Input tax credit: when you can claim it, and when you cannot

General information, not professional advice. GST rules, rates and due dates change by notification. Check the current position on the GST Portal or with your CA before you act on anything here.

What ITC is

The GST you pay on business purchases can be set against the GST you collect on sales, so you pay the difference. This is what stops tax compounding at every stage, and it is also the single largest source of disputes, because the credit depends on somebody else doing their job.

The four conditions

1. You hold a tax invoice or debit note issued by a registered supplier.
2. You have received the goods or services. Where goods arrive in lots, credit comes with the last lot.
3. The tax has actually been paid to the government by the supplier.
4. You have filed the return for the period in which you claim it.

The GSTR-2B rule

Since 1 January 2022, credit is available only for invoices that appear in your GSTR-2B, the static statement generated on the 14th of the following month from what your suppliers reported. You may hold a perfectly valid invoice, but if the supplier has not filed, the credit is not yours yet. When they file, it appears in a later 2B and you claim it then.

This is why reconciliation is a monthly job and not an annual one. What the three lists look like.

The 180-day payment rule

If you do not pay your supplier within 180 days of the invoice date, the credit you took has to be reversed, with interest. Pay later and you can take the credit again. For a business that buys on long credit this is a real cash effect, and it is easy to miss because nothing external reminds you: it is your own payables ageing that tells you.

Blocked credits

Section 17(5) lists what you can never claim, however valid the invoice. The ones that catch small businesses:

• Motor vehicles for passenger transport with up to 13 seats, with narrow exceptions for resale, passenger transport services and driving schools
• Food and beverages, outdoor catering, beauty treatment, health services, club and fitness memberships, unless you are in the same line of business
• Rent-a-cab, life and health insurance, except where an employer is legally obliged to provide it
• Works contract services for constructing immovable property, other than plant and machinery
• Goods or services used for personal consumption
• Goods lost, stolen, destroyed, written off, or given away as gifts or free samples
• Any tax paid under composition, or on goods and services used for exempt supplies

That last free-sample line surprises people: give away stock and you reverse the credit you took on it.

The annual deadline

Credit for invoices of a financial year must be claimed by 30 November following that year, or the date of filing the annual return for it, whichever is earlier. An invoice found in a drawer in January for the previous March is usually a lost credit.

What this means in practice

• Collect purchase bills as they arrive, not at the end of the quarter. Why the purchase file matters.
• Reconcile against 2B every month and chase the suppliers who have not filed, while the relationship is fresh.
• Watch your payables ageing for the 180-day line.
• Tag the blocked categories in your books so nobody claims them by habit.

Purchase records that hold up

In AawazAI, a purchase is recorded from a photograph of the supplier's bill or from a sentence, with the supplier's GSTIN and the tax split captured on the entry. The purchase register you hand your CA is supplier-wise with GSTIN and HSN, which is the file a 2B reconciliation actually runs on. Credit is only treated as claimable where a valid GSTIN is on the record, so an unreadable or missing GSTIN does not quietly become a claim.

Frequently asked questions