GST Blocked Credit & Section 17(5) Advisory

Section 17(5) permanently blocks ITC on: (a) motor vehicles for conveyance of persons with seating capacity up to 13 (including cars) — except for resale, transportation services, or driving training; (b) food, beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery; (c) membership of a club, health and fitness centre; (d) works contract services for immovable property, except where the recipient is in the business of further supply of works contracts; (e) goods or services used in construction of immovable property on own account, other than plant and machinery; (f) goods or services used for personal consumption.

No. Section 17(5)(a) of CGST Act 2017 blocks ITC on motor vehicles designed to carry persons where seating capacity does not exceed 13 — regardless of whether use is exclusively for business. The three statutory exceptions are: (i) further supply of such vehicles (e.g., a car dealer); (ii) transportation of persons as a taxable service (taxi operators); (iii) imparting motor driving training. Trucks, buses exceeding 13 passengers, and ambulances are not within the block. The Supreme Court in Ambika Enterprises v. UOI has not disturbed this position.

No. Section 17(5)(c) and 17(5)(d) of CGST Act 2017 block ITC on works contract services and on goods or services used in construction of immovable property on own account, unless the immovable property qualifies as "plant and machinery" — defined in the Explanation to Section 17 as apparatus, equipment, and machinery fixed to earth by a foundation or structural support, but specifically excluding land, building, and civil structures. A factory shell or office fitout does not qualify. Movable machinery bolted to a foundation (compressors, CNC machines) may qualify; this is frequently disputed at adjudication.

Rule 42 of CGST Rules 2017: ITC on common inputs and input services attributable to exempt supplies must be reversed each month using the formula D1 = (E/F) x C2, where E = value of exempt supply in the month, F = total turnover in the month, and C2 = common credit. Monthly reversals are provisional; a final calculation is done for the full financial year and any net difference paid or claimed in GSTR-3B of September following the financial year (or the date of filing the annual return, whichever is earlier). Rule 43 applies the same logic to capital goods spread over 60 months.

From 1 January 2022, Section 16(2)(aa) of CGST Act 2017 (inserted by Finance Act 2022) makes ITC conditional on the supply appearing in the recipient's GSTR-2B — which is auto-populated from the supplier's GSTR-1/IFF. If the supplier has not filed or has under-reported, the ITC does not appear in GSTR-2B and cannot be claimed. Rule 36(4) caps provisional ITC (not in GSTR-2B) at nil from 1 January 2022 onwards. The recipient has no statutory recourse against the supplier under CGST Act for this loss; the only remedy is civil action for breach of contract or commercial indemnity in the purchase agreement.