GST Input Tax Credit (ITC) Rules: Eligibility, Conditions, Restrictions, Reversal & Compliance Guide
Input Tax Credit
Input Tax Credit (ITC) refers to the credit of GST levied on the acquisition of goods and/or services that the registered taxpayer is entitled to use towards fulfilling GST liability in respect of outward supplies, provided the conditions and limitations laid down under GST law are fulfilled.
Assuming a business has purchased goods worth ₹1,00,000 along with GST worth ₹18,000.
Provided that such a purchase qualifies for Input Tax Credit and other conditions are fulfilled, ₹18,000 will be allowed as Input Tax Credit to the business entity.
In case the business entity makes outward taxable supplies with GST liability worth ₹30,000, Input Tax Credit can usually be used to offset the liability.
Simple illustration:
- GST on eligible purchases = ₹18,000
- GST on outward taxable supplies = ₹30,000
- Eligible ITC = ₹18,000
- Net GST to be paid after ITC = ₹12,000
Therefore, ITC ensures that the companies do not pay GST twice for the same value addition.
Who Can Claim ITC?
An entity that is registered for GST can claim ITC for inward supply that is used for business purposes or is likely to be used in the course of business.
Some entities that can claim ITC include:
- Proprietorship firm
- Partnership firm
- LLP
- Company
- Trust/society (registered under GST)
- Other registered entities
However, ITC will depend on the type of transaction and whether the statutory requirements are met.
A non-registered entity usually cannot claim ITC.
Basic Conditions for Claiming ITC
Section 16 of the CGST Act forms the basic framework for claiming ITC.
There are certain conditions which must be fulfilled by the registered person for claiming the ITC.
1. The person needs to be registered under GST
In general terms, ITC can be claimed by a registered person. GSTIN of the recipient needs to be properly mentioned on the relevant tax invoice or any other required document.
2. The purchase should be made for business purposes
The goods/services should be used or intended to be used for business purposes.
For example:
Principally eligible:
A trading firm buys computer to be used by its accounts department.
Generally not eligible:
The employee buys a personal TV for his home and there is no relation between the expenditure and business.
Thus, the business purpose of the expenditure needs to be clearly ascertained.
3. The recipient has to have a valid tax document
The ITC claim should always be based on the following valid prescribed document:
- Invoice raised by the supplier
- Debit note
- Bill of entry in case of imports
- Prescribed tax payment invoices, wherever required
The document needs to have all the essential details, which must be related to the actual supply made.
4. There should be actual supply received
The other important requirement for claiming the ITC is that there should be supply of goods/services.
In case of delivery of goods in lots/instalments, the conditions for receiving of the goods need to be considered before claiming the ITC.
The ITC cannot be claimed just on the basis of the invoice being received in the absence of the actual supply, unless otherwise provided in GST law.
5. Compliance by the supplier should be ensured
The link between ITC and reporting/tax compliance has been provided in the GST regime.
Therefore, the recipient needs to ensure that the relevant invoice is reported by the supplier in the statement issued to the recipient, especially GSTR-2B.
All purchase invoices cannot be treated as ITC eligible by virtue of being in the records.
What Is GSTR-2B and Why Does ITC Need It?
GSTR-2B is an automatic Input Tax Credit Statement that is prepared for the recipient on the basis of data submitted by the suppliers and others.
Some of the important details in this document are:
- Invoices
- Debit Notes
- Credit Notes
- Import Credits
- ITC Available
- ITC Not Available/Restricted, if applicable
This report is widely used by businesses as a valuable input in doing ITC reconciliation.
But GSTR-2B should not be seen as a substitute for cross verification of the transaction, invoice, receipt of goods/services, purpose of the business and other requirements.
Reconciliation of GSTR-2B
ITC reconciliation process is a process to match the purchase entries in the books with GSTR-2B and other GST related documents.
Some of the reconciliations may include:
1. Matching Invoice
The invoice has been recorded in the books and the invoice is also reflected in GSTR-2B.
2. Missing in GSTR-2B
There is a record of the invoice in the purchase register but there is no entry of this in GSTR-2B.
Possible reasons may include:
- Supplier hasn’t filed the relevant return
- Invoice has not been uploaded by the supplier
- Wrong GSTIN
- Wrong Invoice Number
- Wrong Reporting Period
- Reporting error by Supplier
3. Mismatch
It is reflected in both records, but there are significant differences between the two.
Some of them are:
- Mismatch in Invoice Number
- Mismatch in Invoice Date
- Mismatch in Taxable Value
- Mismatch in IGST
- Mismatch in CGST
- Mismatch in SGST
4. Multiple Invoices
The same invoice might have been recorded twice or even thrice in the records.
