Input Tax Credit: What You Can Claim and What You Cannot

Input tax credit is what stops GST becoming a tax on a tax. You pay GST on what you buy, you collect it on what you sell, and you hand over the difference.

That is the theory. In practice, credit gets denied for reasons that have nothing to do with the purchase being genuine.

Four conditions, all of them required

1. You hold a valid tax invoice
2. You have actually received the goods or services
3. The supplier has paid the tax to the government
4. The supplier has filed their return, so the invoice appears in your GSTR-2B

Condition three and four are the uncomfortable ones. They put your credit in somebody else's hands. A supplier who does not file can cost you real money on a purchase you paid for in full.

What is blocked outright

Some credit is denied regardless of paperwork. Motor vehicles in most cases, food and beverages, club memberships, personal consumption, and goods lost, stolen or given as free samples.

Works contract services for construction of immovable property are blocked too, which surprises a lot of businesses fitting out an office.

The 180-day rule

If you claim credit and then do not pay the supplier within 180 days of the invoice date, the credit is reversed and interest applies. Slow payment to vendors is not free.

What to actually do about it

Reconcile GSTR-2B against your purchase register every month, not every year. A missing invoice found in month one is a phone call. The same invoice found in December is an argument with somebody who has forgotten the transaction.