Blocked Credit under GST

Definition

Blocked credit refers to the input tax credit that cannot be claimed by a taxpayer under the Goods and Services Tax (GST) regime. Input tax credit is the tax paid on inputs, i.e., goods and services that are used in the course of business, which can be set off against the output tax liability of the taxpayer.

Under GST, certain goods and services are classified as blocked credits, which means that the input tax paid on such goods or services cannot be claimed as credit. This is because these goods and services are not considered as inputs in the production or provision of taxable goods or services.

The relevance of blocked credit under the GST regime is that it affects the amount of input tax credit that a taxpayer can claim, which in turn impacts their tax liability. Businesses need to be aware of the various types of blocked credits and the conditions for availing input tax credit to ensure that they comply with GST laws and minimize their tax liability. Failure to comply with GST regulations related to blocked credit can result in penalties and interest charges

Types of blocked credit

There are various types of blocked credit under the Goods and Services Tax (GST) regime, which are as follows:

• Blocked credit on goods or services used for personal consumption: Any goods or services purchased by a taxpayer that are used for personal consumption, such as food, travel, or accommodation, are not eligible for input tax credit. This is because these goods and services are not used for business purposes.
• Blocked credit on goods or services used for exempt supplies: Exempt supplies are those that are not subject to GST, such as education and healthcare services. If a taxpayer purchases goods or services for making such exempt supplies, they cannot claim input tax credit on such purchases. This is because the input tax credit is only available for goods or services used for making taxable supplies.
• Blocked credit on goods or services used for non-business purposes: Input tax credit is only available for goods and services that are used in the course of business. If a taxpayer purchases goods or services for non-business purposes, such as for personal use or for a hobby, they cannot claim input tax credit on such purchases.
• Blocked credit on certain goods or services: The GST law also specifies certain goods or services that are not eligible for input tax credit. These include motor vehicles, except for those used for providing transportation services, goods and services used for construction of immovable property, except for certain specified cases, and goods and services used for outdoor catering, beauty treatment, and health services.

It is important for businesses to understand these various types of blocked credit and comply with the GST laws to avoid any penalties or interest charges. Maintaining proper records of input tax credit and ensuring that it is used only for business purposes can help businesses minimize the impact of blocked credit on their tax liability.

Conditions for availing blocked credit

Businesses can avail input tax credit under the Goods and Services Tax (GST) regime subject to certain conditions. However, certain goods and services are classified as blocked credits, and the input tax paid on such goods or services cannot be claimed as credit. The conditions for availing blocked credit under GST are as follows:

• The goods or services must be used or intended to be used in the course of business: Input tax credit is available only for goods or services used in the course of business. If a taxpayer purchases goods or services for non-business purposes, such as for personal use or for a hobby, they cannot claim input tax credit on such purchases.
• The taxpayer must possess a valid tax invoice or other prescribed documents: The taxpayer must possess a valid tax invoice or other prescribed documents such as debit notes, credit notes, or bill of entry to claim input tax credit. The tax invoice or other prescribed documents must contain certain details such as the GSTIN of the supplier and recipient, description of goods or services, tax amount, etc.
• The taxpayer must have actually received the goods or services: Input tax credit can be claimed only if the taxpayer has actually received the goods or services. If the goods or services have not been received, the taxpayer cannot claim input tax credit.
• The taxpayer must have paid the tax charged on such goods or services to the supplier: The taxpayer must have paid the tax charged on the goods or services to the supplier to claim input tax credit. If the tax has not been paid, the taxpayer cannot claim input tax credit.
• The goods or services must be used for making taxable supplies: Input tax credit can be claimed only for goods or services used for making taxable supplies. If a taxpayer purchases goods or services for making exempt supplies, they cannot claim input tax credit on such purchases.

It is important for businesses to meet these conditions to avail input tax credit and comply with the GST laws to avoid any penalties or interest charges. Maintaining proper records of input tax credit and ensuring that it is used only for business purposes can help businesses minimize the impact of blocked credit on their tax liability.

Examples of blocked credit

There are various scenarios in which blocked credit may arise under the Goods and Services Tax (GST) regime. Some examples of such scenarios are:

• Blocked credit on input services used for construction of a building: Input tax credit is not available for goods and services used for the construction of an immovable property that is not used for further supply of goods or services. For example, if a business purchases services such as architectural services or construction services for the construction of a building that is not used for further supply of goods or services, input tax credit on such services would be blocked.
• Blocked credit on goods or services used for employee welfare: Input tax credit is not available for goods or services used for employee welfare, such as food and beverages provided to employees, transportation services provided to employees, or health and fitness services provided to employees. For example, if a business purchases food and beverages for its employees, input tax credit on such purchases would be blocked.
• Blocked credit on certain goods or services: The GST law specifies certain goods or services that are not eligible for input tax credit. For example, input tax credit on motor vehicles is not available, except for those used for providing transportation services. Similarly, input tax credit on goods and services used for outdoor catering, beauty treatment, and health services is also blocked.
• Blocked credit on goods or services used for exempt supplies: Input tax credit is not available for goods and services used for making exempt supplies. For example, if a business purchases goods or services for providing healthcare services, which are exempt from GST, input tax credit on such purchases would be blocked.

