Input tax credit is the mechanism that keeps GST a tax on value addition rather than a tax on turnover. It is also the single largest source of dispute between taxpayers and the department. Most of these disputes are not about interpretation. They are about whether the taxpayer can show, on the record, that the statutory conditions were satisfied.
This article sets out how the credit provisions fit together and what a business should keep ready before an officer asks.
The four conditions in section 16
Section 16(2) is the gateway. A registered person is entitled to credit only when all of the following are satisfied.
Possession of a tax invoice or debit note issued by a registered supplier, or another prescribed document.
Details of the invoice have been furnished by the supplier and communicated to the recipient, which in practice means the invoice appears in GSTR-2B.
Receipt of the goods or services. Where goods are delivered to a third party on the direction of the recipient, receipt is treated as having taken place.
Tax charged has actually been paid to the Government by the supplier, in cash or through utilisation of admissible credit.
A fifth requirement follows in the same section. The recipient must have furnished the return under section 39. Credit does not exist in the abstract. It exists only when it is claimed in a valid return within the time allowed.
Time limit for taking credit
Credit for an invoice or debit note of a financial year cannot be taken after the thirtieth day of November of the following financial year, or the date of furnishing the annual return, whichever is earlier. This is a hard limit. Once it passes, the credit is lost even if every other condition is satisfied.
In practice this means the reconciliation for a financial year must be closed well before that date, not after the audit is complete.
Payment to the supplier within one hundred and eighty days
Where the recipient fails to pay the supplier the value of the supply along with tax within one hundred and eighty days from the date of the invoice, an amount equal to the credit availed is added to the output tax liability, along with interest. The credit can be taken again when the payment is eventually made.
Businesses with long payment cycles should track this ageing separately. It is easy to overlook because nothing in the return system flags it automatically.
Blocked credits under section 17(5)
Section 17(5) lists supplies on which credit is not available, whatever the business purpose. The list is specific and it is read strictly.
Category | Position | Common exception |
|---|---|---|
Motor vehicles for transport of persons with seating capacity up to thirteen | Credit blocked | Further supply of such vehicles, transport of passengers, driving training |
Food and beverages, outdoor catering, health services, club membership | Credit blocked | Where the inward supply is used to make an outward taxable supply of the same category, or where an obligation exists under any law |
Works contract services for construction of immovable property | Credit blocked | Where it is an input service for further supply of works contract service |
Goods or services used for construction of immovable property on own account | Credit blocked | Plant and machinery, as defined in the explanation |
Goods lost, stolen, destroyed, written off, or given as gifts or free samples | Credit blocked | None |
The exclusion for plant and machinery is important in manufacturing. The definition covers apparatus, equipment and machinery fixed to earth by foundation or structural support, but excludes land, building and other civil structures, telecommunication towers and pipelines laid outside factory premises.
Apportionment where supplies are partly exempt
Where inputs are used partly for business and partly for other purposes, or partly for taxable supplies and partly for exempt supplies, credit is restricted to the portion attributable to business and taxable supplies. Rules 42 and 43 prescribe the working, for inputs and input services and for capital goods respectively.
The common error here is treating the rule 42 working as an annual exercise. It is a monthly computation with an annual true up, and the annual adjustment carries interest implications if it is missed.
What the record should contain
When credit is questioned, the reply is only as strong as the documentation attached to it. For a significant claim, keep the following together as one file.
Tax invoice with a complete description, GSTIN of both parties and the place of supply
Proof of receipt such as a goods receipt note, weighment slip, e-way bill or service acceptance record
Evidence of payment to the supplier, mapped invoice by invoice
The GSTR-2B extract for the month in which the credit was claimed
The reconciliation working that explains any difference between books and GSTR-2B
For services, the contract or work order that establishes the business purpose
Reversal and re-availment
Credit that has been reversed is not always lost. Where the reversal was because of non payment to the supplier, it can be taken again on payment. Where the reversal was because of a rule 42 working, the annual adjustment corrects the position. Keep the reversal and the re-availment traceable to each other in the credit register, because an officer reading only one side of the entry will treat it as a short payment.
Common questions on input tax credit
Can credit be claimed if the invoice is not appearing in GSTR-2B?
Is credit available on goods given as free samples?
What happens if credit is claimed and later found ineligible?
Does a payment made through a book adjustment count for the one hundred and eighty day rule?
Input tax credit is not a concession. It is a statutory entitlement that comes with statutory conditions. A business that treats the conditions as a monthly discipline rather than an annual clean up will spend far less time defending its credit.