5. Ineligible ITC
It might be recorded in GSTR-2B, but it might not necessarily be eligible for input tax credit under the GST Act.
For example, some of the credits that are blocked under Section 17(5).
Claiming ITC within Time Limit
According to the provisions of GST law, there is a time limit within which ITC can be claimed against the invoice or the debit note.
It is important to note that ITC is normally not allowed beyond the statutory time limit that is tied to the respective financial year and the annual return filing, taking into consideration the applicable provisions during the respective period.
As such, it is important that one does not wait up until the end of the financial year to locate all the missing invoices.
An ITC reconciliation should ideally be conducted at regular intervals.
Import ITC under GST
Import ITC is generally possible provided certain conditions are met.
In case of imported goods, the relevant form is the Bill of Entry.
If IGST is paid on the imported goods, then this can qualify as ITC under GST, provided that the imported goods have been used for business purposes and other statutory requirements are met.
ITC in case of Reverse Charge Mechanism (RCM)
In some cases, the recipient will be liable to pay GST under the reverse charge mechanism.
In such a situation, if the GST has been paid under RCM and the inward supply of goods or services is eligible for claiming ITC, then the recipient can claim ITC as per the terms prescribed in the rules.
Proper accounting and return filing should reflect:
- RCM liability
- Applicable payment of GST
- Eligibility of ITC
- Claim of ITC in the appropriate return
The taxpayer should not presume that any ITC is automatically eligible after making payment under the reverse charge mechanism.
Blocked Input Tax Credit under Section 17(5)
One of the most significant ITC rules is the Section 17(5) of the CGST Act, in which certain ITC restrictions/blocking is mentioned.
The categories in which ITC can be blocked/ restricted include:
Expenditure on:
- motor vehicle and conveyance
- food and beverages
- outdoor catering
- beauty treatment and health services
- cosmetic and plastic surgery
- Membership of club or other similar institutions
- certain expenditure in respect of travel benefits given to employees
- Works Contract Services under certain situations
- Construction of immovable property
- Personal consumption of goods and services
- Goods or services lost, stolen, destroyed, written off or disposed of as a gift or free samples
- Tax paid under certain circumstances
The application of the restriction will depend upon the nature of the expenditure and the exceptions available under the law.
ITC on Motor Vehicles
ITC on motor vehicles is mostly not available where the vehicle is meant for carrying persons and has a particular seating capacity.
But ITC may be allowed in certain cases where the vehicle is used for certain eligible activities like:
- Further supply of the vehicle
- Carrying passengers
- Training in driving the vehicle
It is advisable that the business consider the exact use of the vehicle before claiming the ITC.
ITC on Food, Beverages, and Outdoor Catering
ITC on certain food and beverage expenses, outdoor catering and their related services is mostly not available.
Exceptions may be made in some cases where the taxpayer is making an outward taxable supply of the same goods or services or the provision of such services/goods is mandatory for the employer by law.
It means that just mentioning the expense of food or catering as a business expense will not make the GST eligible for ITC.
ITC on Works Contract Services
ITC of works contract services is restricted in certain situations, especially where the service is used for the construction of immovable property.
The taxpayer needs to consider the nature of the works contract, the recipient of the service, the property and the purpose of the expenditure while claiming ITC.
ITC on Construction of Immovable Property
ITC may not be available where the taxpayer incurs an expenditure on the construction of immovable property for his/her own use, even if the expenditure is incurred in the course of business.
The definition of the construction expenditure should be considered carefully.
ITC on Personal Expenses
GST incurred on goods or services consumed personally will normally not qualify for ITC.
For instance, where a business buys goods for purely personal use of the proprietor and there is no business purpose for that purchase, ITC will not normally be claimed.
If the expense can be split into business and personal or non-business use, then the appropriate provisions on apportionment and reversal should be observed.
ITC on Gifts and Free Samples
ITC may be limited in cases of disposal of goods as gifts or free samples where the blocked credit provisions apply.
Thus businesses engaged in promoting their products need to clearly differentiate:
- Regular business purchases
- Marketing samples
- Promotional gifts
- Free samples
The GST treatment of such expenses will depend on the particular transaction and relevant provisions.
Apportionment of ITC for Taxable and Exempt Supplies
In case where goods or services are partly used for taxable supply and partly for exempt supply, eligible ITC may have to be apportioned.
Also where inputs or input services are partly used for business purposes and partly for non-business purposes, appropriate provisions for ITC should be followed.
