Library / Goods and Services Tax: The Professional's Master Guide

16. Blocked Credits (Section 17(5))

Section 17(5) of the CGST Act lists goods and services on which credit is not available even though every condition of section 16 is met. It opens with "Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18", so it overrides the general entitlement. The items blocked are mostly personal in nature (cars, food, clubs, holidays), end up in immovable property outside the GST chain, or do not deserve credit (composition tax, fraud demands, lost goods). Each exception is narrow and is read strictly.

16.1 Motor vehicles, vessels and aircraft: clauses (a), (aa) and (ab)

Clause (a) blocks credit on motor vehicles for transportation of persons with approved seating capacity of not more than 13 persons (including the driver), except when used for further supply of such vehicles, transportation of passengers, or imparting training on driving them. Goods vehicles and passenger vehicles with more than 13 seats are outside the block. Clause (aa) blocks credit on vessels and aircraft except when used for further supply, transport of passengers or goods, or training. Clause (ab) blocks general insurance, servicing, repair and maintenance of the vehicles, vessels and aircraft in (a) and (aa), unless the vehicle is used for an excepted purpose or the service is received by a manufacturer of such vehicles or by an insurer. This structure dates from the amendment effective 1 February 2019.

Illustration 96: Vehicle fleet of a manufacturer

Rathi Industries Pvt. Ltd., Nashik, buys the following in 2026-27 (post 22 September 2025 rates).

(a) SUV for the managing director Rs. 12,00,000 plus 40% = Rs. 4,80,000: blocked.

(b) Small car for the sales team Rs. 6,00,000 plus 18% = Rs. 1,08,000: blocked.

(d) Delivery truck Rs. 25,00,000 plus 18% = Rs. 4,50,000: allowed (goods vehicle).

(e) Insurance and servicing of the SUV Rs. 60,000 plus 18% = Rs. 10,800: blocked under clause (ab).

Result: Allowed Rs. 9,90,000. Blocked Rs. 4,80,000 + Rs. 1,08,000 + Rs. 10,800 = Rs. 5,98,800, which is added to the cost in the books.

Key point

A car dealer's demo cars and a driving school's cars carry credit under the exceptions. A taxi operator paying 5% without ITC on passenger transport is barred by the rate notification, not by section 17(5).

16.2 Food, beauty, health, rent-a-cab and insurance: clause (b)(i)

Sub-clause (i) of clause (b) blocks food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of the vehicles, vessels or aircraft in clauses (a) and (aa), and life and health insurance. Credit is still allowed in two cases:

Same category or composite supply: 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 (a caterer sub-contracting part of an order; an event manager buying food for an event package).
Obligation under law: it is obligatory for the employer to provide the item to employees under any law in force. CBIC Circular 172/04/2022-GST clarified that this proviso applies to the whole of clause (b).

After GST 2.0, individual life and health policies are exempt. Group health and life policies for employees remain at 18%, and credit is blocked unless a law requires the cover. Beauty and wellness services are at 5% without credit.

Illustration 97: Canteen, events and staff lunch

Sai Auto Components Ltd. employs 400 workers in Pune; the State Factories Rules require a canteen above 250 workers.

(a) Canteen contractor bills Rs. 4,00,000 plus 5% = Rs. 20,000. Allowed: canteen obligatory under law.

(b) Diwali lunch for staff at a hotel (specified premises) Rs. 1,50,000 plus 18% = Rs. 27,000. Blocked.

(c) Sai Events, an event manager, buys catering from a hotel that is specified premises, Rs. 2,00,000 plus 18% = Rs. 36,000, for a client's product launch billed at Rs. 6,00,000 plus 18%. Allowed: element of a taxable composite supply.

Result: Allowed Rs. 20,000 and Rs. 36,000; blocked Rs. 27,000.

16.3 Clubs, fitness and travel benefits: clause (b)(ii) and (iii)

Credit is blocked on membership of a club, health and fitness centre, and on travel benefits to employees on vacation, such as leave or home travel concession. Business travel is not affected: a sales manager's flight to meet a customer is an input service, but an LTC holiday package is blocked.

16.4 Works contract and own-account construction: clauses (c) and (d)

Clause (c) blocks works contract services for construction of immovable property (other than plant and machinery), except where used for further supply of works contract service. Clause (d) blocks goods or services received for construction of immovable property (other than plant and machinery) on own account, even when used in the business. "Construction" includes re-construction, renovation, additions, alterations or repairs to the extent of capitalisation, so repairs charged to profit and loss are not blocked.

"Plant and machinery" means apparatus, equipment and machinery fixed to earth by foundation or structural support, used for making outward supplies, including such foundation and support. It excludes land, building or other civil structures, telecommunication towers, and pipelines laid outside the factory premises.

Judicial view: Plant or machinery: the functionality test

Safari Retreats (P) Ltd. v. Chief Commissioner of CGST (Supreme Court, 2024): On 3 October 2024 the Court upheld clauses (c) and (d), but held that "plant or machinery" in clause (d) is wider than the defined "plant and machinery". A building such as a mall built for letting out could be a "plant" if it passes a functionality test on the facts, and the matter was sent back to the High Court.

The Finance Act, 2025 substituted "plant and machinery" for "plant or machinery" in clause (d) retrospectively from 1 July 2017, on the recommendation of the 55th GST Council meeting, calling the earlier words a drafting error. The functionality test no longer applies; credit on malls, hotels, warehouses and offices for letting out is blocked for all open periods. Taxpayers who relied on Safari Retreats should review their exposure and watch for challenges to the retrospective amendment.

Illustration 98: New factory project

Neelkanth Foods Pvt. Ltd. sets up a factory in Indore. All costs are capitalised; GST at 18%.

