Blocked Input Tax Credit (ITC) Under GST: What You Can’t Claim

Section 17(5) of the CGST Act defines “blocked credits” – categories of goods and services on which ITC is not available . In general, ITC cannot be claimed for purchases not used for business or taxable supplies. Key ineligible categories include (with statutory references):

Motor vehicles and vessels (Sec 17(5)(a),(aa)): ITC is blocked on cars, motorcycles and small passenger vehicles (≤13 seats) or personal conveyances, unless used for further taxable supply (e.g. renting out as taxi), passenger transportation, or training on driving/navigating . (For example, a truck used for goods transport qualifies; a luxury car used privately does not.) Similarly, general insurance, servicing or repair of such vehicles is blocked except where the vehicle is used in a business-supplied manner .
Specified services (Sec 17(5)(b)): ITC on food, beverages and outdoor catering, beauty or health services, cosmetic/plastic surgery, renting/leasing of motor vehicles/vessels/ aircraft, and life/health insurance, is disallowed . (Exception: if a taxpayer incurs these expenses to make an identical taxable supply – e.g. a catering business buying food for its catering service – ITC on that input can be claimed .) Club memberships and health club fees are also blocked (Sec 17(5)(b)(ii)), as are employee travel benefits like leave travel concession (b(iii)) – except where legally mandated .
Immovable property and works contracts (Sec 17(5)(c),(d)): ITC is generally not available on construction of buildings or works contracts for immovable property (except for plant & machinery) . Clause (c) disallows ITC on works contract services for constructing any immovable (other than plant/machinery), unless that contract is itself supplied onwards. Clause (d) bars ITC on goods/services used in constructing immovable property on one’s own account. (For example, a manufacturer building its own factory cannot claim ITC on raw materials; however, building a warehouse for rent may qualify under the Safari Retreats ruling – see below.) An exception exists: if the immovable property (or works contract) is used in further taxable supply (e.g. a builder constructing apartments for sale or lease), ITC may be available .
Composition scheme taxes (Sec 17(5)(e)): If a person has paid tax under the composition scheme (Sec 10), no ITC is allowed on inputs related to those supplies .
7 Non-resident taxpayers (Sec 17(5)(f)): Credit is blocked on goods/services received by a non resident taxable person (except where they import goods).
Corporate Social Responsibility (CSR) expenses (Sec 17(5)(fa)): From FY 2021–22, any goods/ services used for CSR obligations under the Companies Act are specifically disallowed .
Personal use and loss of goods (Sec 17(5)(g),(h)): ITC is blocked on goods/services used for personal consumption . Similarly, goods lost, stolen, destroyed, gifted or used as free samples are outside ITC (gifts/free samples get zero credit) .
Tax paid under assessment (Sec 17(5)(i)): The Finance Act 2024 added Sec 17(5)(i), blocking ITC on tax paid under Section 74 (fraud/misstatement cases) for periods up to FY 2023–24 . (From Nov 1, 2024, taxpayers can claim ITC on any Section 74 demands raised for periods ending FY 2023–24 .)

These restrictions arise not from business usage but by legislative fiat. The CBIC text reads: “Notwithstanding anything contained… input tax credit shall not be available in respect of the following, namely…” , thus clearly barring credit in each listed case.

Exceptions and nuances: In many cases the law itself carves out exceptions (notable “provided that” clauses). For example, ITC on catering or health services (17(5)(b)) is permitted if the taxpayer furnishes the same category of service in its output (e.g. a health clinic buying medicines for resale) . Likewise, insurance/servicing ITC on a vehicle is allowed if the vehicle is used in taxable business (e.g. an airline insuring its planes) . Importantly, goods/services used for an exempt supply are also subject to apportionment rules (Sec 17(2)), so businesses must segregate input credit to taxable vs exempt.

