GST Input Tax Credit: Why Your Credit Gets Denied
Input tax credit is where most GST money is won or lost. The tax itself is arithmetic; the credit is conditional, and each condition is a place a claim can fail.
Four conditions, all of which must hold
Under Section 16, you may claim credit only where:
- You hold a tax invoice or other prescribed document
- You have received the goods or services
- The supplier has actually paid the tax to the government
- You have filed the relevant return
Condition three is the uncomfortable one. Your credit depends on someone else's compliance. If your supplier collects GST from you and never deposits it, the credit is at risk even though you did nothing wrong.
GSTR-2B is the reference point
Credit is available largely on the basis of what appears in your auto-generated GSTR-2B. If an invoice is not reflected there, claiming it is generally not open to you.
This makes monthly reconciliation non-negotiable. Compare your purchase register against GSTR-2B every period and chase the gaps immediately — a supplier who has not filed for one month will usually fix it if you ask in week two. Asking in month nine, at annual return time, rarely works.
Blocked credits under Section 17(5)
Some credit is simply unavailable regardless of documentation:
- Motor vehicles for passenger transport with limited seating, with specific exceptions for further supply, passenger transport and driving instruction
- Food and beverages, outdoor catering, beauty treatment, health services, club and fitness memberships
- Works contract services for construction of immovable property, other than plant and machinery
- Goods or services used for personal consumption
- Goods lost, stolen, destroyed, written off or given away as free samples
Corporate gifting and staff welfare spends are a recurring source of wrongly claimed credit.
The 180-day rule
If you claim credit on an invoice and then do not pay the supplier within 180 days, the credit must be reversed, with interest. It can be reclaimed once you pay. Businesses stretching creditors past six months frequently miss this and discover it during audit, by which time interest has been running.
Apportionment where supplies are mixed
If you make both taxable and exempt supplies, or use inputs partly for business and partly otherwise, credit must be apportioned under Rules 42 and 43. Common inputs — rent, audit fees, software — need a defensible basis of allocation, computed monthly and trued up annually.
A monthly routine that works
Reconcile the purchase register to GSTR-2B, flag missing invoices and chase suppliers, check the ageing report for anything approaching 180 days, and confirm no blocked credit has slipped through on employee expense claims. Fifteen minutes a month is far cheaper than a reversal with interest two years later.
Want your ITC position reviewed before it becomes a notice? Talk to Kunal P Shah & Co.