What is Blocked Credit under GST:
Under the Goods and Service Tax (GST) regime, businesses are generally allowed to claim Input Tax Credit (ITC) on taxes paid for goods and services used in the course or furtherance of business. Under the GST framework, Input Tax Credit is the fundamental economic engine of GST, ensuring that tax is effectively levied only on value addition and minimising the cascading effect of taxes.
However, Section 17(5) of the CGST Act, 2017 creates specific statutory breaks in this seamless flow of credit. This provision identifies specific categories of goods or services in respect of which ITC is restricted, subject to exceptions and conditions under the law. Consequently, taxpayers may be unable to claim ITC on these transactions, transforming genuine business-related expenses into absolute operating costs that directly drain corporate cash flow.
Blocked ITC Categories – Where Does the Credit Chain Break?
Section 17(5) of the CGST Act, 2017 carves out specific categories of goods and services from the general scheme of Input Tax Credit. The principal categories are summarised below:
1. Motor Vehicles, Vessels, Aircraft and Related Services:
Under Sections 17(5)(a),(aa) and (ab), ITC is generally restricted on specified motor vehicles, vessels and aircraft, as well as related insurance, servicing, repair and maintenance services. However, the law provides specific exceptions, particularly where such assets are used for further supply, transportation of passengers or goods, or imparting training in the prescribed manner. The restriction is significant because GST paid on such assets and services can become an embedded cost for businesses even where the assets are used in commercial operations.
2. Food, Beverages, Employee Benefits and Related Services:
Section 17(5)(b) restricts ITC on specified goods and services including food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, club memberships, specified insurance services and employee travel benefits. The provision contains several exceptions, including circumstances where the supply is used for making an outward taxable supply of the same category or where provision of certain benefits is obligatory for the employer under applicable law.
3. Works Contract and Construction of Immovable Property:
Sections 17(5)(c) and 17(5)(d) impose significant restrictions on ITC relating to the construction of immovable property. Clause (c) restricts ITC on works contract services used for construction of immovable property, except to the extent specifically permitted under the provision, including where such services are used for further supply of works contract services. Clause (d), on the other hand, deals with goods or services used for the construction of immovable property on the taxable person’s own account, including where such construction is undertaken in the course or furtherance of business, subject to the statutory treatment of Plant and Machinery.
4. Supplies Taxed under the Composition Scheme:
Under Section 17(5)(e), ITC is not available in respect of goods or services or both on which tax has been paid under Section 10, i.e., supplies covered by the composition levy. The restriction is consistent with the underlying design of the composition scheme, under which tax is discharged at a prescribed rate with corresponding restrictions on input tax credit.
5. Supplies Received by a Non-Resident Taxable Person:
Under Section 17(5)(f), ITC is restricted in respect of goods or services or both received by a non-resident taxable person, except in relation to goods imported by such person.
6. Corporate Social Responsibility Expenditure:
Under Section 17(5)(fa), ITC is blocked in respect of goods or services or both received by a taxable person and used or intended to be used for activities relating to the person’s obligations under Section 135 of the Companies Act, 2013, relating to Corporate Social Responsibility (CSR). The provision presents an interesting policy paradox: an expenditure may arise from a statutory obligation under one legislation, while the GST paid on that expenditure is specifically denied as credit under another.
7. Personal Consumption:
Under Section 17(5)(g), ITC is not available on goods or services or both used for personal consumption. This restriction is relatively intuitive because the fundamental purpose of ITC is to facilitate business consumption.
8. Loss, Theft, Destruction, Write-off, Gifts and Free Samples:
Under Section 17(5)(h), ITC is blocked in respect of goods which are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. The underlying rationale is that where goods do not ultimately contribute to taxable business supplies in the prescribed manner, retention of the corresponding ITC could result in an unintended revenue leakage.
9. Tax Paid under Section 74:
Under Section 17(5)(i), ITC is blocked in respect of any tax paid in accordance with Section 74 in respect of any period up to Financial Year 2023–24. This provision reflects the legislative policy that tax discharged in circumstances involving fraud, wilful misstatement or suppression, as covered by the specified provision, should not subsequently generate an input tax credit.
Why Section 17(5) exists:
Section 17(5) is not arbitrary, it reflects a policy balance between:
- Preventing ITC on specified personal or non-business consumption
- Restricting credit in areas where the law specifically considers revenue implications; and
- Protecting the tax base while maintaining the integrity of the GST credit chain.
