Taxation - GST Ch 07: Itc - Test 4: answer key

Question 1 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. Aarav Event Foods Ltd, registered in Haryana, operates an outdoor catering division and organises taxable corporate conferences. It also operates a food-processing factory employing 310 workers. During July 2026, the company received outdoor catering services from Prakash Caterers for ₹3,00,000 plus GST of ₹54,000. These services were incorporated into Aarav's own taxable outdoor catering contracts supplied to corporate customers. The company charged GST on the corresponding outward catering invoices. On 12 August 2026, Aarav organised an anniversary celebration for its own employees and prospective customers. It hired an external caterer for ₹1,50,000 plus GST of ₹27,000. The food was served at the event without any separate consideration, and the expense was treated as a promotional expenditure. No taxable catering or event-management service was supplied by Aarav in relation to this event. The company also engaged another caterer to operate its factory canteen. The factory employs 310 workers, and provision of a canteen is obligatory under section 46 of the Factories Act, 1948. The caterer raised invoices for ₹2,00,000 plus GST of ₹36,000 during September 2026. Aarav bore the entire expenditure. Separately, Aarav received catering services worth ₹1,20,000 plus GST of ₹21,600 from a registered caterer for a conference organised for a client. Aarav supplied the client a taxable conference-management package, and the catering formed an integral element of that taxable composite supply. The client was charged a consolidated package price. All invoices were in Aarav's name, the services were received during the relevant months, and all other conditions for claiming ITC were satisfied. Management proposes to claim credit on all four transactions because they relate to business operations.

Aarav received outdoor catering services carrying GST of ₹54,000 from Prakash Caterers. These services were incorporated into Aarav's own taxable outdoor catering supplies to customers. The company has fulfilled the other conditions for claiming ITC. Determine the eligibility of this credit under section 17(5)(b).

1. ₹54,000, because the inward service supports an outward taxable supply of the same category. (correct answer)
2. ₹27,000, because only half the input catering expenditure qualifies.
3. Nil, because outdoor catering is blocked regardless of onward utilisation.
4. Nil, because the subcontracted caterer is a different registered person.

Answer: A — ₹54,000, because the inward service supports an outward taxable supply of the same category.

Explanation. Section 17(5)(b)(i) permits ITC where the inward supply is used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply. Aarav procured outdoor catering services for its own taxable outdoor catering contracts. Therefore, the exception applies. GST on inward catering = ₹3,00,000 × 18% = ₹54,000. Eligible ITC = ₹54,000, provided the remaining statutory conditions are satisfied.

Where it goes wrong. Treating the restriction on outdoor catering as absolute and overlooking the same-category outward taxable supply exception.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 2 · 2 marks · Taxation - GST Ch 07: Itc · hard

Aarav incurred GST of ₹27,000 on outdoor catering services for its own anniversary celebration. The food was served to employees and prospective customers without separate consideration. Aarav neither provided an outward catering service nor included the catering as an element of a taxable composite or mixed supply. Determine the credit available on this expenditure.

1. Nil, because neither specified outward-supply exception nor statutory obligation applies. (correct answer)
2. ₹27,000, because the celebration promotes Aarav's taxable business.
3. ₹13,500, because the food was served partly to prospective customers.
4. ₹27,000, because the catering service was procured from a registered supplier.

Answer: A — Nil, because neither specified outward-supply exception nor statutory obligation applies.

Explanation. Outdoor catering is covered by section 17(5)(b)(i). The same-category exception is unavailable because Aarav did not make an outward taxable catering supply. The taxable composite or mixed supply exception is also absent. No applicable law requires Aarav to organise this celebration. Accordingly, the full GST of ₹27,000 is blocked. Business promotion by itself does not convert an inward catering service into an eligible outward taxable supply.

Where it goes wrong. Assuming that catering used for marketing or employee engagement automatically qualifies as an input for taxable business activity.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 3 · 2 marks · Taxation - GST Ch 07: Itc · medium

Aarav employs 310 workers in its food-processing factory and engages an external caterer for its factory canteen. GST charged on these catering services is ₹36,000. Section 46 of the Factories Act, 1948 requires the company to maintain a canteen. The company does not charge its employees separately for the meals. Determine the eligible credit.

1. ₹36,000, because provision of the canteen is a statutory employer obligation. (correct answer)
2. ₹18,000, because only half the canteen expenditure is eligible.
3. Nil, because the statutory exception applies only to health insurance.
4. Nil, because meals supplied to employees without consideration are blocked.

Answer: A — ₹36,000, because provision of the canteen is a statutory employer obligation.

