Input Tax Credit

The four conditions in section 16

Section 16(2) opens with a negative — no registered person is entitled to credit unless all of the following are satisfied. They are cumulative, so failing any one of them defers or destroys the claim regardless of how obviously commercial the purchase was.

• You hold a tax invoice or other prescribed document issued by a supplier registered under the Act. A proforma invoice, a quotation or a bank statement will not do.
• You have received the goods or the services. Where goods are delivered to somebody else on your instruction, you are treated as having received them — the 'bill to, ship to' case.
• The details of the invoice have been furnished by the supplier and communicated to you, which in practice means the invoice appears in your GSTR-2B.
• The tax charged on the supply has actually been paid to the government by the supplier, in cash or through credit.
• You have furnished the return under section 39 for the period in which the credit is taken.

The third and fourth conditions put your credit at the mercy of somebody else's compliance. A supplier who raises a perfectly good invoice, takes your money including the tax, and then does not file, leaves you holding a cost rather than a credit. This is why a supplier's filing history matters commercially and not only as a matter of housekeeping.

Goods received in instalments, and the time limit

Where an invoice covers goods delivered in lots, credit arises only on receipt of the last lot. A part delivery does not give a part credit, so a consignment that straddles a year end sits on the wrong side of it until it is complete.

There is also an outer date. Credit on an invoice for a financial year cannot be taken after the thirtieth day of November following the end of that year, or after the annual return for that year is furnished, whichever happens first. The date is absolute — it is not extended because the supplier filed late, and there is no mechanism for condoning it in the ordinary course.

An invoice discovered during the audit of a closed year is usually a lost credit rather than a late one. The practical defence is a reconciliation run every month, not a search once a year. The outer date in section 16(4) has been amended, and relief has been given for particular years by amnesty; confirm the current position for the year you are working on before you treat a credit as either alive or dead.

The 180-day payment rule

Credit is allowed on the strength of an invoice, before the supplier has been paid. The second proviso to section 16(2) stops that becoming a permanent subsidy: where you have not paid the supplier the value of the supply together with the tax within one hundred and eighty days of the date of the invoice, the credit already taken must be added back to your output tax liability, with interest.

The reversal is not final. Once you pay the supplier, the credit may be taken again, and the re-claim is not subject to the November time limit that governs a first claim. So the rule delays the credit rather than denying it, at the cost of interest for the period in between.

The rule does not apply where no consideration is payable — supplies deemed to be made without consideration between related or distinct persons, and tax paid under reverse charge, are outside it. Payment made by a book adjustment or by set-off against a receivable counts as payment; the rule is about the debt being discharged, not about a bank transfer.

Ageing of trade payables is normally run for cash flow. Under GST it is also a tax exercise, and the two are usually run by different people. An old creditor balance that nobody has looked at is a reversal waiting to be found by an auditor, with interest running from the date the credit was taken.

Blocked credit — section 17(5)

Some credit is denied outright, however clearly the expenditure was incurred for business. The list is closed and is worth knowing item by item, because a large part of the disputed credit in any audit sits in it.

Free samples and promotional giveaways are the item that catches most businesses. The cost sits in the marketing budget and looks entirely commercial, but the credit on the goods given away must be reversed. The exception a practitioner looks for first is whether the arrangement is really a discount on a sale rather than a gift.

Immovable property, and where the argument usually is

The construction bar has generated more litigation than any other item on the list, because it turns on a distinction between a building and 'plant and machinery' that is easy to state and hard to apply. Foundations and structural supports for plant are expressly within the definition; land, buildings and other civil structures are expressly outside it, as are pipelines and telecommunication towers laid outside the factory premises.

The treatment of a commercial building constructed for letting out has been argued at length and has been the subject of an amendment applying from the start of the levy. Anything material in this area should be taken to counsel rather than settled from a summary.

Apportionment — rules 42 and 43

Where inputs are used partly for taxable supplies and partly for exempt supplies, or partly for business and partly not, only the business and taxable proportion may be retained. Rule 42 does this for inputs and input services, month by month; rule 43 does it for capital goods, spread over their assumed life.

Rule 42 works by elimination. Take the total input tax for the period, remove what is exclusively for non-business use, exclusively for exempt supplies and blocked under section 17(5), then remove what is exclusively for taxable supplies including zero-rated supplies. What remains is common credit. Of that, the proportion that the exempt turnover bears to the total turnover is reversed, and a further five per cent is reversed where the common inputs are also put to some personal use. The reversals are added to output tax liability for the month.

