Apportionment of Credit and Blocked Credits u/s 17 of the CGST Act, 2017: An In-depth Analysis

The Goods and Services Tax ( GST ) was implemented in 2017 subsuming all other indirect taxes including VAT. It was introduced to ease the taxation of businesses. One important area covered under the GST is the input tax credit ( ITC ).

Under GST, it allows the businesses  to offset the tax they pay on inputs against the tax they collect on outputs. However, the government has put some restrictions on the same. The Section 17 of the GST deals with the apportionment and the blocked credit.

Section 17 of the CGST Act: Apportionment and Blocked Credit

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

The Section 17(1) of the GST Act deals with the apportionment of the ITC when the goods or services were partly used for the business and partly for other business. In this situation, the registered person can claim the credit only to the extent that they use those goods and services for the business purposes and not for any other purposes used. Thus this implies that the businesses can use the ITC only for the businesses purposes and not for the non-businesses.

Eg: If a business bought a car which was used partly for business and partly for personal purposes, then it can only claim the ITC on the portion of the GST paid that corresponds to the business use and the rest of ITC will be blocked.

Complete Draft Replies of GST ITC Related Notices, Click Here

Further, the Section 17(2), it states that  the apportionment can be available to the taxable supplies which includes the zero rated supplies, However it will not be available to exempted supplies or the goods exempted from the tax. Thus, the apportionment is only available to the taxable supplies.

Section 17(2) of the CGST Act provides clarity on the value of exempt supplies, stating that it shall include supplies on which the recipient is liable to pay tax on a reverse charge basis, transactions in securities, sale of land, and, subject to the conditions specified in Schedule II, the sale of buildings.

The value of exempt supply under this section is further clarified by an explanation, which excludes the value of activities or transactions specified in Schedule III, except for those mentioned in paragraph 5 of the said Schedule and certain other prescribed activities. This distinction ensures that businesses have clear guidelines on what constitutes exempt supplies and can accurately determine their tax liabilities.

Complete Draft Replies of GST ITC Related Notices, Click Here

In the instance of banking and financial institutions, including NBFCs, the Section 17(4) provides an option regarding the apportionment of ITC. These entities, engaged in services like accepting deposits or extending loans, can either comply with the provisions of Section 17(2) or choose to avail 50% of the eligible ITC on inputs, capital goods, and input services each month. The remaining 50% of the credit will lapse.

It is important to note that once the option is taken, it cannot be withdrawn for the remainder of the financial year. However, it is provided that the 50% restriction does not apply to tax paid on supplies made between registered persons who share the same PAN.

Blocked Credits under Section 17(5)

The subsections 1, 2 3 and 4 of the Section 17 states about the apportionment of credits, the rest of the subsections of this provision states about the  blocked credits of the ITC. The provision 17(5) lists the categories of the goods and services for which the ITC is not available or blocked. It was added to the act to prevent the business from claiming ITC on expenditures which do not directly contribute to the taxable income generation.

The question comes to mind is whether the blocked ITC is really blocked? The blocked credit is not entirely gone. It can be treated as an expense or can be added to the cost of the capital assets where you can allow the deductions in the direct tax calculations.

The blocked credits are as follows:

(a) Motor Vehicles and Vessels

Motor Vehicles: ITC is not available for motor vehicles used for the transportation of persons, provided they have an approved seating capacity of no more than 13 persons (including the driver). However, the ITC is allowed if the vehicle is used for the following purposes:

• Further supply of such motor vehicles
  • Transportation of passengers
  • Imparting training on driving such vehicles

Vessels and Aircraft: Similarly, ITC is blocked on vessels and aircraft unless they are used for the following purposes:

• Further supply of vessels or aircraft
  • Transportation of passengers or goods
  • Imparting training on navigating vessels or flying aircraft

(b) Services of General Insurance, Servicing, Repair, and Maintenance

The ITC is blocked for these contegory too . The general insurance, servicing, repair, and maintenance services related to motor vehicles, vessels, and aircraft mentioned above, unless the vehicles are used for the specified taxable activities.

(c) Food, Beverages, and Health Services

The Foods, Beverages, Health services cosmetic surgery, and leasing or renting of motor vehicles cannot claim the ITC. However, the credit can be claimed if these goods or services are used for making an outward taxable supply of the same category of goods or services or as part of a taxable composite or mixed supply.

(d) Works Contract Services for Construction

In this case, the credit is not allowed for works contract services related to the construction of immovable property (other than plant and machinery), unless such services are used for further supply of works contract services.

(e) Personal Consumption

This is an obvious provision that as it is established that ITC is only for the businesses, thus the Goods and services acquired for personal consumption are not eligible for ITC. This includes goods that are lost, stolen, destroyed, written off, or disposed of by way of gifts or free samples.

(f) Corporate Social Responsibility (CSR) Activities

The CSR activities are conducted by the companies having large profits. The GST act has clarified that the input tax is not available for goods or services used for activities related to CSR under Section 135 of the Companies Act, 2013.

(g) Tax Paid Under Composition Scheme (Section 10)

Another category exempted from claiming the ITC is the Goods and services received by a taxable person who is under the Composition Scheme (Section 10).

(h) Non-Resident Taxable Person

Non-resident taxable persons are not eligible to claim ITC except for the tax paid on imported goods. They cannot claim ITC on the domestic purposes.

(i) Other Blocked Credits

Other blocked credits include those for goods or services that are used for activities like the supply of goods or services for which no tax is levied under the GST law, or where the tax is paid on RCM basis.

Impact on Various Sectors

There is no only specific industries are affected by the blocked credit. Different industries were affected on various levels. The automotive sector faces a significant impact due to restrictions on ITC for motor vehicles. Companies that supply vehicles or engage in transportation need to carefully track the usage of these assets to ensure they are complying with the restrictions.

Further,The real estate sector is also impacted by the blocked credit provisions on works contract services and construction-related activities. Builders and contractors must carefully account for the ITC on construction services used for personal property versus commercial property.

The food and beverage, and hospitality sectors are also impacted by the restrictions on ITC for services like outdoor catering and health services. However, they can still claim ITC if they are providing similar services in return.

The blocked credit may impact the businesses in different ways. It reduces the amount of ITC that can be claimed by the businesses which may impact high tax liability. It impacts the cash flow of the business who has high capital expenditures. Also, the business has to be careful while claiming the ITCs. They should not avail the ITC blocked items.

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