Explanation. Section 46 of the Factories Act requires a factory employing more than 250 workers to maintain a canteen. Aarav employs 310 workers, so this obligation applies. Circular No. 172/04/2022-GST clarifies that the statutory-obligation proviso applies to the whole of section 17(5)(b). Thus, the catering service qualifies even though meals are supplied without charge. Eligible ITC = ₹36,000 × 1 = ₹36,000.

Where it goes wrong. Restricting the statutory-obligation proviso to particular services instead of applying it throughout clause (b).

Authority. Section 17(5)(b) of the CGST Act, 2017; Section 46 of the Factories Act, 1948; Circular No. 172/04/2022-GST dated 06.07.2022

Question 4 · 2 marks · Taxation - GST Ch 07: Itc · hard

Aarav procured outdoor catering services carrying GST of ₹21,600 for a client's conference. It charged the client for a taxable conference-management package at a consolidated price, and the catering formed an integral element of that package. The company did not issue a separate catering invoice to the client. What is the ITC treatment?

1. Nil, because the outward catering service must be separately invoiced.
2. ₹21,600, because the inward catering forms an element of a taxable composite supply. (correct answer)
3. ₹10,800, because only half the input catering cost is attributable to the package.
4. Nil, because conference-management services are different from catering services.

Answer: B — ₹21,600, because the inward catering forms an element of a taxable composite supply.

Explanation. The statutory exception covers inward supplies used as an element of a taxable composite or mixed supply. Aarav incorporates the catering into its taxable conference-management package and charges a consolidated consideration. Separate outward invoicing of catering is not essential to this exception. The inward tax is ₹1,20,000 × 18% = ₹21,600. Since the catering forms an element of the taxable package, the full ₹21,600 is eligible, subject to other conditions.

Where it goes wrong. Insisting on a separate outward catering invoice even though the catering forms part of a taxable composite or mixed supply.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 5 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. Aster Lifestyle and Wellness Pvt Ltd, registered in Maharashtra, operates taxable beauty-treatment and cosmetic-wellness centres in Mumbai and Pune. During September 2026, it engaged an independent registered specialist to provide beauty-treatment services worth ₹2,40,000 plus GST of ₹43,200. These services were incorporated into Aster's own taxable beauty-treatment packages supplied to customers. Aster charged GST on the entire outward package price. The company also procured health-screening services for its senior employees for ₹1,00,000 plus GST of ₹18,000. These examinations were part of a voluntary employee-wellness initiative. No provision of any applicable law required Aster to provide these particular services. The company separately purchased group health insurance for its employees, paying GST of ₹54,000, and group life insurance, paying GST of ₹36,000. Both insurance policies were voluntary employee benefits and were not mandated by any law applicable to Aster. Aster additionally paid ₹24,000 towards GST on annual club memberships for senior executives and ₹30,000 towards GST on memberships of a private fitness centre for its directors. Neither membership was required under any statute. Finally, Aster arranged a holiday package for 15 high-performing employees. The travel agency charged ₹1,20,000 plus GST of ₹21,600. Although the company's HR policy described the package as an employee entitlement, no applicable law required the employer to provide such vacation travel benefits. All services were received and invoices were issued in Aster's name. The company has furnished its relevant returns and satisfied the general conditions for ITC. Its finance department argues that employee welfare and customer-service expenditures should qualify because they support the company's taxable business.

Aster procured beauty-treatment services carrying GST of ₹43,200 from an independent registered specialist. Aster used these services as part of its own taxable beauty-treatment packages supplied to customers. The inward and outward services belong to the same category. Which amount is eligible as ITC?

1. ₹43,200, because the inward service supports outward taxable beauty treatment. (correct answer)
2. Nil, because beauty treatment is a blocked category under section 17(5)(b).
3. ₹21,600, being half the GST charged by the specialist.
4. Nil, because the specialist is not an employee of Aster.

Answer: A — ₹43,200, because the inward service supports outward taxable beauty treatment.

Explanation. Beauty treatment services are covered by section 17(5)(b)(i), but the restriction does not apply where the inward service is used for making an outward taxable supply of the same category. Aster uses the specialist's service in its own taxable beauty-treatment packages. GST on the inward service = ₹2,40,000 × 18% = ₹43,200. Thus, the entire ₹43,200 qualifies under the same-category exception.

Where it goes wrong. Overlooking the outward taxable supply exception because the inward beauty service is procured from an independent specialist.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 6 · 2 marks · Taxation - GST Ch 07: Itc · medium

Aster incurred GST of ₹18,000 on voluntary employee health-screening services. The expenditure was part of an employee-wellness initiative, but no applicable law required Aster to arrange the examinations. Its management argues that employee health services promote business efficiency. Determine the credit available under section 17(5)(b).

