Limitations, Conditions, and Restrictions in ITC Claims Under GST Decoded

The Central Board of Indirect Taxes and Customs (CBIC)’s latest amendment of the Central Goods and Services Tax (GST) Act, with respect to availing of input tax credit (ITC), has recently gone into force. 

Below, we elaborate on the changes made and where the CGST act stands now on ITC claims.

Overview: ITC under GST

Section 2 (63) of the CGST Act 2017 defines ‘input tax credit’ as the credit of input tax. Input tax refers to all the taxes paid on goods and/or services used in the final production of goods/services. 

In other words, businesses can reduce their total tax liability on goods sold by claiming a deduction of the taxes already paid on their inputs.

ITC: Legal Framework

The legal provisions related to ITC have been covered under Chapter V of the CGST Act under sections 16-21. 

Section 16 deals with the eligibility conditions for availing of ITC. Let’s learn more about ITC’s conditions in the paragraphs below.

Section 16(2): Eligibility for ITC

As per section 16(2), a registered person needs to satisfy all the following conditions to be eligible for ITC:

1. They should be in possession of a tax invoice/debit note/any other tax paying document that has been issued by a supplier registered under the GST act.
2. The details of the above-mentioned tax invoice/debit note/other taxation document has been furnished in the statement of outward supplies by the supplier. Additionally, these details need to be communicated to the recipient as specified by section 37 of the CGST Act.
3. The goods/services have already been received.
4. The tax liability with respect to such supply of goods has already been paid to the government.
5. They should have filed their return under section 39 of the CGST Act.
6. ITC should not be restricted in GSTR-2B under Section 38 of the CGST Act. (w.e.f. 1st October 2022).

Section 16(4): Time Limit for Claiming ITC

W.e.f. 1st October 2022, the time limit for availing of ITC has been extended. Now, a registered person can claim ITC by the following two dates, whichever is earlier:

• 30th November following the conclusion of the relevant financial year, or
• Filing of the relevant annual return under section 44 of the CGST Act.

Section 38: Communication of Details of Inward Supplies and ITC

The Finance Act, 2022 revamped Section 38 to further tighten input tax credit claims in a bid to eliminate ITC fraud. 

The newly revamped section 38 under the CGST Act states that the details of outward supplies that are furnished by a registered person’s suppliers will be communicated to the recipients by way of an auto-generated GSTR-2B statement.

The revised section 38 also prescribes the contents of the GSTR-2B, i.e., describes the cases where ITC may be available and the cases where ITC cannot be availed.

The conditions under which ITC can no longer be claimed under the revised Section 38 have been mentioned below:

• Where the inward supplies are received from a newly registered supplier. 
• Where a supplier has defaulted on tax payments and this default has continued for the prescribed time period.
• Where the supplier pays lower taxes than what was payable as per their statement of outward supplies and this difference exceeds the prescribed limit.
• Where a supplier claims higher ITC than what they were eligible for and this difference exceeds the prescribed limit.
• Where the supplier has utilised more than the prescribed limit of ITC for the payment of output taxes.
• Where any other conditions as prescribed have not been met.

In short, the cases in which a taxpayer can claim ITC will now be solely decided through the auto-generated GSTR 2B statement.

But what about the ineligibility of ITC?

Section 17(5): Ineligible ITC/Blocked Credits

Section 17(5) of the CGST Act details a list of purchases on which businesses cannot claim any ITC. They are:

1. Motor Vehicles, with a maximum seating capacity of thirteen persons (including the driver), vessels, and aircraft with a few exceptions. The exceptions include when such vehicles are further sold, are used for transporting passengers and goods, or utilised for imparting training to car drivers, or for navigation and imparting flying training. 
2. General insurance, servicing, repair and maintenance expenses incurred for motor vehicles, vessels, and aircrafts that are mentioned in point 1, except when used for the purposes specified therein.
3. Leasing, renting, or hiring of motor vehicles, vessels, and aircrafts referred to in point 1, except when used for the purposes specified therein.
4. Rent-a-cab, health insurance, and life insurance (on vehicles mentioned in point 1) except where it is mandatory for employers to provide these services or when these services are further supplied as a part of composite supply.
5. Food & beverages, outdoor catering, health services, beauty treatment, and cosmetic & plastic surgery, unless such expenses were incurred for the provision of final goods/services either as a taxable composite or in mixed supply.
6. Club, health centre, and fitness centre membership.
7. Travel benefits extended to employees, including LTC or home travel concession, where it is mandated by law to provide these benefits. 
8. Work contract services that are utilised for the construction, renovation, addition, alterations (of a capital nature) or reconstruction of immovable property, excluding plant and machinery. The exception is when these services are provided for further supply of works contract services.
9. Goods/services received by a taxpayer for the construction of an immovable property, excluding plant and machinery, irrespective of personal or business use.
10. Domestic purchases made by composition taxpayers.
11. Goods/services used for personal consumption.
12. Goods/services received by a non-resident taxable individual unless they were imported by them.
13. Purchased goods that get lost, are stolen, written off when damaged, or when given away as free samples or gifts.
14. ITC will not be available on taxes paid due to non-payment or a shortfall in tax payments or excessive refunds have been availed of. Additionally, ITC is not available in cases where ITC was utilised through fraud, wilful misstatements, suppression of facts, or on confiscated/ seized goods.
15. ITC will also not be available where tax has been paid in cases where goods in transit have been detained or seized and penalties have been imposed.

For a detailed explanation of Section 17(5), you can refer to our article here.

The details of ineligible ITC can be accessed through the auto-drafted GSTR-2B statement.

The latest amendment has also made changes to GSTR-3B, in which taxpayers need to report the permanently ineligible ITC claims separately. Now the blocked credits under section 17(5) will be reported in Table 4(B)(1).

How Can You Find Out Whether ITC is Restricted in the GSTR-2B?  

The details of restricted ITC can be viewed from the auto-generated GSTR-2B form. For this,

1. Log onto the GST portal with your credentials and click on ‘Return Dashboard’.
2. You will be taken to the ‘File Returns’ page. From the drop down list, select the relevant financial year, quarter, and period and click on ‘Search’.
3. You can now click either ‘View’ or ‘Download’ on the ‘GSTR-2B’ tile. You should choose ‘Download’ if the number of documents across GSTR-2B exceeds 1,000. From the ‘Download’ page, either click on ‘Generate JSON File to Download’ or ‘Generate Excel File to Download’.
4. You can click the ‘View’ button when the number of documents across GSTR-2B are under 1,000. This will display the ‘GSTR-2B-Auto-Drafted IT Statement’ with ‘Summary’ and ‘All Tables’ tabs.
5. The ‘Summary’ tab is divided into ‘ITC available’ and ‘ITC not available’ tabs. The ‘ITC not available’ tab is further divided into ITC not available and ITC reversal (Table 4). This section summarises the restricted ITC claims.
6. You can click on the ‘Expand All’ arrow to further expand all the sections in GSTR-2B form.

Filing Accurate ITC Claims with Clear

To accurately file ITC claims, businesses must reconcile their GSTR-2B form with their books of accounts. Additionally, they need to undertake rigorous vendor compliance checks to ensure that their suppliers have issued tax invoices/debit notes and uploaded details of outward supplies accurately and timely. 

Carrying these activities manually can be an onerous task. Instead, businesses can opt for Clear’s advanced solutions that help businesses in automating their ITC claims and vendor management processes. 

With our Clear GST solution, an advanced reconciliation engine helps you easily match data between your books and GSTR-2B. It can also be customised as per your needs, thus enabling you to claim 100% ITC in the GSTR-3B.