Section 17 Of The Central Goods And Services Tax Act 2017
Original Text
17. Apportionment of credit and blocked credits.
(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
Explanation.—For the purposes of this sub-section, the expression ‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except,—
(i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and
(ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule.
(4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:
Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year:
Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—
(A) further supply of such motor vehicles; or
(B) transportation of passengers; or
(C) imparting training on driving such motor vehicles;
(aa) vessels and aircraft except when they are used––
(i) for making the following taxable supplies, namely:—
(A) further supply of such vessels or aircraft; or
(B) transportation of passengers; or
(C) imparting training on navigating such vessels; or
(D) imparting training on flying such aircraft;
(ii) for transportation of goods;
(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):
Provided that the input tax credit in respect of such services shall be available—
(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;
(ii) where received by a taxable person engaged—
(I) in the manufacture of such motor vehicles, vessels or aircraft; or
(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;
(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre; and
(iii) travel benefits extended to employees on vacation such as leave or home travel concession:
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
(e) goods or services or both on which tax has been paid under section 10;
(f) goods or services or both received by a non-resident taxable person except on goods imported by him;
(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013);
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
(i) any tax paid in accordance with the provisions of section 74 in respect of any period upto Financial Year 2023-24.
(6) The Government may prescribe the manner in which the credit referred to in sub-sections (1) and (2) may be attributed.
Explanation.––For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.
Visual Summary
Apportionment
ITC is restricted to business use and taxable supplies. No credit for personal use or exempt supplies.
Banking Option
Banks can choose between actual apportionment OR a flat 50% ITC claim on eligible inputs.
Blocked Credits (17(5))
The ‘Negative List’: Motor vehicles, food, beauty, CSR, and immovable property construction are generally blocked.
Summary
Section 17 acts as a filter for Input Tax Credit (ITC). While Section 16 allows ITC generally, Section 17 restricts it. The core principle is that ITC is only available for goods/services used for business purposes and for making taxable supplies. If you buy something for personal use or to make tax-exempt sales, you cannot claim the GST paid on that purchase.
The most critical part of this section is Sub-section (5), often called the “Blocked Credit” list. This list specifies items on which ITC is never allowed, even if used for business. This includes most passenger vehicles, food and beverages, club memberships, and construction of buildings (unless you are in the construction business). Recent amendments have also explicitly blocked credit for Corporate Social Responsibility (CSR) expenses.
In-Depth Analysis
1. The Mechanism of Apportionment (Rule 42 & 43):
Section 17(1) and (2) mandate that if inputs are used for both business and non-business purposes, or for both taxable and exempt supplies, the credit must be reversed proportionately. This is operationally handled via Rules 42 (inputs/input services) and 43 (capital goods) of the CGST Rules, which provide mathematical formulas to calculate the reversal amount.
2. The Banking Option (Section 17(4)):
Banks and NBFCs have a unique business model with massive exempt income (interest). Tracking every input against taxable vs. exempt supply is administratively difficult. Section 17(4) offers a simplified compliance method: take a flat 50% of eligible ITC and forego the rest. This option, once exercised, is binding for the financial year.
3. Immovable Property & The “Plant and Machinery” Debate:
Section 17(5)(c) and (d) block credit for construction of immovable property. The exception is “plant and machinery.” This distinction is vital. If a structure is defined as a building, credit is blocked. If it qualifies as plant and machinery (like a foundation for a heavy machine), credit is allowed. This has been a massive area of litigation (see Deep Research below).
4. Personal Consumption & Write-offs:
Section 17(5)(g) and (h) ensure that goods leaving the business chain without tax (stolen, destroyed, or personally consumed) do not retain ITC. This prevents tax leakage where the final consumption happens without output tax.
Deep Research & Legal Precedents
The interpretation of Section 17(5) has undergone significant turbulence recently, specifically regarding real estate and CSR.
In a landmark judgment (Oct 2024), the Supreme Court initially ruled in favor of taxpayers. It introduced the “Functionality Test,” stating that if a building (like a mall) is essential to the business activity (renting), it might qualify as a “plant,” thereby allowing ITC. This challenged the strict blockage of ITC on immovable property.