Case law and circulars: The landmark Safari Retreats cases illustrate the subtlety of Sec 17(5)(d). In Safari Retreats Pvt. Ltd. v. CC, CGST (Odisha HC 2019), the court read down the provision so that a mall built for lease (generating taxable rental) was treated as “not for own use,” allowing full ITC . The Supreme Court in CIT v. Safari Retreats (Oct 3, 2024) applied a functionality test: a building can be treated as a “plant” for GST if it plays the same role in supplying a service as machinery does in manufacturing . In effect, SC held that if a commercial building generates taxable income (like a plant generates goods), denying ITC defeats GST’s anti-cascading purpose . (However, the government has since amended Sec 17(5)(d) to replace “plant or machinery” with “plant and machinery” retrospectively , thereby excluding buildings from the exception.)

Other rulings: Courts have generally upheld Sec 17(5) as a valid classification. In Safari Retreats the SC explicitly held clauses (c) and (d) (on immovable property) are constitutionally valid . To date, high courts have also struck down ITC claims on motor vehicle purchases for company directors, confirming the narrow scope of exceptions. Circulars (e.g. CBIC Circulars) clarify details – e.g. insurer vs vehicle usage – and updates (e.g. Notification 21/2018 reduced late fee on nil returns).

Practical impact and compliance: Businesses must vigilantly segregate blocked vs allowable ITC. For instance, a firm buying a car should claim credit only if it uses the car for taxable passenger transport or similar approved activity; otherwise it must reverse the credit. Companies must track costs on club memberships or executive travel, and ensure any input on exempt supplies is prorated. The Safari Retreats change has broad finance implications: real-estate developers can now claim ITC on malls/ warehouses built for lease (estimated ~₹30,000 Cr of credits unlocked ). Conversely, the legislative rollback (“plant and machinery”) imposes a compliance burden: businesses must now debit ITC accounts for past claims on buildings. In practice, tax departments audit these blocked credits closely; improper claims can trigger demand notices or penalties. Companies should maintain detailed invoices and usage records to justify any claimed credit, and use ITC-reversal provisions (e.g. for personal use) in their GST returns.

Penalties Under the GST Act (Sec. 122–138)

GST law provides a range of penalties for non-compliance. Section 122 lists specific contraventions attracting a base penalty of ₹10,000 or an amount equal to the tax evaded/undue credit (whichever is higher) . Key examples of Sec 122 offences include: issuing incorrect or fake invoices; collecting tax but not remitting it; failing to deduct/pay TDS/TCS tax; wrongfully availing ITC without receipt of goods/ 2 17 18 services; suppressing turnover; using another’s GSTIN; and obstructing officers . (For instance, a dealer collecting ₹50,000 as tax but not paying it over beyond 3 months incurs penalty ≥₹50,000 .) An additional sub‐clause was added in 2020: an e-commerce operator violating TCS provisions (Sec 52) faces the same ₹10,000/tax penalty . Section 122(1A) further penalizes any person who benefits from a prohibited transaction, imposing a penalty equal to the tax or ITC involved .

Other general penalties include: Sec 123 (failure to furnish specified information returns, e.g. TDS/TCS returns) – penalty of ₹10,000 or tax amount; Sec 124 (failure to furnish statistical returns under Sec 151)– ₹25,000 for first default (₹50,000 for repeat); and Sec 125 (general penalty) – ₹10,000 or tax, for any contravention not covered elsewhere.

Late Fees for Returns

Section 47 provides for late fees on delayed returns. A registered taxpayer who misses the due date for f iling GSTR-1, GSTR-3B, or other returns (sec 37/39 etc.) must pay ₹100 per day of delay under CGST (plus ₹100 under SGST), capped at ₹5,000 each . (For example, a two-month delay in GSTR-3B would attract ₹100×60 = ₹6,000 CGST + ₹6,000 SGST, subject to the ₹5,000 cap each.) For composition returns or other filings, similar provisions apply (e.g. GSTR-4 delay fee is 0.25% of state turnover, sec 47(2)). Notably, for nil returns the government has often reduced the rate (currently ₹50/day each, capped at ₹2,500 under notifications). Filing beyond the statutory limits can thus incur significant late fees.

