Section 17(5) of the CGST Act: A Comprehensive Guide
GST (Goods and Services Tax) needs to be paid for a variety of transactions. The main advantage for businesses is the ability to claim input credit for GST paid. However, the circumstances under which GST cannot be claimed must be known by all enterprises. In this guide, you will learn in detail about Section 17(5) of the CGST Act, commonly referred to as the GST-blocked input credits. It is imperative that you comprehend this portion in great detail if you are a regular taxpayer. The blocked credit categories that prohibit input tax credit claims are described in this post.
Table of content
What is Section 17(5) of the CGST Act?
The CGST Act's Section 17(5) alludes to a particular GST provision that deals with blocked credits or ineligible ITC. Purchases covered in this clause cannot be made by the taxpayer and they cannot claim ITC while paying output tax. This clause lists 11 clauses wherein claims are not eligible for ITC. The provisions of Sections 16(1), "Availability of ITC in general when used for business," and 18(1), "ITC availability in special cases," are superseded by Section 17(5) of the CGST Act.
As per the most recent update in Budget 2024, the Government of India suggested modifying section 17(5) of the CGST Act. It pertains to block credits, and suggested the subsequent modifications.
Limit the blocking of input tax credits for taxes paid under Section 74 (fraud or deliberate misrepresentation or omission of facts) for claims made for the fiscal years 2023–2024.
Remove the references to sections 130 (Confiscation of goods or conveyances and imposition of punishment) and 129 (Detention, seizure, and release of goods and conveyances in transit).
When is Input Tax Credit Not Available?
We will now list the circumstances when the input tax credit cannot be availed of. These are listed as follows:
Transportation and Conveyance: Clauses (a), (aa), and (ab)
When using passenger transport vehicles such as:
Autorickshaws with three wheels
Automobiles with four wheels
Motorcycles or two-wheelers
Tempo travellers or buses with 13 seats or fewer
Any other vehicle utilised for transportation
Nonetheless, if the buyer is involved in any of the following businesses, they may still be eligible for an ITC claim when buying passenger transport vehicles:
Transportation services for passengers, taxis, buses, and leasing
Retail stores, factories, and showrooms for automobiles.
Driving institutes
Section 17(5) clause (a)
The GST paid on the acquisition of aircraft, ships, and boats is not eligible for an ITC claim. On the other hand, if the buyer is involved in any of the following companies, ITC may be claimed:
Ship, vessel, and aircraft resale
Has aviation and ship/vessel navigation training facilities.
Aircraft, cruise, boat rental, and passenger transportation services.
Services for the transportation of goods using tractors and trucks.
Section17(5) clause (aa)
Additionally, ITC cannot be used to pay for insurance purchases or maintenance costs for taxis, tempo travelers/mini buses, ships, watercraft, or aeroplanes. If the buyer is involved in any of the following businesses, ITC is permitted:
Exemptions from clauses (a) and (aa).
The producers of the vehicles mentioned above.
Insurance providers offering general insurance for the vehicles listed above.
Clause (b): Food, Catering, and Vehicle Rental
The following items cannot be bought with ITC:
The cost of meals, drinks, or catering while outside.
Costs associated with plastic surgery, aesthetic procedures, and medical services.
It is legal to rent or lease motor vehicles, aeroplanes, or boats.
Purchasing health and life insurance.
Ongoing costs associated with health and fitness centres or club memberships.
Costs associated with employee leave or reimbursement for travel to and from home on vacation.
Exceptions under clause (b)
It is possible to claim ITC in the following cases:
When selling the same products or services again as a composite or blended sale with other products.
When providing products and services to employees is required in order to comply with the law.
Clause (c) and (d) - Construction of Buildings
You cannot receive a tax credit for the GST you paid on job work expenditures or building construction costs, including materials, if you are registered for GST. This applies to both commercial and residential building expenses. Furthermore, even if the money is recognised as an asset, you are not eligible for a tax credit if you spend it on building repairs or renovations. On the other hand, you are still eligible to claim a tax credit for those expenses if you are a building business, constructor, or promoter selling these buildings after construction. Additionally, you can purchase or construct machinery and plants to receive a tax credit.
