Section 17 of the Central Goods and Services Tax (CGST) Act, 2017 deals with the apportionment of Input Tax Credit (ITC) and specifies certain situations where Input Tax Credit is either restricted or completely blocked.
Section 16 of the CGST Act provides the basic eligibility and conditions for claiming ITC. However, merely satisfying Section 16 does not mean that the entire GST paid on every business expense can always be claimed as credit. Section 17 places important restrictions where goods or services are used partly for business and partly for non-business purposes, or where they are used for taxable as well as exempt supplies.
It also contains Section 17(5), which lists specific categories of goods and services on which ITC is not available, subject to the exceptions provided in the law. The current provision also contains special rules for banking companies and financial institutions, CSR-related expenses and certain historical tax payments.
What is Section 17 of the CGST Act?
Section 17 is titled “Apportionment of credit and blocked credits.”
In simple words, this section answers two important questions:
- How much ITC can be claimed when an expense is used for both business and non-business purposes?
- When is ITC completely blocked even though the goods or services may have been purchased in connection with business?
For example, suppose a registered person purchases a service that is used 70% for business and 30% for personal purposes. The ITC cannot simply be claimed for the entire amount. The credit has to be restricted to the portion attributable to business use.
Similarly, if a particular expense falls under the blocked-credit provisions of Section 17(5), ITC may not be available even if the expense is related to the business.
Therefore, Section 17 is an important provision for determining the actual amount of ITC that can be retained by a registered person.
Section 17(1) – Goods or Services Used for Business and Other Purposes
Section 17(1) applies when goods or services are used partly for business purposes and partly for other purposes.
In such a situation, ITC is restricted only to the amount attributable to the business purpose.
Example
Suppose a registered person purchases a mobile phone for ₹50,000 plus GST and uses it:
- 80% for business activities
- 20% for personal activities
If the GST charged on the purchase is ₹9,000, the entire ₹9,000 cannot automatically be treated as eligible ITC.
The credit has to be restricted to the portion attributable to business use, subject to the applicable rules and other conditions.
The basic principle is:
Business use → Eligible portion of ITC
Non-business use → ITC restricted
The detailed manner of determining and reversing such credit is prescribed through the GST Rules.
Section 17(2) – Taxable Supplies and Exempt Supplies
Section 17(2) deals with goods or services that are used partly for:
- Taxable supplies, including zero-rated supplies; and
- Exempt supplies.
In such cases, the ITC is restricted to the portion attributable to taxable supplies, including zero-rated supplies.
Example
Suppose a business has common input services used for both taxable and exempt supplies.
If the GST paid on those common services is ₹1,00,000, the entire amount may not be available as ITC. The eligible amount has to be determined by applying the prescribed apportionment mechanism.
The portion attributable to taxable and zero-rated supplies can remain eligible, while the portion attributable to exempt supplies is required to be reversed or excluded according to the applicable rules.
What is an Exempt Supply for Section 17?
For the purpose of Section 17(2), the value of exempt supplies is determined in the manner prescribed under the GST law.
The calculation can include certain supplies and transactions such as:
- Supplies on which the recipient is liable to pay tax under reverse charge;
- Transactions in securities;
- Sale of land; and
- Sale of building, subject to the provisions referred to in the section.
The law also contains an explanation concerning activities or transactions covered under Schedule III. Certain Schedule III activities are excluded from the value of exempt supply for this purpose, while the activity covered by paragraph 5 of Schedule III is treated differently.
Therefore, businesses should not simply treat every non-taxable-looking transaction as an exempt supply for ITC reversal. The specific provisions of the CGST Act and Rules need to be examined.
Section 17(3) – Determination of Exempt Supply Value
Section 17(3) provides the basis for determining the value of exempt supplies for the purpose of ITC apportionment.
This is important because the value of exempt supplies is used in the calculation for determining the amount of common ITC attributable to exempt supplies.
The actual calculation is governed by the prescribed rules, particularly the provisions dealing with the manner of determination and reversal of ITC.
Rules 42 and 43 – How Common ITC is Apportioned
Section 17 gives the legal principle, while the CGST Rules prescribe the practical method for calculating the eligible and ineligible portion of ITC.
For inputs and input services, Rule 42 provides the mechanism for determining the amount attributable to business use, exempt supplies and taxable supplies.
For capital goods, Rule 43 provides the corresponding mechanism. CBIC’s GST rules specifically provide formulas for identifying common credit and the portion attributable to exempt supplies and non-business purposes.
In practical terms, ITC may have to be divided into different categories such as:
- ITC exclusively related to non-business purposes;
- ITC exclusively related to exempt supplies;
- Blocked ITC under Section 17(5);
- ITC exclusively related to taxable and zero-rated supplies; and
- Common ITC.