Rule 43 treats a capital item as consumed evenly over five years — sixty months. A sixtieth of the common credit on the item is attributed to each month, and the exempt proportion of that monthly figure is reversed, with interest. If the item was first used exclusively for exempt supplies and later becomes common, it enters the calculation at that point.

Both computations are provisional through the year and are finalised after it ends. The annual figure is compared with the sum of the monthly reversals; a shortfall is paid with interest, and an excess may be claimed back.

• Exempt turnover for this purpose includes supplies on which the recipient pays under reverse charge, transactions in securities, the sale of land, and the sale of a completed building.
• Zero-rated supplies — exports and supplies to a special economic zone — are taxable for this purpose, not exempt. Credit attributable to them is not reversed.
• The value of land and building for the exempt turnover figure is taken as the value adopted for stamp duty; for securities, one per cent of the sale value.

A company with a small stream of exempt income — interest on a fixed deposit is the usual one — often assumes rule 42 does not concern it. Interest income is an exempt supply and does enter the formula, though the rules exclude interest from the turnover figure in certain cases. The point is that the calculation has to be done and documented, not that the answer is always large.

Credit on reverse charge supplies

Where the recipient rather than the supplier is liable for the tax, the liability must be discharged in cash. Credit sitting in the electronic credit ledger cannot be used to pay it, because the tax has not yet entered the system at that point.

Once paid, the tax becomes available as credit in the ordinary way, subject to the usual conditions and to the blocked-credit list. The document that supports the claim is the self-invoice the recipient is required to raise for a supply received from an unregistered person, or the supplier's invoice where the supplier is registered.

There is no 180-day rule here, since the tax was paid by the recipient and there is no supplier payment on which credit depends.

Paying reverse charge tax and forgetting to claim the credit is a common and entirely avoidable loss, particularly on legal fees, goods transport and imported services. The payment goes out through one box of the return and the credit comes back through another; nothing in the form links them.

Credit on capital goods

Capital goods take credit in full in the month the conditions are met. There is no requirement to spread it, which distinguishes GST from the earlier regime where credit on capital goods was taken across two years.

The choice that must be made is between credit and depreciation. Where the tax component of the cost of a capital asset is capitalised and depreciation is claimed on it under the Income-tax Act, credit on that tax component is not allowed. You may take one or the other, not both.

Where capital goods on which credit was taken are later sold, tax is payable on the higher of two figures: the credit taken reduced by a prescribed percentage for each quarter or part quarter of use, or the tax on the transaction value.

Deciding to capitalise the GST on an asset is normally a fixed-asset register entry made by someone who is not thinking about the return. Once depreciation has been claimed on it, the credit is gone, and the entry is difficult to unwind after the accounts are signed.

GSTR-2A — the live statement

GSTR-2A is a read-only statement of everything your suppliers have said about you. It is assembled continuously: the moment a supplier files, amends or files late, the corresponding line moves in your 2A. There is no cut-off, no generation date and no version. Open the same month's 2A in June and again in December and the two will not agree, because in the meantime three suppliers filed a quarter they had left open and one issued a credit note against an invoice from the previous year.

It draws on more sources than any other statement. The supplier's GSTR-1 is the bulk of it, but a non-resident's GSTR-5, an input service distributor's GSTR-6, a deductor's GSTR-7 and an e-commerce operator's GSTR-8 all feed their own parts of it. TDS and TCS credits in particular are visible here and only here, which is why 2A did not become redundant when 2B arrived.

What 2A is genuinely good at is history. Because it keeps moving, it is the right place to answer questions about behaviour over time — did this supplier ever file the March quarter, how late does he usually run, has the invoice we have been chasing since August finally appeared. Because it keeps moving, it is the wrong basis for a claim: a figure taken from it can never be reproduced later, so neither you nor an officer can agree on what it said on the day the return was filed.

A reconciliation working paper built on 2A cannot be re-performed. When the same month is opened a year later during an audit, the statement has changed underneath the paper, and the difference between the two is impossible to explain. Archive a downloaded copy with the date of download on it if you use 2A for anything you may have to defend.

GSTR-2B — the static statement the claim rests on

GSTR-2B is generated once for a period, on a fixed date, and is then frozen. Nothing that happens afterwards changes it. That single property is what makes it usable as the basis of a claim: the credit it supports for a month is a number that can be reconciled, signed off, archived and produced again unchanged three years later.

For a monthly filer it is generated for each month on the fourteenth day of the following month. What it contains is decided by a window, not by invoice dates. Everything a monthly supplier filed between the twelfth of the month and the eleventh of the following month falls into that month's statement; a supplier filing quarterly under QRMP has his own window running to the thirteenth. A document filed after the window closes does not go anywhere near a re-run of the old statement — it lands in the next 2B that has not yet been generated.

