Apportionment of Credit and Blocked Credits – Section 17 of GST

The GST framework in India allows registered persons to claim Input Tax Credit (ITC) on goods and services used in their business. However, Section 17 of the GST Act outlines provisions for apportionment of credit and cases where ITC is blocked. Let’s explore these provisions in detail.

Apportionment of Credit (Section 17(1) & (2))

Business vs. Non-Business Use

According to Section 17(1), when goods or services are used partly for business and partly for personal or non-business purposes, ITC can only be claimed for the business-related portion.

Taxable vs. Exempt Supplies

Section 17(2) states that if goods or services are used for both taxable (including zero-rated) and exempt supplies, ITC is restricted to the proportion attributable to taxable supplies.

Computation of Exempt Supplies

Under Section 17(3), the value of exempt supplies includes:

• Supplies taxable under reverse charge,

• Transactions in securities,

• Sale of land and buildings (except under specified conditions).

However, activities listed in Schedule III of the GST Act (except specified exclusions) do not count as exempt supplies.

Special Provision for Banking & Financial Institutions (Section 17(4))

Banks and NBFCs can either:

• Follow the standard apportionment rule under Section 17(2), or

• Avail 50% of eligible ITC every month, with the remaining ITC lapsing.

The 50% restriction does not apply to inter-branch supplies within the same PAN.

Blocked Credits – Section 17(5)

Despite the ITC eligibility, certain goods and services are explicitly excluded from ITC claims:

1. Motor Vehicles, Vessels, and Aircraft

ITC is not available for motor vehicles with seating capacity under 13 persons, vessels, and aircraft except when used for:

• Further supply,

• Passenger transportation,

• Training purposes,

• Goods transportation (for vessels and aircraft).

2. Insurance, Repairs, and Maintenance

ITC on general insurance, servicing, and maintenance of motor vehicles, vessels, and aircraft is blocked unless:

• The vehicle is used for an eligible purpose,

• The recipient is a manufacturer or insurer of such goods.

3. Specific Services

ITC is blocked for expenses related to:

• Food and beverages, outdoor catering,

• Beauty treatments, health services, and cosmetic surgeries,

• Life and health insurance (except where mandatory by law),

• Club memberships and health fitness centers,

• Employee travel benefits (like leave travel concession).

4. Works Contract & Construction Services

• ITC is blocked for works contract services related to immovable property, except for subsequent supply of works contract services.

• ITC is also unavailable for self-constructed immovable property.

5. Composition Scheme & Non-Resident Taxable Persons

• Tax paid under the composition scheme is ineligible for ITC.

• ITC cannot be claimed on goods/services received by non-resident taxable persons (except imports).

6. Corporate Social Responsibility (CSR) Expenditure

ITC on expenses incurred for fulfilling CSR obligations under the Companies Act is blocked.

7. Personal Consumption & Lost Goods

• ITC cannot be claimed on goods/services used for personal consumption.

• Goods lost, stolen, destroyed, written off, or given as gifts/samples are ineligible.

8. Tax Paid Under Specific Provisions

Tax paid under Section 74 (related to fraud, suppression, or willful misstatement) is not eligible for ITC.

Conclusion

Section 17 of the GST Act plays a crucial role in determining the eligibility of ITC. Businesses must ensure proper segregation of inputs used for taxable and exempt supplies, as well as adhere to the restrictions on blocked credits. Understanding these provisions helps in maximizing ITC claims while maintaining compliance with GST laws.

For professional assistance in GST compliance, consult a qualified Chartered Accountant (CA) to optimize your tax benefits.