The Goods and Services Tax system in India is designed on the principle of allowing seamless input tax credit to reduce the cascading effect of taxation. This means that businesses can generally claim credit for the tax paid on inputs used to make taxable supplies. However, there are specific restrictions under the law where input tax credit is not permitted. These situations are outlined in Section 17(5) of the Central Goods and Services Tax Act, 2017. Credits restricted under this section are commonly referred to as blocked input tax credits.
When the GST law was initially implemented in July 2017, the provisions relating to blocked input tax credit were drafted broadly, particularly in relation to motor vehicles. This led to interpretational issues and disputes. In order to bring clarity and precision, the CGST (Amendment) Act, 2018 introduced significant changes to Section 17(5). Effective from 1 February 2019, the earlier clauses (a) and (b) were replaced with clauses (a), (aa), (ab) and (b). The amended provisions now provide more specific definitions and conditions under which credit is blocked or permitted.
We focus on clauses (a), (aa), and (ab) of Section 17(5), dealing with motor vehicles, vessels, and aircraft, along with related services such as general insurance, servicing, repair, and maintenance.
Motor Vehicles Under Clauses (a), b(i), and (ab)
The law specifies that credit is blocked on motor vehicles used for the transportation of persons having an approved seating capacity of not more than thirteen persons, including the driver. This restriction applies regardless of whether the vehicle is purchased outright or obtained through leasing, renting, or hiring arrangements. In addition to the vehicles themselves, input tax credit is also blocked on related services, namely general insurance, servicing, repair, and maintenance.
There are certain exceptions where credit is permitted. The first is where the motor vehicle is used for further supply of such vehicles. This applies to entities engaged in trading or supplying motor vehicles, where the vehicles themselves are the outward taxable supplies. The second exception is for transportation of passengers. This covers businesses like taxi operators, tourist bus companies, or transport services for passengers. The third exception is for imparting training on driving such vehicles, which applies to driving schools and training institutes.
The restriction also extends to services of leasing, renting, or hiring of motor vehicles. Credit on these services is allowed if the vehicles are used for the same specified purposes as above. Moreover, if the recipient is engaged in the manufacture of such vehicles or in the supply of general insurance services in respect of these vehicles, credit is also permitted.
The introduction of the seating capacity condition marked a significant shift from the earlier rule, which blocked credit on all motor vehicles irrespective of capacity or use. This change allows greater flexibility for businesses that require larger vehicles for commercial purposes. Additionally, the explicit inclusion of general insurance, servicing, repair, and maintenance in the blocked credit list eliminates uncertainty and potential disputes over such expenses.
For example, a company purchasing a twelve-seater minibus to operate as a paid shuttle service for tourists can claim credit on both the vehicle and related maintenance services. However, if the same company purchases a sedan for executive use, the credit would be blocked because it does not meet any of the allowed usage conditions.
Vessels and Aircraft Under Clauses (aa), b(i), and (ab)
The restrictions placed on vessels and aircraft closely mirror those for motor vehicles. Credit is blocked on the purchase, leasing, renting, or hiring of vessels and aircraft. Similar to motor vehicles, input tax credit is also blocked on related services such as general insurance, servicing, repair, and maintenance.
However, there are clearly defined situations where credit is allowed. The first is for further supply of such vessels or aircraft, relevant for businesses dealing in the sale or lease of these assets. The second is for transportation of passengers, applicable to ferry operators, cruise lines, and passenger airlines. The third is for imparting training on navigation or flying, which covers aviation schools and maritime training institutes. The fourth permitted use is for the transportation of goods, relevant to cargo shipping companies and freight airlines.
Credit on leasing, renting, or hiring of vessels and aircraft is also allowed if they are used for any of these specified purposes. Additionally, businesses engaged in the manufacture of vessels or aircraft, or in supplying general insurance services in relation to them, can claim credit where the assets form part of their taxable outward supply.
Before the amendment, the law did not specifically mention insurance, servicing, repair, and maintenance for vessels and aircraft, leading to uncertainty. The updated provisions now expressly include these services in the blocked credit list unless they fall under the permissible categories.