This is why an invoice can sit in a 2B months away from its own date, and why nothing is wrong when it does. A supplier raises an invoice on 15 July, forgets the July GSTR-1, and files it on 12 August. It missed the July window by a day. It appears in the August 2B, and August is the month in which credit on it may be taken. Read the other way, a strictly punctual supplier's July invoice filed on 10 August is inside the July window and appears in the July 2B even though it was filed in August.

The sources are narrower than 2A's: the supplier's GSTR-1 and any amendment to it, GSTR-5 and GSTR-6, together with import data drawn from ICEGATE rather than from any supplier's return. TDS and TCS do not appear. Within the statement, lines are split between credit that is available and credit that is not — the second group holds, among other things, supplies where the place of supply puts the credit in a state where you are not registered, and documents already beyond the time limit for claiming.

Clause (aa) of section 16(2) is what makes this statement the operative one. Credit is conditional on the invoice having been furnished by the supplier in his statement of outward supplies under section 37 and communicated to you — and section 38 is the provision under which that communication is auto-generated. The statement you receive under it is 2B, so 2B, not 2A and not your purchase register, is what the entitlement is measured against.

The generation date, the exact hours of the cut-off window, and the treatment of QRMP suppliers are portal mechanics set by advisory and have been adjusted more than once. Confirm the current position on the portal for the period you are reconciling rather than working from the dates given here.

GSTR-2A and GSTR-2B side by side

The two statements are drawn from overlapping data and answer different questions. Most of the confusion in a GST department comes from using one where the other was meant.

A supplier who has genuinely filed will show in your 2A almost at once and in your 2B only at the next generation. Treating a 2A entry as authority to claim in the current month is the commonest way a business ends up claiming a month early, and an early claim is as much a mismatch as a wrong one.

How the reconciliation is run

The exercise compares three populations that ought to describe the same purchases: the purchase register, the month's 2B, and the credit you propose to put in the return. It is done line by line rather than in totals, because two totals can agree while the underlying lines are wrong in opposite directions, and because the remedy for each kind of difference is different.

A line is matched on five things together. Matching on fewer produces false pairs, and matching on more produces false breaks.

• The supplier's GSTIN — not his name, which is free text on your side and legal-entity text on his.
• The invoice number, exactly as it appears in each place.
• The invoice date.
• The taxable value, before tax.
• Each tax head separately — IGST, CGST, SGST or UTGST, and cess. A line where the total is right and the heads are wrong is a real difference, because credit in the wrong head cannot be used against the liability you actually have.

In practice the great majority of first-pass breaks are invoice-number mismatches on invoices that are otherwise identical. The supplier's system prints INV/2026-27/00147 and the person keying it into your books records 147. Leading zeros vanish in a spreadsheet column formatted as a number, a prefix is dropped as noise, a slash becomes a hyphen, and a supplier with several series types the wrong one into his own GSTR-1. The value and the tax agree perfectly; only the key does not. A reconciliation that treats the invoice number as authoritative will report a hundred exceptions where there are two, so the sensible method is to match on the number first and then re-match whatever is left on GSTIN, date and value, and look at what pairs up.

What to do about each difference

Every category has an owner and a deadline. The reason to run the reconciliation monthly rather than annually is that most of these remedies are only available while the supplier can still amend, and that window closes long before the audit does.

• Chase before the deadline, not after it. A supplier who has not yet filed can simply include the invoice; a supplier who has filed must amend, which is slower, and a supplier past his own amendment window cannot help you at all.
• Never claim credit merely because you hold an invoice. Holding the document is the first condition in section 16(2), not the whole of it. Commercial reality — the goods arrived, the money was paid, the invoice is genuine — is not one of the conditions, and this is the single most common cause of a demand.
• Distinguish an invoice not yet filed from one that will never be filed. The first is a timing difference: the supplier is late, the credit appears in a later 2B, and the only cost is waiting. The second is a loss, and the sooner it is recognised the more of it can be recovered commercially.
• The practical test of which one you have is the supplier's other invoices. If his later invoices are appearing and yours is not, the invoice has a problem — wrong GSTIN, wrong number, or never entered. If nothing of his is appearing, the supplier has a problem, and you should be looking at the exposure across every invoice of his that is open.
• Write the credit off when the outer date for claiming it has passed, or earlier when the supplier has stopped filing altogether and the amount is not worth pursuing. Until then it is a receivable, and it should be visible as one. Where the contract allows it, the cleanest recovery is to withhold the tax portion of the payment until the invoice appears — but that is a commercial term to be agreed at the order stage, not a decision to be taken unilaterally at the reconciliation.

