BLOCKED CREDIT – GST
(Detailed discussion with Illustration)
CMA Amit Dey
Tax Consultant
C redit in respect of input tax incurred on certain acquisitions is specifically prohibited. Such GST is
added to cost of inward supplies and this is known as blocked credit
Blocked credit is in conflict with the fundamental characteristics of GST. But denial of credit can be
justified on following grounds:
1) To avoid the administrative burden of controlling the actual use of such goods/services, which
may be easily used for dual purposes (business/private) due to their nature,
2) It is way of reducing the risk of fraud, and
3) Such supplies are supposed to contain an element of consumption in the real life sense of the
term, e.g. entertainment in restaurant.
Section 17(5) Notwithstanding anything contained in sub section (1) of section 16 and sub section (1)
of section 18 input tax credit shall not be available in respect of the following namely
a) Motor vehicles and other conveyances except when they are used
i) For making the following taxable supplies namely
A) Further supply of such vehicles are conveyance, or
B) Transportation of passengers, or
C) Imparting training and driving flying, navigating such vehicles or
conveyances,
ii) For transportations of goods
Motor vehicle Sec 2(76) Motor vehicles shall have meaning as has been assigned to it
under motor vehicle act 1988
Conveyance Sec 2 (34) Conveyance includes a vessel an aircraft and a vehicle
Illustration:
Supplier Outward supply Inward supply Admissibility
of ITC
Dealer of car Sale of car Purchase of car yes
Radio taxi operator Passenger transportation Purchase of car yes
Service
Airline Passenger transportation Purchase of aircraft yes
Service
Motor driving school Training on Driving Purchase of car yes
Aviation training institute Navigation training Purchase of aircraft yes
Call centre Business support Service Purchase of car No
Coaching institute Chemical coaching Service Purchase of car No
Dealer of truck Sale of truck Purchase of truck yes
Driving school Training on driving Purchase of truck yes
GTA Goods transportation Service Purchase of truck yes
Courier agency Goods transportation Service Purchase of truck yes
Cement Manufacturer Supply of cement Purchase of truck yes
Builder/contractor Construction Service Purchase of truck yes
b) The following supply of goods or services or both
i) Food and beverages, outdoor catering, beauty treatment, help services, cosmetic
and plastic surgery except where an inward supply of goods or services or both of a
particular category is used by a registered person(for making an outward taxable
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supply
…..of the same category of goods or services or both (i.e. his outward supply is of
same category)
Or
(as an element of a taxable composite or mixed supply (i.e. making bundle with his
outward supply of different category))
Illustration:
Supplier Outward Supply Inward Supply Admissibility
of ITC
Dealer of beverages Sale of beverages Purchase of beverages Yes
Restaurant Restaurant Service Purchase of beverages supply as part Yes
of restaurant Service
Airlines Passenger Outdoor catering services supply as Yes
transportation part of air travel price
Service
Hospital Health care Service Outdoor catering services supply as Yes
part of healthcare service to patients
Coaching Institute Coaching Service Purchase of beverages for
consumption by employees or visitors
in office No
Outdoor catering Service for giving
farewell to students
Hospital Health care Service Health care Service by doctor Yes
Actress Acting Service Beauty treatment services
Brand Ambassador Plastic Surgery Service No
Service
(ii) Membership of a club, health and fitness Centres:
Illustration:
Supplier Outward Supply Inward Supply Admissibility of ITC
A Ltd. Supplier of Mobile Club membership for its No
directors
Mr. Jain (Gym Trainer) Gym Training / Health & Fitness Centre No
Coaching Service
(iii) Rent A Cab, life insurance and health and insurance Except where-
(A) The government notifies the services which are obligatory for an employer to
provide to its employees under any law for the time being in force; or
(B) Such inward supply of goods or services or both of a particular category is used by a
registered person (for making an outward taxable supply
… of the same category of goods or services or both) or
… (as part of a taxable composite or mixed supply) and
Illustration:
Supplier Outward Supply Inward supply Admissibility of ITC
Fab Cab Rent – A – Cab Service Rent – A – Cab Service Yes
(Sub-Contracting)
DJ Hotel Accommodation Service Rent – A – Cab Service Yes
(for pickup of visitor from airport)
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EduDelight Coaching Service Rent – A – Cab Service No
(for intra city travel of its
outstation faculties)
Jhinuk Supplier of garments Insurance of trading stock Yes
Garments Insurance of factory building Yes
Insurance of motor vehicle No
GIC General insurance ICICI Prudential Yes
Service (Re-Insurance of health insurance
policies)
Jain Crackers Suppliers of Crackers Life insurance of Workers No
(Mandatory under Law)
(iv) Travel benefits extended to employees on vacation such as leave or home travel concession
(C) works contract services when supplied for construction of an immovable property (other
than plant and machinery) except where it is an input service for further supply of works contract
service;
Explanation :- for the purpose of clauses (c ) and (d)
….. the expression “construction” includes re-construction, renovation, additions or alterations or
repairs, to the extent of capitalization, to the said immovable property
Illustration:
Supplier Outward supply Inward supply Admissibility of ITC