Clause (e) and (f): Non-resident and Composition
Composition taxpayers are restricted by Section 10. It prevents them from claiming Input Tax Credit (ITC) on purchases made using GST in consideration of their quarterly turnover tax payment. In addition, the CGST Act's Section 17(5) states that composition-taxable individuals are ineligible for the ITC regardless of whether they provide goods or services. Advance tax deposits are necessary for taxable individuals who are not residents. They are not able to claim Input Tax Credits (ITC) for any other domestic purchases. However, they can request ITC for Integrated GST (IGST) paid on imported items.
Clause (g): Personal Use
Products that are bought and utilised for personal use are not eligible for ITC claims. ITC is permitted on the value of products or services used for business purposes if the purchased goods are utilised partially for personal and partially for commercial purposes.
Clause (h): Lost and Free Sample
Items that are misplaced, pilfered, written off, harmed, or distributed as free presents are not eligible for ITC claims.
Clause (i) - Fraudulent ITC Claims
It is not possible to claim the Input Tax Credit (ITC) for the following:
Past records of underpayment or nonpayment of taxes.
Overpayment of tax refunds.
Illegal use or illegal acquisition of disproportionate Input Tax Credits; or
Wilfully falsifying, hiding information, or the seizing and confiscation of property.
Reporting of Section 17(5) in GSTR-3B
As per Section 17(5) of the CGST Act, each buyer or recipient is required to declare any previously claimed ineligible ITC that has been reversed when filing GSTR-3B for the relevant month or quarter. For the GSTR-3B's Table 4(B) to be reversed, you must disclose the irrelevant ITC value. As of July 5, 2022, Table 4(D) of the GSTR-3B will no longer need the reporting of ineligible ITC under Section 17(5) of the CGST Act. Reporting the ineligible ITC amount that needs to be changed in Table 4(B) is sufficient. Compare the list you identified from the books of accounts with the list of ineligible ITC provided on GSTR-2B. The ITC component should ideally be booked for purchases or expenses in the books of accounts, rather than being booked separately under ITC available for claims. You must reverse any ineligible ITC claimed after comparing books with GSTR-2B in GSTR-3B of the ensuing months or quarters with interest.
Implications of Section 17(5) of the CGST Act
For taxpayers, Section 17(5) of the CGST Act has important ramifications. The clause limits the circumstances under which input tax credits are available, which may raise the taxpayer's cost of production. Let us examine the ramifications of every scenario addressed in Section 17(5):
Products or services intended for individual use:
This limitation makes sure that input tax credits for items or services used for personal use are not claimed by taxpayers. Nonetheless, the clause permits taxpayers to claim input tax credits for products or services utilised for official functions as long as they are utilised for the advancement of business.
Items or services (apart from machines and plants) utilised in the building of real estate:
This limitation makes sure that products or services utilised in the building of the immovable property are not eligible for input tax credits. This is so that the input tax credit is not available since building immovable property is not regarded as a business activity.
Products or services utilised in the building of equipment, unless such equipment is being utilised to supply taxable goods or services:
This limitation makes sure that the construction of equipment and machinery utilised in the provision of taxable products and services is the only purpose for which input tax credit is available. This is so because building equipment and plants for non-taxable or personal use is not regarded as a business activity, and as a result, the input tax credit is not permitted.
Items or services that a taxable non-resident person receives:
This restriction makes sure that products or services received by a taxable person who is not a resident are not eligible for input tax credit. This is due to the fact that an input tax credit cannot be granted to a non-resident taxable person since they do not have a permanent establishment in India.
Products or services utilised in the scheme of composition:
This limitation guarantees that taxpayers covered by the composition scheme won't submit claims for input tax credits. This is so because the input tax credit is not permitted for taxpayers under the composition scheme, who pay tax at a fixed rate on their turnover.