(a) Works contract for factory building Rs. 2,00,00,000: GST Rs. 36,00,000, blocked. (b) Machine foundations Rs. 20,00,000: GST Rs. 3,60,000, allowed. (c) Machinery Rs. 1,50,00,000: GST Rs. 27,00,000, allowed.

(d) Compound wall Rs. 15,00,000: GST Rs. 2,70,000, blocked. (e) Effluent pipeline outside the factory Rs. 8,00,000: GST Rs. 1,44,000, blocked. (f) Office roof repairs expensed Rs. 2,00,000: GST Rs. 36,000, allowed.

Result: Allowed = Rs. 3,60,000 + Rs. 27,00,000 + Rs. 36,000 = Rs. 30,96,000. Blocked = Rs. 36,00,000 + Rs. 2,70,000 + Rs. 1,44,000 = Rs. 40,14,000.

Practice note

Ask contractors to bill machine foundations separately from the building, and keep drawings showing which foundation carries which machine. A lump-sum turnkey invoice invites the department to treat the whole as a building.

16.5 Composition tax, non-residents and CSR: clauses (e), (f) and (fa)

Clause (e) blocks composition tax. Clause (f) blocks supplies received by a non-resident taxable person, except goods he imports. Clause (fa), from 1 October 2023, blocks goods or services used for corporate social responsibility obligations under section 135 of the Companies Act, 2013. A company buying computers for Rs. 10,00,000 plus GST Rs. 1,80,000 to donate to a school under its CSR plan cannot claim the Rs. 1,80,000.

16.6 Personal use, lost goods, gifts and samples: clauses (g) and (h)

Clause (g) blocks goods or services for personal consumption. Clause (h) blocks goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. If credit was taken on purchase, it must be reversed when the event occurs. For destroyed finished goods, the credit on the inputs contained in them is reversed. Normal process loss is not covered.

Illustration 99: Flood loss with insurance claim

Kiran Chemicals, Vadodara, loses stock in a flood in August 2026. All inputs were bought at 18%.

Step 1: Raw material destroyed, cost Rs. 6,00,000: reverse Rs. 1,08,000.

Step 2: Finished goods destroyed containing inputs of Rs. 4,00,000: reverse Rs. 72,000.

Result: Total reversal Rs. 1,80,000 (CGST Rs. 90,000 + SGST Rs. 90,000) in Table 4B(1) for August 2026. The insurance claim of Rs. 12,00,000 attracts no GST and does not save the credit.

Illustration 100: Gifts, samples and personal use

Om Pharma Ltd., October 2026:

(a) Diwali hampers for 200 employees at Rs. 3,000 each = Rs. 6,00,000 plus 18% = Rs. 1,08,000. Not a supply (below Rs. 50,000 per employee), but credit is blocked as a gift.

(b) Physician samples containing inputs with credit of Rs. 9,000: reverse.

(c) A director takes an air conditioner from stock (cost Rs. 40,000, credit Rs. 7,200) for his home: reverse, unless treated as a taxable supply to him.

Result: Credit not available = Rs. 1,08,000 + Rs. 9,000 + Rs. 7,200 = Rs. 1,24,200.

CBIC Circular 92/11/2019-GST clarified that in "buy one, get one free" offers nothing is free; both items form one supply for one price, and full credit is available. Discounts shown on the invoice do not affect credit.

16.7 Tax paid on fraud demands: clause (i)

Clause (i) blocks credit of tax paid under section 74 for any period up to FY 2023-24; rule 36(3), as amended in 2024, likewise refers only to demands confirmed under section 74. The reference to sections 129 and 130 was omitted by the Finance Act, 2023, and the Finance (No. 2) Act, 2024 limited the clause to periods up to FY 2023-24. On its present text, the clause does not cover tax paid under section 74A for FY 2024-25 onwards; check for any later amendment before advising.

16.8 Master table of blocked credits

The table below is a checklist for the monthly credit review.

Clause	Blocked item	Credit still allowed when
17(5)(a)	Passenger motor vehicles up to 13 seats	Resale; passenger transport; driving training
17(5)(aa)	Vessels and aircraft	Resale; passenger or goods transport; training
17(5)(ab)	Insurance, repair and servicing of above	Excepted use; received by manufacturer or insurer
17(5)(b)(i)	Food, catering, beauty, health, cosmetic surgery, rent-a-cab, life and health insurance	Same category or composite outward supply; obligatory under law
17(5)(b)(ii), (iii)	Club and fitness membership; leave or home travel	Obligatory under law
17(5)(c), (d)	Works contract and own construction of immovable property, including capitalised repairs	Plant and machinery; further works contract; repairs expensed
17(5)(e), (f), (fa)	Composition tax; non-resident taxable person; CSR	Goods imported by non-resident
17(5)(g), (h)	Personal use; goods lost, destroyed, written off, gifted, free samples	None (normal process loss not covered)
17(5)(i)	Tax paid under section 74 up to FY 2023-24	None

Chapter summary

• Section 17(5) overrides section 16(1): blocked credits are denied even if every section 16 condition is met.

• Passenger vehicles up to 13 seats and their insurance and repair are blocked unless used for resale, passenger transport or training; goods vehicles and larger buses are not.

• Food, health, beauty, rent-a-cab and insurance are allowed only for same category or composite outward supplies, or where obligatory under law.

• Own-account construction of buildings and civil structures, including capitalised repairs, is blocked; the Finance Act, 2025 has undone the Safari Retreats functionality test retrospectively.

• CSR spending, personal use, gifts, free samples and lost or destroyed goods are blocked; reverse credit on inputs in destroyed finished goods.

• Tax paid under section 74 for periods up to FY 2023-24 is not creditable.