Should Section 17(5) of the CGST Act Continue Anymore?

[K Balasubramanian -]

1. Introduction: While most of the provisions of the CGST Act 2017 were drafted after careful thought and taking clues from Indirect Tax Laws prevalent in India prior to 01/07/2017 as well as from GST Law of the Countries where GST was in place, I fail to understand the logic behind sub section 5 of Section 17 of CGST Act on Blocked Credit.  Assuming that there was a real need for the sub section 5, still I am unable to appreciate the NEED behind that sub section being non-obstante one. Let us examine this elaborately in the coming paras.

2. Though as per Section 16 (1) of the CGST Act 2017 the taxpayer is entitled to take credit of input tax charged on any supply of goods or services or both to him which are USED OR INTENDED TO BE USED IN THE COURSE OR FURTHERANCE OF HIS BUSINESS, the same is subject to certain restrictions contained mostly under Section 16 as well as Section 17 of the CGST Act.

3. The conditions stipulated under Section 16 and prevalent as on 01/07/2017 are reasoned ones keeping in mind the entire focus on avoidance of bogus credits. However, the subsequent amendments to Section 16 made as applicable from 01/01/2022 as well as from 01/10/2022 are not only additional burden on the taxpayer but also forces the tax payer to suffer for either a wrong action or inaction on the part of his supplier on which he has absolutely no control.

4. Moving forward to Section 17, it appears that the sub sections contained in Section 17 other than that of sub section 5 have some reasoning which are well appreciated in line with the requirements.

5. The Goods and Service Tax Council deserves lot of appreciations from the taxpayers as the COUNCIL has thought of the difficulties arising out of Section 17(5). The amendments made by way of Notification No 02/2019-CT dated 29/01/2019 made applicable from 01/02/2019 are truly beneficial to the taxpayer as few credits which were blocked ones up to 31/01/2019 became eligible subsequently.

6. The CBIC has issued Circular No 172/04/2022-GST dated 06/07/2022 through GST Policy wing which has clarified several issues on Section 17 (5), which gives comfort to the common tax payer to believe that the Government is open to address the genuine hardships of the common tax payer.

7. However, the insertion of clause (fa) through The Finance Act, 2023 dated 31/03/2023 and notified through Notification No 28-2023- CT dated 31/07/2023 and brought into force with effect from 01/10/2023 prompted me to ponder as to what could be the rationale behind this amendment and what the Government is planning to achieve through this amendment.

8. This amendment by way of insertion of a new clause (fa) restricts ITC on funds spent on Corporate Social Responsibility.  While the requirement for CSR spend itself arises based the requirements under the Companies Act, 2013, why a credit arising out of a legal requirement should come under blocked credit. So far as a Corporate Entity, which is required to make CSR Spend is concerned, there would be no impact on the funds outflow as the entire exercise is NEUTRAL as explained below.

9. Let us assume that the requirement for CSR spend for XYZ Limited works out to INR one lakhs during the current financial year. In case there is no restriction on ITC as blocked credit (as made applicable from 01/10/2023), the amount on CSR spend would be INR One Lakhs excluding applicable GST. However, due to restriction from 01/10/2023, the total spend on CSR would be INR One Lakhs including applicable GST. That way, in both cases, funds outflow remains INR One Lakh only as ITC is used towards tax on outward supply, in case ITC is eligible.

10.  In the first place, a question arises as to what is the need for sub section 5 of Section 17, as it restricts in most of the cases the Availment of ITC, even though the said expenditure is incurred wholly for business purposes only. For the sake of simplicity, let us examine expenses on motor vehicle. When the Tax Payer uses a motor vehicle EXCLUSIVELY for his business purposes, despite the fact that it is OWNED or HIRED, ITC pertaining to motor vehicle is denied. Why the GST paid under RCM on hiring a vehicle for a GENUINE business purpose should be denied?   

11. It is not the case that the entire spend on clauses covered under Section 17(5) becomes blocked. There are cases where credit is eligible when the same is spent where   the supply happens to be the same both on inward as well as outward. Credit is also available where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. This situation would definitely lead to infructuous litigation.

12. The first question is whether there is any need to continue with Sub Section 17 (5) anymore?. In case the answer happens to be YES, is there still any further requirement to keep this 17(5) as NON-OBSTANTE one.

13. Conclusion:  On behalf of the entire taxpayers who face genuine hardship arising out of Section 17(5), it is appealed to the Government to remove the sub section 5 of section 17 in toto.

14. In case it is not possible to remove the sub section 5 as above, kindly remove all curbs in respective clauses which go against the principles of SEAMLESS flow of ITC in cases where the input as well as input service are in line with Section 2 (59) and 2 (60) respectively.