Only the eligible portion ultimately remains available for use.
What is Common Credit?
Common credit is ITC that cannot be directly linked exclusively to taxable supplies, exempt supplies or non-business activities.
For example, a business may have:
- Office rent;
- Accounting services;
- Internet services;
- Professional consultancy;
- Common software;
- Administrative expenses.
If these expenses are used for both taxable and exempt activities, the corresponding ITC may become common credit.
The applicable rules prescribe how this common credit is apportioned.
Section 17(4) – Special Rule for Banking Companies and Financial Institutions
Section 17(4) provides a special option for certain banking companies and financial institutions, including non-banking financial companies.
Such entities may choose to follow the normal apportionment mechanism under Section 17(2), or they may opt for a specified method under which they can avail 50% of eligible ITC on inputs, capital goods and input services for the relevant period, with the remaining portion lapsing, subject to the conditions of the law.
This option is subject to the conditions prescribed under the CGST Act and Rules.
Important point about the 50% option
The 50% restriction does not apply in the same manner to every type of tax paid by such entities.
For example, CBIC has clarified that where one registered branch of a banking company makes a taxable supply to another registered branch having the same PAN, the recipient branch can be eligible for the full ITC on such supply despite the 50% option.
Therefore, banking companies and financial institutions need to examine Section 17(4), its provisos and the applicable rules separately.
Section 17(5) – Blocked Input Tax Credit
Section 17(5) is one of the most important provisions relating to ITC.
It begins with a non-obstante provision, meaning that notwithstanding the general ITC entitlement under Section 16(1), ITC is not available for the categories specified in Section 17(5), subject to the exceptions contained in the provision.
These are commonly known as blocked credits.
The major categories are explained below.
1. Motor Vehicles for Transportation of Persons
ITC is generally blocked on motor vehicles used for transportation of persons where the approved seating capacity is not more than 13 persons, including the driver.
However, the law provides exceptions where such vehicles are used for specified purposes, including:
- Further supply of such motor vehicles;
- Transportation of passengers; or
- Imparting training on driving such motor vehicles.
Example
If a company purchases a normal passenger car for general administrative use, the GST paid on that car may fall within the blocked-credit provision.
On the other hand, a vehicle purchased by a business engaged in passenger transportation may qualify under the relevant exception, subject to the statutory conditions.
Therefore, the purpose for which the vehicle is used is important.
2. Vessels and Aircraft
Section 17(5) also contains restrictions relating to vessels and aircraft.
ITC is generally restricted unless the vessel or aircraft is used for specified purposes such as:
- Further supply;
- Transportation of passengers;
- Training relating to navigation or flying; or
- Transportation of goods.
The specific statutory conditions and exceptions must be checked before claiming ITC.
3. Insurance, Servicing, Repair and Maintenance
ITC restrictions also apply to certain general insurance, servicing, repair and maintenance expenses relating to the motor vehicles, vessels and aircraft covered by the relevant provisions.
Exceptions can apply where the underlying vehicle, vessel or aircraft is itself used for eligible purposes or where the recipient is engaged in specified businesses such as manufacturing the relevant vehicles, vessels or aircraft or providing the relevant insurance services.
4. Food and Beverages
ITC is generally blocked on specified inward supplies such as:
- Food and beverages;
- Outdoor catering;
- Beauty treatment;
- Health services;
- Cosmetic and plastic surgery; and
- Certain leasing, renting or hiring of motor vehicles, vessels or aircraft.
Life insurance and health insurance are also covered by the relevant restriction, subject to the exceptions provided in the law.
One important exception is where an inward supply is used for making an outward taxable supply of the same category, or as an element of a taxable composite or mixed supply.
Example
A restaurant purchasing food ingredients for making its taxable outward food supply cannot be treated in exactly the same manner as an ordinary office purchasing food for employees.
The nature and use of the inward supply must be examined along with the statutory exception.
5. Membership of Club, Health and Fitness Centre
ITC is blocked on membership of:
- Clubs;
- Health centres; and
- Fitness centres,
subject to the specific provisions of Section 17(5).
Therefore, a business cannot generally claim ITC merely because the membership is connected in some way with business activities.
6. Travel Benefits to Employees
ITC is generally blocked on travel benefits provided to employees for vacation, such as:
- Leave travel;
- Home travel concession; and
- Similar vacation-related benefits.
However, the law provides an exception where the employer is legally obligated to provide such benefit to its employees under a law for the time being in force.
7. Works Contract Services for Construction of Immovable Property
ITC is blocked on works contract services when they are supplied for construction of an immovable property, except where the works contract service is itself an input service for further supply of works contract service.
The restriction does not apply in the same manner to plant and machinery, which is treated separately under the statutory definition.
