Blocked Input Tax Credits (ITC) in GST: Key Restrictions and Exceptions

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Businesses are generally eligible to claim Input Tax Credits for the goods and services they use in their day-to-day operations. However, there are certain circumstances as per Section 17 of the CGST Act where the availability of ITC is restricted. These credits are categorised as blocked credits.

  1. Business and personal use: When goods or services are utilized both for business purposes and personal purposes then businesses are eligible to only claim ITC in respect of the portion used for their business.
  2. Inputs used for Taxable and Exempt Supplies: In cases where goods or services are utilized for both taxable supplies and exempt supplies, Input tax credit will only be available for those inputs which are used in the sale of Taxable supplies. Taxable supplies will include Zero rated supplies. Zero rated supplies means Export of Goods/Services or Supplies made to Special Economic Zones.
  3. ITC Eligibility for Banks and Financial Institutions: Banks and Financial Institutions engaged in accepting deposits and providing Loans and Advances have two options for Claiming ITC.
    1. Either avail ITC as per mechanism mentioned in point no 2 above or
    2. Claim only 50% of the eligible ITC.

The restriction of claiming only 50% of ITC is not applicable on transactions    between the different branches of the same entity.

  1. Motor Vehicles: ITC is not available for Motor Vehicles for transportation of persons with a seating capacity of up to 13 persons, including the driver. However, if the Motor Vehicle is used for the following purposes ITC can be availed.
    1. Further supply of Motor Vehicle;
    2. Transporting Passengers e.g. Using the Vehicle as a Taxi;
    3. Vehicles used in providing training.

There is no restriction on claiming ITC for motor vehicles with a seating capacity of more than 13 passengers. E.g. When you Travel by Ola / Uber cab services the GST charged by them cannot be claimed as ITC.

  1. Vessels and Aircraft: Similar to ITC on motor vehicles with seating capacity of up to 13 persons, Input Tax Credits (ITC) for vessels and aircraft is not permitted. ITC is blocked for Vessels and Aircrafts irrespective of Seating Capacity.However, if the Vessel or Aircraft is used for following purposes ITC can be availed.
    1. Purchased for the purpose of resale;
    2. used for Passenger transportation;
    3. used for providing Training for operation of Vessels or Aircraft
    4. used for transporting goods.
  2. Any Expenses incurred towards Insurance, Repairs & Maintenance, or Renting of Motor Vehicles, Aircrafts and Vessels also fall under Block Credits.
  3. ITC is not available for following specified services
    1. Food and beverages;
    2. Outdoor catering;
    3. Beauty treatment;
    4. Health services;
    5. Cosmetic and plastic surgery;
    6. renting or hiring of motor vehicles, vessels or aircraft (except for purposes as specified in exceptions of Point 4 and 5 above);
    7. Life insurance and health insurance;
    8. Membership of a club, health and fitness centre (ITC not available without any exceptions)
    9. Travel benefits to employees such as Leave Travel Concession. However, If the Employer is mandatorily required to provide certain benefits under any law, then the ITC can be claimed for the same.
  4. If the services mentioned at point no 7a to 7g are used for providing services of the same category or as a part of Mixed or Composite Supply then ITC is eligible to be claimed.
  5. ITC on Works Contract services for construction of immovable property excluding Plant and Machinery, except if the same are used for further supply of works contract services.
  6. ITC cannot be claimed on
    1. Goods lost/destroyed
    2. Distributed as free samples or gifts;
    3. Goods written off
  7. Goods or services on which tax has been paid under composition Actually, under the composition Scheme no tax cannot be collected by the supplier from the purchaser and hence the question of claiming ITC doesn’t arise. Similarly, any supplier who opts for composition Scheme for supply of goods or services then they are not eligible to claim any Input Tax Credit on Goods or Services used for making supplies.
  8. ITC can’t be claimed on goods received by a non-resident taxable person except on goods imported by him;
  9. No ITC is allowed for any goods and services used for personal purposes.
  10. W.e.f. 1st October 2023 CBIC vide Notification No 28/2023 dated 31st July 2023 has notified that any Expenditure incurred by a company as a part of CSR initiative will be classified as Blocked credits.

It is pertinent for businessmen to keep a check on the ITC which falls under block credits as defined in Section 17 of CGST Act. Though, these credits may appear in your GSTR-2B but for correct compliance under GST the onus lies on the businessman to not claim these ITC as they may end up paying additional interest and penalties for wrong claim of ITC.
As an exception to this rule as explained above, when goods or services are used for the primary purpose of selling or providing goods and services within the same category, ITC for these specific goods and services will still be allowable, despite restrictions imposed as per 17 of the CGST Act.

Input Tax Credit (ITC) Provisions in GSTR-5, Input tax credit (ITC) distribution and utilisation in GSTR-6, Input Tax Credit (ITC) Provisions in GSTR-4

author avatar
CA Abhishek D Mundhra Chartered Accountant
Abhishek D Mundhra is a Chartered Accountant with 12+ years of post-qualification experience with expertise in the field of GST and other Direct and Indirect Taxes.

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