When you, as a taxpayer, make purchases, you naturally expect to claim input tax credit on the GST paid. After all, ITC helps reduce tax costs by allowing you to offset the tax paid on purchases against the tax collected on sales. However, not all purchases qualify for ITC. Some transactions are specifically blocked under Section 17(5) of the GST Act, meaning you must bear the full tax cost without any credit.
These restrictions override the general ITC eligibility rules laid out in Section 16(1), which defines when ITC can be claimed, and Section 18(1), which covers special cases like new registrations and transition from a composition scheme. The intent behind these restrictions is to prevent misuse and ensure ITC is only available for genuine business expenses.
Section 17(5) lists eleven specific clauses with transactions where ITC is restricted, covering a wide range of goods and services. In this blog, we will go through each of these clauses, explaining when ITC cannot be claimed, what exceptions exist, and how you can stay compliant with Section 17(5) with ease.
11 Clauses of Section 17 (5)- Ineligible Transactions and Exceptions
Clause (a)- Motor Vehicles & Conveyances
As per clause (a) of Section 17 (5), ITC is not allowed on the purchase, leasing, renting, or hiring of motor vehicles unless they are used for business purposes.
Ineligible Transactions:
- Purchase of cars, bikes, or other vehicles for general business use
- Leasing or renting of vehicles for employee transportation
- Repairs, maintenance, and insurance of personal or company-owned vehicles
Exceptions (Where ITC is Allowed):
- Vehicles used for transportation of goods
- Vehicles used for passenger transport (e.g., taxis, buses)
- Vehicles used for providing training on driving, flying, or navigation
For example, if a business buys a car for its CEO, ITC cannot be claimed. But if a logistics company purchases a truck for goods transportation, ITC is eligible.
Clause (b)- Food, Beverages, Outdoor Catering, and Similar Services
Section 17 (5) also does not allow ITC on expenses related to food and beverages, catering services, and related supplies, even if these are used for business purposes.
Ineligible Transactions:
- Office pantry expenses (tea, coffee, snacks)
- Catering services for company events
- Restaurant bills incurred during business meetings
Exceptions:
- If the business itself is engaged in providing similar services (e.g., a catering company purchasing food supplies)
- If the supply of food and beverages is part of a contractual obligation, such as mandatory catering for employees under a government rule
For example, an IT company providing free lunch for employees cannot claim ITC. However, a hotel that includes breakfast in its room package can claim ITC on food purchases.
Clause (c)- Membership of Clubs, Health & Fitness Centres
Businesses cannot claim ITC on membership fees paid for clubs, health and fitness centres, and similar facilities.
Ineligible Transactions:
- Gym memberships for employees
- Corporate club memberships for executives
- Subscriptions to recreational facilities
Exceptions:
- If the business itself is engaged in providing such memberships (e.g., a gym purchasing equipment)
For instance, a company paying for executive golf club memberships cannot claim ITC. But a gym purchasing new treadmills for its facility can avail ITC.
Clause (d)- Travel Benefits for Employees (Leave Travel, Vacation Packages)
ITC is not allowed on any expenses related to employee travel benefits such as leave travel concessions or vacation packages.
Ineligible Transactions under clause d:
- Airfare, train tickets, or hotel stays provided to employees as part of their salary package
- Travel expenses for personal vacations, even if reimbursed by the company
Exceptions:
- If the employer is required to provide such benefits under a legal obligation
For example, if a company provides free travel vouchers to employees as a perk, ITC cannot be claimed. However, if a business is legally required to provide travel benefits to workers (such as in certain government contracts), ITC is allowed.
Clause (e) and (f)- Contract Services or Goods or Services for Construction for Immovable Property
Section 17 (5) restricts ITC on works contract services or goods/services used for the construction of an immovable property (except when used for providing further works contract services).
Ineligible Transactions:
- Construction of company-owned office buildings, warehouses, or factories
- Interior designing or renovation of company premises
- Purchase of cement, bricks, and steel for office or warehouse construction
- Hiring of labor for inhouse building projects
Exceptions:
- If the business is engaged in providing works contract services (e.g., a construction company hiring subcontractors)
- If the works contract is for plant and machinery, not general building structures
- If the goods/services are used for resale or further supply
- If they are related to plant and machinery installation
For example, if a software company builds a new office, ITC on construction costs is not allowed. But if a construction firm hires subcontractors for a real estate project, ITC is eligible.
Clause (g)- Goods Lost, Stolen, Destroyed, or Given as Gifts
ITC is not allowed on goods that are lost, stolen, damaged, written off, or distributed as gifts or free samples.
Ineligible Transactions:
- ITC on expired stock that is disposed of
- Free promotional samples given to customers
- ITC on items damaged in transit
Exceptions:
- If the goods are sold at a discount instead of being given for free
For example, if a cosmetics company distributes free sample lipsticks to promote a new product, ITC cannot be claimed. However, if the company sells them at a discounted rate, ITC is eligible.
How to Classify Eligible/Ineligible ITC Using Auto-Drafted GSTR-2B?
Rule section 17 (5) could be complicated especially when your company deals into similar transactions deemed ineligible under this section. However, the government has made it easier to classify such transaction using your GSTR-2B form. GSTR-2B helps you identify eligible and ineligible ITC by providing a transaction-wise breakdown based on the details filed by suppliers in their GSTR-1. The classification is broadly categorized as:
- ITC Available (Eligible for Claim): ITC that can be availed as per GST laws.
- ITC Not Available (Ineligible for Claim): ITC restricted due to provisions like Section 17(5), mismatched invoices, or supplier noncompliance.
Since ITC under Section 17(5) is ineligible, businesses must crosscheck GSTR2B’s ITC classification before claiming credits.
What If You Claim Ineligible ITC Under Section 17(5)?
If you mistakenly or intentionally avail ITC on ineligible items, you need to do two things reverse it with applicable interest and report it in GSTR-3B.
1. ITC Reversal with Interest
If ITC is wrongly availed on restricted transactions as per Section 17 (5), you are required to reverse the ITC amount in your GST return. Additionally, interest is charged at 24% per annum, calculated from the date of claiming the ITC to the date of reversal.
For example, if you wrongly availed ₹1,00,000 ITC on a passenger vehicle purchase in April but reversed it in October (after six months), the interest would be:
Interest Calculation:
– ₹1,00,000 × 24% × (6/12) = ₹12,000
This additional cost can significantly impact working capital, making it essential to classify transactions correctly.
2. Reporting in GSTR-3B
The reversal of ineligible ITC must be reported in Table 4D of GSTR-3B (earlier reported under Table 4B). Taxpayers must ensure accurate classification to avoid penalties during GST audits or scrutiny. The change in reporting structure from 4B to 4D became effective from January 2022, when the government restructured GSTR-3B tables to improve ITC reporting transparency.
Conclusion
Knowing which transactions are eligible/ineligible for ITC does not just make it easier to file your returns but also lets you manage your cash flow more effectively. You should hence make it a general practice to cross-check your eligible ITC with what’s available in your GSTR-2B every month. This way, you will never end up reversing any ITC which was claimed due to ineligibility as per section 17 (5).