1. ₹18,000, because employee health services always qualify as business expenditure.
2. ₹9,000, because half the health-screening expenditure relates to employees.
3. ₹18,000, because the company earns taxable revenue from its operations.
4. Nil, because no same-category outward supply or statutory obligation exists. (correct answer)

Answer: D — Nil, because no same-category outward supply or statutory obligation exists.

Explanation. Health services are specifically covered by section 17(5)(b)(i). The same-category exception is unavailable because Aster does not use these examinations to make an outward taxable health-service supply. Further, no applicable law obliges Aster to provide these services to employees. The voluntary wellness programme does not satisfy the statutory proviso. Therefore, blocked ITC = ₹18,000 and eligible ITC = ₹0.

Where it goes wrong. Confusing a voluntary employee-welfare initiative with a benefit that an employer is legally required to provide.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 7 · 2 marks · Taxation - GST Ch 07: Itc · hard

Aster paid ₹54,000 as GST on group health insurance and ₹36,000 as GST on group life insurance policies taken for its employees. Neither policy was mandated by an applicable law, and Aster did not use the policies for making outward taxable insurance supplies. Calculate the aggregate ITC available on these premiums.

1. Nil, because both insurance categories are blocked and no exception applies. (correct answer)
2. ₹45,000, because half the insurance premiums qualify.
3. ₹90,000, because employee insurance supports business continuity.
4. ₹54,000, because health insurance is eligible but life insurance is blocked.

Answer: A — Nil, because both insurance categories are blocked and no exception applies.

Explanation. Life insurance and health insurance are specifically included in section 17(5)(b)(i). Aster procured these policies for its own employees and is not making outward taxable insurance supplies using the inward policies. No statutory obligation to provide these policies exists. Thus, both credits are blocked. Total GST = ₹54,000 + ₹36,000 = ₹90,000. Eligible ITC = Nil under the stated facts.

Where it goes wrong. Assuming that group policies automatically qualify because they protect employees and reduce business risks.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 8 · 2 marks · Taxation - GST Ch 07: Itc · hard

Aster paid GST of ₹24,000 on club memberships and ₹30,000 on fitness-centre memberships for its directors. The memberships were described in employment and remuneration documents as executive benefits. However, no applicable law required the company to provide these memberships. Can Aster claim any of the stated credit?

1. ₹54,000, because the memberships form part of employee remuneration.
2. ₹27,000, because only the fitness-centre membership qualifies.
3. ₹24,000, because club membership is allowed for directors.
4. Nil, because an employment agreement is not a statutory employer obligation. (correct answer)

Answer: D — Nil, because an employment agreement is not a statutory employer obligation.

Explanation. Section 17(5)(b)(ii) blocks credit on membership of clubs and health or fitness centres. The proviso allows credit where the employer is obliged by a law to provide the benefit. A contractual remuneration term or company HR policy does not, by itself, constitute such a statutory obligation. Blocked credit = ₹24,000 + ₹30,000 = ₹54,000. Therefore, eligible ITC is Nil.

Where it goes wrong. Treating a contractual employment benefit as equivalent to an obligation imposed by a law.

Authority. Section 17(5)(b)(ii) of the CGST Act, 2017; Circular No. 172/04/2022-GST dated 06.07.2022

Question 9 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. Nandini Real Estates and Infrastructure Pvt Ltd, registered in Karnataka, undertakes works contracts for commercial construction projects and also maintains its own manufacturing facility. During August 2026, it engaged a registered subcontractor for works contract services valued at ₹6,00,000 plus GST of ₹1,08,000. The services related to construction of a commercial complex belonging to a client. Nandini itself had undertaken the principal works contract and incorporated the subcontractor's services into its taxable outward works contract. The company also hired a contractor for construction of an additional office building on its own land. The contractor charged ₹5,00,000 plus GST of ₹90,000. The expenditure was capitalised as part of the office building. In another project, a contractor constructed a foundation and structural supports for a production machine permanently fixed to the earth. The machine was used for manufacturing taxable goods. The contractor charged ₹4,00,000 plus GST of ₹72,000, and the company capitalised the expenditure. A further contractor executed a pipeline project worth ₹3,00,000 plus GST of ₹54,000. The pipeline was laid outside the factory premises and was not used as part of eligible plant and machinery. The expenditure was capitalised. During September 2026, the company also encountered inventory losses. Goods carrying ITC of ₹9,000 were lost in transit, goods carrying ITC of ₹6,000 were stolen from a warehouse, and goods carrying ITC of ₹12,000 were destroyed in a warehouse fire. Goods carrying ITC of ₹15,000 were written off after becoming obsolete. The company additionally distributed business merchandise carrying ITC of ₹5,400 as gifts and product samples carrying ITC of ₹3,600 to prospective customers without consideration. A separate promotional scheme offered two units of a product for a single consolidated price. All the relevant inward credits had previously been availed.