For instance, a shipping company purchasing a cargo vessel for transporting goods can claim credit on the purchase as well as on marine insurance and maintenance services. On the other hand, if a corporation purchases a yacht for private use by executives, credit is blocked because the asset is not used for any of the specified business purposes.
Purpose and Rationale Behind the Restrictions
The restrictions on input tax credit for motor vehicles, vessels, and aircraft are grounded in policy considerations. These assets are often associated with personal or luxury use, making it difficult for tax authorities to distinguish between business and personal consumption without clear rules. By setting specific usage conditions and capacity limits, the law ensures that credit is available only when there is a clear and direct link to taxable business activities.
The seating capacity threshold of thirteen persons for motor vehicles provides a measurable and objective standard. Vehicles exceeding this capacity are typically used for commercial passenger transport, which is generally taxable and eligible for credit. Similarly, the permitted uses for vessels and aircraft focus on commercial activities that form part of the taxable supply chain.
These targeted restrictions aim to prevent revenue leakage while minimising the compliance burden for businesses genuinely engaged in commercial transport, trading of such assets, or related training services.
Industry-Wise Impact of the Provisions
The transport and logistics industry benefits from the exceptions provided under Section 17(5). For passenger transport services such as bus operators and taxi aggregators, the ability to claim credit on eligible vehicles and related services improves operational efficiency. Similarly, in the shipping and aviation sectors, companies involved in cargo transport or passenger services can recover the tax paid on high-value assets and maintenance expenses, which form a substantial part of their cost base.
Manufacturers of motor vehicles, vessels, and aircraft are also in a favourable position. Since their business involves the production and sale of these assets, the law allows them to claim credit on inputs and services directly linked to their manufacturing activity. This ensures that tax costs are not embedded in the price of the final product, maintaining competitiveness.
Insurance companies offering general insurance for these assets are another group that can claim credit, as the provision of insurance is itself a taxable supply. In contrast, corporate entities acquiring such assets for internal or private use face blocked credit and must absorb the tax cost as part of the acquisition expense.
Practical Scenarios and Interpretational Points
A practical example involves a travel agency that leases a fleet of vans, each with seating capacity of ten, for conducting guided city tours. Since the vehicles are used for passenger transport, the agency can claim credit on the leasing charges, insurance, and servicing expenses. Another example is an airline that leases aircraft for both domestic and international passenger services. The airline can claim credit on the leasing charges, maintenance, and insurance costs because the usage aligns with the permitted purposes.
However, complexities arise in mixed-use scenarios. For example, if a company owns a motor vehicle that is occasionally used for transporting clients but is primarily assigned to senior management for personal travel, the predominant use may lead to credit being blocked. The same principle applies to vessels and aircraft that are not consistently deployed for the specified taxable activities.
To avoid disputes, businesses must maintain clear usage records, such as trip logs, client invoices, and service contracts, to substantiate that the asset is used for a qualifying purpose under the law.
Compliance Considerations and Documentation
Compliance with Section 17(5) requires a proactive approach in tracking and classifying asset usage. Businesses should have internal policies that clearly define eligible uses of motor vehicles, vessels, and aircraft in line with the law. Purchase agreements, leasing contracts, and usage schedules should be reviewed for compliance before claiming credit.
Accounting systems should be configured to flag transactions involving these assets, prompting a review to determine whether the claimed credit is permissible. This reduces the risk of inadvertent errors and potential penalties during audits.
Tax officers examining blocked credit cases will expect to see documentary evidence that supports the claimed exception. For motor vehicles used in passenger transport, this could include service contracts with customers, permits, and trip logs. For vessels and aircraft, proof of commercial operations, cargo manifests, or training schedules will be relevant. The absence of such records may result in the credit being disallowed.
Interaction with Related GST Provisions
The blocked credit rules for motor vehicles, vessels, and aircraft must also be understood in the context of other provisions of the CGST Act. The definition of plant and machinery in the explanations to Section 17 specifically excludes motor vehicles for transportation of persons, reinforcing the view that such assets are not generally considered eligible for credit unless they fall under the permitted categories.
