Introduction
Input Tax Credit (ITC) is a key feature of GST, designed to avoid tax cascading. However, the GST law clearly identifies certain credits as blocked, meaning ITC cannot be claimed even if the expense is incurred for business purposes.
In 2026, the GST department has strengthened scrutiny using data analytics and return-based validations. As a result, incorrect claims of blocked ITC are one of the most common reasons for GST notices and reversals. Businesses must clearly understand the updated interpretation of blocked ITC to stay compliant.
Legal Basis of Blocked ITC
Blocked ITC is governed by Section 17(5) of the CGST Act. These restrictions override the general entitlement to ITC.
Key point for 2026:
Availability of ITC is determined not only by nature of expense but also by actual usage, documentation, and accounting treatment.
Major Categories of Blocked ITC (2026 Focus)
1. Motor Vehicles & Conveyance
ITC is blocked on motor vehicles used for:
- Transportation of persons
- Personal or mixed use
ITC allowed only if vehicle is used for:
- Further supply of such vehicles
- Transportation of goods
- Passenger transport service
- Driving training institutes
2026 interpretation:
Authorities verify vehicle registration, insurance type, and expense nature to determine eligibility.
2. Food, Beverages & Catering
Blocked ITC includes:
- Food and beverages
- Outdoor catering
- Canteen and meal expenses
- Club memberships
Exception:
Allowed only when provision of such service is mandatory under any law or used for outward supply of the same category.
3. Employee Welfare & Personal Consumption
ITC is blocked on expenses related to:
- Gifts to employees (beyond prescribed limits)
- Personal use benefits
- Recreational or leisure facilities
2026 scrutiny:
Clear distinction is made between statutory obligations and voluntary benefits.
4. Works Contract Services
ITC is blocked on works contract services used for:
- Construction of immovable property
Allowed only when:
- Works contract service is used for further supply of works contract service
Repairs and maintenance are allowed; capital construction remains blocked.
5. Construction of Immovable Property
ITC is blocked on:
- Buildings
- Office premises
- Factories and warehouses
Blocked even if:
- Capitalised in books
- Used for business operations
Only plant and machinery is excluded from this restriction.
6. Purchases from Composition Dealers
ITC is not available on supplies received from:
- Composition scheme taxpayers
This remains a frequently observed error.
Common Blocked ITC Errors Seen in 2026
❌ ITC claimed on motor car insurance
❌ Office renovation treated as repairs
❌ Employee food expenses claimed without legal mandate
❌ ITC not reversed on damaged or obsolete stock
❌ Free promotional goods treated as business expense ITC
Best Practices to Manage Blocked ITC
✔ Maintain separate ledger for blocked ITC
✔ Review expenses under Section 17(5) before claiming ITC
✔ Monthly ITC reconciliation instead of year-end adjustments
✔ Document statutory requirements for employee benefits
✔ Train accounts team on blocked credit rules
Conclusion
In 2026, blocked ITC rules are enforced more strictly than ever. Businesses must move beyond assumptions and apply careful analysis and documentation before claiming ITC. Proactive identification of blocked credits ensures smoother compliance and reduces the risk of disputes.