Products or services used for non-business purposes:
This limitation makes sure that products or services used for personal use are not eligible for input tax credits by taxpayers. This covers things like personal entertainment and gifts for staff members.
Conclusion
The CGST Act's Section 17(5) places limitations on the circumstances in which input tax credits are available. This clause guarantees that input tax credit can only be claimed on products or services utilised for business and not for non-commercial or personal usage. To guarantee that the GST system is followed, taxpayers need to be aware of the ramifications of Section 17(5).
FAQ
Q1. What is ITC reversal in section 17(5)?
Reversing such an input tax credit is necessary if the taxpayer requests it for the products or services specified in section 17(5) of the GST Act.
Q2. When is ITC not available under Section 17(5)?
If products are utilised for personal use and are misplaced, stolen, destroyed, given away as presents or free samples, or used for any other purpose outside business, ITC is not applicable under Section 17(5).
Q3. What does blocked credit mean?
Under the Goods and Services Tax (GST) regime, an input tax credit that is blocked is one that a taxpayer is not permitted to claim. The tax paid on inputs, or the items and services utilised in the course of business, is known as an input tax credit. Also, it can be deducted from the taxpayer's output tax burden.
Q4. What is blocked ITC in GST 17(5)?
Blocked Input Tax Credit (ITC) is the term used to describe input tax credits for specific goods and services that a registered taxpayer is not able to claim under the Goods and Services Tax (GST) in India. Businesses can utilise the input tax credit method to obtain credit for the GST they pay on purchases, which they can use to reduce the GST burden on sales.
Q5. How do you check for blocked credit in GST?
You need to make sure the blocked credit in GST does not belong to any of the categories listed in Section 17(5) of CGST before checking it.
Q6. Where to get the list of ineligible ITC u/s 17(5) of the CGST Act?
According to Section 17(5) of the CGST Act, taxpayers can view a list of their purchases made during a tax period on which ITC is not available by logging into GSTR-2B or the "Auto-drafted ITC Statement." The GSTR-2B statement contains details on the ITC that is eligible and ineligible. Go to the return dashboard after logging into the GST portal. Choose the appropriate year and month. For more information, refer to the instructions provided in our GSTR-2B access guide. GSTR-2B contains the details that you can view and download.
Q7. Can we claim ITC on Travelling expenses?
Travel-related ITC can only be claimed if the trip was undertaken for business purposes. In other words, if the trip is being taken for personal reasons, you are not eligible to claim ITC.
Q8. Can I claim ITC on goods that are given as gifts?
According to Section 17(5) of the CGST Act, products that are given away as gifts or free samples are not eligible for ITC claims.
Q9. Can ITC be claimed on goods used for personal consumption?
According to Section 17(5) of the CGST Act, ITC cannot be claimed on products used for personal consumption.
Q10. Is there any exception to the provisions of Section 17(5)?
No, the CGST Act's Section 17(5) does not include any exceptions.
Q11. Can ITC be claimed on goods used for business purposes but sold as scrap later?
Yes, as long as the sale of scrap attracts GST and the relevant tax is paid, it is possible to claim input tax credits (ITC) on goods utilised for business purposes but later sold as scrap.
Q12. What is ineligible ITC as per section 17(5)?
Certain purchases are not eligible for Input Tax Credits (ITC) under the GST, according to Section 17(5) of the CGST Act. It includes a number of categories, including transportation, catering, building construction, composition, private usage, misplaced products, and false claims.
Q13. What is the Rule 38 of CGST?
In accordance with CGST Rule 38, a financial institution or banking company, including an NBFC (non-banking financial company), that provides services by accepting deposits or making advances or loans that do not adhere to Section 17(2) rules must reverse half of the input tax credit that was claimed on Form GSTR 3B.
Q14. What are the Rules 42 and 43 of CGST?
Input tax credits that are claimed when a supply is utilised partially for personal and partially for business purposes are subject to Rules 42 and 43. The claimed input tax must be revoked and declared void.
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