This becomes important in case of businesses with a mixture of:
- Taxable supply
- Exempt supplies
- Non-GST supplies
- Business activities
- Non-business activities
ITC Reversal
ITC may have to be reversed in different situations.
Some common cases are:
- Failure by suppliers to meet the conditions relating to the supplier payment within the prescribed period
- Goods or services partially used for exempt supplies
- Goods or services partially used for non-business purposes
- Identification of blocked or ineligible ITC
- Reduction of original taxable value or tax through credit notes
- Loss, theft, destruction or write-off of the goods
- Excess ITC claimed
- Duplicate invoices
- Others as specified under GST legislation
Condition regarding 180-Day Payment
Where the recipient fails to make the payment of the amount equivalent to the value of the supply along with tax charged thereon, within the stipulated 180 days of the invoice date, the appropriate treatment of ITC will have to be given by applying the GST provisions.
The taxpayer will need to reverse or adjust the ITC according to the applicable provisions.
In case the payment has been made to the supplier after the expiry of the stipulated time, then the taxpayer may claim ITC according to the applicable provisions.
Therefore, businesses need to prepare the aging report of vendors properly and keep track of unpaid invoices.
Impact of Credit Notes on ITC
The taxpayer needs to see the effect of credit notes issued by the supplier which reduce the taxable value or amount of tax charged on a supply on ITC.
For example:
Original invoice:
Taxable value = ₹1,00,000
GST = ₹18,000
Later, the supplier issued a credit note for reducing the taxable value by ₹20,000.
In such a case, the reduction in the ITC will need to be appropriately accounted for.
Credit notes will therefore have to be matched with the purchase ledger and GSTR-2B.
ITC on Capital Goods
Capital goods are assets purchased by a business for which GST has been paid. ITC may be claimed for capital goods purchased, subject to certain conditions.
Some examples of such capital goods are:
- Computers
- Machinery
- Office equipment
- Furniture (if eligible)
- Business equipment
Therefore, taxpayers should use the asset in business to avail of the ITC on capital goods.
Claiming Depreciation under Income Tax Act Post ITC
A taxpayer needs to be prudent in claiming depreciation on the Income-tax Act basis.
Where ITC has been claimed on the GST portion of the capital asset, generally speaking, depreciation should not be claimed on that portion of GST for income-tax purposes.
Thus, the books of accounts should show clearly the following:
- Cost of the asset
- Portion of GST on the asset
- ITC claimed
- Depreciable value
Utilisation of ITC
Once ITC becomes eligible, it may be utilized for meeting output GST liability according to utilization rules.
The three main tax components are:
- IGST
- CGST
- SGST / UTGST
The utilization order is as per GST rules and shall be followed in preparing the return.
The taxpayer must have proper record keeping for knowing the following:
- Opening ITC
- ITC claimed during the month
- Reversed ITC
- Utilized ITC
- Closing ITC
Documents Required for ITC
Businesses should ensure that proper documentation is there for claiming ITC.
The following documents may be considered important ones:
- Tax invoices under GST
- Debit notes
- Credit notes
- Purchase orders
- Receipts of goods
- Delivery challans
- E-way bills (if any)
- Records of payment
- Bank statement
- Import Bills of Entry
- Documents evidencing expenses
- Ledgers of vendors
- GSTR-2B
- Purchase ledger
- Records of GST return
Proper documentation assumes greater significance in GST scrutiny/audit.
Common ITC Mistakes
ITC problems for businesses arise from mistakes such as:
1. Claiming ITC for no receipt of goods or services
Where there is no receipt, then an invoice alone does not qualify for claiming ITC under the statutory condition.
2. Claiming personal ITC
Personal and business expenses must be separately kept apart.
3. Claiming ITC when it is blocked
Businesses sometimes claim ITC just because the invoice comes in GSTR-2B.
4. Duplicate ITC
One invoice might have been claimed more than once owing to some mistakes in accounting or reconciliation.
5. Inaccurate GSTIN
An invoice that contains wrong recipient GSTIN.
6. The supplier doesn’t report the invoice
The invoice which has been duly recorded in the accounts of a business is not reported by the supplier and thus not appearing in GSTR-2B.
7. Wrong Tax Classification
Wrong classification of IGST, CGST, and SGST might give problems in reconciliation and utilization.
8. ITC not reversed
ITC that may later require reversing under the law.
