Input Tax Credit (ITC) is one of the most powerful features of GST — but also the most scrutinized. Incorrect ITC claims are the primary driver of GST notices and demands. Understanding the rules completely is non-negotiable.
Conditions for Claiming ITC
- You must possess a valid tax invoice or debit note
- Goods or services must have been received (not just invoiced)
- Tax charged by supplier must have been paid to the government
- You must have filed your GSTR-3B for the relevant period
- The supply must not be on the blocked credit list (Sec 17(5))
- Invoice must appear in GSTR-2B (or you must meet conditions for claiming without GSTR-2B match)
Blocked Credits Under Section 17(5) — Cannot Claim ITC
- Motor vehicles (cars, two-wheelers) — EXCEPT when used for supply of motor vehicles, transportation of passengers, or driving school
- Food and beverages, outdoor catering
- Club memberships and health/fitness centre services
- Rent-a-cab services (unless in the same business)
- Life insurance and health insurance (not for employees mandated by law)
- Construction of immovable property (building, civil works)
- Goods/services for personal consumption
- Goods lost, stolen, destroyed, or gifted as samples
GSTR-2B Reconciliation — Why It's Mandatory
From 2022, Rule 36(4) requires ITC to be claimed only to the extent it appears in GSTR-2B. If your supplier hasn't filed their GSTR-1, their invoices won't appear in your GSTR-2B — and you cannot claim that ITC (you must chase the supplier to file). Claiming ITC without GSTR-2B match is the #1 risk in GST audits.
ITC Reversal Rules
| Situation | Reversal Rule |
|---|---|
| Exempt and non-business use | Rule 42/43 — proportionate reversal |
| Capital goods used for exempt supply | Rule 43 — 5-year proportionate reversal |
| Non-payment to supplier within 180 days | Rule 37 — reverse ITC + interest; re-avail after payment |
| Goods/services received but used for personal purpose | Full reversal |