and machinery” in Section 17(5)(d), with effect from 1 July 2017. Accordingly, construction-related ITC claims must be examined under the amended statutory wording, including the exclusions applicable to buildings and civil structures.
4. Other Blocked Credits
Section 17(5) also covers certain other situations.
- Composition scheme: Clause (e) blocks ITC on goods or services on which tax has been paid under Section 10.
- Non-resident taxable person: Clause (f) restricts credit on goods or services received by a non-resident taxable person, except on imported goods.
- Corporate Social Responsibility: Clause (fa) blocks credit on goods or services used or intended to be used for activities relating to CSR obligations under Section 135 of the Companies Act, 2013.
- Personal consumption: Clause (g) blocks credit on goods or services used for personal consumption.
- Lost goods and gifts: Clause (h) covers goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
- Specified earlier tax payments: Clause (i) addresses tax paid under Section 74 in respect of periods up to Financial Year 2023-2024.
These provisions show why the purpose and actual use of a purchase are important while examining ITC eligibility.
5. What Should a Taxpayer Check?
Before claiming ITC, a taxpayer should check the invoice, the nature of the goods or services, their use in business and the relevant restrictions under Section 17(5). The accounts department should also maintain proper records so that the reason for claiming credit can be explained if the department raises a query.
If ITC is disputed, the relevant facts and the applicable clause should be examined instead of deciding the matter only on the basis of the description appearing in the invoice.
Conclusion
Section 17(5) is an important provision because it places restrictions on ITC even where GST has been paid on a purchase. Every case must be examined according to the nature of the goods or services and the actual provisions applicable to it.
In my view, proper checking at the time of claiming credit can help taxpayers avoid unnecessary disputes. Tax professionals should explain these restrictions to their clients and ensure that credit is claimed only where the law permits it. Correct compliance is better than claiming credit first and facing a demand later.
