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Apportionment of Credit and Blocked Credits under GST

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Section 17 is the backbone provision regulating the eligibility and quantification of Input Tax Credit (ITC) where inputs and input services are used for mixed purposes, or where ITC is not permissible at all.

It aims to:

  • Prevent misuse of ITC in cases of personal consumption or exempt supplies
  • Enforce fair apportionment of common credit where supplies are both taxable and exempt
  • Specify a clear list of disallowed ITC (blocked credits)

Applicable to:

  • Registered persons under GST
  • Input, input services, and capital goods
  • Interstate and intrastate supplies, exempt and taxable supplies, personal use, and construction activities

 

Apportionment of Input Tax Credit

Section 17(1): Business Use vs. Personal Use

“Where goods or services are used partly for business and partly for other purposes, ITC is allowed only to the extent used for business.”

Key Points:

  • Only business-related usage qualifies for ITC
  • Personal use portion must be reversed
  • Applies to input, input services, and capital goods

Rule Reference:

  • Rule 42 for inputs/input services
  • Rule 43 for capital goods

🧾 Practical Example:

Mr. A purchases an office laptop for ₹60,000 + ₹10,800 GST and uses it 80% for business, 20% for personal use.
Eligible ITC = ₹10,800 × 80% = ₹8,640

 

Section 17(2): Taxable vs. Exempt Supplies

“Where goods or services are used for both taxable (including zero-rated) and exempt supplies, ITC is allowed only for taxable supplies.”

Key Points:

  • Applies to exempted goods/services (like education, health, etc.)
  • Requires monthly reversal of common credit
  • Rule 42 and Rule 43 govern detailed computation
  • Zero-rated supplies (exports, SEZ) are treated as taxable for ITC eligibility

Rule Reference:

  • Rule 42 & 43: Prescribe A, B, C, D, E, F formula for reversal

🧾 Example:

If you make:

  • Taxable supplies: ₹15 lakhs
  • Exempt supplies: ₹5 lakhs
  • Total ITC on input services = ₹2 lakhs

Proportionate eligible ITC = 2,00,000 × (15/20) = ₹1,50,000
ITC to be reversed = ₹50,000

 

Section 17(3) Valuation of Exempt Supplies

Provision:

Exempt supplies also include:

  • Supplies on which recipient pays under Reverse Charge
  • Transactions in securities
  • Sale of land
  • Sale of buildings, subject to Schedule II

Explanation Update (w.e.f. 01.10.2023):
“Value of exempt supply” shall not include Schedule III items except:

  • Para 5 – Sale of land/building under certain conditions
  • Para 8(a) – Certain high seas sales or merchant trading

Section 17(4) Special Option for Banking & Financial Institutions

Provision:
A banking company, NBFC, or financial institution may:

  • Either follow apportionment under sub-section (2), or
  • Avail only 50% of eligible ITC on inputs, input services, capital goods every month

🔁Once opted, cannot be changed during the year.
Same PAN Entity Exception: 50% limit does not apply to inter-branch supplies under same PAN.

🧾 Example:
If a bank incurs ₹1,00,000 ITC in a month:

  • Can claim only ₹50,000
  • Remaining ₹50,000 lapses

 

Section 17(5) Blocked Credits

Provision:
No ITC allowed in following cases, even if used in course of business:

🚫 (a) Motor Vehicles for Passenger Transport (<13 seats)

ITC allowed only if used for:

  • Further supply (sale) of vehicle
  • Transportation of passengers
  • Driving school (training)

🚫 (aa) Vessels & Aircraft

Allowed only if used for:

  • Sale/resale
  • Passenger transport
  • Navigation/flying training
  • Goods transport

🚫 (ab) Insurance, Servicing, Repair for above Vehicles/Vessels/Aircraft

Allowed only if:

  • Used for the above purposes
  • Supplied by manufacturer or insurer

🚫 (b) Specified Goods/Services

ITC not allowed on:

  • Food & beverages, catering, beauty, health services, cosmetic/plastic surgery
  • Life & health insurance, club memberships
  • Vacation/leave travel for employees

✅ Exception: ITC allowed if:

  • Used to provide same category of outward supply, or
  • Statutorily required for employees (e.g., ESIC, factory canteen)

🚫 (c) Works Contract Services for Construction of Immovable Property

Allowed only if:

  • Used as input service for another works contract

🚫 (d) Goods/Services for Construction of Immovable Property (Own Use)

Even if for business, ITC not allowed.

🧾 Example:

  • Building a new office → No ITC on cement/steel/labour if capitalised
  • Plant & Machinery ✅ Allowed (defined below)

🚫 (e) Composition Scheme Dealers (Section 10)

  • No ITC on goods/services taxed under Composition Scheme.

🚫 (f) Non-Resident Taxable Person (NRTP)

  • Except for goods imported, ITC not allowed.

🚫 (fa) Corporate Social Responsibility (CSR) Activities

[New – w.e.f. 01.10.2023]

  • No ITC on inputs/services used for CSR obligations under Companies Act.

🚫 (g) Personal Consumption

  • No ITC on anything used personally, even if registered.

🚫 (h) Goods Lost, Stolen, Destroyed, Written Off, Gifted, Free Samples

🚫 (i) Tax Paid under Section 74 (up to FY 2023-24 only)

  • Relating to fraud, misstatement, suppression, etc.

🔄[Updated w.e.f. 01.11.2024]
Earlier blocked under sections 74, 129, 130.
Now limited to section 74 only, for periods up to FY 2023–24.

 

Conclusion

Section 17 ensures that ITC is used correctly and only for business-related and taxable purposes. Businesses must carefully:

  • Maintain accurate records of usage
  • Perform monthly reversals and apportionment

Avoid using blocked goods/services to prevent ITC denials during audits

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