Input Tax Credit is the backbone of GST — but also the most audit-sensitive area. This guide covers Section 16 eligibility conditions, blocked credits under Section 17(5), GSTR-2B reconciliation, ITC reversal rules under Rule 42 and 43, Rule 86B cash payment requirement, and capital goods ITC for FY 2025-26 (AY 2026-27).
Input Tax Credit (ITC) is the mechanism that makes GST a value-added tax — businesses pay GST only on the value they add, not on the entire sale price. Yet ITC is also the most contested area in GST audits, with the Department scrutinising every rupee claimed. One wrong claim can trigger a demand notice with 18% interest and a 100% penalty. Know the rules — in detail.
Input Tax Credit (ITC) is the credit a GST-registered business gets for the GST paid on its purchases (inputs, input services, and capital goods) that are used in the course or furtherance of business. This credit can be set off against the GST liability on outward supplies — reducing the net tax payable.
Example: A manufacturer buys raw materials worth ₹10,00,000 and pays GST of ₹1,80,000 (18%). He sells finished goods worth ₹15,00,000 and collects GST of ₹2,70,000 (18%). His net GST payable = ₹2,70,000 – ₹1,80,000 = ₹90,000. The ₹1,80,000 paid on purchases is the ITC.
The Supreme Court has held that ITC is a statutory right given by the legislature. However, it is a conditional right — available only when all conditions of Section 16 are met and the credit is not blocked under Section 17(5).
All four conditions under Section 16(2) must be satisfied simultaneously to claim ITC:
Under Rule 37A (inserted w.e.f. 1 Oct 2022), if your supplier files GSTR-3B but has not paid tax, your ITC is reversed in the subsequent month automatically. You must then recover the amount from the supplier. This has made supplier compliance monitoring critical.
Section 17(5) of the CGST Act blocks ITC on the following — no credit is available regardless of business use:
| Category | Blocked? | Exceptions (Where ITC Allowed) |
|---|---|---|
| Motor vehicles (passenger, ≤13 persons) | ❌ Blocked | Allowed if used for: further supply of vehicles; transport of passengers; imparting driving training; transportation of goods |
| Vessels and aircraft | ❌ Blocked | Same exceptions as motor vehicles |
| Food & beverages, outdoor catering | ❌ Blocked | Allowed if obligatory under any law / used to make same category taxable supply |
| Health services, beauty treatment, cosmetic surgery | ❌ Blocked | Allowed if used to make same category taxable supply |
| Membership of clubs, health & fitness centres | ❌ Blocked | None |
| Travel benefits to employees (LTA/vacation) | ❌ Blocked | None |
| Works contract for immovable property | ❌ Blocked | Allowed if used as input service for further works contract supply; plant & machinery |
| Construction of immovable property (own account) | ❌ Blocked | Plant & machinery (not buildings attached to earth) |
| Composition scheme taxpayers | ❌ Blocked | N/A |
| Goods/services for personal consumption | ❌ Blocked | None |
| Goods lost, stolen, destroyed, written off, gifted, free samples | ❌ Blocked | None |
Many businesses claim ITC on employee cab services and canteen/food expenses. These are blocked under Section 17(5) unless they are obligatory under any law (e.g., factory canteen under Factories Act for 250+ workers). Ensure your ITC claims are reviewed by a CA periodically.
GSTR-2B is the auto-drafted monthly ITC statement on the GST portal, generated on the 14th of each month based on GSTR-1 filings by your suppliers for the previous month. It is a static document and shows the maximum ITC available to you for that period.
Why GSTR-2B reconciliation is critical:
We provide monthly GSTR-2B reconciliation for businesses in Delhi NCR, identifying ITC mismatches, supplier filing defaults, and potential reversal risks — before the GST department does. Learn about our GST services.
When inputs or input services are used partly for taxable and partly for exempt supplies, or partly for business and personal use, ITC must be reversed proportionately.
ITC on common inputs and input services used for both taxable and exempt supplies must be reversed as follows:
For capital goods used for both taxable and exempt supplies, ITC reversal is calculated over a period of 60 months (5 years). Monthly reversal = Total ITC / 60 × (exempt turnover / total turnover for that month). Any remaining ITC after useful life can be transferred to electronic credit ledger.
Rule 42 reversal done provisionally each month must be reconciled annually using actual turnover figures for the full FY. Any excess or short reversal must be adjusted in GSTR-3B of August of the subsequent FY (i.e., by September 30). Failure to do annual true-up can lead to interest demands.
Capital goods are goods with a value exceeding ₹10,000 (per the definition) used in business for productive purposes. ITC on capital goods can be claimed fully in the month of receipt if used exclusively for taxable supplies.
If you buy plant and machinery for manufacturing (taxable supply), full ITC on IGST/CGST/SGST paid on machinery is available immediately. However, buildings attached to earth and structural civil works are not capital goods for ITC purposes — ITC is blocked under Section 17(5)(d).
Rule 86B (effective 1 January 2021) requires that registered persons with taxable turnover exceeding ₹50 lakh in a month must pay at least 1% of their total tax liability in cash from the electronic cash ledger — not from ITC.
Exceptions — Rule 86B does NOT apply if:
Violation of Rule 86B attracts a penalty of ₹10,000 or the amount of ITC availed in violation — whichever is higher. The GST portal also restricts filing of GSTR-3B if Rule 86B is violated. Monitor your monthly turnover carefully if you are near the ₹50 lakh threshold.
ITC on an invoice can be claimed only up to the earlier of the following two dates:
Example: For an invoice dated July 2025 (FY 2025-26), ITC must be claimed by 20 October 2026 (September 2026 GSTR-3B due date) or the date of GSTR-9 filing for FY 2025-26 — whichever is earlier. ITC claimed after this is ineligible and subject to reversal with 18% interest.
Unclaimed ITC from old invoices automatically lapses if the time limit passes. We see many businesses missing ITC on vendor invoices received late. Implement a monthly invoice tracking system and reconcile purchases within 30 days of receipt. Contact our CA team if you have old unclaimed ITC — we can assess recoverability.
Our CA team provides complete GST compliance services — GSTR-1/3B/9 filing, GSTR-2B reconciliation, ITC reversal calculations, Rule 86B monitoring, and GST notice handling for businesses across Delhi, Noida, Gurugram and NCR.