In-Depth Analysis of Input Tax Credit under the GST Act: Section 17 – Apportionment of Credit and Blocked Credits

Section 17 – Apportionment of Credit and Blocked Credits

Sub-section (1): Business and Non-Business Use

When goods or services are used partly for business and partly for other purposes, ITC shall be restricted to the portion attributable to business use only.

Sub-section (2): Taxable vs Exempt Supplies

When goods or services are used:

• Partly for taxable supplies (including zero-rated supplies), and

• Partly for exempt supplies under CGST or IGST Acts,

Then, ITC shall be restricted to the portion used for taxable and zero-rated supplies.

Sub-section (3): Value of Exempt Supplies

The value of exempt supplies for apportionment under sub-section (2) shall be as prescribed, and shall include:

• Supplies on which the recipient pays tax under reverse charge,

• Transactions in securities,

• Sale of land, and

• Sale of building, subject to clause (b) of para 5 of Schedule II.

Explanation to Sub-section (3):

The value of exempt supply shall not include activities listed in Schedule III, except:

• (i) Activities under para 5 of Schedule III, and

• (ii) Activities as may be prescribed under clause (a) of para 8 of Schedule III.

Sub-section (4): Option for Banks and NBFCs

A banking company, financial institution, or NBFC providing services like deposits, loans, or advances may:

• Either comply with sub-section (2), or

• Claim 50% of the eligible ITC each month on inputs, capital goods, and input services. The rest shall lapse.

Provisos:

• Once this option is exercised, it cannot be withdrawn during the financial year.

• The 50% restriction does not apply to inter-branch supplies between registered persons having the same PAN.

Sub-section (5): Blocked Credits

Notwithstanding Section 16(1) and 18(1), no ITC is allowed on the following:

Clause (a): Motor Vehicles

Motor vehicles (seating = 13 including driver), except when used for:

• Further supply of such vehicles,

• Transportation of passengers,

• Training on driving such vehicles.

Clause (aa): Vessels and Aircraft

Vessels and aircraft, except when used for:

(i) Taxable supplies such as:

(A) Further supply of vessels or aircraft,

(B) Passenger transport,

(C) Navigation or flying training.

(ii) Transportation of goods.

Clause (ab): Insurance & Repairs for Vehicles/Vessels/Aircraft

General insurance, servicing, repair & maintenance of the vehicles/vessels/aircraft in (a) and (aa), except when:

(i) Used as per (a)/(aa),

(ii) Received by a person:

            (I) Manufacturing such vehicles/vessels/aircraft,

            (II) Supplying insurance services for such vehicles/vessels/aircraft.

Clause (b): Specified Goods/Services

The following goods/services, except when used for outward supply of same category or as part of a taxable composite/mixed supply:

(i) Food & beverages, outdoor catering, beauty treatment, health services, cosmetic/plastic surgery, leasing/hiring of motor vehicles, vessels, aircraft (as per a/aa), life/health insurance.

(ii) Membership of clubs, health & fitness centres.

(iii) Travel benefits to employees on vacation (e.g., LTC, home travel).

Exception: Allowed if employer is legally obligated to provide under any law.

Clause (c): Works Contract Services

ITC on works contract services for construction of immovable property (excluding plant/machinery), except where its an input for further works contract service.

Clause (d): Construction on Own Account

ITC on goods/services used for construction of immovable property on own account, even if used for business.

Explanation: “Construction” includes:

• Reconstruction,

• Renovation,

• Additions/alterations,

• Repairs (if capitalized).

Clause (e): Composition Scheme

ITC on goods/services taxed under Section 10 (Composition Scheme).

Clause (f): Non-Resident Taxable Person

ITC on goods/services received by non-resident taxable person, except imports.

Clause (fa): CSR Activities

ITC on goods/services used for Corporate Social Responsibility (CSR) obligations under Section 135 of the Companies Act, 2013.

Clause (g): Personal Consumption

ITC on goods/services used for personal consumption.

Clause (h): Lost, Stolen, Gifted, or Sampled Goods

ITC on goods that are:

• Lost,

• Stolen,

• Destroyed,

• Written off,

• Given as gifts or free samples.

Clause (i): Tax Paid under Section 74

ITC of tax paid under Section 74 for any period up to FY 2023–24.

Sub-section (6): Attribution Rules

The Government may prescribe the manner in which credit under sub-sections (1) and (2) is to be attributed to business/exempt use.

Explanation – Definition of Plant and Machinery

“Plant and Machinery” includes:

• Apparatus, equipment, and machinery fixed to earth via foundation or structural support,

• Used for outward supply of goods/services.

Excludes:

• Land and buildings or other civil structures,

• Telecom towers,

• Pipelines laid outside factory premises.

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