The concept of Blocked Credit under GST refers to certain Input Tax Credit (ITC) that a registered person is not allowed to claim, even if the goods or services are used in the course or furtherance of business.
This restriction is governed by Section 17(5 of the CGST Act, 2017). The section overrides general ITC eligibility provisions and clearly lists items on which ITC is blocked under GST.
The main reason for blocking credit on these items is to prevent the misuse of ITC for personal consumption, to control the tax base, and because some of these supplies are considered to have a strong element of personal or dual (business and personal) use.
Here are the major categories of blocked credit with examples:
1. Motor Vehicles, Vessels, and Aircraft (Section 17(5)(a) and (aa))
General Rule: ITC is blocked on motor vehicles for the transportation of persons having a seating capacity of not more than thirteen persons (including the driver), vessels, and aircraft.
| Blocked Credit Example | Reason for Blocking |
|---|---|
| A company buys a 5-seater sedan for the Managing Director | Seating capacity is 5 and it’s for general personnel transport, not for specific exempted business use. |
| A firm purchases a 12-seater tempo traveller for employees | Seating capacity is 12 and it’s for employee transport, not for the core business of passenger transport service. |
Exceptions (ITC is Allowed):
ITC is not blocked (i.e., it can be claimed) when the motor vehicle (with less than 13 seating capacity), vessel, or aircraft is used for:
- Further supply of such vehicles or conveyances (i.e., resale).
- Example: A car dealership buys a new 5-seater car from the manufacturer for the purpose of selling it to a customer. (ITC is Allowed)
- Transportation of passengers as a taxable service.
- Example: A taxi service company (e.g., cab aggregator) buys a fleet of 7-seater cabs for its business. (ITC is Allowed)
- Imparting training on driving, flying, or navigating such vehicles or conveyances.
- Example: A driving school purchases a hatchback car for giving driving lessons. (ITC is Allowed)
- Transportation of goods (ITC is generally available on trucks, lorries, etc.).
2. Services related to Vehicles (Section 17(5)(ab))
General Rule: ITC is blocked on the services of general insurance, servicing, repair, and maintenance relating to the blocked motor vehicles, vessels, or aircraft (i.e., those mentioned in point 1).
- Example: A company pays for the annual maintenance contract (AMC) and insurance renewal for its 5-seater sedan used by the director. (ITC is Blocked)
Exception (ITC is Allowed):
ITC on these services is allowed if:
- ITC on the motor vehicle, vessel, or aircraft itself is allowed (e.g., for a taxi company).
- The recipient is engaged in the manufacturing of such vehicles or the supply of general insurance services for such vehicles.
3. Food, Beverages, Health, and other Personal Services (Section 17(5)(b))
General Rule: ITC is blocked on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, club memberships, and rent-a-cab/life/health insurance.
| Blocked Credit Example | Reason for Blocking |
|---|---|
| A manufacturing company organises a team lunch for its employees at a local restaurant. | Food and beverages are considered for personal consumption/staff welfare. (ITC is Blocked) |
| A private company pays the annual membership fee for a gym for its senior management. | Club and health/fitness centre memberships are blocked. (ITC is Blocked) |
| A company pays for the optional group health insurance for its employees. | Life and health insurance are blocked unless legally mandated. (ITC is Blocked) |
Exceptions (ITC is Allowed):
ITC is not blocked (i.e., it can be claimed) if:
- The inward supply is used by a registered person for making an outward taxable supply of the same category (or as an element of a composite/mixed supply).
- Example: A caterer purchases raw food ingredients and uses outdoor catering services to provide catering to a client. (ITC is Allowed)
- Example: A beauty salon buys cosmetic products to provide beauty treatment services to clients. (ITC is Allowed)
- It is obligatory for an employer to provide such supplies to its employees under any law for the time being in force (e.g., mandatory canteen services under the Factories Act).
4. Construction of Immovable Property (Section 17(5)(c) and (d))
General Rule: ITC is blocked on goods or services (like cement, steel, architect fees, works contract service) used for the construction of an immovable property (other than plant and machinery) on one’s own account (even if used for business).
- Example: A business buys construction materials and hires a contractor to build a new office building or a warehouse for its own use (and not for the purpose of selling the building). (ITC is Blocked)
Exception (ITC is Allowed):
- If the immovable property being constructed is Plant and Machinery (e.g., a foundation for a heavy machine like a blast furnace).
- If the works contract service is taken as an input for the further supply of works contract service (i.e., a sub-contractor providing service to a main contractor).
5. Goods Lost, Stolen, Destroyed, Gifted, or Free Samples (Section 17(5)(h))
General Rule: ITC is blocked on goods lost, stolen, destroyed, written-off, or disposed of by way of gift or free samples.
| Blocked Credit Example | Reason for Blocking |
|---|---|
| A trader’s stock is destroyed in a fire accident. | The goods are lost/destroyed. (ITC must be reversed/blocked) |
| A company distributes products as free samples for promotion. | The goods are disposed of as gifts or free samples. (ITC must be reversed/blocked) |
6. Personal Consumption (Section 17(5)(g))
General Rule: ITC is blocked on goods or services used for personal consumption.Example: A GST-registered business owner buys a personal laptop or furniture using the business account, which is primarily used at home for non-business purposes. (ITC is Blocked)
