Introduction

The Goods and Services Tax (GST) system has significantly simplified the Indian taxation landscape by replacing a convoluted array of indirect taxes with a cohesive framework. Among the myriad advantages of GST, the seamless flow of Input Tax Credit (ITC) throughout the supply chain stands out. Nevertheless, businesses occasionally contend with the challenge of blocked credit, resulting in confusion and financial repercussions. In this blog, we will delve into the concept of blocked credit under GST, scrutinize its underlying reasons, and elucidate effective strategies for businesses to manage and mitigate its impact.

Understanding Input Tax Credit (ITC)

GST empowers registered businesses to claim credit for the taxes paid on inputs and services used in their operations. In essence, when GST is paid on purchases, businesses can offset that amount against the GST collected from customers, thereby reducing their overall tax liability. This mechanism is known as Input Tax Credit (ITC) under GST.

Exploring Blocked Credit under GST

Blocked credit in GST pertains to the portion of input tax credits that a registered taxpayer cannot claim for specific inputs or services. Simply put, it represents unclaimed or unusable credit that cannot be utilized to reduce the output tax liability. Various reasons contribute to credit being blocked within the GST system.

Reasons for Blocked Credit under GST

1. Non-GST Supplies:
   • Transactions with non-GST registered vendors or composition dealers render businesses ineligible for input tax credit.
2. Personal Use or Exempt Supplies:
   • Goods or services used for personal consumption or for supplies exempt from GST disallow ITC under GST. For instance, purchasing vehicles primarily for personal use restricts the ability to claim credit on GST paid for these vehicles.
3. Blocked Services:
   • Explicitly listed services under blocked services in GST, such as catering services or employee health insurance, do not permit businesses to claim input tax credits.
4. Capital Goods for Non-Taxable Supplies:
   • Input tax credit on capital goods acquired for non-taxable supplies, such as machinery for a non-GST taxable business division, is blocked.
5. Composition Scheme:
   • Businesses opting for the composition scheme in GST cannot claim input tax credits. While subjected to a lower GST rate, they are unable to collect GST from customers or claim credits.
6. Blocked Credit Due to Non-Compliance:
   • Non-compliance with GST regulations, such as delayed filing of returns or discrepancies in returns, may lead to blocked credit until the issues are rectified.

Impacts of Blocked Credit under GST

While blocked credit poses challenges for businesses, strategies can mitigate its impact:

1. Maintain Accurate Records:
   • Detailed and accurate record-keeping is crucial to identify and address blocked credit. Ensure all transactions are well-documented with readily available supporting evidence.
2. Regularly Reconcile Input and Output Taxes:
   • Frequent reconciliation of input and output taxes aids in identifying and rectifying discrepancies promptly, minimizing the impact of blocked credit due to non-compliance.
3. Optimize Procurement Practices:
   • Evaluate procurement practices to avoid purchases leading to blocked credit. Preferably source from GST-registered vendors whenever feasible.
4. Review Business Structure:
   • In certain cases, restructuring the business or its divisions may mitigate blocked credit. Consult with tax experts to explore options aligning with business objectives.