Similarly, Schedule II of the Act classifies certain leasing and renting activities as supplies of goods or services, which impacts how input tax credit is evaluated in these cases. Understanding these related provisions helps businesses make accurate credit decisions and align their transactions with GST compliance requirements.
Clause b(i) – Specified Goods and Services
Clause b(i) restricts input tax credit on certain inward supplies of goods and services. The list includes food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance, and health insurance. The restriction applies regardless of whether the business purchases these directly or through a third party.
The rationale is that these goods and services are often consumed personally and do not form part of the taxable outward supply in most cases. However, there are clear exceptions where input tax credit is allowed.
Situations Where Credit is Permitted
The first permitted case is when the inward supply of goods or services is used for making an outward taxable supply of the same category. For example, a catering business purchasing catering services from another provider for a large event can claim credit because the expense is directly tied to providing its own taxable catering service.
The second case is when such goods or services are used as an element of a taxable composite or mixed supply. In a composite supply, the items are naturally bundled and supplied together in the ordinary course of business, while in a mixed supply, they are supplied together for a single price but do not naturally go together. An example would be a health package sold by a wellness centre that includes health services, dietary plans, and beauty treatments as a bundled taxable service.
The third permitted case is when it is obligatory for an employer to provide such goods or services to employees under any prevailing law. For instance, if a law requires a business to provide health insurance to its employees, the GST paid on such insurance premiums can be claimed as input tax credit.
Practical Examples
Consider a corporate event management company that purchases outdoor catering for an event it organises for a client. Since the catering service is an integral part of its taxable event management service, the company can claim input tax credit. Conversely, if the same catering service is arranged for a company’s internal annual day celebration, with no connection to an outward taxable supply, the credit would be blocked.
In the case of life and health insurance, many employers provide these as part of employee welfare schemes. Unless mandated by law, such as under state regulations for certain industries, the input tax credit on these expenses remains blocked.
Clause b(ii) – Membership of Clubs, Health, and Fitness Centres
Clause b(ii) blocks input tax credit on membership fees for clubs, health centres, and fitness centres. The restriction applies irrespective of whether the membership is for business networking, employee welfare, or other purposes.
The legislative intent here is to prevent credit on expenditures that primarily serve personal or recreational purposes, even if there is a potential indirect business benefit. Club memberships often include amenities such as sports facilities, dining areas, and entertainment, which are not directly linked to taxable supplies.
For example, a business may take a corporate membership in a premium club for meeting clients. While such interactions might lead to business opportunities, the connection to taxable outward supplies is not direct or measurable in GST terms. Therefore, the credit is blocked.
An exception could arise if a business operates a fitness centre or health club as its taxable activity. In such cases, memberships purchased for resale or incorporation into its own services might qualify for input tax credit, though such scenarios are rare and would require careful documentation.
Clause b(iii) – Travel Benefits for Employees
Clause b(iii) blocks input tax credit on travel benefits extended to employees on vacation, such as leave travel concession or home travel concession. These benefits are typically part of employment contracts or human resource policies and are seen as personal in nature.
The restriction applies regardless of whether the travel is domestic or international. Since such travel is not connected to the provision of outward taxable supplies, the GST law does not permit credit on the related costs.
For example, if an employer provides an annual leave travel allowance covering air tickets for employees and their families, the GST charged on such tickets or related travel services is not eligible for credit. Even if the travel indirectly boosts employee morale and productivity, it does not satisfy the requirement of being used in the course or furtherance of business for GST purposes.
It is important to distinguish between travel for vacation and travel for official business purposes. Business travel for client meetings, site visits, or training is eligible for input tax credit, provided it meets other general eligibility conditions under Section 16 of the CGST Act. The restriction under clause b(iii) applies only to vacation-related travel benefits.
Clause (c) – Works Contract Services for Immovable Property
Clause (c) blocks input tax credit on works contract services when supplied for the construction of immovable property, other than plant and machinery. The restriction applies unless the works contract service is used for further supply of works contract service. In other words, if a works contractor hires another contractor to complete part of a project, the main contractor can claim credit on that expense.
The term works contract is defined in the GST law to mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property where the transfer of property in goods is involved.
