Input tax credit (ITC) is one of the most powerful features of the GST framework — and one of the most litigated. The ability to offset taxes paid on business purchases against your GST liability is fundamental to the logic of the system: tax should fall only on the value added at each stage, not accumulate throughout the supply chain. But the conditions for claiming ITC are specific, and the consequences of a wrong claim — recovery with 24% interest and a penalty of up to 100% of the tax — are severe. These are the mistakes we see most often.
Mistake one: claiming blocked credits
Section 17(5) of the CGST Act lists categories of supply where ITC is blocked, regardless of whether the tax is genuinely paid for business purposes. The most commonly misunderstood items: motor vehicles (except for specific businesses like taxi operators, driving schools, or manufacturers of motor vehicles), food and beverages, health and beauty services, club memberships, works contract for the construction of immovable property, and goods or services used for personal consumption. Many businesses — particularly those with employee welfare programmes or company cars — unknowingly claim ITC on these categories. The scrutiny here has intensified significantly since 2023.
Mistake two: claiming more than what's in GSTR-2B
Since the introduction of Rule 36(4), ITC can be claimed only to the extent it appears in your auto-populated GSTR-2B statement. If a supplier has not filed their GSTR-1, the invoice does not appear in your 2B, and you cannot claim the credit regardless of whether you hold the invoice and have paid the tax. Many businesses — especially those with large vendor bases that include small, irregular filers — discover reconciliation gaps at year-end that can be significant. The solution is supplier management: regular follow-ups with non-filers, and in some cases, switching suppliers who are persistently late.
Notice trigger: The GST portal's analytics engine compares ITC claimed in GSTR-3B with the amount available in GSTR-2B every month. Any over-claim is flagged automatically and triggers a system-generated notice (GSTR-DRC-01C). Ignoring these notices leads to demand proceedings.
Mistake three: missing the time limit
ITC on an invoice can be claimed only until the earlier of: the date of filing the annual return for that year, or 30 November of the following financial year. A December purchase invoice for FY 2024-25 — if the credit was not claimed in any GSTR-3B filed before 30 November 2025 — is permanently lost. This sounds like a compliance formality but in practice, businesses with incomplete monthly reconciliations routinely discover old, unclaimed credits after the window has closed.
Mistake four: inadequate documentation
ITC eligibility requires a valid tax invoice, actual receipt of goods or services, evidence that the tax was paid to the government, and the return being filed. In a GST audit or scrutiny, officers frequently request all four conditions to be demonstrated together. Common failures: purchases received in parts but the full invoice ITC claimed before all parts are received; services where the invoice date precedes delivery; and expenses where the original invoice is with a vendor but a photocopy is in the books. Audit-ready ITC documentation means the invoice, the proof of delivery, and the payment record — all indexed by invoice number.
If your business has received a notice related to ITC claims, or if you want to clean up your ITC position before the annual return filing, our GST advisory team can run a reconciliation review and help you determine what to retain and what to reverse proactively.
