Input tax credit is where GST's promise — tax only on value added — either works or breaks for your business. Claimed well, ITC is a permanent cost advantage; claimed carelessly, it is the single largest source of GST notices, because every credit you take is machine-checked against your suppliers' filings. Here are the rules that govern ITC, the credits you cannot take, and the monthly routine that keeps your claims audit-proof.
The four conditions of Section 16 — all must hold
- You hold a valid tax invoice (or prescribed document)
- You have received the goods or services
- The tax has actually been paid to government by the supplier — operationalised through GSTR-2B: no appearance, no credit
- You have filed your return (GSTR-3B) claiming it
Two riders bite hardest in practice: the 180-day rule — pay your supplier within 180 days of invoice or reverse the credit with interest (reclaimable on payment); and the time limit — ITC for a financial year must be claimed by the 30 November following it (or the annual return, if earlier). Credits discovered after that date are simply lost.
GSTR-2B is the gatekeeper
Since the matching regime hardened, your claimable ITC each month is what appears in GSTR-2B — the static statement generated from suppliers' GSTR-1 filings. The operational consequences: buy from suppliers who file on time (a discount from a non-filer is usually a loss after blocked credit); reconcile purchases-to-2B monthly and chase missing invoices while suppliers can still amend; and track 'appearing but not availed' credits so nothing lapses at the November cutoff. Supplier discipline is now a procurement criterion, not just an accounts problem.
Blocked credits: Section 17(5)'s no-go list
- Motor vehicles for passenger transport (≤13 seats) — except when used for further supply, transport of passengers, or driving training
- Food and beverages, outdoor catering, beauty, health and club memberships — except where used to make the same category of outward supply, or where statutorily obligatory for employees
- Works contract and construction of immovable property on your own account (plant and machinery excepted)
- Goods lost, stolen, destroyed, written off, or given as gifts/free samples
- Personal consumption; composition-scheme purchases
Diwali gifts, free samples to customers, and goods destroyed in the godown all require ITC reversal — three items auditors check first because businesses reliably miss them.
Reversals and common supplies
If you make both taxable and exempt supplies (including, notably, interest income and sale of securities in some computations), common-input credit must be apportioned under Rules 42/43 — monthly, with an annual true-up. Capital-goods credit has its own five-year reversal mechanics on change of use or sale. And credit notes from suppliers reduce your available ITC in the month they surface in 2B — reconcile them, or your 3B silently overclaims.
The monthly ITC hygiene routine
A one-hour month-end discipline prevents years of dispute: reconcile purchase register to 2B (three buckets — matched, in-books-not-in-2B, in-2B-not-in-books); chase suppliers on bucket two in writing; verify no blocked credits crept in; run the 180-day ageing on supplier payments and reverse where due; compute Rule 42 apportionment if you have exempt income; and file 3B claiming exactly the reconciled figure. Preserve the workings — they are your first and best defence in any scrutiny.
How Aidwish helps
Aidwish sets up the ITC reconciliation stack for clients — monthly 2B matching, supplier-discipline tracking, reversal computations and the November-deadline sweep — and defends historic claims in scrutiny and audit alongside your CA.