The term construction is also specifically defined to include reconstruction, renovation, additions, or alterations, or repairs to the extent of capitalisation. This means that even repair and renovation costs will be subject to blocked credit if they are capitalised in the books of accounts.
Exclusion for Plant and Machinery
The restriction under clause (c) does not apply to plants and machinery. For GST purposes, plant and machinery means apparatus, equipment, and machinery fixed to the earth by foundation or structural support, used for making outward supply of goods or services. It includes such foundation and structural supports but excludes land, building, or other civil structures, telecommunication towers, and pipelines laid outside the factory premises.
For example, the installation of a production line in a factory, fixed to the ground and used in manufacturing, would qualify as plant and machinery, allowing input tax credit on related works contract services. On the other hand, constructing an office building, even if used for business operations, would not qualify for credit on works contract services.
Practical Scenarios
A manufacturing company constructing a new corporate office engages a contractor for the building work. Since the building is an immovable property and not plant and machinery, the input tax credit on the contractor’s services is blocked. However, if the same company installs a fixed conveyor system in its production unit through a works contract, credit is allowed because the conveyor system is part of the plant and machinery used for making taxable supplies.
In the real estate sector, developers who construct residential or commercial complexes for sale are generally engaged in the supply of works contract services. When such developers hire subcontractors for specific parts of the project, they can claim input tax credit on those subcontracted services because they are used for further supply of works contract services.
Impact of These Provisions on Businesses
The restrictions in clauses b(i), b(ii), b(iii), and (c) affect a broad range of industries. Hospitality businesses often incur expenses on catering and food services, but credit is allowed only when such services are resold or form part of a taxable package. Corporate entities that provide employee welfare benefits, such as club memberships, health insurance, or leave travel allowances, must bear the GST cost without credit unless these are legally mandated.
Construction and infrastructure businesses face significant implications under clause (c). While plant and machinery installations qualify for credit, civil construction costs do not. This distinction influences project costing, budgeting, and contract structuring. Many businesses choose to segregate contracts for plant and machinery from civil works to maximise credit eligibility.
Professional service firms and corporate offices also need to be cautious when capitalising renovation expenses, as capitalisation triggers the blocked credit rule even for repair and alteration work. Careful planning and accounting can help identify situations where expenses can be treated as revenue rather than capital, thereby preserving credit eligibility.
Compliance and Documentation Practices
Given the scope of these restrictions, businesses should establish clear internal policies for processing expenses that fall under these clauses. Expense claims for food, catering, memberships, employee travel benefits, and construction work should be reviewed for GST credit eligibility before the credit is claimed.
Supporting documents such as service agreements, invoices, event contracts, and legal compliance records are essential for demonstrating exceptions where credit is permitted. For works contract services, clear documentation of whether the work relates to plant and machinery or civil construction is critical. Engineering drawings, installation specifications, and fixed asset registers can serve as supporting evidence.
Regular internal audits focusing on blocked credit categories help prevent non-compliance and potential disputes with tax authorities. Training finance and procurement teams on the nuances of Section 17(5) ensures that blocked credits are identified at the source, reducing the risk of errors in GST returns.
Clause (d) – Construction of Immovable Property on Own Account
Clause (d) blocks input tax credit on goods or services used for the construction of an immovable property, other than plant and machinery, when such construction is carried out on one’s own account. This restriction applies even if the immovable property is used in the course or furtherance of business.
The provision is aimed at ensuring that businesses do not claim credit on capital assets like office buildings or warehouses constructed for their own use. Since such assets are not directly sold or used in providing taxable outward supplies, the GST law treats the input cost as outside the credit chain.
Construction here includes reconstruction, renovation, additions, alterations, or repairs to the extent of capitalisation in the books of accounts. This means that if repair work is capitalised instead of being treated as a revenue expense, the related input tax credit will be blocked.
Example
If a company constructs its own head office building, GST paid on cement, steel, architectural services, and contractor charges is not eligible for credit. However, if the company installs machinery in a factory, fixed to the earth and used for manufacturing taxable goods, it is considered plant and machinery and therefore eligible for credit.