Nandini received works contract services worth ₹6,00,000 plus GST of ₹1,08,000 from a subcontractor. Nandini was itself engaged as the principal works contractor for construction of a commercial complex belonging to a client. It incorporated the subcontractor's services into its own taxable outward works contract. Determine the credit available on the subcontractor's invoice.

1. ₹1,08,000, because the inward service is used for further supply of works contract service. (correct answer)
2. ₹54,000, because only half the subcontractor's GST is eligible.
3. Nil, because subcontracting involves construction of immovable property.
4. Nil, because only the owner of the commercial complex can claim ITC.

Answer: A — ₹1,08,000, because the inward service is used for further supply of works contract service.

Explanation. Section 17(5)(c) blocks works contract services used for construction of immovable property, but allows the exception where the inward service is an input service for further supply of works contract service. Nandini is itself a works contractor and uses the subcontractor's service in its outward taxable works contract. Eligible ITC = ₹6,00,000 × 18% = ₹1,08,000. The construction being an immovable property does not defeat this exception.

Where it goes wrong. Applying the immovable-property restriction without examining whether the recipient is using the input service for further supply of works contract services.

Authority. Section 17(5)(c) of the CGST Act, 2017

Question 10 · 2 marks · Taxation - GST Ch 07: Itc · hard

Nandini received works contract invoices carrying GST of ₹90,000 for construction of its own office building and ₹54,000 for laying a pipeline outside its factory premises. Both projects were capitalised, and neither was undertaken as an input for further supply of works contract services. The pipeline is not part of eligible plant and machinery. Determine the total ITC blocked under section 17(5)(c).

1. ₹90,000, because only construction of the office building is restricted.
2. ₹1,44,000, because both projects fall within the applicable restriction. (correct answer)
3. ₹54,000, because pipeline construction alone is blocked.
4. Nil, because both projects support taxable manufacturing operations.

Answer: B — ₹1,44,000, because both projects fall within the applicable restriction.

Explanation. The office building is an immovable property other than eligible plant and machinery. The pipeline outside the factory premises is expressly excluded from the definition of plant and machinery. Neither project qualifies for the further-supply works contract exception. Accordingly, office-building ITC blocked = ₹90,000; pipeline ITC blocked = ₹54,000. Aggregate blocked credit = ₹90,000 + ₹54,000 = ₹1,44,000.

Where it goes wrong. Assuming that every structure used in manufacturing constitutes plant and machinery, including external pipelines.

Authority. Section 17(5)(c) of the CGST Act, 2017; Explanation to Section 17 of the CGST Act, 2017

Question 11 · 2 marks · Taxation - GST Ch 07: Itc · hard

Nandini's inventory records show ITC of ₹9,000 on goods lost in transit, ₹6,000 on stolen goods, ₹12,000 on goods destroyed in a fire, ₹15,000 on obsolete goods written off, ₹5,400 on merchandise distributed as gifts and ₹3,600 on product samples distributed without consideration. Calculate the aggregate blocked credit under section 17(5)(h).

1. ₹45,000, excluding destroyed goods and promotional samples.
2. ₹51,000, comprising all six categories of affected goods. (correct answer)
3. ₹36,000, comprising only inventory losses and written-off goods.
4. ₹30,000, excluding gifts and samples used for customer promotion.

Answer: B — ₹51,000, comprising all six categories of affected goods.

Explanation. Section 17(5)(h) blocks ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or samples supplied without consideration. The amounts are ₹9,000 + ₹6,000 + ₹12,000 + ₹15,000 + ₹5,400 + ₹3,600. Aggregate reversal = ₹51,000. Each category is independently covered by the provision; promotional purpose does not restore credit on goods distributed as gifts or samples without consideration.

Where it goes wrong. Excluding destroyed goods, gifts or promotional samples from the reversal calculation merely because the losses or distributions arise during normal business operations.

