An Overview of Blocked Input Tax Credit (ITC) under GST

Introduction 

In the GST regime, Input Tax Credit (ITC) is an important mechanism, by which a business will claim a credit on account of tax paid on purchases or inputs so that the said credit is utilized to offset the tax liability arising from outputs. Though blocked ITC does not allow businesses under the GST to claim ITC at particular junctures, such instances exist in multiple forms and are referred to as “blocked ITC”. This is done to deter potential misuse and ensure that legitimate business activities alone are used. Here’s an overview of the law, facts, numbers, and regulations with respect to blocked ITC.

The Legal Framework for Blocked ITC under GST

Blocked ITC is defined and governed by Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017. This section elaborates on the types of goods and services for which ITC is not allowed. Such Restrictions are placed to avoid ITC claims on purchases that are not directly related to the taxable business activities.

Section 17(5) bars claims of ITC on purchases and services that it deems do not have an immediate business utility, or are likely to enable a tax avoidance or create a tax evasion loophole. It forms part of the framework of measures for ensuring effective administration of GST and curbing fraudulent claims.

Categories of Blocked ITC under GST

Under Section 17(5) of the CGST Act, there are several categories of goods and services on which ITC is blocked. These include, but are not limited to:

1. Motor Vehicles and Vessels: ITC is barred on motor vehicles, aircraft, and vessels unless they are used for specific specified purposes, like the transportation of goods, further supply of the vehicle, or providing passenger services. If the vehicle is used for personal purposes, then the credit is not allowed.

Section 17(5)(a): ITC on motor vehicles and other means of transportation is restricted, unless they are used to transport goods or passengers, or for the business of transporting of passengers or goods, or for providing training for driving, flying, navigating, etc.

2. ITC on Construction of Immovable Property: No ITC is available for any goods or services used for construction of immovable property except for the property used for business. The reason is that construction of a residential property is considered as personal expense unless the property is used for commercial purposes like letting out.

Section 17(5)(d): ITC is not available on goods and services used for construction of immovable property (except plant and machinery)unless the property is used for business purposes.

3. Food and Beverages: There is a block on ITC for food and beverages unless eaten by employees or consumed for business purposes like conducting business meetings, conferences, etc. Yet, there are some inputs in the food industry, raw materials exempted.

Section 17(5)(b): This is blocked for food and beverages, health services and membership of clubs and gymnasium, unless incurred for business purposes.

Personal Goods and Services: All personal goods and services, including health and fitness club memberships, are blocked under GST.

Regulatory Requirements 

The blocking of ITC under GST is not an ad hoc process but is supported by clear regulatory mandates to ensure compliance. The GST law puts specific conditions and also carries out compliance checks to govern and  prevent the misuse of the input tax credit. The related regulatory provisions are:

• GST Rules and Provisions: The CGST Act requires businesses to ensure that ITC claims are legitimate and in accordance with the prescribed conditions. Tax authorities audit or investigate claims for blocked ITCs.
• Tax Invoices: Businesses have to keep proper documentation for all purchases, including tax invoices and receipts, to support their ITC claims. Failure to produce valid documents may lead to the rejection of the ITC claim.
• Annual Return and Reconciliation: Taxpayer The taxpayers must submit their annual returns, and hence, the difference in the ITC claim has to be adjusted. A mismatch in the claimed amount of ITC by a business and that reported by suppliers can bring about blocked ITC or penalty.
• Penalties and interest: In case a business erroneously claims blocked ITC it may be liable for penalties and interest on the amount wrongly claimed. The GST authorities can enforce fines along with interest as a penalty for non-compliance with provisions of ITC.
• Audits and Investigations: GST audits are conducted by tax authorities to ensure that businesses are not claiming blocked ITC fraudulently. Businesses can face significant penalties if they are found to have made incorrect claims.

The Impact of Blocked ITC on Businesses

The blocking of ITC significantly affects the business, especially in industries where blocked items constitute a significant share of their costs. For instance, construction companies may incur big amounts on building materials and services, but cannot claim ITC if the construction is for residential purposes. Again, a travel agency might incur big amounts on transport and insurance but cannot claim ITC for personal traveling expenses.

This incurs financial implications since the business may have to bear the tax burden on the blocked inputs, thereby increasing its total operational costs. The businesses must also ensure that they are not unknowingly claiming blocked ITC as this will lead to penalties and reversal of the credit claimed.