GST Basics #12: Section 17 — When the Law Takes Your Input Tax Credit Back

Section 17 takes back part of the credit Section 16 gives you. A plain-language walk through apportionment between business and non-business and between taxable and exempt supplies, the 50% option for banks, and the blocked credit list in Section 17(5).

Section 16 tells you when you are entitled to input tax credit. Section 17 is the section that takes some of it away again. It does that in two quite different ways, and it helps to keep them apart.

The first way is apportionment. Section 17(1) says that where you buy something and use it partly for your business and partly for something else, you may keep only the credit attributable to the business use. Section 17(2) does the same job for a different split: where a purchase feeds both taxable supplies, including zero-rated exports, and exempt supplies, only the taxable share of the credit survives. Section 17(3) then tells you what counts as an exempt supply for this arithmetic, and it is broader than most people expect. It sweeps in supplies on which the recipient pays under reverse charge, transactions in securities, the sale of land and, subject to conditions, the sale of a completed building. Section 17(6) leaves the working to the rules, and Rules 42 and 43 of the CGST Rules set out the formulas, Rule 42 for inputs and input services and Rule 43 for capital goods. Section 17(4) gives banks, financial institutions and NBFCs a shortcut: instead of doing that arithmetic, they may simply take fifty per cent of their eligible credit each month and let the rest lapse. The choice is made once and cannot be changed during that financial year.

The second way is the blocked credit list in Section 17(5), and this is the part that catches ordinary businesses. Whatever your turnover and however clean your invoices, no credit is available on motor vehicles for carrying passengers with up to thirteen seats, or on vessels and aircraft, unless you are in the business of supplying them, transporting passengers, or training drivers; nor on their insurance and repairs. Nothing on food and beverages, outdoor catering, beauty treatment, health services, club and fitness memberships, or travel benefits given to employees, unless you supply the same thing onward or the law obliges you to provide it. Nothing on works contract services for constructing immovable property, or on goods and services used to construct property on your own account. Nothing on purchases from a composition dealer, on goods for personal consumption, or on goods lost, stolen, destroyed, written off or given away as free samples.

CBIC's Circular No. 172/04/2022-GST dated 6 July 2022 (https://gstcouncil.gov.in/sites/default/files/2024-06/cir-172-04-2022-cgst.pdf) clarified two useful points here: the "obligatory for an employer under any law" proviso applies to the whole of clause (b), not just its last limb, and the leasing restriction covers only motor vehicles, vessels and aircraft.

Clauses (c) and (d), on construction, remain the most litigated part of Section 17, and their wording has been amended since the Supreme Court considered it. Check the current text before relying on either. The full section text is in CBIC's consolidated CGST Act at https://cbic-gst.gov.in/pdf/CGST-Act-Updated-30092020.pdf

Next in this series: Section 18, credit in special circumstances.

Topics:Section 17 CGSTblocked creditSection 17(5)input tax credit reversalRule 42Rule 43exempt supplymotor vehicle ITCworks contract ITCbanks 50 per cent optionGST basicsChennai

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