Best Practices for ITC Management
A good ITC management process should include:
Step 1: Maintaining the Purchase Register
All purchases should be recorded with details of:
- Supplier’s name
- GSTIN
- Invoice number
- Date of invoice
- Taxable value
- IGST
- CGST
- SGST
- Total value of invoice
- Eligibility of ITC
- Status of ITC
Step 2: Download GSTR-2B
GSTR-2B must be downloaded and kept for all applicable tax periods.
Step 3: Matching of Accounts With GSTR-2B
Match purchase accounts with GSTR-2B and find out any differences.
Step 4: Identify Ineligible ITC
Make a list of all blocked, personal use, exempt use, and other ineligible ITC.
Step 5: Follow-Up With Suppliers
If any invoices are missing, then follow-up with suppliers and ask them to rectify the situation.
Step 6: Check ITC Prior To Filing GSTR-3B
Final ITC should be checked prior to filing the return.
Step 7: ITC Reconciliation Statement
An ITC reconciliation statement should be maintained with:
Purchase Register → GSTR-2B → Eligible ITC → Ineligible ITC → Reversal → ITC Claimed
Monthly ITC Reconciliation Format
| Particulars | Amount |
| Purchase Register ITC | ₹10,00,000 |
| Less: Not appearing in GSTR-2B | ₹50,000 |
| Less: Ineligible ITC | ₹30,000 |
| Less: Duplicate ITC | ₹10,000 |
| Add: Eligible previous-period invoices | ₹20,000 |
| Eligible ITC | ₹9,30,000 |
| ITC reversed | ₹20,000 |
| Net ITC considered | ₹9,10,000 |
The actual calculation should be prepared according to the taxpayer’s records and the provisions applicable to the relevant tax period.
Checklist for Claiming ITC
A taxpayer needs to check the following before claiming ITC:
- GST registration status
- Availability of invoice
- Supplier GSTIN is accurate
- The details of invoice are accurate
- Goods/services received
- Goods/services are received for business purpose
- Proper reporting of invoice
- Inclusion of invoice in GSTR-2B, if required
- No blockage of ITC under Section 17(5)
- Impact of credit note checked
- Terms of payment checked
- Non-business use/exempt supply considered
- Duplicate invoices are deleted
- Review of requirements of ITC reversal
- Claimed ITC within required period
Eligible ITC vs. GSTR-2B ITC
It is vital for one to understand that just because the ITC figure is reflected in the GSTR-2B, it does not automatically mean that it is the same as the eligible ITC that the person will claim.
For instance:
ITC as per GSTR-2B = ₹5,00,000
But
₹20,000 is related to personal use
₹30,000 is blocked ITC
₹10,000 is duplicate
₹15,000 is from an incorrect transaction
Thus:
ITC as per GSTR-2B = ₹5,00,000
Minus:
Ineligible ITC = ₹7
Importance of ITC Reconciliation for GST Compliances
ITC Reconciliation is not simply an accounting task. ITC Reconciliation is an important GST compliance tool.
A well-conducted ITC Reconciliation process will help the businesses:
- Detect missing invoices
- Detect duplicate invoices
- Detect wrong GSTIN
- Detect tax value mismatch
- Detect any reporting issues by the suppliers
- Prevent excess ITC claims
- Detect blocked ITC
- Monitor vendor compliances
- Avoid GST notices
- Accurate filling of GSTR-3B
Businesses with a large number of vendors must think about using an automatic ITC Reconciliation process.
Consequences of Inaccurate ITC Claims
Inaccurate or excess ITC claims lead to:
- ITC reversal
- Interest Liability, wherever applicable
- Penalties in applicable cases
- GST Notices
- Compliance Issues
- Reconciliation Issues
- Vendor Disputes
- Litigation
Hence, the businesses must not only aim at maximizing ITC but claiming correct and eligible ITC.
Conclusion
Input Tax Credit is an essential part of the GST system and can help in reducing the GST burden of the business substantially. But the ITC claim can be made only after satisfying the applicable conditions.
An ITC claiming process should involve proper invoice management, proper verification of receipt of goods/services, vendor compliance monitoring, GSTR-2B reconciliation, blocked credit identification, proper reversal wherever applicable and proper reporting in GST return forms.
Businesses must have a proper monthly ITC reconciliation process and not wait till the end of the financial year. Proper ITC reconciliation process will help to identify the discrepancies and conduct proper follow-ups with vendors.
Thus, the ultimate aim should be that each ITC claimed rupee is properly backed up, is eligible under GST law, properly reconciled and reported.
Note: GST Provisions, Notifications, Circulars and Judicial Precedents may vary from time to time. Businesses must verify the applicable rules while making a final ITC claim.
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