Blocked Credits and Common Credit Apportionment in a Dual-Supply Factory
Sunrise Foods Pvt Ltd, a GST-registered manufacturer of packaged snacks at Nagpur, makes both taxable and exempt supplies. For October 2024 its records show the following. (a) GST of ₹6,80,000 on inputs and input services used commonly for taxable and exempt supplies; the opening balance of common credit in the electronic credit ledger is ₹2,00,000. (b) GST of ₹4,20,000 on civil works and materials for a new corporate office building constructed on land owned by the company, capitalised in the books. (c) GST of ₹55,000 on a 25-seat bus purchased to pick up and drop employees. (d) GST of ₹38,000 on a two-wheeler purchased in the company's name and used by the sales manager for both business and personal errands. (e) CSR expenditure of ₹1,20,000 paid to an NGO, on which GST of ₹21,600 was charged, the spend being mandatory under section 135 of the Companies Act 2013. (f) GST of ₹90,000 on a hotel stay at Goa for the managing director's family on a leisure trip. Turnover for October 2024: taxable ₹1,40,00,000 and exempt ₹60,00,000.
1. Examine each of items (a) to (f) and state whether the input tax credit is available, blocked, or available only after apportionment, with reasons.
Read the worked answer
(a) Common inputs and input services - ₹6,80,000
Not blocked. It is common credit used for both taxable and exempt supplies, so section 17(2) applies and the credit must be apportioned under rule 42. Note that rule 42 applies to inputs and input services; rule 43 would apply to capital goods.
(b) Civil works and materials for the new office building - ₹4,20,000
Blocked under section 17(5)(d): goods or services received for construction of an immovable property, other than plant and machinery, on the taxable person's own account, including where used in the course or furtherance of business. Capitalising the amount in the books, or the fact that the building is used for the business, does not help. If the building is later given on rent, credit remains blocked.
(c) 25-seat bus for employee pick-up and drop - ₹55,000
Available. Section 17(5)(a) blocks motor vehicles for transportation of persons with approved seating capacity of not more than 13 persons including the driver. A 25-seat bus is outside the block. It is also not hit by section 17(5)(b)(iii), which blocks travel benefits on vacation such as leave or home travel concession; daily commuting is not vacation travel. As the bus is used wholly for the taxable business, no apportionment is needed.
(d) Two-wheeler - ₹38,000
Blocked under section 17(5)(a). A two-wheeler is a motor vehicle for transportation of persons with capacity well below 13, and none of the exceptions (use as stock-in-trade for furtherance of the business, transportation of passengers, transportation of goods) applies. Partial personal use by the sales manager also fails the test in section 17(1).
(e) CSR spend - ₹21,600
Blocked. Section 17(5)(fa), inserted with effect from 1 October 2023, blocks credit on goods or services used for activities relating to corporate social responsibility obligations under section 135 of the Companies Act 2013. Since the spend is mandatory under section 135, the block applies squarely. Had it been a voluntary spend outside section 135, (fa) would not apply, but credit would still need a business nexus under section 17(1).
(f) Hotel stay for the MD's family on a leisure trip - ₹90,000
Not available. The expenditure is personal and not used in the course or furtherance of business, so section 17(1) denies the credit. The family members are not employees travelling on business, so the employee-benefit reasoning does not apply either.
2. Compute the credit available to Sunrise Foods Pvt Ltd for October 2024 in respect of items (a) to (f), showing the rule 42 working.
Read the worked answer
Step 1 - blocked and ineligible amounts
| Item | ₹ | Treatment |
|---|---|---|
| (b) office building civil works | 4,20,000 | Blocked, section 17(5)(d) |
| (d) two-wheeler | 38,000 | Blocked, section 17(5)(a) |
| (e) CSR | 21,600 | Blocked, section 17(5)(fa) |
| (f) family hotel stay | 90,000 | Not in furtherance of business, section 17(1) |
| Total ineligible outright | 5,69,600 |
Step 2 - rule 42 apportionment of common credit
Common credit for October = ₹6,80,000 current + ₹2,00,000 opening = ₹8,80,000.
Exempt proportion = 60,00,000 ÷ 2,00,00,000 = 30%.
- D1, credit attributable to exempt supplies = 8,80,000 × 30% = ₹2,64,000 - ineligible.
- Eligible common credit = 8,80,000 − 2,64,000 = ₹6,16,000.
The 5% de minimis in rule 42(1)(h) is not available because the exempt portion is 30%, far above 5%.
Step 3 - total credit available
| Particulars | ₹ |
|---|---|
| Eligible portion of common credit | 6,16,000 |
| (c) bus used wholly for taxable business | 55,000 |
| Total ITC available for October 2024 | 6,71,000 |
Step 4 - follow-up
Rule 42 requires a monthly computation and an annual recalculation for the whole financial year before 30 November of the following year, with any excess credit availed being reversed with interest. Because the exempt turnover varies month to month, the October figure is provisional.
If the bus were also used partly for exempt activity, it would have to be treated as common credit and apportioned.
3. What are the consequences of availing the blocked credits, and what time limits govern the availment and reversal of credit?
Read the worked answer
Consequences of availing blocked credit
- The credit of ₹5,69,600 is recovered as wrongly availed input tax credit under section 73 (or section 74 where suppression or misstatement is alleged), along with interest at 18% under section 50(3) from the date of utilisation.
- Penalty exposure follows the demand provision invoked; voluntary reversal and payment before issue of notice can attract reduced or no penalty under section 73(5).
- If the credit has been passed on to customers, section 73 does not protect the supplier; the demand still stands, and the supplier must absorb it.
- Interest can be arrested in part by debiting the electronic credit ledger and reversing the amount before utilisation, but interest on the amount already utilised cannot be avoided.
Time limits
- Section 16(4): credit for FY 2024-25 must be availed by 30 November 2025 or the date of furnishing the annual return, whichever is earlier. Credit after that date lapses.
- Section 16(2)(aa) and rule 36(4): credit is available only if the details are furnished by the supplier in GSTR-1 and communicated in GSTR-2B.
- Rule 37: if the recipient fails to pay the supplier within 180 days of the invoice date, the credit must be reversed with interest; it can be re-availed on payment.
- Rule 42(2): the annual recalculation of common credit must be completed before 30 November following the end of the financial year.
- Section 16(2)(c): credit is not available unless the tax has actually been paid to the government by the supplier.
Practical suggestion: maintain a blocked-credit register mapping each invoice to the clause of section 17(5) or section 17(1) relied on, so that a departmental audit or the annual return reconciliation can be supported item by item.