Business may view these restrictions as restrictive, but policy-makers view it as a safeguard against misuse.
The Safari Retreats Dilemma – Decoding the “Functionality Test” and Retrospective Roadblocks:
In Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., the Supreme Court examined the scope of Section 17(5)(d) in the context of ITC on goods and services used for construction of commercial immovable property. The Court upheld the constitutional validity of Section 17(5)(c) and (d) and held that the expression “plant or machinery” used in Section 17(5)(d) could not be equated with the defined expression “plant and machinery”. The Court further held that whether a building could qualify as a “plant” was a factual question to be determined by applying the “functionality test”, having regard to the business of the taxable person and the role played by the building in that business.
However, the Finance Act, 2025 retrospectively amended Section 17(5)(d), with effect from 1 July 2017, by substituting the expression “plant or machinery” with “plant and machinery” and inserting a clarification to give effect to this interpretation notwithstanding anything contrary contained in any judgment, decree or order of a court or other authority. This amendment significantly altered the statutory position considered by the Supreme Court.
The Structure Divide-Section 17(5)(c) and 17(5)(d):
Although clauses (c) and (d) both restrict ITC relating to the construction of immovable property, they operate in materially different circumstances. Clause (c) addresses works contract services received by the recipient, whereas clause (d) addresses goods or services used for construction undertaken on the taxable person’s own account. The distinction can be understood through the following comparison:
| Basis of Distinction | Section 17(5)(c ) – Works Contract | Section 17(5)(d) – Own-Account- Construction |
| Operational Approach | The business engages a contractor to execute construction through a works contract. | The taxable person undertakes construction on its own account, using purchased goods and/or services. |
| Nature of inward supply | The restriction operates on Works Contract Services received for construction of immovable property. | The restriction operates on goods or services or both for construction of immovable property on taxable person’s own account. |
| Typical Example | A company engages a Contractor for construction of an immovable property under works-contract. | A company purchases cement, steel, architectural services etc for constructing an immovable property. |
| Statutory exception | ITC is available where the works contract service is an input service for the further supply of works contract service, subject to the statutory provisions. | The restriction does not apply to the extent the expenditure relates to plant and machinery, as defined under the Act. |
The Way Forward:
As India targets sustained macro-economic growth, the GST Council must balance revenue collection with corporate growth. Allowing tax credits for genuine business expenses is crucial.
Lift Restrictions on Mandatory Welfare:
Companies may be required to provide health insurance and safety measures to employees. Employment laws mandates these expenses. Therefore, these costs deserve full tax credits.
Recognize Real Estate Realities:
Buildings like warehouses and hotels generate taxable revenue. Blocking construction related ITC can increase the cost. The GST Council should allow credits for verified, revenue-generating commercial properties subject to appropriate safeguards.
Move to a Proportionate Credit System:
Denying input tax credit on corporate vehicles adds unnecessary costs to business logistics. The Council can introduce a partial credit system. This approach may limit personal misuse while supporting genuine business transport.
Conclusion:
Ultimately, blocked ITC represents a deliberate policy compromise between maintaining an uninterrupted tax chain and preventing the misuse of public revenue. However, when legitimate business expenditure is converted into dead costs, these statutory restrictions directly influence corporate financial health, pricing and costing models across sectors. While the foundational promise of the GST regime was to eliminate cascading through seamless credit, the restrictions under Section 17(5) create deliberate breaks in this continuity. By converting genuine commercial expenses such as transit assets, employee welfare and vital business infrastructure into permanent operating costs, the current framework places a persistent strain on corporate working capital.
However, as highlighted in the proposed roadmap, safeguarding state revenue doesn’t require an absolute block on legitimate corporate credits. A balanced approach—with reforms such as lifting blocks on mandatory employee welfare, recognising the commercial reality of revenue-generating infrastructure and introducing proportionate credit mechanisms for business-use vehicles—can enable the GST Council to protect public revenue without stifling industrial growth. Striking this balance between regulatory oversight and economic neutrality is essential for GST to mature into a truly progressive and globally competitive “One Nation, One Tax” ecosystem.
The true measure of a seamless GST system is not merely how much revenue it protects, but how effectively it allows genuine businesses to claim the credit they are economically entitled to.
Note: This article is a part of Article Writing Competition 2026 conducted by onlinetaxupdate.com
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