Credit taken because the invoice is genuine, the goods arrived and the money was paid — but the entry never reached 2B — remains the commonest cause of a demand. The second commonest is the opposite: credit not taken at all on an invoice that did appear, because the reconciliation was run to find excesses and nobody looked at the other column.

How long a difference can be left open

A difference that is still open at the year end is not necessarily lost, but it is on a clock. Section 16(4) sets an outer date for claiming credit on an invoice or debit note relating to a financial year: the thirtieth day of November following the end of that year, or the furnishing of the annual return for that year, whichever comes first.

Because the annual return is normally filed well after November, the November date is the one that bites. And since credit is taken through the monthly return, the practical deadline is the return for October of the following year, which is filed in November. That return is the last ordinary opportunity to pick up any invoice of the previous financial year that has been sitting unclaimed.

This reverses the direction of the chase in the second half of the year. Between April and September a missing invoice is an irritation. From about August onwards, every invoice of the previous year that is still open needs to be either claimed or written off, because after the November return the question is closed and the supplier's willingness to fix it no longer matters.

• The date is an outer limit on a first claim. It does not restrict re-taking credit that was reversed under the 180-day rule and is being reclaimed after payment.
• It runs from the financial year the invoice relates to, not the year you found it. An invoice of an earlier year discovered during an audit two years later is a lost credit, not a late one.
• There is no ordinary power to condone the date. Relief for particular years has come by amendment and by amnesty, which is exactly why the position has to be checked for the specific year rather than assumed.

Both the outer date in section 16(4) and the special relief given for particular years have been amended. Confirm the position for the financial year you are working on before you treat a credit as either still alive or already dead.

The Invoice Management System

The Invoice Management System is a newer facility on the portal that puts a step between what a supplier files and what reaches your 2B. Documents filed by suppliers land on a dashboard, and on each one the recipient may take one of three actions before the statement is generated.

Accepting a document lets it flow into the credit-available part of your 2B in the ordinary way. Rejecting it keeps it out of your 2B altogether, so no credit on it is offered to you, and the rejection is communicated back to the supplier, whose own liability on that document is restored to him until he reports it again. Keeping a document pending holds it out of the current 2B without rejecting it; it stays on the dashboard for you to act on in a later period.

Taking no action is not a fourth option. A document left untouched is treated as accepted and flows into 2B as though you had accepted it, which means the system's default is that credit is offered to you and the burden of refusing it is yours.

The two mistakes worth naming are opposite. Rejecting a good invoice suppresses credit you were entitled to and puts the supplier to the trouble of reporting it again, after which you must accept it and have the statement recomputed. Accepting by inaction pulls into your 2B a document you have not looked at — and appearing in 2B satisfies one condition, not the others, so an accepted document you should not have credit on is still an ineligible credit if you claim it.

Used properly the facility changes the reconciliation from something done after the statement to something done before it, which is the more useful order: a difference resolved on the dashboard never becomes a difference in the return.

Everything about this facility that is a date, a scope or a compulsion is still moving — when it applies, to whom, whether an action is optional, how long a document may be kept pending, which categories of document can be acted on at all, and by what point actions must be taken for a given period. Treat the mechanism described here as the shape of it and confirm the current rules and advisories on the portal before relying on any of it operationally.

Differences that will never close

Some breaks are not errors and will not resolve however long the supplier is chased. Recognising them early is what stops a reconciliation from carrying the same twenty lines forward every month. Each needs a documented reason rather than a follow-up.

The useful discipline is to separate the exception list into two: differences that are waiting on somebody, each with a name and a date, and differences that are explained and will not move. The first list should be short and should shrink. The second should be documented once and carried forward without being re-investigated every month.

How credit is reported in GSTR-3B

Table 4 of GSTR-3B is not a single figure. It separates credit available, credit reversed, credit reclaimed and credit that was never eligible, and the department reads the four together against your 2B.

• Only 4(A) less 4(B) reaches the credit ledger. Row 4(D) is disclosure and does not move any money.
• The portal maintains a running statement of amounts reversed under 4(B)(2) and reclaimed under 4(D)(1). A reclaim larger than the balance available draws a query, so the two must be kept in step.
• Credit denied because the place of supply is another state is a real cost, not a timing difference. The remedy is to register there or to change how the supply is billed, and both decisions belong before the invoice, not after.

Reversing an ineligible credit by netting it off inside 4(A) instead of reporting it in 4(B) produces the same tax and a different return. The comparison the department runs is against 2B at the level of 4(A), so a netted figure looks like credit that was never claimed and invites the question.