Input tax credit: claiming, protecting and reconciling
Input tax credit is the only part of GST where the amount at stake is the same size as the tax itself. It is also the part with the most conditions, the shortest deadlines, and the least forgiving arithmetic. This guide covers what has to be true before credit can be taken, what takes it away again, and where a reconciliation habit earns more than it costs.
Five things that all have to be true
Section 16(2) makes credit conditional, and the conditions are cumulative. Fail one and the credit is not available, however commercially obvious the transaction.
- You hold a tax invoice or debit note from a registered supplier, or another prescribed tax-paying document.
- The supplier has reported it and it has reached you. Section 16(2)(aa) requires the supplier to have furnished the details in the statement of outward supplies and for those details to have been communicated to you. Rule 36(4) puts it in concrete terms: the invoice must appear in your GSTR-2B.
- You have received the goods or services. Where goods come in lots, credit is available only on the last lot.
- The tax has actually been paid to the government, in cash or through credit.
- You have furnished your own return under Section 39.
Two further conditions sit outside the list but bite as hard. Section 16(2)(ba) blocks credit that has been restricted in the communication under Section 38. And Section 16(3) denies credit on the tax component of capital goods where depreciation has been claimed on that component under the Income-tax Act.
The old provisional-credit cushion in Rule 36(4), which allowed 5% or 10% above what appeared in the supplier statement, has been gone since 1 January 2022. There is no tolerance now. Either the invoice is in GSTR-2B or the credit is not available.
Two deadlines, and a relief that is narrower than it sounds
The 180-day payment rule. Under the second proviso to Section 16(2), if you have not paid the supplier the value of the supply plus tax within 180 days of the invoice date, an amount equal to the credit availed becomes payable with interest. Rule 37 makes it proportionate to the amount unpaid, and requires the reversal in the GSTR-3B for the tax period immediately following the 180-day period. Credit can be re-availed once payment is made, with no time limit on the re-availment. Reverse charge supplies are outside this rule, and supplies made without consideration under Schedule I are deemed paid.
The claim deadline. Section 16(4) bars credit on an invoice or debit note after 30 November following the end of the relevant financial year, or the date of filing the annual return, whichever is earlier.
Sections 16(5) and 16(6) were inserted retrospectively by the Finance (No. 2) Act 2024 and are widely misdescribed as reopening old years. They do not. Section 16(5) protects credit for 2017-18 to 2020-21 only where it was taken in a return that was actually filed on or before 30 November 2021. It validates what was done; it does not create a fresh window. Section 16(6) deals with the narrower case of a registration cancelled and later revoked.
The special rectification procedure that went with those provisions, notified on 8 October 2024 by Notification 22/2024-Central Tax, ran for six months and closed on 7 April 2025. Material still describing it as available is out of date. Note also that Section 150 of that Act bars refund of tax already paid or credit already reversed, although a corrigendum to the accompanying circular confirms that pre-deposits remain refundable where an appeal succeeds on these provisions.
Blocked credits under Section 17(5)
Some credit is denied regardless of business use. The list that matters for an ordinary business:
- Motor vehicles for transport of persons with approved seating capacity of not more than thirteen including the driver, unless used for further supply of such vehicles, transport of passengers, or driving instruction. Vehicles for transport of goods are not blocked. There is no value threshold: the test is seating capacity.
- Vessels and aircraft, on the same pattern, and general insurance, servicing and repair of any of these where the underlying vehicle is itself blocked.
- Food and beverages, outdoor catering, beauty treatment, health services, cosmetic surgery, club and gym membership, life and health insurance, and leave or home travel concession for employees. Two exceptions matter: where the inward supply is used to make an outward taxable supply of the same category, and where providing it to employees is obligatory for an employer under any law in force.
- Works contract services for construction of immovable property, other than plant and machinery, unless the service is an input to a further supply of works contract service.
- Goods or services for construction of immovable property on your own account. Blocked even where the property is later used for taxable business purposes, such as renting it out. The block does not extend to plant and machinery: apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making an outward supply, including the foundation and structural supports, but excluding land, buildings and other civil structures, telecommunication towers, and pipelines laid outside factory premises. Construction includes reconstruction, renovation, addition or alteration, but only to the extent the cost is capitalised; repairs expensed through the profit and loss account are not caught. This block applies specifically to construction on your own account and does not extend to a building constructed for outright sale.
- Goods lost, stolen, destroyed, written off, or disposed of by gift or free sample.
- Corporate social responsibility spend under Section 135 of the Companies Act, blocked since 1 October 2023.
- Goods or services used for personal consumption, and tax paid under the composition scheme.
- Tax paid under Sections 74, 129 and 130, meaning tax paid on a fraud-based demand or on detention and confiscation of goods.
One consequence of the move to Section 74A for financial year 2024-25 onwards has not been addressed in published material we could rely on, and we have not stated a position on it here.
Apportionment and reversal: Rules 42 and 43
Where inputs are used partly for business and partly not, or partly for taxable and partly for exempt supplies, only the attributable portion is creditable. Section 17(3) widens what counts as exempt for this purpose to include supplies on which the recipient pays under reverse charge, transactions in securities, sale of land, and sale of a completed building.