Planning Considerations
Businesses often distinguish between capital and revenue expenditures for this reason. Minor renovations that are not capitalised but expensed in the profit and loss account may qualify for input tax credit, provided they do not otherwise fall under blocked credit provisions. Proper classification of such expenses can have a significant impact on GST liability.
Clause (e) – Goods and Services Purchased from Composition Scheme Suppliers
Clause (e) blocks input tax credit on goods or services on which tax has been paid under Section 10, also known as the Composition Scheme. Under this scheme, eligible small taxpayers pay tax at a fixed rate on turnover and are not allowed to collect tax from their customers.
Since suppliers under the Composition Scheme cannot charge tax separately, the tax they pay is not eligible for credit in the hands of the recipient. The recipient must therefore treat the cost of such purchases as final, without any input credit adjustment.
Example
A retail store purchasing goods from a small trader registered under the Composition Scheme will not receive a tax invoice showing GST separately. Any notional tax paid under the scheme by the supplier is not passed on to the buyer as credit. This makes composition scheme purchases potentially more expensive for businesses that can otherwise claim GST credit on regular purchases.
Practical Impact
While purchases from composition dealers can sometimes be cheaper due to lower compliance costs and pricing flexibility, the loss of input tax credit may offset these benefits for GST-registered buyers. Businesses need to weigh the price advantage against the credit loss before finalising procurement sources.
Clause (f) – Goods and Services Received by Non-Resident Taxable Persons
Clause (f) blocks input tax credit on goods or services received by a non-resident taxable person, except for goods imported by them. This restriction ensures that non-residents operating in India on a temporary basis do not claim credit on local procurements unless it relates to imported goods.
A non-resident taxable person is someone who occasionally undertakes transactions involving the supply of goods or services in India but has no fixed place of business or residence in the country. Such persons must register under GST before making taxable supplies.
Example
If a foreign event organiser sets up a temporary stall in India and procures catering services locally, the GST paid on those services will not be available as credit. However, if the organiser imports display equipment from abroad for use in the event, the GST paid on import (IGST) can be claimed as credit.
Rationale
The restriction reflects a policy choice to limit credit availability to situations where goods are brought into the country and taxed under customs law. Local service procurements by non-residents are treated differently to prevent misuse and ensure that the temporary presence in India does not create a disproportionate input credit claim.
Clause (g) – Goods and Services for Personal Consumption
Clause (g) blocks input tax credit on goods or services used for personal consumption. The GST law maintains a clear distinction between business use and personal use, allowing credit only for the former.
The term personal consumption covers any use of goods or services for personal needs, enjoyment, or benefit of an individual, irrespective of whether the expense is borne by the business.
Example
If a company purchases a television set for use in the managing director’s home, the GST paid is not eligible for credit. Even if the expense is recorded in the company’s accounts, the use is personal and unrelated to the company’s taxable supplies.
Similarly, if a business organises a purely social gathering for employees unrelated to business promotion or statutory compliance, the expenses on food, entertainment, and venue hire would be considered personal consumption for GST purposes.
Mixed Use Scenarios
When goods or services are used partly for business and partly for personal purposes, the credit must be apportioned accordingly. The portion attributable to personal consumption is blocked under this clause, while the business portion may still be eligible under Section 16.
Clause (h) – Goods Lost, Stolen, Destroyed, Written Off, or Given as Gifts or Free Samples
Clause (h) blocks input tax credit on goods lost, stolen, destroyed, written off, or distributed as gifts or free samples. The rationale is that such goods are no longer used in making taxable supplies and therefore should not entitle the recipient to credit.
Loss and Theft
If goods are damaged during transit, destroyed in a fire, or stolen from a warehouse, the input tax credit claimed on them must be reversed. The same applies to goods that expire before being sold, such as perishable items in the food and pharmaceutical industries.
Written Off
When inventory is written off in the books, either due to obsolescence or damage, the credit on such goods becomes ineligible. Businesses must ensure that GST credit is reversed in the period when the write-off is accounted for.
