One of the biggest attractions of the GST system is Input Tax Credit (ITC) – the ability to set off the tax you pay on purchases against the tax you collect on sales. Sounds like a dream, right?
But here’s the catch: not every expense qualifies for ITC. The GST law clearly lists certain goods and services on which ITC cannot be claimed. These are called “blocked credits.”
Think of it like this: GST allows you to breathe through the oxygen mask of ITC, but in some cases, the regulator says – “Sorry, this oxygen is not for you.”
In this blog, we’ll break down what blocked credits are under GST, the legal framework, real-life examples, case laws, and compliance tips so that you never mistakenly claim ineligible ITC and invite tax notices.
Legal Basis of Blocked Credit
The key provision is Section 17(5) of the CGST Act, 2017, which explicitly disallows ITC on certain goods and services, regardless of their use in business.
What Are Blocked Credits?
In simple words, Blocked credits are those Input Tax Credits that you are not allowed to claim under GST, even if you incur the expense for business purposes.
This is mainly to prevent misuse, plug revenue leakage, or align tax benefits with policy decisions.
List of Blocked Credits Under Section 17(5)
Let’s go clause by clause:
1. Motor Vehicles & Conveyances
- ITC is blocked on motor vehicles for transporting persons with a seating capacity of ≤ 13 (including driver).
- Exceptions (where ITC is allowed):
- Vehicles used for transportation of goods.
- Vehicles used for passenger transport (bus operators, cab services).
- Driving schools providing training.
📌 Example: A company director buys a luxury car in the company’s name. ITC not allowed. But a logistics company buying trucks for goods movement? ITC allowed.
2. Food, Beverages & Personal Consumption Items
- ITC blocked on:
- Food & beverages
- Outdoor catering
- Beauty treatment, health services, cosmetic & plastic surgery
- Allowed if:
- Used for making outward taxable supplies of the same category (e.g., caterer buying catering services).
📌 Example: A corporate books a hotel banquet with catering for its annual party – ITC blocked. But a catering business hiring subcontractors – ITC allowed.
3. Membership of Clubs, Health & Fitness Centres
- ITC not allowed on expenses like:
- Gym memberships for employees
- Club fees
- Spa/fitness centres
📌 Scenario: A company pays for its executives’ golf club membership. ITC blocked.
4. Rent-a-Cab, Life Insurance, Health Insurance
- ITC blocked on these services.
- Exceptions (allowed if):
- Company is mandated by law (e.g., under Factories Act) to provide insurance/transport.
- Services are used to make taxable outward supply of the same service.
📌 Example: If a company provides employee transport as per law, ITC is allowed. But arranging cabs voluntarily for staff? ITC blocked.
5. Works Contract Services
- ITC blocked on works contracts for construction of immovable property (except plant & machinery).
- Exception: Allowed if the works contract is for supplying further works contract services.
📌 Example: A real estate developer constructing a mall cannot claim ITC on contractor bills. But a contractor subcontracting another? ITC allowed.
6. Construction of Immovable Property
- ITC not allowed on goods/services used for construction of immovable property (other than plant & machinery), even if used for business purposes.
📌 Example: Office renovation – ITC blocked. But buying machinery for a factory – ITC allowed.
7. Goods/Services for Personal Consumption
- ITC is blocked if goods/services are used for personal consumption.
📌 Example: Company buys furniture for MD’s house – ITC blocked.
8. Goods Lost, Stolen, Destroyed, or Written Off
- ITC blocked on goods lost, stolen, destroyed, written off, or given as free samples.
📌 Example: Pharma company distributes free medical samples – ITC blocked.
9. Tax Paid Under Certain Situations
- ITC blocked on:
- GST paid under Section 74 (fraud, suppression, misstatement).
- GST paid under Section 129 & 130 (confiscation, detention, seizure).
📌 Example: If goods are seized in a truck due to non-compliance, the penalty tax paid cannot be claimed as ITC.
Case Law Insights on Blocked Credit
- Safari Retreats Pvt. Ltd. vs. Union of India (Orissa HC, 2019)
- Court allowed ITC on construction of immovable property intended for letting out.
- However, the decision was stayed by SC. Pending clarity.
- Calibre Chemicals Pvt. Ltd. vs. CCE, Daman (2021)
- Refund allowed for services distinguished from “commission agent.” Shows how carefully ITC eligibility must be examined.
- McLeod Russel India Ltd. vs. UOI (Gauhati HC, 2025)
- Reinforced that bona fide taxpayers should not be penalized for supplier defaults.
Practical Checklist for Businesses
✅ Verify invoices against Section 17(5) before claiming ITC.
✅ Keep separate accounts for blocked credits (to avoid accidental claims).
✅ Reconcile GSTR-2B with books monthly.
✅ For doubtful cases, check if the expense is mandatory under law (if yes, ITC may be allowed).
✅ Watch for judicial updates – some blocked credits are under litigation.
Real-Life Scenarios
- Corporate Gym Memberships: A company sponsors employee wellness programs with gym memberships. ITC blocked.
- Office Renovation: Spending on tiles, interiors, and civil works for office space – ITC blocked (immovable property).
- Factory Fire: Raw material destroyed in fire – ITC blocked on destroyed stock.
- Logistics Business Trucks: Company buys trucks for delivery services – ITC allowed (not blocked).
Frequently Asked Questions (FAQs)
Q1. Is ITC allowed on company cars?
No, unless used for transport services or driving schools.
Q2. Can I claim ITC on free employee meals?
No. Food & beverages are blocked credits unless part of outward catering supply.
Q3. What about ITC on health insurance for employees?
Allowed only if mandated by law (e.g., ESIC, Factories Act compliance).
Q4. Can ITC be claimed on goods given as promotional freebies?
No. Free samples = blocked credit.
Q5. Is ITC available on office construction expenses?
No, construction of immovable property is ineligible (except plant & machinery).
Conclusion
Blocked credits under GST are like “no-entry zones” for ITC. Section 17(5) ensures businesses don’t misuse ITC for personal perks, capital building, or freebies.
ITC is the lifeblood of GST, but blocked credits are the guardrails. Stay vigilant, claim only eligible ITC, and protect your business from disputes and penalties.
