Blocked Credits Under GST: The Complete Guide to Section 17(5)

Blocked credits under GST are the input tax a registered business pays but may never set off, however genuine the purchase. Section 17(5) of the CGST Act lists them: staff meals, cars for directors, club memberships, gifts and building works are the usual suspects in an Indian SME's books.

The trap is that these purchases look like any other bill. The supplier files it, it appears in GSTR-2B, and a busy accountant claims it with the rest. The credit is then reversed later, often with interest, when a notice or an audit catches it.

This guide lists what is blocked, the exceptions, an illustrative example and how Apragya keeps blocked credit out of the claim.

What Section 17(5) blocks

Section 17(5) overrides the general rule that tax on business purchases is creditable. If a purchase falls in one of its categories, the credit is blocked even when the invoice is valid, the goods were received and the supplier paid the tax.

Most categories carry exceptions. A car dealer may claim credit on cars bought for resale, a caterer on food bought to serve customers, and an employer on canteen or insurance costs that a law obliges it to provide. Read each item with its exception before blocking a bill.

The main categories are below. The wording has been amended several times, including on construction of immovable property, so check the current text of the section before you rely on a borderline case.

• Motor vehicles for carrying up to 13 people, with their repairs and insurance, unless used for resale, passenger transport or driving training
• Vessels and aircraft, outside the uses the section allows
• Food and beverages, outdoor catering, beauty treatment, health services and cosmetic surgery, unless used for the same kind of outward supply or required by law
• Club, health and fitness memberships, and travel benefits such as leave travel for employees
• Life and health insurance, unless the law makes it compulsory for the employer
• Works contracts and goods or services for building immovable property on your own account, other than plant and machinery
• Tax paid under the composition scheme
• Goods lost, stolen, destroyed, written off, or given away as gifts or free samples
• Goods or services used for personal consumption, and tax paid on demands involving fraud

Why blocked credit slips into the claim

An illustrative month at a Pune engineering firm

Take an illustrative 60-person machining firm in Pune. In one month its purchase register holds raw material, tooling, a sedan for the managing director, Diwali gift hampers for customers, a catered staff lunch and a contractor's bill for extending the office floor.

The accountant tagged the four bills as blocked when they were booked, so the month's claim carried only the steel, tooling and machine installation. The blocked tax went to the cost of each item instead, and the GSTR-3B working showed it separately from the eligible credit.

How Apragya keeps ineligible ITC under GST out of the claim

Handling the section 17(5) blocked credit list: spreadsheets or Apragya

A spreadsheet can hold a list of blocked items. It cannot sit next to each purchase, stop the credit reaching the return, or show later who marked a bill as blocked and why.

What sets Apragya apart on ITC not allowed under GST

Blocked credit is one part of the GSTR-2B reconciliation and the purchase register. For the wider rules, see the input tax credit guide.

Getting started with blocked credits

1. List the purchase types your business makes that fall under Section 17(5).
2. Note the exception, if any, that applies to your line of business.
3. Tag those bills as blocked when they are booked, not at month end.
4. Reconcile the month's GSTR-2B and check blocked items were not claimed.
5. Have your tax adviser review borderline cases, especially construction.

Most businesses find that five or six recurring purchase types account for nearly all their blocked credit.