Input Tax Credit under GST: Section 17 – Apportionment & Blocked Credits

In-Depth Analysis of Input Tax Credit under the GST Act: Section 17 – Apportionment of Credit and Blocked Credits

Section 17 of the GST Act details conditions for Input Tax Credit (ITC) apportionment and specifies ‘blocked credits’ where ITC cannot be claimed. When goods or services are used partly for business and partly for non-business purposes, ITC is limited to the business portion. Similarly, for supplies used for both taxable (including zero-rated) and exempt purposes, ITC is restricted to the taxable and zero-rated portion. The value of exempt supplies for this calculation includes reverse charge supplies, securities transactions, and sales of land or building, but generally excludes activities listed in Schedule III. Banking companies and NBFCs have an option: either follow the general apportionment rules or claim a flat 50% of eligible ITC monthly, with the remainder lapsing, an option that cannot be changed during the financial year and doesn’t apply to inter-branch transfers with the same PAN. Furthermore, Section 17(5) specifically blocks ITC on certain items, including most motor vehicles, vessels, and aircraft (unless used for further supply, passenger transport, or training), along with their related insurance, servicing, and repairs. ITC is also disallowed for food and beverages, outdoor catering, beauty treatments, health services, club memberships, and employee travel benefits (unless legally mandated). Works contract services for immovable property (excluding plant/machinery) and goods/services used for self-construction of immovable property are also blocked. Additionally, ITC is unavailable for goods/services under the Composition Scheme, those received by non-resident taxable persons (except imports), goods/services used for Corporate Social Responsibility (CSR), personal consumption, or items lost, stolen, destroyed, written off, gifted, or provided as free samples. Tax paid under Section 74 for periods up to FY 2023-24 is also a blocked credit.

Sub-section (1): Business and Non-Business Use

When goods or services are used partly for business and partly for other purposes, ITC shall be restricted to the portion attributable to business use only.

Sub-section (2): Taxable vs Exempt Supplies

When goods or services are used:

√ Partly for taxable supplies (including zero-rated supplies), and

√ Partly for exempt supplies under CGST or IGST Acts,

Then, ITC shall be restricted to the portion used for taxable and zero-rated supplies.

Sub-section (3): Value of Exempt Supplies

The value of exempt supplies for apportionment under sub-section (2) shall be as prescribed, and shall include:

√ Supplies on which the recipient pays tax under reverse charge,

√ Transactions in securities,

√ Sale of land, and

√ Sale of building, subject to clause (b) of para 5 of Schedule II.

Explanation to Sub-section (3):

The value of exempt supply shall not include activities listed in Schedule III, except:

√ (i) Activities under para 5 of Schedule III, and

√ (ii) Activities as may be prescribed under clause (a) of para 8 of Schedule III.

Sub-section (4): Option for Banks and NBFCs

A banking company, financial institution, or NBFC providing services like deposits, loans, or advances may:

√ Either comply with sub-section (2), or

√ Claim 50% of the eligible ITC each month on inputs, capital goods, and input services. The rest shall lapse.

Provisos:

√ Once this option is exercised, it cannot be withdrawn during the financial year.

√ The 50% restriction does not apply to inter-branch supplies between registered persons having the same PAN.

Sub-section (5): Blocked Credits

Notwithstanding Section 16(1) and 18(1), no ITC is allowed on the following:

Clause (a): Motor Vehicles

Motor vehicles (seating ≤ 13 including driver), except when used for:

√ Further supply of such vehicles,

√ Transportation of passengers,

√ Training on driving such vehicles.

Clause (aa): Vessels and Aircraft

Vessels and aircraft, except when used for:

(i) Taxable supplies such as:

(A) Further supply of vessels or aircraft,

(B) Passenger transport,

(C) Navigation or flying training.

(ii) Transportation of goods.

Clause (ab): Insurance & Repairs for Vehicles/Vessels/Aircraft

General insurance, servicing, repair & maintenance of the vehicles/vessels/aircraft in (a) and (aa), except when:

(i) Used as per (a)/(aa),

(ii) Received by a person:

(I) Manufacturing such vehicles/vessels/aircraft,

(II) Supplying insurance services for such vehicles/vessels/aircraft.

Clause (b): Specified Goods/Services

The following goods/services, except when used for outward supply of same category or as part of a taxable composite/mixed supply:

(i) Food & beverages, outdoor catering, beauty treatment, health services, cosmetic/plastic surgery, leasing/hiring of motor vehicles, vessels, aircraft (as per a/aa), life/health insurance.

(ii) Membership of clubs, health & fitness centres.

(iii) Travel benefits to employees on vacation (e.g., LTC, home travel).

Exception: Allowed if employer is legally obligated to provide under any law.

Clause (c): Works Contract Services

ITC on works contract services for construction of immovable property (excluding plant/machinery), except where it’s an input for further works contract service.

Clause (d): Construction on Own Account

ITC on goods/services used for construction of immovable property on own account, even if used for business.

Explanation: “Construction” includes:

√ Reconstruction,

√ Renovation,

√ Additions/alterations,

√ Repairs (if capitalized).

Clause (e): Composition Scheme

ITC on goods/services taxed under Section 10 (Composition Scheme).

Clause (f): Non-Resident Taxable Person

ITC on goods/services received by non-resident taxable person, except imports.

Clause (fa): CSR Activities

ITC on goods/services used for Corporate Social Responsibility (CSR) obligations under Section 135 of the Companies Act, 2013.

Clause (g): Personal Consumption

ITC on goods/services used for personal consumption.

Clause (h): Lost, Stolen, Gifted, or Sampled Goods

ITC on goods that are:

√ Lost,

√ Stolen,

√ Destroyed,

√ Written off,

√ Given as gifts or free samples.

Clause (i): Tax Paid under Section 74

ITC of tax paid under Section 74 for any period up to FY 2023–24.

Sub-section (6): Attribution Rules

The Government may prescribe the manner in which credit under sub-sections (1) and (2) is to be attributed to business/exempt use.

Explanation – Definition of Plant and Machinery

“Plant and Machinery” includes:

√ Apparatus, equipment, and machinery fixed to earth via foundation or structural support,

√ Used for outward supply of goods/services.

Excludes:

√ Land and buildings or other civil structures,

√ Telecom towers,

√ Pipelines laid outside factory premises.

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