Gifts and Free Samples
The restriction also applies when goods are given away without consideration. Even if the distribution is part of a marketing strategy, such as promotional gifts or free samples to potential customers, the GST law blocks credit on them. This is because the definition of supply under GST requires consideration for the transaction to be part of the taxable chain, except in certain deemed supply cases which are taxed separately.
Example
A cosmetics manufacturer distributing free sample packs to promote a new product cannot claim input tax credit on the raw materials and packaging used for those samples. Similarly, a corporate giving away branded merchandise as festival gifts to clients must reverse the input tax credit claimed on those items.
Clause (i) – Taxes Paid in Certain Offence Cases
Clause (i) blocks input tax credit on any tax paid in accordance with Section 74, Section 129, or Section 130 of the CGST Act. These sections deal with situations involving fraud, willful misstatement, suppression of facts, detention and seizure of goods in transit, and confiscation of goods or conveyances.
Section 74
This section covers recovery of tax not paid, short paid, or erroneously refunded, or input tax credit wrongly availed or utilised, where the shortfall is due to fraud or suppression of facts. Any tax paid under this section is a penalty for misconduct and not eligible for credit.
Section 129
This section applies to detention, seizure, and release of goods and conveyances in transit. If goods are found to be transported without proper documents or in contravention of GST provisions, they may be detained. The tax and penalty paid for their release cannot be claimed as input tax credit.
Section 130
This section deals with confiscation of goods or conveyances and levy of penalty in cases of severe contraventions. Any tax paid as part of the confiscation proceedings is similarly blocked from credit eligibility.
Example
If a transporter moves goods without a valid e-way bill and the goods are detained, the tax and penalty paid for release cannot be claimed as input credit by either the transporter or the owner of the goods. Likewise, if a manufacturer understates sales to evade tax and is caught, the tax paid as part of the penalty proceedings under Section 74 is not creditable.
Business and Compliance Implications
Clauses (d) to (i) create a wide range of blocked credit scenarios that businesses must carefully monitor. The restrictions affect capital expenditure planning, supplier selection, procurement policies, employee benefits, loss management, and compliance during audits.
Construction on its own account requires strategic decisions about capitalisation and expense classification. Purchases from composition scheme dealers must be weighed against the loss of input tax credit. Non-resident taxable persons need to segregate imports from local procurements to maximise credit eligibility.
Personal consumption, losses, gifts, and offence-related taxes demand strict internal controls to ensure that ineligible credits are identified and reversed in time. Detailed documentation, including reasons for write-offs, proof of loss, and legal obligations for employee benefits, is essential to defend credit claims and reversals during GST audits.
Conclusion
The framework of input tax credit under the GST regime is designed to create a seamless flow of credit, thereby eliminating the cascading effect of taxes. However, Section 17(5) of the CGST Act, 2017 lays down deliberate and specific restrictions to ensure that credits are available only in circumstances that are directly connected to taxable business activities. These blocked credit provisions safeguard the integrity of the GST system by preventing undue claims that could erode the tax base.
Clauses (a) to (i) collectively address a wide spectrum of scenarios. From motor vehicles and vessels to personal consumption and goods lost due to theft or destruction, the law draws clear lines between eligible and ineligible credits. It also ensures that capital assets not intended for outward supply, services given for personal benefit, or transactions connected to non-compliance do not create unintended credit benefits. These provisions also take into account industry-specific situations, such as works contract services for immovable property, promotional free samples, and imports by non-resident taxable persons.
For businesses, the real challenge lies not just in understanding the blocked credit categories but also in maintaining robust accounting and compliance systems to track them. Each procurement decision, capital expenditure, and employee benefit plan must be reviewed through the lens of Section 17(5) to avoid wrongful availment of input tax credit. Timely identification and reversal of ineligible credits, supported by adequate documentation, remain critical for compliance and to avoid interest or penalties.
Ultimately, the blocked credit rules in Section 17(5) are not an obstacle but a structural safeguard within GST. By ensuring that credits are claimed only where there is a direct and legitimate connection to taxable output, these provisions reinforce fairness, transparency, and fiscal discipline in the tax system. Businesses that adapt their processes to respect these boundaries can operate with greater certainty and minimise disputes, while fully benefiting from the legitimate credits the law intends to provide.