Example
A contractor receiving works contract services for constructing an immovable property for its own business generally needs to examine the restriction under Section 17(5)(c).
However, if a works contractor receives a works contract service as an input for making a further supply of works contract service, the statutory exception may apply.
8. Goods and Services Used for Construction of Immovable Property on Own Account
Section 17(5) also restricts ITC on goods or services received by a taxable person for construction of an immovable property on their own account, including when those goods or services are used in the course or furtherance of business.
This restriction applies to the extent specified in the law and excludes plant and machinery from the relevant restriction.
The term construction includes activities such as:
- Reconstruction;
- Renovation;
- Additions;
- Alterations; and
- Repairs,
to the extent of capitalization to the immovable property.
What is Plant and Machinery?
For the purpose of the relevant provisions, plant and machinery means apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making outward supply of goods or services or both.
It includes the relevant foundation and structural supports but excludes:
- Land, building or other civil structures;
- Telecommunication towers; and
- Pipelines laid outside the factory premises.
The Finance Bill, 2025 amended the wording in Section 17(5)(d) from “plant or machinery” to “plant and machinery”, with the amendment deemed to have effect from 1 July 2017.
9. Goods or Services Taxed Under Composition Scheme
ITC is not available on goods or services, or both, on which tax has been paid under the composition levy provisions of Section 10.
Therefore, a registered person receiving supplies from a supplier who has paid tax under the composition scheme cannot claim ITC of the composition tax merely because the purchase is used for business.
10. Supplies Received by a Non-Resident Taxable Person
Section 17(5) restricts ITC on goods or services received by a non-resident taxable person, except in respect of goods imported by such person.
This is a specific restriction and should not be confused with the general ITC provisions applicable to ordinary registered taxpayers.
11. CSR Expenses
Section 17(5) also blocks ITC on goods or services received by a taxable person when they are used or intended to be used for activities relating to the person’s obligations under corporate social responsibility (CSR) referred to in Section 135 of the Companies Act, 2013.
This provision was introduced to specifically deal with ITC relating to CSR obligations.
Example
If a company purchases goods specifically for carrying out activities that relate to its statutory CSR obligations under Section 135 of the Companies Act, the corresponding ITC may be blocked under Section 17(5)(fa).
12. Goods or Services Used for Personal Consumption
ITC is blocked where goods or services are used for personal consumption.
This is consistent with the basic principle that GST input credit is intended to provide credit for eligible business-related supplies rather than personal expenses.
Example
If a business purchases an item exclusively for the personal use of its owner and not for business purposes, the ITC cannot be claimed merely because the invoice is issued in the business’s name.
13. Goods Lost, Stolen, Destroyed or Written Off
ITC is blocked in respect of goods that are:
- Lost;
- Stolen;
- Destroyed;
- Written off; or
- Disposed of by way of gift or free samples.
This provision is particularly relevant for businesses maintaining inventory.
Example
Suppose a business purchases goods and claims ITC. Later, some of those goods are destroyed in an incident or are written off in the books.
The business cannot continue treating the related ITC as eligible merely because the original purchase was for business purposes. The Section 17(5) restriction has to be considered.
14. Tax Paid Under Section 74 for Periods up to FY 2023-24
The current Section 17(5)(i) provides that ITC is not available for tax paid in accordance with Section 74 in respect of any period up to Financial Year 2023-24.
This provision has changed from the earlier wording.
Previously, Section 17(5)(i) referred to tax paid under Sections 74, 129 and 130. The Finance (No. 2) Act, 2024 changed the provision so that the current wording refers specifically to Section 74 for periods up to FY 2023-24. The GST Council records the corresponding legislative change and its rationale.
Therefore, older articles that simply state that Section 17(5)(i) blocks ITC on tax paid under Sections 74, 129 and 130 may not accurately describe the current statutory wording.
Section 17(6) – Government May Prescribe the Manner of Attribution
Section 17(6) provides that the Government may prescribe the manner in which the credit referred to in Section 17(1) and Section 17(2) is to be attributed.
This is why the practical calculation of ITC apportionment is not performed only by reading Section 17. The relevant provisions of the CGST Rules must also be considered.
For inputs and input services, Rule 42 is important, while Rule 43 deals with capital goods.
Section 17 and Input Tax Credit – Simple Example
Suppose a registered business has the following ITC during a tax period:
| Particulars | ITC |
|---|---|
| ITC exclusively related to taxable supplies | ₹40,000 |
| ITC exclusively related to exempt supplies | ₹15,000 |
| ITC related to non-business use | ₹5,000 |
| Blocked ITC under Section 17(5) | ₹10,000 |
| Common ITC | ₹30,000 |
The business cannot simply claim the entire ₹1,00,000.