Authority. Section 17(5)(h) of the CGST Act, 2017

Question 12 · 2 marks · Taxation - GST Ch 07: Itc · medium

Nandini distributed certain products under a promotion in which customers paid a single consolidated price for two units. The arrangement was advertised as a two-for-one offer, and the company had originally availed ITC of ₹24,000 on the inputs used in the two units. No additional amount was separately collected for the second unit. What is the correct treatment of the ITC under the sales-promotion clarification?

1. ₹12,000, because credit on the second unit must be reversed.
2. Nil, because the second unit is treated as a gift under section 17(5)(h).
3. ₹12,000, because only the first unit forms part of the taxable supply.
4. ₹24,000, because the arrangement is a two-unit supply for one consolidated price. (correct answer)

Answer: D — ₹24,000, because the arrangement is a two-unit supply for one consolidated price.

Explanation. The two-for-one offer is not treated as an individual supply of one paid unit and another gratuitous unit. It is a supply of two units for one consolidated price. Circular No. 92/11/2019-GST, read with Circular No. 251/08/2025-GST, clarifies that ITC is available on inputs used in such promotional offers. Accordingly, no reversal is required under section 17(5)(h). Eligible credit = ₹24,000.

Where it goes wrong. Treating the promotional second unit as a gift rather than considering the consolidated-price nature of the transaction.

Authority. Section 17(5)(h) of the CGST Act, 2017; Circular No. 92/11/2019-GST dated 07.03.2019; Circular No. 251/08/2025-GST dated 12.09.2025

Question 13 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered event-management company receives outdoor catering services costing ₹4,00,000 plus GST of ₹72,000. It incorporates the catering into a taxable conference package supplied to corporate clients for a single consolidated consideration. The catering is an integral component of that package, although the company does not separately charge for meals. Assuming the other ITC conditions are fulfilled, determine the credit available under section 17(5)(b).

1. Nil, because the company is not primarily engaged in catering.
2. ₹36,000, because only half the catering tax qualifies.
3. ₹72,000, because catering forms an element of a taxable composite or mixed supply. (correct answer)
4. Nil, because the clients are charged one consolidated package price.

Answer: C — ₹72,000, because catering forms an element of a taxable composite or mixed supply.

Explanation. Section 17(5)(b)(i) contains an exception for inward supplies used as an element of a taxable composite or mixed supply. The event-management company includes outdoor catering as an integral component of its taxable conference package. Separate pricing for catering is unnecessary. Tax on inward catering = ₹4,00,000 × 18% = ₹72,000. Accordingly, the full ₹72,000 qualifies under the stated exception, subject to other ITC requirements.

Where it goes wrong. Assuming that catering must be the principal outward activity or separately priced to qualify under the composite or mixed supply exception.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 14 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered aesthetic clinic supplies taxable cosmetic procedures and beauty-treatment packages. It obtains specialist cosmetic-treatment services from another registered clinic for ₹5,00,000 plus GST of ₹90,000. These services are incorporated into the clinic's own taxable cosmetic-treatment packages. The services are received in the same tax period and are not used for employees or directors. Determine the credit available under section 17(5)(b).

1. Nil, because cosmetic and plastic surgery services are blocked.
2. ₹45,000, because only half the inward specialist service qualifies.
3. ₹90,000, because the inward treatment supports outward taxable supplies of the same category. (correct answer)
4. Nil, because only goods and not services qualify for the exception.

Answer: C — ₹90,000, because the inward treatment supports outward taxable supplies of the same category.

Explanation. Cosmetic and plastic surgery services are covered by section 17(5)(b)(i). However, the same-category exception permits credit where inward services are used to make outward taxable supplies of the same category. Here, the clinic uses specialist cosmetic-treatment services to supply its own taxable cosmetic packages. GST = ₹5,00,000 × 18% = ₹90,000. Thus, the full ₹90,000 is eligible, subject to the remaining statutory requirements.

Where it goes wrong. Assuming that the restriction on cosmetic and plastic surgery services admits no same-category outward taxable supply exception.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 15 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered wellness company receives health services carrying GST of ₹36,000 from a medical provider. It incorporates these services into its own taxable health-service package supplied to corporate clients. The package includes consultations and diagnostic health services, and the entire package is taxable. The company satisfies the general ITC conditions. Determine the credit available on the inward health services.

1. Nil, because health services are always blocked under section 17(5)(b).
2. ₹18,000, because only half the inward services qualify.
3. Nil, because the outward supply includes services other than diagnostics.
4. ₹36,000, because the inward health services support an outward taxable supply of the same category. (correct answer)

Answer: D — ₹36,000, because the inward health services support an outward taxable supply of the same category.