Builder Construction Service Construction Service Yes – ITC is admissible when
contractor (Construction of big (Works contact) work contract service is input
project for reliance) (Sub-contracting) service for further supply of
works contract Service
Debjani Academy Coaching Service Construction Service No- ITC is blocked for works
(Works contract) contract service supplied for
(Construction of an construction of immovable
additional floor of its property
GST registered officer)
Priyanka Coaching Service Works contract Yes-minor repairs are not be
Foundation (repairs of toilets treated as construction of
costing 20,000) immovable property and hence,
its ITC is admissible
Lytton Hotel Accommodation Renovation No-heavy renovation
Service (30 years old structure (capitalised in books) is to be
now renovated at cost treated as construction of IP,
of 3,00,000) and hence its ITC is blocked
(d) Goods or services or both received by a taxable person for construction of an immovable
property (other than plant or machinery) on his own account including when such goods or
services or both are used in the course or furtherance of business
Illustration:
Supplier Outward supply Inward supply Admissible of ITC
Builder Construction Service Purchase of building Yes
contractor (Works Contract) material architect service
(Construction of big procurement of labour
project for reliance) from labour contractor
Builder Construction Service Purchase of building No-as it is case of
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contractor (Works contract) material goods/services used for
(Constructing its new Architect service construction of an
head office) Procurement of labour immovable property on his
from labour contractor own account (self-use)
Debasmita Coaching Service Purchase of building No-as it is case of
Tutorial material architect service goods/services used for
construction Service (pure construction of an
labour contract) immovable property on his
own account (self-use)
(e) Goods or service or both on which tax has been paid under section 10:
Tax paid under sec 10 = GST under composition scheme
Supplier working under composition scheme is not entitled to collect any GST from recipient. Thus,
recipient is not entitled to any ITC
(f) Goods or services or both received by a non-resident taxable person except on goods
imported by him
NRTP = Person who occasionally undertakes supply but no fixed place of business or
residence in India. He is not allowed any ITC except that of goods imported by him and supplied here.
(g) Goods or service or both used for personal consumption:
A runs a proprietary firm registered under GST law. Stationary is purchased in bulk by the firm
ostensibly for use in the business, however 60% of the stationary is actually used by the family of A for
personal use. No ITC is available with respect to the stationary used for personal consumption.
(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples:
and
ITC is not allowed in such cases as the destruction or writing off of goods or giving them as gift/sample
takes them out of the supply chain and it is event which is functionally equivalent to consumption
Illustration:
Supplier Outward supply Inward supply Admissibility to ITC
EduDelight Coaching Service Purchase of bed sheets No- ITC is not
Academy (for gifting to admissible of goods
franchises/business disposed of by way of
partners on Diwali) gifts
Jhunuk Ltd Garment Distribution as free No- ITC is not
Manufacturer sample of garments admissible of goods
manufactured by it disposed of by way of
free sample
NM Ltd of Supplier of Lost of stock in flood No- ITC is not
Bhubaneswar toys/goods admissible in respect
of goods lost (even if
it is natural calamity)
RB Ltd of West Supplier of bed Loss of stock due to fire No- ITC is not
Bengal sheets/goods Loss due to theft admissible in respect
of goods lost/stolen
Rij electronics Supplier of electronic 1000 pieces of USB 2.0 pen No- ITC is not
items drives (of value 500 each) admissible in respect
written of this year of goods written of in
the books of account
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(i) Any tax paid in accordance with the provisions of sections 74, 129 and 130
Section 74 It deals with recovery of tax not paid or short paid by Tax paid is not eligible as
reason fraud wilful misstatement or suppression of facts ITC
Section 129 It deals with detention seizure and release of goods in Tax paid is not eligible as
transit which had been removed in contravention of legal ITC
provisions
Section 130 It deals with confiscation of goods in certain circumstances Tax paid is not eligible as
ITC
Illustration:
M/s DAD ltd, supplied taxable goods from the factory after manufacture in the month of October 2018
for sale to a distributor for Rs. 8,00,000 M/s DAD ltd as suppressed this transaction, however he
deposited the GST @ 12% and those goods on 10-01-2009 against show cause notice and demand
order passed under section 74 (when there is fraud) of the CGST Act 2017 by the control tax officer and
passed the order accordingly.
Whether distributor namely recipient of those goods is eligible to take input tax credit?
Solution:
As per section 17(5) of the CGST Act 2017, no credit on payment of Tax due to fraud, wilful-
misstatement or suppression of Fact etc. shall be allowed.
In the given case no Input Tax Credit was available to Registered Person if the supplier has paid Tax in
pursuance of order where any demand has been confirmed on account of any fraud, wilful-
misstatement or suppression of Fact and so on under section 74 of the CGST Act 2017.
Hence, ITC is not allowed to recipient of these goods (i.e. Distributer in the given case).
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