What is blocked credit under GST?

Under the Goods and Services Tax (GST) framework in India, Blocked Credit refers to the input tax credit (ITC) that cannot be claimed by a registered taxpayer. Even though the taxpayer incurs GST on certain goods and services, they are not allowed to claim credit for the tax paid on these items. The list of such items is specified under the provisions of the GST Act.

Provisions Regarding Blocked Credit under GST

The main provision governing blocked credits is laid out under Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017. This section specifies the types of goods and services on which a registered taxpayer cannot claim input tax credit.

Key Provisions under Section 17(5):

1. Motor Vehicles:
   • Input credit on motor vehicles is blocked unless the vehicle is used for the following purposes:
     • Transportation of goods.
     • Passenger transport.
     • Provided as a part of a taxable service (e.g., taxis, cabs).
   • This means that businesses that buy vehicles for personal use or for resale cannot claim ITC.
2. Food and Beverages, Outdoor Catering, and Life Insurance:
   • Input credit is blocked for food and beverages, outdoor catering, and life insurance or health insurance premiums, except when:
     • The expense is incurred for business purposes, and
     • The same is provided to employees as part of their taxable remuneration.
3. Construction of Buildings (except for taxable supply):
   • Credit is blocked for any goods or services used for the construction of a building or civil structure unless it is used to make taxable supplies.
4. Works Contract Services:
   • ITC is not allowed on works contract services used for the construction of immovable property, other than for business purposes (e.g., residential property).
5. Personal Consumption:
   • Any goods or services used for personal consumption cannot claim input credit, even if they are part of the business’s operations.
6. Rent-a-Cab Services:
   • ITC on rent-a-cab services is blocked unless the services are used for the taxable business activity.
7. Goods and Services used for “Non-Business” Purposes:
   • Any goods or services used exclusively for personal use or non-business purposes are ineligible for credit.
8. Non-Taxable Supplies:
   • ITC cannot be claimed on any input or service used to supply non-taxable goods or services.

Acts in the Indian Constitution Relevant to GST

The Goods and Services Tax Act was introduced as a constitutional amendment in India:

1. Constitution (One Hundred and First Amendment) Act, 2016:
   • This amendment to the Indian Constitution paved the way for the introduction of GST.
   • It altered various provisions related to taxation, including the introduction of a new Article 246A to empower the Parliament and State Legislatures to levy taxes on the supply of goods and services.
2. Article 246A:
   • Provides the power to both the Union Government and State Governments to impose GST within their respective jurisdictions.
3. Article 279A:
   • This article established the Goods and Services Tax Council, a key body that recommends on GST-related matters, including the list of goods and services for which credit can be blocked.
4. Article 268A:
   • Empowers the Union Government to levy tax on the supply of goods and services, subject to the GST Council’s recommendations.

Landmark Cases and Judgments on Blocked Credit

Several landmark cases have helped clarify the provisions around blocked credit and the interpretation of GST laws:

1. M/s. Sutherland Global Services Pvt. Ltd. v. Union of India (2019):
   • This case dealt with the eligibility of Input Tax Credit (ITC) on motor vehicles. The company argued that they used vehicles for the provision of taxable services (transporting employees). However, the court ruled in favor of the tax department, emphasizing that the credit for motor vehicles could only be claimed when the vehicles were used for taxable supplies such as transportation of goods or passengers.
2. Toyota Kirloskar Motor Pvt. Ltd. v. Union of India (2018):
   • This case was about the eligibility of ITC on certain goods used by the automotive manufacturer. The ruling clarified that manufacturers could not claim input credit on certain goods purchased for business purposes if the same were not sold in the course of taxable supplies.
3. Vodafone Idea Ltd. v. Union of India (2021):
   • In this case, the Delhi High Court dealt with the issue of blocking ITC on telecom services used for non-business purposes. The ruling laid down the importance of differentiating between business and non-business uses of input services and clarified that if the services were used for personal consumption, no ITC would be allowed.
4. AAR Ruling on ITC Blockage for Goods Used for Personal Consumption (2019):
   • A significant ruling from the Authority for Advance Rulings (AAR) clarified that no ITC can be claimed for goods and services used for personal consumption, even if these were used in the course of the business.

Conclusion

Blocked credit under GST aims to prevent misuse of input tax credit for non-business, personal, or exempted goods and services. The provisions under Section 17(5) clearly define the categories where ITC is ineligible, such as motor vehicles (unless used for specific purposes), food and beverages, and works contracts for construction. Landmark cases have further defined the contours of these provisions, and judgments emphasize the distinction between business and non-business consumption.