The following categories need to be removed or apportioned:
- ITC exclusively related to exempt supplies;
- ITC related to non-business purposes;
- Blocked ITC under Section 17(5); and
- The portion of common ITC attributable to exempt supplies or other restricted purposes.
The remaining eligible credit can be claimed subject to Section 16 and other applicable provisions.
The actual calculation of common credit and reversals has to be performed according to the prescribed GST Rules.
Difference Between Section 16 and Section 17
Section 16 and Section 17 should be read together.
| Section 16 | Section 17 |
|---|---|
| Provides basic eligibility for ITC | Restricts or blocks ITC in specified situations |
| Contains conditions for claiming ITC | Deals with apportionment and blocked credits |
| Covers documents, receipt of supply and tax payment conditions | Covers business/non-business and taxable/exempt allocation |
| Provides the general framework for ITC | Contains specific restrictions under Section 17(5) |
| Section 16(4) provides the time limit for taking ITC | Section 17 determines whether the credit is eligible in the first place |
Therefore, passing the conditions of Section 16 does not automatically make every input tax amount claimable.
Difference Between Reversal and Blocked Credit
These two concepts are often confused.
ITC Reversal
ITC may be reversed when credit was initially eligible but subsequently needs to be reversed according to the applicable provisions.
For example, common ITC may need to be apportioned between taxable and exempt supplies.
Blocked Credit
Blocked credit is credit that the law specifically makes unavailable under Section 17(5).
For example:
- Certain passenger motor vehicles;
- Certain food and beverage expenses;
- Club memberships;
- Certain construction-related expenses;
- Personal consumption;
- CSR-related expenses; and
- Goods lost, stolen, destroyed or written off.
The distinction is important because the legal reason for non-availability of credit is different in each case.
Why Section 17 is Important for GST Compliance
Section 17 is important because businesses often receive GST invoices containing tax that appears in their purchase records or auto-populated ITC data. However, the presence of an invoice or tax amount does not by itself establish that the credit is finally eligible.
Before claiming ITC, a registered person should consider:
- Whether the expense is used for business;
- Whether it is used for taxable or zero-rated supplies;
- Whether it is also used for exempt supplies;
- Whether it has any personal or non-business use;
- Whether it falls under Section 17(5);
- Whether the required conditions under Section 16 are satisfied; and
- Whether the prescribed reversal or apportionment rules apply.
This approach helps prevent incorrect ITC claims and subsequent reversal, interest or other compliance consequences.
Key Points of Section 17 of CGST Act
Section 17 can be remembered through the following points:
- Section 17(1): Restricts ITC where goods or services are used partly for business and partly for other purposes.
- Section 17(2): Restricts ITC where goods or services are used for taxable/zero-rated as well as exempt supplies.
- Section 17(3): Provides the basis for determining the value of exempt supplies for apportionment.
- Section 17(4): Provides a special 50% ITC option for specified banking companies and financial institutions, subject to conditions.
- Section 17(5): Lists blocked credits.
- Section 17(5)(a): Covers specified motor vehicles.
- Section 17(5)(aa): Covers specified vessels and aircraft.
- Section 17(5)(ab): Covers specified insurance, servicing, repair and maintenance.
- Section 17(5)(b): Covers specified food, beverages, insurance, health and related services and employee travel benefits.
- Section 17(5)(c): Covers specified works contract services.
- Section 17(5)(d): Covers specified construction-related goods and services.
- Section 17(5)(e): Covers supplies taxed under the composition scheme.
- Section 17(5)(f): Covers specified supplies received by non-resident taxable persons.
- Section 17(5)(fa): Covers specified CSR-related expenses.
- Section 17(5)(g): Covers personal consumption.
- Section 17(5)(h): Covers lost, stolen, destroyed, written-off goods and gifts/free samples.
- Section 17(5)(i): Covers tax paid under Section 74 for periods up to FY 2023-24.
- Section 17(6): Enables prescription of the manner of attribution through rules.
Conclusion
Section 17 of the CGST Act is an important provision for determining how much Input Tax Credit a registered person can actually retain. While Section 16 establishes the general eligibility and conditions for ITC, Section 17 places restrictions where inputs or services are used for non-business purposes, exempt supplies or categories specifically identified as blocked credits.
For businesses having both taxable and exempt supplies, proper apportionment of common ITC is particularly important. Similarly, expenses covered by Section 17(5) should be checked carefully before claiming credit.
The provisions relating to blocked credits have also changed over time, including the treatment of CSR expenses, the wording relating to plant and machinery and the amendment concerning tax paid under Section 74. Therefore, businesses should refer to the current CGST Act and applicable GST Rules rather than relying only on older articles or explanations.
For practical GST compliance, Section 17 should always be read along with Section 16, Section 18, Rule 42 and Rule 43, as the eligibility, apportionment and reversal of ITC are connected provisions.
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