Summary: The 57th GST Council Meeting held on 8 October 2026 recommended significant rationalisation of blocked Input Tax Credit (ITC) under Section 17(5) of the Central Goods and Services Tax Act, 2017. The proposed reforms seek to remove restrictions on ITC relating to outdoor catering, health and life insurance, telecommunication towers, pipelines laid outside factory premises, free samples, and goods destroyed or written off upon expiry of shelf life where required by law. Under the existing framework, these expenditures are subject to specific restrictions despite their potential connection with business activities, resulting in additional costs, cascading of taxes and litigation. The proposed relaxation is expected to benefit employers, manufacturers, telecom operators, pharmaceutical companies, FMCG businesses and other industries. The recommendations also contemplate limited same-line-of-business ITC relief for specified services and expansion of refund eligibility for accumulated credit on input services and capital goods. However, the GST Council’s recommendations are not self-executing. The proposed changes will become enforceable only upon the necessary statutory amendments and commencement provisions. Until then, the existing restrictions under Section 17(5) continue to govern credit eligibility. Taxpayers must distinguish the present legal position from the recommended framework, preserve supporting documents, monitor implementing legislation and avoid claiming additional ITC solely on the strength of the Council’s announcement. The article compares the existing provisions with the recommended changes and examines their practical implications for businesses.
Article On Rationalization of Blocked Credit Under Section 17(5) of CGST Act, 2017 – Before Vs After 57Th GST Council Meeting
- 1. Introduction and Statutory Scheme
- 2. Recommendation of 57th GST Council Meeting Held on 8th October, 2026
- 3. Category Wise Analysis – Before vs After
- i) Outdoor Catering – Section 17(5)(b)(i)
- ii) Health and Life Insurance – Section 17(5)(b)(iv))
- iii) Telecommunication Towers – Section 17(5)(d)
- iv) Pipelines Laid Outside Factory Premises – Section 17(5)(c) & (d)
- v) Free Samples – Section 17(5)(h)
- vi) Goods Destroyed / Written off due to Expiry of Shelf Life – Section 17(5)(h)
- 4. Legal Effect and Advisory
- 5. Conclusion
1. Introduction and Statutory Scheme
Section 17(5) of the Central Goods and Services Tax Act, 2017 is a non-obstante provision which begins with the expression “Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18”. It enumerates specific categories of goods and services where Input Tax Credit shall not be available, even though such goods or services are used in the course or furtherance of business.
The legislative intent was to block credit which is in nature of personal consumption or where there is high risk of evasion. However, over a period of 9 years, this provision became a major reason for cascading of taxes and litigation, particularly for employee welfare costs and industrial infrastructure.
2. Recommendation of 57th GST Council Meeting Held on 8th October, 2026
In the 57th GST Council Meeting chaired by Hon’ble Union Finance Minister at Bharat Mandapam, New Delhi, the Council has recommended wide ranging reforms to ensure seamless flow of ITC and to unlock working capital.
One of the most significant recommendations is Rationalization of blocked ITC by amendment in Section 17(5) of the CGST Act, 2017 to remove restrictions on availment of ITC inter-alia on certain supplies.
The categories identified by the Council are:
- Outdoor catering
- Health insurance and life insurance
- Telecommunication towers
- Pipelines laid outside factory premises
- Free samples
- Goods destroyed or written off on expiry of shelf life as required by law.
It is pertinent to note that the Council has only recommended the amendment. The same shall become operative only upon amendment of the Act through Finance Act / Ordinance and notification of effective date and relevant CGST Rules. Till such time, the existing provision continues to operate. Taxpayers are advised not to start claiming credit merely on basis of press release.
3. Category Wise Analysis – Before vs After
i) Outdoor Catering – Section 17(5)(b)(i)
Before (Existing Position): ITC on food and beverage, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery was blocked, except where same line of business or where it is obligatory for employer under any law. Therefore companies providing canteen facility to employees could not avail ITC, leading to cost increase.
