Blocked Input Tax Credit under GST: Explained

The blocked credits, as defined under Section 17(5) of the CGST Act, is a provision for every regular taxpayer, that expands upon the list of purchases that are not eligible for ITC claim, that is, the purchases on which GST has been paid but the business cannot claim Input Tax Credit (ITC) over the same. This blog will take you through a detailed overview of a clause-wise explanation of Section 17(5) of the CGST Act, whereby, the details of blocked ITC will be discussed.

The list of ineligible or blocked ITC under GST Section 17(5) includes items such as motor vehicles and other conveyances (except when they are used for making taxable supplies), food and beverages, outdoor catering, beauty treatment, health services, rent-a-cab, life insurance and health insurance, goods or services used for personal consumption, and any tax paid under the provisions of sections 74, 129, and 130 of the CGST Act, 2017

Section 16 of the Central Goods and Services Act, 2017 (“CGST Act”) stipulates the eligibility and conditions for availing of ITC. Blocked credit refers to the input tax credit that cannot be claimed by a taxpayer under the Goods and Services Tax (GST) regime. Failure to comply with GST regulations related to blocked credit can result in penalties and interest charges.

Types of blocked credit

There are various types of blocked credit under the Goods and Services Tax (GST) regime, which are as follows:

Blocked credit on goods or services used for personal consumption: Any goods or services purchased by a taxpayer that are used for personal consumption, such as food, travel, or accommodation, are not eligible for input tax credit. Blocked credit on goods or services used for exempt supplies:

Exempt supplies are those that are not subject to GST, such as education and healthcare services. I Blocked credit on certain goods or services:

The GST law also specifies certain goods or services that are not eligible for input tax credit. Maintaining proper records of input tax credit and ensuring that it is used only for business purposes can help businesses minimize the impact of blocked credit on their tax liability.

Examples of blocked credit There are various scenarios in which blocked credit may arise under the Goods and Services Tax (GST) regime. Some examples of such scenarios are:

Rule 86A of the CGST Rules was introduced vide Notification No. 75/2019 dated 26.12.2019, empowering GST Officers to restrict the ITC accessible in a taxpayer’s electronic credit ledger if the Officer has “reasons to believe” that the ITC was obtained unlawfully.

Sub-rule (1) of Rule 86A of the CGST Rules stipulates certain conditions for the blocking of ITC availed through tax invoices debit notes or any other document under Rule 36 of the CGST Rules:

Unblocking of Input Tax Credit

lines issued by the Delhi Government highlight the current figures of ITC lying blocked by the GST Officers beyond a period of one year, which were blocked on account of mismatches/investigation/non-existence or receipt of alert notices, etc. To address the issue of such blocked ITCs, the Guidelines direct the Proper Officers to immediately take steps to finalize the investigation/proceedings in all such cases and either utilize the blocked credits against demands or unblock the ITC.

In case the registration was canceled for reasons other than non-existing/non-functional firm, then the ITC to the extent believed to be availed fraudulently or ineligible would be disallowed and demand created. The blocked ITC would be unblocked and utilized for the payment of demand.

The blocked credits, as defined under Section 17(5) of the CGST Act, is a provision for every regular taxpayer, that expands upon the list of purchases that are not eligible for ITC claim, that is, the purchases on which GST has been paid but the business cannot claim Input Tax Credit (ITC) over the same.
This blog will take you through a detailed overview of a clause-wise explanation of Section 17(5) of the CGST Act, whereby, the details of blocked ITC will be discussed.

Conditions to claim an input tax credit under GST

1. Section 16 of the CGST Act lays down the conditions to be fulfilled by GST-registered buyers to claim ITC. The conditions are summarized as follows-
2. Such input tax credit is eligible for claims if the goods or services purchased are further used for business purposes and not personal use.
3. Buyer must hold such tax invoice or debit note or document evidencing payment towards the purchase.
4. Such tax invoice or debit note is filed by the supplier in Form GSTR-1 and it appears in the buyer’s Form GSTR-2B.
5. The buyer must furnish the GST returns in Form GSTR-3B.
6. Where the goods are received in lots or in installments. ITC will be allowed to be availed when the last lot or installment is received.
7. The buyer must pay towards the supply of goods and/or services within 180 days from the invoice date. If they fail to, then the ITC already claimed will need to be paid to the government, along with interest payable under Section 50. The ITC claim can be again made once the payment is made to the supplier.
8. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good purchased.
9. ITC on a tax invoice or debit note belonging to a financial year must be claimed within the time limit given by the GST provisions, explained in the next section.
10. must be identified and split as it is used together for selling both exempt and taxable supplies and/or business and non-business activity.
11. There are certain items listed that are not eligible for ITC claims under Section 17(5) of the CGST Act.

Conclusion

To minimize the impact of blocked credit, businesses must maintain proper records, classify purchases correctly, ensure that input tax credit is used only for business purposes, monitor changes in the GST law, and conduct regular internal audits.

To get a list of ineligible Input Tax Credit (ITC) on the GST portal, you can follow these steps: Log in to the GST Portal: Visit the official GST portal and log in using your(Goods and Services Tax Identification Number) and password. Click on the “Return Dashboard” option. Input Tax Credit is the backbone of GST.

GST was implemented to remove the cascading effect of taxes i.e. to make a seamless flow of credit available at every stage of the supply chain. In GST, it is the provisions of ITC which essentially make GST a value-added tax i.e. collection of tax at all points of the supply chain after allowing credit of tax paid at earlier points.

This seamless chain of credit is broken in case of supplies charged to the Composition scheme, Supply of exempted goods or services or both, Ineligible ITC on certain goods or services or both (as provided in Section 17(5) of CGST Act, 2017).

This Blog is written by Kratika Pal.