Input Tax Credit (ITC) Eligibility under GST: A Legal Overview

🔹 1. Statutory Provision – Section 16 of the CGST Act, 2017

Section 16(1):

Every registered person is entitled to take credit of input tax charged on supply of goods or services (or

both) used or intended to be used in the course or furtherance of business.

Essential Conditions:

1. Person must be registered.

2. Goods/services must be used in the course or furtherance of business.

3. ITC can be credited to electronic credit ledger.

🔹 2. Conditions for Availment – Section 16(2)

ITC shall be available only if the following four conditions are satisfied:

✅ (a) Possession of a Tax Invoice or Debit Note

• Must possess a valid invoice or other prescribed document (as per Rule 36(1) of CGST Rules).

✅ (b) Receipt of Goods or Services

• Actual receipt is mandatory.

• For Bill-to-Ship-to model, deemed receipt applies (Explanation to Section 16(2)).

✅ (c) Tax Paid to Government

• The supplier must have actually paid the tax (in cash or via ITC) to the government (as seen from GSTR-2B).

✅ (d) Filing of Return

• The recipient must have furnished the return under Section 39 (i.e., GSTR-3B).

🔒 Proviso to Section 16(2):

If payment is not made to the supplier within 180 days, ITC shall be reversed (Rule 37), and can be

reclaimed once payment is made.

🔹 3. Time Limit for Availing ITC – Section 16(4)

ITC shall not be available after the earlier of:

• 30th November of the following financial year or

• Filing of annual return (GSTR-9)

🔹 4. Blocked Credits – Section 17(5)

Notwithstanding eligibility, ITC is NOT available in certain cases, such as:

• Motor vehicles (except for transport, training, or further supply)

• Food & beverages, outdoor catering, etc. (unless used for making outward taxable supplies)

• Works contract services for construction of immovable property (other than plant & machinery)

• Construction of immovable property on own account

• Goods lost, stolen, destroyed, written off

• Membership of club, health services, beauty treatment, etc.

🔹 5. Apportionment of Credit – Section 17(1) & 17(2)

Where goods/services are used partly for business and partly for non-business, ITC shall be allowed

only to the extent of business use.

Similarly, ITC on exempt supplies is not allowed – to be reversed as per Rule 42 and Rule 43.

🔹 6. Reversal of ITC in Case of Non-payment – Rule 37

If the recipient fails to pay the supplier within 180 days, the ITC availed must be reversed with interest.

📊 Practical Compliance Notes

• Check GSTR-2B monthly for eligible ITC.

• Maintain a robust invoice matching system.

• Ensure vendor compliance: tax payment and filing.

• Reverse ITC on exempt, personal, or blocked use.

• Maintain documentary evidence of payment within 180 days.

🧾 Conclusion

Input Tax Credit is a critical pillar of GST but is condition-bound. Adherence to Section 16, 17, and

related Rules is essential. Judicial trends indicate a pro-credit interpretation, especially when ITC is

denied for supplier default, but substantive conditions must be fulfilled.

📘 Input Tax Credit (ITC) Reversal under GST: Legal Framework & Analysis

🔹 1. Statutory Basis: Section 16(2), Section 17(1)–(5), and Section 18(4) of CGST Act

Input Tax Credit, though allowed under Section 16, must be reversed in specific scenarios where

conditions are not fulfilled, or the usage of goods/services changes.

The key legal bases for ITC reversal are:

Provision Trigger for Reversal

Section 16(2) Proviso Non-payment to supplier within 180 days

Section 17(1) & (2) Supplies used for personal/exempt/non-business purposes

Section 17(5) Blocked credits

Section 18(4) Transition from taxable to exempt supply or from regular to composition scheme

🔹 2. Reversal for Non-Payment to Supplier – Proviso to Section 16(2) & Rule 37

✅ Trigger:

• Failure to pay the value plus tax to the supplier within 180 days from invoice date.

✅ Action Required:

• ITC shall be added to output tax liability with interest (Rule 37(3)).

• Re-credit allowed when payment is subsequently made.

✅ Interest:

• From the date of availment till the date of reversal under Section 50.

🔹 3. Reversal for Exempt / Non-Business Use – Section 17(1) & 17(2)

Where goods/services are used:

• Partly for non-business purposes

• Partly for exempt supplies

Then, only proportionate ITC can be claimed.

🧾 Governed By:

• Rule 42: For inputs/input services

• Rule 43: For capital goods

🧮 Example:

If 20% of a facility is used for exempt supply, then 20% of related ITC must be reversed every month.

🔹 4. Reversal of Credit on Capital Goods – Rule 43

When capital goods are used for both taxable and exempt supply, ITC is to be:

• Averaged over 60 months, and

• Reversed proportionately for exempt use.

🔹 5. ITC Reversal on Transition to Exempt / Composition Scheme – Section 18(4), Rule 44

Trigger:

• If a taxpayer switches from regular to composition scheme or goods/services become exempt, ITC on stock and capital goods must be reversed.

Valuation for reversal:

• Inputs: Based on invoice value (if available).

• Capital goods: ITC reduced by 5% per quarter from date of purchase (Rule 44).

🔹 6. Reversal in Case of Credit Note Issued – Section 34

Where a credit note is issued by the supplier for discount/return:

• The recipient must reverse proportionate ITC if already claimed.

🔹 7. Reversal of ITC for Blocked Credits – Section 17(5)

If inadvertently claimed on:

• Motor vehicles

• Construction of immovable property

• Membership, health, beauty, catering, etc.

→ ITC must be voluntarily reversed.

🔹 8. ITC Reversal on Supply of Free Samples, Gifts, etc.

As per Section 17(5)(h), goods disposed of without consideration (like samples, gifts, personal use)

require ITC reversal.

📊 Practical Scenarios Requiring Reversal

Scenario Reversal Required? Section/Rule

Non-payment to supplier in 180 days ✅ Sec 16(2), Rule 37

Use of input for exempt supplies ✅ Sec 17(2), Rule 42

Switch to composition scheme ✅ Sec 18(4), Rule 44

ITC claimed on motor vehicle ✅ Sec 17(5)(a)

Inputs destroyed in fire ✅ Sec 17(5)(h)

Goods given as gifts ✅ Sec 17(5)(h)

Credit note received ✅ Sec 34

Capital goods used for exempt use ✅ Rule 43

🔍 Key Compliance Measures

• Monthly review of GSTR-2B and purchase registers.

• Use of apportionment formulas under Rule 42/43.

• Maintain clear records of payments, usage, and credit availed.

• Reverse credit with interest wherever applicable.

🧾 Conclusion

ITC reversal is a crucial compliance requirement under GST and failure to reverse when mandated may

attract interest and penalties. Sections 16 to 18, along with Rules 37, 42, 43, and 44, provide the legal

machinery to regulate reversals. Proper accounting, timely review, and robust vendor management

are essential to avoid litigation.