After (Recommended Position): Restriction is recommended to be removed. ITC on outdoor catering shall be allowed. Further, Council has also recommended limited ITC in same line of business for restaurant and outdoor catering services, thereby bringing parity with passenger transport and motor vehicle renting services.
ii) Health and Life Insurance – Section 17(5)(b)(iv))
Before (Existing Position): ITC blocked on life insurance and health insurance to the extent it is not obligatory under any law. Employers providing group mediclaim, group term life, personal accident cover as staff welfare were denied credit, despite Supreme Court observation in some cases that it is part of employee cost.
After (Recommended Position): The Council recommended to remove blockage on health and life insurance. This will be a big relief for employers and will reduce cost of employee benefits and improve ease of doing business.
iii) Telecommunication Towers – Section 17(5)(d)
Before (Existing Position): Clause (d) blocks ITC on goods or services for construction of immovable property (other than plant and machinery). Department considered telecom towers as immovable property and denied ITC. This led to huge litigation for telecom operators.
After (Recommended Position): ITC on telecommunication towers is recommended to be allowed. This recognizes that towers are in nature of plant and machinery and essential infrastructure for providing taxable telecom services.
iv) Pipelines Laid Outside Factory Premises – Section 17(5)(c) & (d)
Before (Existing Position): ITC on pipelines laid outside factory for transportation of goods was denied on ground that it is construction of immovable property and not plant and machinery. Industries like oil and gas, chemicals, sugar had huge blocked credit.
After (Recommended Position): Council has recommended to allow ITC on pipelines laid outside factory premises. This will ensure seamless credit for manufacturing sector where supply chain requires external pipelines.
v) Free Samples – Section 17(5)(h)
Before (Existing Position): Section 17(5)(h) blocks ITC on goods disposed of by way of gift or free samples. Pharmaceutical, FMCG, consumer goods companies distributing free samples for marketing were required to reverse ITC, increasing marketing cost.
After (Recommended Position): Blockage on free samples is recommended to be removed. This aligns with commercial reality that free samples are not gift but business promotion to further taxable supply.
vi) Goods Destroyed / Written off due to Expiry of Shelf Life – Section 17(5)(h)
Before (Existing Position): ITC was required to be reversed where goods were destroyed, lost, damaged or written off, including due to expiry. This caused hardship in pharma and food industry where expiry destruction is legally mandated under Drugs and Cosmetics Act or FSSAI.
After (Recommended Position): Council has recommended to allow ITC where goods are destroyed or written off on expiry of shelf life, as required by law. It is clarified that this is narrower and does not cover every destruction, but only where law mandates destruction on expiry. This is a balanced approach to prevent misuse but allow genuine cases.
4. Legal Effect and Advisory
The above rationalization is intended to reduce cascading of taxes and ensure smoother flow of ITC across supply chain.
However, from legal standpoint:
a. The recommendation is subject to legal amendments and effective date. Until notification, existing Section 17(5) continues.
b. For past period, taxpayers who have already reversed credit cannot automatically re-avail without specific retrospective amendment.
c. Separate safeguards are expected via circular to prevent misuse.
d. In addition to this, Council has also recommended refund of accumulated ITC on input services w.e.f 01.11.2026 and on capital goods spread over 60 months w.e.f 01.04.2027, and same line of business relaxation for hotel accommodation upto Rs. 7,500 and gym services.
5. Conclusion
The recommendations of 57th GST Council under Section 17(5) mark a watershed moment shifting from restrictive to trust-based taxation. By allowing ITC on outdoor catering, health and life insurance, telecom towers, pipelines outside factory, free samples and legally mandated expiry destruction, the Council has acknowledged ground realities of modern business.
Once notified, this will significantly reduce litigation, lower cost of doing business, and fulfil the core objective of GST i.e., seamless credit flow and avoidance of cascading effect. Taxpayers are advised to wait for Finance Bill amendment via notification and maintain proper documentation to substantiate eligibility when law comes into force.
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Disclaimer: This article is for informational purposes only and does not constitute legal advice. Stakeholders should refer to the official GSTN Advisory and consult their tax advisor for specific situations.