Interest on Delayed Payment

Section 50 mandates interest on late tax payments. Any short payment or delay in remitting GST incurs interest “at such rate not exceeding 18% per annum” (as notified) . Practically, the notified rate is 18%. Interest runs from the day after the due date until payment. (Earlier Finance Acts had used higher rates, but since July 1, 2017 the rate was fixed at 18% .) For example, paying a ₹1 lakh tax bill one year late would cost ~₹18,000 in interest. If ITC is fraudulently availed and used, higher interest (24%) may apply as per Sec 50(3) (though CBDT has in practice aligned this with 18%).

Detention, Seizure and Prosecution

GST provides for detention and confiscation of goods in transit. Under Sec 129, goods transported without required e-way bills or documents may be detained; penalty (often double the tax due) and tax payment are required for release. If the person fails to pay, Sec 130 allows forfeiture of goods/vehicle. These are administrative penalties akin to customs.

Section(s)	Offence	Penalty/Action
Sec 122(1)	Specific contraventions by a taxable person (e.g. issuing false invoices, collecting tax but not paying, false ITC claims, non-registration, obstructing officers, etc.)	₹10,000 or tax evaded/credit misused (whichever higher) 16 20 . (E‑commerce operators under Sec 52 face same penalty .)
Sec 123	Failure to furnish prescribed information/TDS return	₹10,000 or tax amount (whichever higher
Sec 124	Failure to furnish statistics under Sec 151	₹25,000 (first default); ₹50,000 (subsequent)
Sec 125	Other contraventions not covered elsewhere	₹10,000 or tax amount (whichever higher
Sec 129 130	Transporting taxable goods without documents (e-way bill, invoice, etc.)	Goods may be detained/confiscated; penalty equal to tax due (up to 2× tax for owner, plus confiscation under Sec 130)
Sec 132	Fraudulent tax evasion/offences (fake invoicing, tax fraud above thresholds)	If tax/credit evaded >₹5 crore: up to 5 yrs imprisonment + fine . If ₹2–5 crore: up to 3 yrs + fine . Fraudulent refund or ITC >₹1–2 crore (clause b): up to 1 yr + fine 25 . Lesser offences (e.g. false records) up to 6 months (or fine)
Sec 132(5)	Offences under (a)–(d) with prescribed penalty (cognizable, non bailable)	Cognizable arrest possible (see Sec 69)
Sec 133	Liability of officers/offenders assisting offences	Officers who abet or omit duties face same punishment as principal offenders
Sec 134	(Cognizance of offences)	Officers who abet or omit duties face same punishment as principal offenders

Offenders (registered vs unregistered): The penalties apply to both registered and unregistered persons. For example, anyone required to be registered (Sec 22) but failing to register commits an offence under Sec 122(xi) 32 (penalized ₹10,000 or tax due). Unregistered dealers evading GST or issuing invoices can be prosecuted under Sec 122/132 just like a registered person. Composition taxpayers who violate conditions (e.g. make inter-state sale) also face penalties per these sections.

Recent changes (up to FY 2024–25): Major updates include:

Compounding rules (Sec 138): Finance Act 2023 liberalized compounding charges to 25%–100% of tax , down from the earlier 100%–250%. This reduces the cost of settling offences.
Interest (Sec 50): The notified interest rate remains 18% per annum for delayed tax (down from 24% in initial years).
GST Council and notifications have tweaked late fees (e.g. reduced rates for nil returns) and provided one-time amnesties (e.g. waiving late fees for certain earlier periods).
Section 17(5) amendments: Though about input tax credit, they affect penalties insofar as wrongly denied ITC could not attract penalty; now legislative changes (Finance Acts 2024–25) narrow or broaden exceptions (see above).

No new penalty sections were added in FY 2024–25, but enforcement remains strict. Tax officials continue to rely on Sections 122–132 as the core penal provisions. In practice, most routine non compliances (late returns, minor short payments) incur late fees/interest rather than criminal prosecution. However, deliberate fraud (fake invoices, suppression of sales) can lead to prosecution under Sec 132, with severe consequences including arrest. Taxpayers and practitioners must therefore ensure timely filings, accurate invoicing, and proper ITC reconciliation to avoid both monetary and criminal liabilities under GST.