GST Section 17 Explained: Apportionment of Input Tax Credit & Blocked Credits

Section 17 of the CGST Act, 2017 governs the apportionment of Input Tax Credit (ITC) and outlines specific scenarios where ITC is blocked or disallowed. It requires taxpayers to proportionately claim ITC when goods or services are used for both business and non-business purposes, or for taxable and exempt supplies.

The section also specifies ineligible credits related to personal use, construction, certain services like insurance and club memberships, and CSR expenses. Special provisions exist for banking and financial institutions. This comprehensive guide by AUBSP explains the legal framework, recent amendments, and compliance strategies to help registered persons accurately manage their ITC claims under GST.

GST Section 17: Apportionment of Credit and Blocked Credits – A Detailed Guide

Welcome! If you’re a registered taxpayer or a GST practitioner trying to understand how input tax credit (ITC) is apportioned and what credits are restricted or “blocked” under GST law, you’re in the right place. This detailed guide is brought to you by AUBSP, a trusted name in taxation and compliance. We will walk you through every clause of Section 17 of the CGST Act, explain its impact, and clarify blocked credit conditions so that you make no mistakes in your compliance.

Overview of Section 17

Section 17 of the CGST Act deals with how a registered person must apportion Input Tax Credit (ITC) if goods or services are used for both business and non-business purposes, or for taxable and exempt supplies. It also clearly lays down conditions where ITC is disallowed, known as blocked credits.

Apportionment of ITC – Business vs Non-Business Use

Section 17(1) – Dual Use of Inputs

When goods or services are used partly for business and partly for personal or other non-business use, ITC can only be claimed in proportion to the business use.

🔍 AUBSP Tip: Maintain proper documentation and separation of input usage to avoid future disallowances.

ITC in Case of Taxable vs Exempt Supplies

Section 17(2) – Mixed Supply Use

Where inputs are used for both taxable (including zero-rated) and exempt supplies, ITC must be claimed only for the taxable portion.

Section 17(3) – What Qualifies as “Exempt Supply”

Includes:

• Supplies liable under reverse charge
• Transactions in securities
• Sale of land
• Sale of buildings (subject to Schedule II, Para 5(b))

Excludes: Activities in Schedule III, except:

• Paragraph 5 transactions
• Certain prescribed transactions under paragraph 8(a)

📝 AUBSP advises strict classification of supplies to avoid ITC reversals under audit.

Special Provisions for Banks & NBFCs

Section 17(4) – Optional Method for Financial Institutions

Banks, NBFCs, and similar institutions may choose between:

1. Regular apportionment under Section 17(2); or
2. Claim 50% of eligible ITC monthly, letting the remaining lapse.

Once chosen, the option is locked for the entire financial year.

🛡 Exception: Intra-group supplies (same PAN) are fully eligible for ITC.

Blocked Credits – ITC Not Available

Section 17(5) – List of Ineligible Credits

Here’s a breakdown of items where ITC is disallowed, irrespective of business use.

A. Vehicles, Vessels, Aircraft

B. Related Services (Repairs, Insurance, Maintenance)

Permissible only if:

• Used in eligible vehicle/vessel/aircraft operations
• For manufacturers or insurance service providers

C. Specific Goods/Services

• Food, beverages, catering
• Cosmetic surgery, health services
• Renting of vehicles, vessels, aircraft
• Club and fitness memberships
• Employee vacation travel

✅ Exception: Allowed if used to make same outward supplies or required by law.

D. Construction Services & Goods

• Works contracts for immovable property (unless for resale)
• Own construction of property (excluding plant & machinery)

E. Others

1. Composition scheme goods/services (Section 10)
2. Supplies to non-resident taxable persons (except imports)
3. CSR-related expenses (w.e.f. 1 Oct 2023)
4. Personal consumption
5. Lost, stolen, destroyed or gifted items
6. Tax paid under Section 74 (till FY 2023-24)

🧾 AUBSP recommends maintaining an audit trail of all blocked credit items to avoid disputes during GST assessments.

Manner of Attribution of Credit

Section 17(6) – Rule-based Attribution

The government is empowered to prescribe specific rules for attribution of ITC between business/personal or taxable/exempt purposes. These rules ensure standardisation and fairness in ITC computation.

Definition of “Plant and Machinery”

The term includes:

• Fixed machinery used for outward supplies
• Structural supports/foundations

But excludes:

• Land and buildings
• Telecom towers
• Pipelines outside factory

⚖ As per Finance Act 2025, the term “plant or machinery” is now clarified and has retrospective effect from 1 July 2017.

