CGST Section 17 — Apportionment of credit and blocked credits

Section 17 of the CGST Act deals with how businesses can claim Input Tax Credit (ITC) when they use goods or services for both business and non-business purposes, or for making both taxable and exempt supplies. It also outlines specific situations where ITC is blocked, meaning it cannot be claimed, even if the goods or services are used for business purposes.

This section applies to all GST-registered individuals or entities (referred to as "registered persons") who use their inputs (goods, services, or both) for a mix of purposes. This mix can include: (a) partly for business and partly for personal or other non-business use, or (b) partly for making taxable supplies (including zero-rated supplies like exports) and partly for making exempt supplies (supplies on which GST is not levied). The section is perpetually in effect and applies whenever such mixed-use scenarios arise.

Here are the key conditions and exceptions:

• Apportionment for Business and Non-Business Use: If inputs are used partly for business and partly for other purposes, ITC can only be claimed on the portion attributable to the business use.
  • Example: A company director uses a company car for both business trips and personal errands. The company can only claim ITC on the portion of the car's cost and maintenance related to business use.
• Apportionment for Taxable and Exempt Supplies: If inputs are used partly for making taxable supplies and partly for making exempt supplies, ITC can only be claimed on the portion attributable to taxable supplies (including zero-rated supplies).
  • Example: A manufacturer produces both GST-taxable goods and GST-exempt agricultural products. They can only claim ITC on the inputs used to manufacture the taxable goods.
• Value of Exempt Supply: The method for determining the value of exempt supplies is prescribed under the GST Rules. Crucially, this value includes supplies where the recipient pays tax under the reverse charge mechanism, transactions in securities, sale of land, and (subject to certain conditions) the sale of buildings. Importantly, post amendment, the value of exempt supply excludes activities or transactions specified in Schedule III of the CGST Act, except those specified in paragraph 5 (sale of land and building) and certain activities mentioned in clause (a) of paragraph 8 of that Schedule (supply of warehoused goods before clearance for home consumption).
• Banking Companies and Financial Institutions: These entities have a specific option. Instead of calculating the exact apportionment, they can choose to avail 50% of the eligible ITC on inputs, capital goods, and input services every month, with the remaining 50% lapsing. This option, once exercised, cannot be withdrawn during the remaining part of the financial year. However, this 50% restriction doesn't apply to taxes paid on supplies made between two registered persons with the same PAN.
  • Example: A bank chooses the 50% option. If its eligible ITC for a month is ₹100,000, it can claim ₹50,000 as ITC, and the remaining ₹50,000 is forfeited.
• Blocked Credits (Section 17(5)): This sub-section lists specific items and services for which ITC is not allowed, even if they are used for business.
  • Motor Vehicles: ITC is generally blocked on motor vehicles for the transportation of persons with an approved seating capacity of not more than thirteen (including the driver). However, exceptions exist if the vehicles are used for: (A) further supply of such vehicles (i.e., dealing in cars), (B) transportation of passengers (taxi service), or (C) imparting driving training.
  • Vessels and Aircraft: ITC is blocked unless used for further supply, transportation of passengers or goods, or imparting navigation/flying training.
  • Related Services: ITC on general insurance, servicing, repair, and maintenance related to the above motor vehicles, vessels, or aircraft is also blocked, unless they are used for the specified purposes.
  • Other Blocked Credits: This also includes food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. However, an exception is made if a business is in the same line of business making similar outward supplies.

Amendments: Significant amendments to Section 17(5) were made effective from 1st February 2019. These changes primarily relate to the rules surrounding ITC on motor vehicles, vessels, and aircraft, and their related services. Prior to this, the law was much more restrictive. The Finance Act 2023 also brought about changes by way of Notification No. 28/2023-C.T. dated 31st July 2023 relating to the 'value of exempt supply'.

Practical Implications for Businesses:

• Businesses need to carefully track how their inputs are used to determine the eligible ITC.
• Robust accounting systems are crucial to accurately allocate ITC between business and non-business use, and between taxable and exempt supplies.
• Businesses should regularly review the list of blocked credits under Section 17(5) to ensure they are not claiming ineligible ITC.
• Banking and financial institutions should evaluate whether the 50% option is more beneficial than calculating the actual apportionment.

Understanding Section 17 is vital for GST-registered businesses to ensure accurate ITC claims and avoid potential penalties for claiming ineligible credits. It encourages businesses to maintain detailed records and understand the nuances of the law.