Blocked Credits in GST: Looks Claimable, But Sorry, Not Allowed

Ever looked at a perfectly valid invoice and thought—“Great! Another ITC to claim!” But wait…not so fast.

Because sometimes, even the most legit-looking tax invoice is off-limits when it comes to claiming Input Tax Credit (ITC). Welcome to the quirky world of Section 17(5) of the CGST Act—the Blocked Credit Zone. Let’s break it down with real examples, situations from client calls, and a few classic “don’t-do-this” moments.

First, What’s ITC Anyway?

In simple terms, Input Tax Credit (ITC) means the GST you paid on your purchases (inputs) that you can use to set off your GST liability on sales (outputs). It’s the backbone of GST’s value-added tax system.

But there's a catch—you can’t claim it on everything.

What Conditions Must Be Met to Claim ITC?

You can only claim ITC if:

-->You have a tax invoice or debit note.

-->Your supplier has filed GSTR-1, GSTR-3B and it reflects in your GSTR-2B.

-->You’ve received the goods or services.

-->The tax is paid to the government.

-->You’ve filed your returns (GSTR-3B).

And finally, the credit is not blocked under Section 17(5). And that’s where the real story begins...

So, What is Blocked Credit?

Blocked credit means ITC that you technically paid for, but the law blocks you from claiming it. These are outlined in Section 17(5). Why block credits? Because not everything you buy is for business. Some expenses are personal, some are easy to misuse. The government wants to plug these leaks and allow credit only where there is a genuine business link.

Clauses (a), (aa), and (ab): Vehicles & Transport

Ever bought a car for your business owner or gifted a Vespa to a team member? ITC? Not allowed.

ITC is blocked on:

-Motor vehicles for transportation of people with seating capacity up to 13 (including driver)

-Vessels and aircrafts

-General insurance, repair, and maintenance for such vehicles

When is ITC allowed?

-If you're in the business of selling such vehicles

-If you offer transportation services (like cabs or buses)

-If you provide training to drive or fly (driving or aviation schools)

-If you transport goods using vessels or aircraft

Clause (b): Food, Beverages & Employee Treats

Planning a team dinner or giving out Diwali hampers? Great for bonding, not for credit.

No ITC on:

-Food and beverages

-Outdoor catering

-Beauty treatment

-Cosmetic or plastic surgery

-Health and life insurance

-Club memberships

-Fitness centers

-Vacation travel for employees

When allowed?

-If you're in the business of providing these services

-If it's a statutory requirement (like mandatory employee health insurance)

Real-life client query: "We are booking cab for our team. Can we claim ITC?" Unless it's mandated by laws—no ITC.

Clauses (c) and (d): Construction & Repair of Immovable Property

You built a fancy new office. Sorry, no ITC on:

-Construction of immovable property (buildings, offices)

-Renovation or repair if capitalized in books

ITC is allowed only if you're in the business of construction or resale of such buildings.

Clause (e): Composition Scheme Suppliers

If your supplier is under the composition scheme, they can’t charge GST, so you can’t claim ITC.

Clause (f): Non-Resident Taxable Person

An NRTP (say, someone attending an Indian trade show) cannot claim ITC on local purchases—except on imported goods.

Clause (g): Personal Use

Bought an iPad that’s used more for Netflix than work? That’s personal use. ITC blocked.

Clause (h): Lost, Stolen, or Gifted Goods

You bought 100 units, gave 10 as gifts, and 5 got damaged.

No ITC on:

-Goods lost, stolen, or destroyed

-Goods given as gifts or free samples

Clause (i): Tax Paid in Fraud Cases

You paid tax as a result of:

-Fraud

-Detention/confiscation of goods

-Misuse of ITC

Then you cannot claim ITC on such amounts.

If the department finds out: You’ll get a Show Cause Notice and have to reverse the credit with interest and penalty under Section 73 or 74, depending on intent. Section 17(5) is like a tax minefield—it seems easy to cross, but one wrong step can cost you interest, penalties, and compliance headaches. And when in doubt—ask, don’t assume!

Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.