The Legislative Counter-Strike (Finance Act, 2025):
To nullify the impact of the Safari Retreats judgment, the government introduced a retrospective amendment to Section 17(5)(d). The phrase “plant or machinery” was changed to “plant and machinery.” By aligning this with the strict definition in the Explanation (which explicitly excludes land and buildings), the amendment effectively blocks ITC on commercial buildings for renting, retrospective from July 1, 2017.
CSR Expenditure Block (Section 17(5)(fa)):
Introduced by the Finance Act, 2023, this clause explicitly blocks ITC on goods/services used for Corporate Social Responsibility (CSR). This ended the debate on whether CSR was a “business expense” eligible for credit. It is now a cost to the company.
The Court held that inherent manufacturing loss (process loss) does not fall under Section 17(5)(h) (goods lost/destroyed). Therefore, ITC reversal is not required for invisible process losses, distinguishing them from theft or fire.
Practical Examples
1. Motor Vehicles (Blocked vs. Allowed)
Scenario A: ABC Ltd. buys a sedan for the Managing Director to commute.
Result: ITC Blocked under 17(5)(a) as seating capacity is likely ≤ 13 and it’s not for specific exempt purposes.
Scenario B: ABC Ltd. buys a truck to transport raw materials.
Result: ITC Allowed as it is for transportation of goods.
2. Food and Beverages
Scenario A: A software company orders lunch for its employees during a meeting.
Result: ITC Blocked under 17(5)(b)(i).
Scenario B: An event management company hires a caterer for a client’s wedding event.
Result: ITC Allowed because the inward supply (catering) is used to make an outward taxable supply of the same category (event catering).
3. Construction of Office
Scenario: XYZ Ltd. constructs a new corporate head office. They buy cement, steel, and hire an architect.
Result: ITC Blocked under 17(5)(c/d) as it results in an immovable property on their own account. However, if they install a specialized lift (plant and machinery), ITC on the lift might be allowed depending on specific state rulings, though the building structure itself is definitely blocked.
Key Takeaways
- ✓ Business Use Only: ITC is strictly for business purposes. Personal use requires proportionate reversal.
- ✓ Taxable Supplies Only: Inputs used for exempt supplies do not qualify for ITC.
- ✕ Strict Negative List: Section 17(5) overrides Section 16. Even if it’s for business, if it’s on the list (cars, food, CSR, construction), you cannot claim it.
- ✕ Construction Block: The 2025 amendment reinforces that building construction for renting is blocked, nullifying the “Functionality Test” for real estate.
Process Flowchart
Practice Questions
1. Which of the following is NOT a blocked credit under Section 17(5)?
A) Food and beverages for staff lunch
B) Membership of a health club
C) Truck used for transportation of goods
D) Construction of office building
Correct Answer: C) Truck used for transportation of goods
2. What is the ITC reversal option available to Banking Companies under Section 17(4)?
A) 20% reversal
B) 50% availment of eligible credit
C) 100% availment
D) No option available
Correct Answer: B) 50% availment of eligible credit
3. Can ITC be claimed on goods used for CSR activities?
A) Yes, always
B) Yes, if it is a statutory obligation
C) No, it is specifically blocked under Section 17(5)(fa)
D) Only 50% allowed
Correct Answer: C) No, it is specifically blocked under Section 17(5)(fa)
Related Provisions
| Section | Description |
|---|---|
| Section 16 | Eligibility and conditions for taking input tax credit |
| Section 18 | Availability of credit in special circumstances |
| Rule 42 & 43 | Manner of determination of input tax credit and reversal |
Conclusion
Section 17 is the gatekeeper of the Input Tax Credit mechanism. While Section 16 opens the door, Section 17 ensures that only legitimate business credits pass through. The list of blocked credits under Section 17(5) is exhaustive and strictly interpreted by tax authorities. With the 2025 amendment closing the “Functionality Test” loophole for immovable property and the specific inclusion of CSR expenses in the blocked list, businesses must exercise extreme caution. Proper apportionment under Rules 42 and 43 is essential to avoid interest and penalty liabilities during audits.