Date-Wise Evolution of Section 17

FAQs on Apportionment of Credit and Blocked Credits

What does Section 17 of the CGST Act deal with?
Section 17 outlines the rules for apportioning input tax credit (ITC) when goods or services are used for both business and other purposes, and also defines ineligible or blocked credits.

When is ITC allowed under Section 17(1)?
ITC is allowed only to the extent that goods or services are used for business purposes.

How is ITC apportioned between taxable and exempt supplies under Section 17(2)?
Only the portion of ITC attributable to taxable and zero-rated supplies is allowed; the rest relating to exempt supplies is disallowed.

What is included in the term ‘exempt supply’ under Section 17(3)?
Exempt supply includes supplies under reverse charge, transactions in securities, sale of land, and sale of buildings as specified in Schedule II.

What activities are excluded from the definition of exempt supply?
Activities listed in Schedule III are excluded, except paragraph 5 transactions and prescribed transactions under paragraph 8(a).

Can banks and financial institutions claim full ITC?
No, they must either comply with Section 17(2) or opt to claim 50% of eligible ITC monthly, with the remaining ITC lapsing.

Once chosen, can a bank change its ITC option within the financial year?
No, once the option is exercised, it cannot be withdrawn during the same financial year.

Is ITC allowed on motor vehicles?
ITC is blocked for motor vehicles with up to 13 seats unless they are used for transport, training, or further supply of such vehicles.

Are vessels and aircraft eligible for ITC?
ITC is blocked unless they are used for transport, training, or further supply of such vessels or aircraft.

Can insurance and maintenance services for vehicles be claimed as ITC?
Only when the vehicle is used for eligible purposes or the recipient is a manufacturer or insurance company of such vehicles.

Is ITC available on food, beverages, and catering services?
No, unless the same goods or services are outwardly supplied or are part of a taxable composite or mixed supply.

Is ITC allowed on club or fitness center memberships?
No, ITC on memberships of clubs or health and fitness centers is blocked.

Can ITC be claimed on travel benefits given to employees?
No, unless such benefits are mandated under any law for the time being in force.

Is ITC allowed on works contract services?
Only if the service is used for further supply of works contract service; otherwise, it is blocked.

Can ITC be claimed for construction of immovable property?
No, ITC is not allowed for construction (including reconstruction, renovation, or repairs) on one’s own account.

What is meant by “plant and machinery” under Section 17?
It includes machinery fixed to the earth used for outward supplies but excludes land, buildings, telecom towers, and external pipelines.

Is ITC available under the composition scheme?
No, ITC is blocked on goods or services taxed under Section 10 (composition scheme).

Can non-resident taxable persons claim ITC?
Only on goods imported by them; ITC on other goods or services is not allowed.

Is ITC allowed for CSR activities?
No, ITC is blocked on goods or services used for Corporate Social Responsibility obligations under the Companies Act, 2013.

Can ITC be claimed for goods or services used personally?
No, ITC used for personal consumption is not eligible.

What happens to ITC on goods lost, stolen, or disposed of as gifts?
ITC is not available on goods that are lost, stolen, destroyed, written off, or given away as gifts or free samples.

Is ITC allowed on tax paid under Section 74?
ITC on tax paid under Section 74 is blocked for any period up to Financial Year 2023–24.

How is ITC attributed when used for both business and non-business or taxable and exempt supplies?
The government prescribes the manner of attribution through rules for proportional distribution of eligible ITC.

What is the significance of Explanation-2 inserted in 2025?
It clarifies that “plant or machinery” includes the entire term even retrospectively, and must be interpreted consistently.

Is the ITC rule under Section 17 retrospective in effect?
Yes, certain amendments such as the definition of plant and machinery and construction-related clauses apply retrospectively from 1 July 2017.

Are there any exceptions for intra-group supplies?
Yes, the 50% restriction for financial institutions does not apply to supplies between entities having the same PAN.

Which notifications relate to Section 17 amendments?
Key notifications include 9/2017, 28/2023, and 17/2024 relating to its introduction and amendments.

How can one avoid issues in ITC attribution under Section 17?
Maintain clear documentation, separate input usage where possible, and follow the prescribed rule-based attribution methods.

Understanding the nuances of Section 17 is crucial for ensuring compliance and avoiding unnecessary reversal of credits. As we have seen, certain ITC benefits are restricted based on usage, nature of supply, and type of recipient. Therefore, every registered person must maintain accurate records and apply logical attribution methods.

This guide aims to be your go-to reference whenever you’re dealing with ITC issues under GST. Stay updated, stay compliant. If you have further queries or need expert advisory, reach out through the AUBSP community or website for practical solutions and support.