Blocked Credit and Apportionment of Credit under GST

Understand Blocked Credits and Apportionment of Credit

Key rules to remember

Business purpose rule, section 17(1)

Eligible ITC = input tax attributable to business purposes

Credit on the part used for personal or other non-business purposes is not allowed.

Exempt supply rule, section 17(2)

Eligible ITC = input tax attributable to taxable supplies (including zero-rated supplies)

Where inputs are used for both taxable and exempt supplies. The exact attribution method is as prescribed in the rules.

Common credit working (exam approach)

Eligible common credit = Common ITC × (Turnover of taxable and zero-rated supplies ÷ Total turnover)

Total turnover includes exempt supplies. Use this proportion only when the question or rules give no better attribution. Credit directly attributable to taxable supplies is fully allowed and to exempt supplies fully denied.

Banks and NBFCs option, section 17(4)

Credit allowed = 50% of eligible ITC each month; rest lapses

Option once exercised cannot be withdrawn during the rest of the financial year. The 50% limit does not apply to tax on supplies between registered persons having the same PAN.

Blocked items, section 17(5)

No ITC on: motor vehicles (up to 13 persons) and vessels/aircraft, with exceptions; related insurance, servicing and repairs; food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing/renting/hiring of such vehicles, life and health insurance; club and fitness membership; employee vacation travel benefits; works contract and goods or services for construction of immovable property (other than plant and machinery); tax paid under composition (section 10); non-resident taxable person's inputs (except imported goods); CSR activities; personal consumption; goods lost, stolen, destroyed, written off, gifted or free samples; tax paid under section 74 for periods up to FY 2023-24

Each item has exceptions. Learn the exception with the item.

How to solve Blocked Credits and Apportionment of Credit questions

1. 1List every input and the GST paid on it, and note whether it is goods, services or capital goods.
2. 2Check section 17(5) first. Cross out any item that is blocked, and check whether an exception applies (for example, vehicle used for transporting passengers, or food supplied as part of a taxable outward supply of the same category).
3. 3For the remaining items, separate business from non-business use and deny the non-business part.
4. 4Separate credit used only for taxable supplies (fully allowed), only for exempt supplies (fully denied) and used for both (common credit).
5. 5Apportion the common credit using the turnover ratio, or the method given in the question.
6. 6Add the allowed amounts to get the eligible ITC, and state the blocked or ineligible amount separately.
7. 7Write a one-line reason for each denial, citing section 17(5) or 17(2) where you are sure.

Quickest way: Three-bucket sort

Common mistakes in Blocked Credits and Apportionment of Credit

• Treating blocked credit and apportionment as the same thing.

  Both reduce credit, and both sit in section 17.

  Fix: Ask whether the item is on the list in section 17(5) (blocked) or whether the use is mixed (apportionment). Blocked items are denied in full, regardless of use.

• Denying credit on food or club membership in every case.

  Students memorise the list without the exceptions.

  Fix: For food, outdoor catering and similar items, credit is allowed where the inward supply is used for an outward taxable supply of the same category or as an element of a taxable composite or mixed supply. Employee benefits are allowed where law obliges the employer to provide them.

• Blocking all construction credit, including plant and machinery.

  Students remember 'construction of immovable property' only.

  Fix: Section 17(5)(c) and (d) exclude plant and machinery. The Act defines plant and machinery as equipment fixed to earth by foundation or structural support and used for outward supply. It excludes land, buildings and civil structures, telecommunication towers and pipelines outside the factory.

• Leaving exempt turnover out of the denominator in the turnover ratio.

  Students divide taxable turnover by taxable turnover.

  Fix: The denominator is total turnover, including exempt supplies. Remember it as taxable ÷ total.

• Applying the ratio to all credit, including credit directly linked to taxable or exempt supplies.

  It feels simpler to apportion everything.

  Fix: Only common credit needs apportionment. Directly attributable credit is allowed or denied in full.

• Forgetting that motor vehicle blocking covers servicing, repair and insurance.

  Students look only at the purchase of the vehicle.

  Fix: Section 17(5)(ab) blocks general insurance, servicing, repair and maintenance for blocked vehicles, vessels or aircraft. It is allowed where the vehicle is used for the permitted purposes, or the recipient manufactures such vehicles or supplies insurance on them.

Worked examples