Explanation. Health services are within the blocked-credit category under section 17(5)(b)(i), but credit is allowed when the inward services are used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply. The company incorporates the medical provider's services into its own taxable health-service package. Accordingly, the full GST of ₹36,000 is eligible.

Where it goes wrong. Treating every inward health service as blocked without testing the same-category taxable output exception.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017

Question 16 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A manufacturing company procures group health insurance for employees at a premium of ₹6,00,000 and pays GST of ₹1,08,000. The policy is voluntary and no statute requires the employer to provide it. On 8 October 2026, the GST Council recommended removal of certain blocked-credit restrictions, including those relating to health and life insurance. The company proposes to claim the credit in its October return. What is the position as at 31 October 2026?

1. The full ₹1,08,000 is available from 8 October because the Council approved the proposal.
2. Nil, because the recommendation has not itself amended section 17(5). (correct answer)
3. ₹54,000, because the Council recommendation permits half the credit.
4. The full ₹1,08,000 is available because group insurance relates to employees.

Answer: B — Nil, because the recommendation has not itself amended section 17(5).

Explanation. As at 31 October 2026, the statutory restriction under section 17(5)(b)(i) continues to cover health insurance. The GST Council's 8 October 2026 recommendation to remove the restriction is a recommendation for legislative amendment, not an amendment itself. No statutory employer obligation or same-category outward taxable supply exception applies here. Accordingly, GST of ₹1,08,000 remains blocked as on the specified cut-off date.

Where it goes wrong. Treating a GST Council recommendation as though it automatically changes the wording and operation of the CGST Act.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017; Recommendations of the 57th GST Council Meeting dated 08.10.2026

Question 17 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered company pays GST of ₹72,000 on annual membership of a private fitness centre for its directors and senior executives. The memberships are used for recreational and wellness activities. The company argues that these services are used in the course of business because healthy executives improve productivity. No provision of law requires the company to provide such memberships. Determine the eligible ITC.

1. ₹72,000, because the memberships are used for employee productivity.
2. ₹36,000, because only half the membership expenditure is blocked.
3. ₹72,000, because the benefit is extended to directors rather than employees.
4. Nil, because membership of a health or fitness centre is blocked without statutory obligation. (correct answer)

Answer: D — Nil, because membership of a health or fitness centre is blocked without statutory obligation.

Explanation. Section 17(5)(b)(ii) blocks ITC on membership of a club, health or fitness centre. The provision does not create an exception merely because the membership improves employee productivity or supports business operations. The statutory employer-obligation proviso is also unavailable because no applicable law requires such membership to be provided. Blocked credit = ₹72,000; allowable credit = ₹0.

Where it goes wrong. Using the general business-purpose test under section 16(1) to override a specific blocked-credit provision.

Authority. Section 17(5)(b)(ii) of the CGST Act, 2017

Question 18 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Aryan Steels Ltd spends ₹2,50,000 plus GST of ₹45,000 on a holiday package for employees who achieve specified production targets. The package includes domestic travel and accommodation during their annual leave. The benefit is described in the company's HR policy as a performance incentive. No law applicable to the employer requires it to provide such vacation travel benefits. What is the ITC treatment?

1. ₹45,000, because the benefit forms part of taxable employee remuneration.
2. ₹22,500, because half of the travel expenditure qualifies.
3. Nil, because vacation travel benefits are blocked without a statutory obligation. (correct answer)
4. ₹45,000, because the employees have achieved their production targets.

Answer: C — Nil, because vacation travel benefits are blocked without a statutory obligation.

Explanation. Section 17(5)(b)(iii) blocks ITC on travel benefits extended to employees on vacation, including leave or home travel concession. The exception applies where the employer is obligated by law to provide the benefit. A voluntary HR incentive or performance-based entitlement does not satisfy this requirement. Accordingly, the GST of ₹45,000 is blocked, and eligible ITC is Nil.

Where it goes wrong. Treating a benefit made compulsory under an internal HR policy as a benefit compulsory under a law.

Authority. Section 17(5)(b)(iii) of the CGST Act, 2017; Circular No. 172/04/2022-GST dated 06.07.2022

Question 19 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered factory employing 280 workers is required under section 46 of the Factories Act, 1948 to maintain a canteen. It engages an outside caterer for the canteen and incurs GST of ₹63,000. The employer supplies meals to its workers without collecting consideration. Can it claim ITC by relying on the statutory-obligation proviso, having regard to Circular No. 172/04/2022-GST?

1. Nil, because the outward supply of meals is without consideration.
2. ₹63,000, because the statutory proviso applies throughout section 17(5)(b). (correct answer)
3. ₹31,500, because the statutory exception is restricted to half the expenditure.
4. Nil, because section 46 applies only to factories employing more than 500 workers.

