GST is based on the principle of Value addition where a taxpayer is allowed to Set-Off all GST paid on Purchases of goods, services, etc. against his liability of Sale of Goods or services. However, there are certain expenses/purchases on which credit of GST paid is denied. Such expenses/purchases are called Blocked Credits. In this article, we will tell you everything about blocked credits. Blocked credits are covered under Section 17 (5) of the CGST Act, 2017.
What is Blocked Credit?
The Word ‘Block’ means a hurdle, a stop in a continuous flow. In the same way, the Goods or services or both on which the Input tax credit (ITC) is not available to be set off against the output tax liability is called Blocked credit. There are few purchases/expenses on which ITC is not available even though it might be purchased for business purposes.
Which Purchases/expenses etc. are included in Blocked credits on which one cannot avail Input tax credit?
The below Purchases/Expenses are ones on which ITC cannot be availed even though they might be purchased for the purpose of Business.
- Purchase of Motor vehicles having a sitting capacity of less than thirteen passengers.
- Purchase of Vessels and aircraft.
- Any kind of expenditure incurred on motor vehicles/vessels and/or aircraft like general insurance, repair, and maintenance, servicing, etc. Note: Earlier this was allowed but from 2018, this has been included in the Blocked Credit list.
- Goods given as Gifts, Free Samples, or goods lost, destroyed, or written off.
- Goods or Services or both used for personal consumption.
- GST paid for Goods or services or both purchased under compositions Scheme [Section 10 of CGST Act2017].
- Any tax paid under section 74, 129, and 130 [mainly fraud cases].
- Goods or Services or both received by a non-Resident taxable person.
- Goods and Services which are used for the construction of immovable properties which is not sold by the Taxpayer (For Example If a person constructs an office building for his Office Premises, materials and services used for such construction will be denied ITC)
- Works contract services.
- Food, beverages, outdoor catering, beauty treatments, health services, cosmetic and plastic surgery, membership of clubs, health and fitness center, rent-a-cab, health insurance except when it is obligatory for an employer to provide to its employee under any law for the time being in force.
- Travel Benefits extended to employees.
- ITC is not available on a few plant and machinery like telecommunication towers and pipelines laid outside factory premises.
When ITC Can be availed on Blocked Credit?
As you might already be aware, GST is a complex law and thus there are exceptions to everything. Below are some instances when GST paid on items in the ‘Blocked Credit’ list can be taken!
- If the supplier is engaged in the further supply of any of the items covered above then he is entitled to avail ITC. For example, A car dealer is entitled to avail ITC of the car purchased from the manufacturer as he is engaged in the further supply of cars. In the same way, the builder is entitled to avail ITC on the construction material purchased.
- In the case of items covered in Point 11 above, one can avail ITC when it is obligatory for an employer to provide any of the items covered in Point 11 above to its employees under any law for the time being in force. For Example: In some states, it is has been made mandatory by the State Government to employers to provide cab facility to women employees after 8.00 PM. If that is the case, ITC is available for the cab services received by the company.
Few More Points to understand Blocked Credits better
- ITC is available on a motor vehicle used for transportation of goods and ITC on any expenses on such vehicles is also available. For Example, Trucks are used for the transportation of goods and their repair and maintenance, service, etc.
- If the motor vehicle or vessel is used for further supply such as imparting training driving a motor vehicle, navigating the vessel, flying aircraft, or for transportation of goods then ITC is available. For Example, Driving Schools can avail ITC of the cars purchased for the use of teaching its students.
- Instead of giving the free samples if someone charges minimum consideration then he can avoid such ITC to fall under blocked credit. For example, buy more save more schemes.
- If the expenses are incurred in relation to the construction of the immovable property and if it is not capitalized in the books then ITC is available. For Example, Repair and maintenance are done to the building if debited to profit and loss account then ITC would be available.
- ITC is available on the plant and machinery even though attached to the earth. For Example: if any foundation work is required for the erection of plant and machinery then ITC would be available for such foundation work, even though it may be civil work.
- Plant and machinery do not include land, building, or any other civil structure, telecommunication tower, and pipelines laid outside the factory premises.
Although GST allows set-off of Taxes Paid against taxes collected, one should always keep in mind the above provisions. If one wrongly avails these blocked credits, he will have to reverse them with INTEREST and PENALTIES.
This article has been written by CA Rishav Daga and the author can be reached at email@example.com