It is important for businesses to understand these scenarios and comply with the GST laws to avoid any penalties or interest charges. Maintaining proper records of input tax credit and ensuring that it is used only for business purposes can help businesses minimize the impact of blocked credit on their tax liability.

Impact on businesses

The impact of blocked credit on businesses can be significant, and it can lead to increased compliance costs and potential cash flow issues. Some of the impacts of blocked credit on businesses are discussed below:

• Increased cost of compliance: Blocked credit increases the complexity of compliance under the GST regime. Businesses need to maintain proper records of input tax credit and ensure that it is used only for business purposes. Failure to comply with the GST laws can result in penalties and interest charges, which can increase the cost of compliance for businesses.
• Potential for cash flow issues: Blocked credit can also lead to cash flow issues for businesses. When input tax credit is blocked, businesses need to pay the full amount of tax on their purchases, which can increase their tax liability and reduce their cash flow. This can be particularly challenging for small and medium-sized enterprises (SMEs) that may have limited financial resources.
• Reduced profitability: Blocked credit can reduce the profitability of businesses. When input tax credit is blocked, businesses need to pay the full amount of tax on their purchases, which can increase their costs and reduce their profitability. This can be particularly challenging for businesses that operate on low profit margins.
• Impact on competitiveness: Blocked credit can also impact the competitiveness of businesses. If businesses cannot claim input tax credit on their purchases, their costs may be higher than their competitors who can claim input tax credit. This can put them at a disadvantage in the market and affect their competitiveness.

To mitigate the impact of blocked credit on their business, businesses can try to optimize their input tax credit claims, maintain proper records of input tax credit, and ensure that it is used only for business purposes. They can also explore alternative financing options to manage their cash flow and improve their competitiveness. It is important for businesses to understand the impact of blocked credit and comply with the GST laws to avoid any penalties or interest charges.

Steps to avoid blocked credit

To avoid blocked credit and maximize their input tax credit claims, businesses can take several measures. Some of these measures are:

• Maintain proper records: Businesses must maintain proper records of their purchases and the input tax credit claimed on them. This includes invoices, receipts, and other relevant documents that support the input tax credit claim.
• Ensure that input tax credit is used only for business purposes: Input tax credit can only be claimed on purchases that are used for business purposes. Businesses must ensure that they do not claim input tax credit on purchases that are used for personal purposes or are exempt from GST.
• Classify purchases correctly: Businesses must correctly classify their purchases as inputs or capital goods to claim the appropriate amount of input tax credit. Inputs are goods or services used in the production or supply of goods or services, while capital goods are goods used for long-term investment.
• Monitor changes in the GST law: The GST law is subject to change, and businesses must monitor any changes that may affect their input tax credit claims. This includes changes in the list of goods and services that are not eligible for input tax credit.
• Conduct regular internal audits: Regular internal audits can help businesses identify any errors or discrepancies in their input tax credit claims and take corrective action.

By implementing these measures, businesses can avoid blocked credit and maximize their input tax credit claims under the GST regime. This can help them reduce their tax liability, improve their cash flow, and enhance their profitability.

Recent Developments

Latest Updates from Budget 2023

Section 17(5) is revised to include another item under ineligible ITC- Expenditure on CSR initiative for corporates.

Where to get the list of ineligible ITC?

To get a list of ineligible Input Tax Credit (ITC) on the GST portal, you can follow these steps:

• Login to the GST Portal: Visit the official GST portal (https://www.gst.gov.in/) and log in using your GSTIN (Goods and Services Tax Identification Number) and password.
• Navigate to the Return Dashboard: After logging in, you will see various options on the dashboard. Click on the "Return Dashboard" option.
• Select the Relevant Month and Year: From the return dashboard, select the relevant month and year for which you want to check the ineligible ITC.
• Access GSTR-2B: To access the list of ineligible ITC, click on GSTR 2B after selecting the relevant month, quarter and year. 
• View and Download Details: Once you have accessed GSTR-2B, you should be able to view and download the details of ineligible Input Tax Credit for the selected month and year.
   

Conclusion

In conclusion, blocked credit under GST can have a significant impact on businesses, particularly in terms of compliance and cash flow. It is important for businesses to understand the various types of blocked credit, the conditions that must be met to avail blocked credit, and the potential impact on their operations. To minimize the impact of blocked credit, businesses must maintain proper records, classify purchases correctly, ensure that input tax credit is used only for business purposes, monitor changes in the GST law, and conduct regular internal audits. By doing so, businesses can maximize their input tax credit claims, reduce their tax liability, improve their cash flow, and enhance their profitability. It is essential for businesses to manage their blocked credit effectively to ensure compliance with GST regulations and minimize costs.