Answer: B — ₹63,000, because the statutory proviso applies throughout section 17(5)(b).

Explanation. Under section 46 of the Factories Act, a factory employing more than 250 workers must maintain a canteen. The employer has 280 workers, so the requirement applies. Circular No. 172/04/2022-GST clarifies that the statutory-obligation proviso applies to all of section 17(5)(b). Therefore, the catering service qualifies despite the meals being supplied without consideration. Eligible ITC = ₹63,000.

Where it goes wrong. Applying the statutory-obligation exception narrowly or incorrectly using a workforce threshold higher than 250 workers.

Authority. Section 17(5)(b) of the CGST Act, 2017; Section 46 of the Factories Act, 1948; Circular No. 172/04/2022-GST dated 06.07.2022

Question 20 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered works contractor engaged in construction of commercial buildings obtains subcontracted works contract services of ₹12,00,000 plus GST of ₹2,16,000. The contractor uses the entire inward service in performing its own taxable works contract for a client. The resulting commercial complex is an immovable property. Determine the ITC position of the principal works contractor.

1. Nil, because the inward service relates to an immovable property.
2. ₹1,08,000, because only half the subcontract cost qualifies.
3. ₹2,16,000, because the subcontract service is used for further supply of works contract service. (correct answer)
4. Nil, because the principal contractor does not own the completed complex.

Answer: C — ₹2,16,000, because the subcontract service is used for further supply of works contract service.

Explanation. Section 17(5)(c) contains a specific exception for works contract services used as an input service for further supply of works contract service. The recipient is a works contractor and uses the entire subcontracted service for its outward taxable works contract. Thus, the statutory exception applies despite the construction of immovable property. GST = ₹12,00,000 × 18% = ₹2,16,000. Eligible ITC is ₹2,16,000.

Where it goes wrong. Assuming that only the property owner can claim credit on subcontracted works contract services.

Authority. Section 17(5)(c) of the CGST Act, 2017

Question 21 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered automobile manufacturer receives works contract services for constructing a foundation and structural supports to permanently fix a production machine to the earth. The machine is used to manufacture taxable vehicles. The contractor charges ₹8,00,000 plus GST of ₹1,44,000. The expenditure is capitalised in the machinery cost. Determine the ITC treatment under section 17(5)(c) and the explanation to section 17.

1. ₹1,44,000, because eligible plant and machinery is expressly excluded from the restriction. (correct answer)
2. Nil, because every capitalised works contract service is blocked.
3. ₹72,000, because only half the foundation expenditure is eligible.
4. Nil, because the manufacturer is not itself a works contractor.

Answer: A — ₹1,44,000, because eligible plant and machinery is expressly excluded from the restriction.

Explanation. Plant and machinery includes apparatus, equipment and machinery fixed to earth by foundation or structural supports and used for making outward taxable supplies. It also includes the relevant foundation and structural supports. The production machine satisfies this definition. The exception for construction of plant and machinery permits ITC irrespective of capitalisation. Eligible credit = ₹8,00,000 × 18% = ₹1,44,000.

Where it goes wrong. Treating capitalisation as a universal bar without examining whether the immovable property is eligible plant and machinery.

Authority. Section 17(5)(c) of the CGST Act, 2017; Explanation to Section 17 of the CGST Act, 2017

Question 22 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A telecommunication company receives works contract services for constructing a telecommunications tower and an associated pipeline laid outside its factory premises. The contractor charges GST of ₹1,80,000 on the tower and ₹90,000 on the external pipeline. Both projects support taxable telecommunications services and the expenditure is capitalised. Neither project is used for further supply of works contract services. Determine the aggregate ITC available.

1. ₹2,70,000, because both structures support taxable outward services.
2. ₹1,80,000, because only the telecommunications tower qualifies.
3. Nil, because both items are excluded from the definition of plant and machinery. (correct answer)
4. ₹90,000, because only the pipeline construction qualifies.

Answer: C — Nil, because both items are excluded from the definition of plant and machinery.

Explanation. The explanation to section 17 excludes telecommunication towers and pipelines laid outside factory premises from the definition of plant and machinery. The works contract services relate to construction of immovable property, and neither qualifies for the further-supply works contract exception. Therefore, the tower-related credit of ₹1,80,000 and pipeline-related credit of ₹90,000 are blocked. Aggregate blocked ITC = ₹1,80,000 + ₹90,000 = ₹2,70,000.