Rule 42 handles inputs and input services monthly. Total credit is reduced by credit attributable to non-business purposes, credit attributable exclusively to exempt supplies, and blocked credit. What remains, less credit attributable exclusively to taxable and zero-rated supplies, is common credit. Of that, a proportion equal to exempt turnover over total turnover is reversed, plus a flat 5% deemed non-business use. The reversals are added to output tax liability.
Rule 43 handles capital goods over a five-year, sixty-month life from the invoice date, with a monthly attribution to exempt supplies added to output tax liability with interest.
The annual true-up under Rule 42(2) is keyed to the due date of the return for the month of September following the financial year, not to 30 November, with interest running from 1 April of the succeeding financial year on any shortfall. This is a genuine mismatch with the credit-claim deadline and it is a common source of error, because a great deal of published material states 30 November for both.
When your supplier is the problem
Rule 37A deals with the case where the supplier reported the invoice in GSTR-1 but never filed the corresponding GSTR-3B. If that GSTR-3B has not been filed by 30 September following the end of the financial year in which you took the credit, you must reverse the credit on or before 30 November of that year. Miss that and the amount is payable with interest. If the supplier files later, you may re-avail in a subsequent GSTR-3B.
This is the practical reason to run a supplier compliance check rather than a pure invoice match. An invoice that appears correctly in your GSTR-2B tells you the supplier filed GSTR-1. It tells you nothing about whether the supplier paid.
Rule 86B works the other way, restricting how much of your own liability can be met from credit. Where taxable supply other than exempt and zero-rated supply exceeds ₹50 lakh in a month, at least 1% of output tax must be paid in cash. Five exceptions take most established businesses out of it, including having paid more than ₹1 lakh of income tax in each of the two preceding years for which the filing deadline has passed, having received a refund exceeding ₹1 lakh on zero-rated supplies or on an inverted duty structure in the preceding year, and having already discharged more than 1% of output tax in cash cumulatively in the current year.
Order of utilisation, and one thing that changed quietly
Section 49(5) with Rule 88A sets the order. Integrated tax credit must be fully exhausted first, against integrated tax and then against central and state tax. Only after that may central or state tax credit be used. Central tax credit can never be set against state tax, or state against central.
Rule 88A softened the sequencing that Sections 49A and 49B would otherwise have imposed: once integrated tax credit is exhausted against integrated tax, the balance may be allocated between central and state tax in any order, rather than being forced through central tax first. For a business with a state-tax-heavy liability profile, that allocation is worth getting right rather than leaving to the portal default.
The Electronic Credit Reversal and Re-claimed Statement on the portal tracks credit reversed in Table 4B(2) of GSTR-3B against credit later re-claimed in Table 4D(1), and warns where a re-claim exceeds the reversal balance available. It warns; it does not block. Reconciling that statement is a five-minute check that prevents a re-availment that cannot be supported.
Getting accumulated credit back out
Credit that cannot be used is refundable in two situations: zero-rated supplies made without payment of tax under a letter of undertaking, and an inverted duty structure where the input rate exceeds the output rate.
The inverted duty formula in Rule 89(5) contains a trap that costs real money. Net input tax credit in that formula means credit on inputs, meaning goods, only. Input services are not in it. The 2022 amendment made after the Supreme Court’s decision in VKC Footsteps added a deduction term giving partial relief for the service component; it did not bring input services into the numerator. A business whose inversion is driven by service costs recovers considerably less than the arithmetic first suggests.
Since 1 October 2025, refund applications assessed as low risk by the system receive 90% provisionally, for both zero-rated supplies and inverted duty structure, with the provisional order due within seven days of acknowledgement. The inverted duty extension began as an administrative measure ahead of the statutory amendment. Certain claimants are excluded from provisional sanction, including those without Aadhaar authentication and suppliers of specified goods such as pan masala and tobacco products.
The September 2025 rate restructuring created fresh inverted positions in several sectors by cutting output rates without matching input rates, and cured others by cutting input rates directly. If your output rate moved in September 2025 and you have never claimed an inversion refund, it is worth a look. Note also the rule from the official guidance on that change: credit already validly availed does not have to be reversed merely because the output rate fell, but where a supply became exempt, credit had to be reversed for supplies made on or after 22 September 2025.
What an engagement on this looks like
Credit review
A pass over what has been claimed against what was claimable: blocked credits taken in error, the 180-day exposure, Rule 42 and 43 apportionment, and the construction position under the current text of Section 17(5).
Reconciliation as a standing process
Purchase register against GSTR-2B, Invoice Management System actioned rather than deemed, supplier filing behaviour tracked, and the reversal and re-claim statement tied out each month rather than each year.
Refund claims
Inverted duty and zero-rated refund claims prepared with the formula applied correctly, including the input-services point, and provisional sanction pursued where the risk score allows it.
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Tell us whether this is a credit review, a reconciliation that is not tying out, a supplier default you are exposed to, or a refund you think you are owed. A partner replies within one business day.
This page is general information, not professional advice. Indian GST law changed substantially between 2024 and 2026, several changes are enacted but not yet notified into force, and how any of this applies depends on your own facts, your state and your sector. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.