Where it goes wrong. Assuming that structures used directly for taxable telecommunications services necessarily qualify as plant and machinery.

Authority. Section 17(5)(c) of the CGST Act, 2017; Explanation to Section 17 of the CGST Act, 2017

Question 23 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered manufacturer originally availed ITC of ₹72,000 on inventory subsequently affected by three incidents. Goods carrying ITC of ₹18,000 were stolen, goods carrying ITC of ₹24,000 were destroyed in a flood, and goods carrying ITC of ₹30,000 were written off after becoming obsolete. The manufacturer had used the goods exclusively for taxable business before these events. Determine the amount that cannot be retained under section 17(5)(h).

1. ₹42,000, because only stolen and written-off goods are covered.
2. ₹36,000, because the destroyed goods retain eligibility until disposal.
3. ₹18,000, because only stolen inventory attracts reversal.
4. ₹72,000, because all three categories are covered by section 17(5)(h). (correct answer)

Answer: D — ₹72,000, because all three categories are covered by section 17(5)(h).

Explanation. Section 17(5)(h) blocks ITC on goods that are stolen, destroyed or written off. The earlier business use does not preserve credit after these specified events. Stolen goods: ₹18,000. Destroyed goods: ₹24,000. Written-off goods: ₹30,000. Total reversal = ₹18,000 + ₹24,000 + ₹30,000 = ₹72,000. Hence, the entire original credit relating to these goods cannot be retained.

Where it goes wrong. Retaining credit on destroyed or obsolete inventory on the ground that the goods were originally purchased for taxable business.

Authority. Section 17(5)(h) of the CGST Act, 2017

Question 24 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A manufacturer has availed ITC of ₹30,000 on goods distributed as promotional samples without consideration and ₹48,000 on goods supplied under a two-unit promotional offer for one consolidated price. In the first transaction, recipients pay nothing; in the second, the price covers both units and the arrangement is treated as a combined supply. Determine the aggregate amount of ITC that may be retained under the relevant sales-promotion clarification.

1. Nil, because both promotional transactions involve one unit supplied without a separate price.
2. ₹48,000, because credit on samples is blocked but the consolidated-price offer qualifies. (correct answer)
3. ₹30,000, because credit on samples qualifies but credit on the additional unit is blocked.
4. ₹78,000, because all promotional distributions are eligible business expenditure.

Answer: B — ₹48,000, because credit on samples is blocked but the consolidated-price offer qualifies.

Explanation. Samples distributed without consideration are covered by section 17(5)(h), so the related ₹30,000 credit is blocked. The two-unit promotional offer is a consolidated-price supply, not a separate gratuitous disposal of the second unit. Circular No. 251/08/2025-GST, read with Circular No. 92/11/2019-GST, permits ITC on inputs used in such offers. Therefore, allowable credit = ₹48,000 and blocked credit = ₹30,000.

Where it goes wrong. Treating a consolidated-price promotional offer as equivalent to distributing individual samples without consideration.

Authority. Section 17(5)(h) of the CGST Act, 2017; Circular No. 92/11/2019-GST dated 07.03.2019; Circular No. 251/08/2025-GST dated 12.09.2025

Question 25 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A manufacturer procures outdoor catering services for its own employee celebration, paying GST of ₹45,000. It does not make any outward taxable catering supply and no statute obliges it to provide this service. The company relies on the 57th GST Council recommendation dated 8 October 2026 to remove certain restrictions under section 17(5), including outdoor catering and samples. Assuming the law position is assessed on 31 October 2026, determine the ITC treatment.

1. ₹45,000, because the Council recommendation immediately permits the credit.
2. ₹22,500, because the recommendation permits partial credit before amendment.
3. Nil, because the existing statutory restriction continues at the stated cut-off. (correct answer)
4. ₹45,000, because all employee-related catering is treated as a taxable supply.

Answer: C — Nil, because the existing statutory restriction continues at the stated cut-off.

Explanation. The GST Council recommended amendment of section 17(5) on 8 October 2026 to remove certain restrictions, including those relating to outdoor catering and samples. A Council recommendation does not itself amend the CGST Act. As at 31 October 2026, the restriction under section 17(5)(b)(i) continues. Since this catering is not used for an outward taxable supply of the same category or as an element of a taxable composite or mixed supply, and no statutory employer obligation applies, the ₹45,000 credit remains blocked.

Where it goes wrong. Applying a proposed legislative change before the corresponding statutory amendment has become effective.

Authority. Section 17(5)(b)(i) of the CGST Act, 2017; Recommendations of the 57th GST Council Meeting dated 08.10.2026