Input Tax Credit (ITC) remains one of the most critical — and often misunderstood — components under India’s Goods and Services Tax (GST) regime. From compliance missteps to procedural nuances, ITC can significantly impact a business’s working capital if not managed correctly. This blog, based on a special episode of the Optotax Podcast, distills key real-world scenarios and solutions discussed by one of India’s top indirect tax experts.
Featuring
CA Deepak Kumar Jain
Founder, Accolet Advisors Pvt. Ltd.
Chartered Accountant | Company Secretary | Law Graduate
With over 24 years of experience in indirect taxation, CA Deepak Kumar Jain has worked with Big 4 firms and advised Indian and multinational companies on GST, customs, foreign trade policy (FTP), SEZ, and legacy tax laws. He also leads IndiaGST.com and is a founding partner at LexEtAl, a global legal and tax advisory collective.
Unsigned Invoices & ITC Eligibility
Invoices received without a physical or digital signature are common in high-volume transactions. While Rule 46 of the CGST Rules requires invoices to be signed or digitally signed, the absence of a signature alone doesn’t invalidate the ITC claim if the business can:
- Prove receipt of goods or services.
- Demonstrate accounting in the books, and
- Show that payment was made.
From a compliance lens, it’s advisable to request signed invoices, especially above certain thresholds – but in exceptional cases, corroborative evidence (agreements, payment proofs, goods receipt, etc.) can help establish eligibility. The law recognizes substance over procedural form in such instances.
Importance of Place of Supply in ITC
Incorrect place of supply (POS) can result in a total loss of ITC, even if the transaction is genuine. Key scenarios where this issue arises include:
- Bill-to-ship-to mismatch: If a customer picks up goods from a supplier’s premises and provides evidences for movement of goods, the POS is the place of delivery upon movement. In case the invoice shows the seller’s state as POS instead of delivery state where the buyer has registration, credit would be denied for incorrect POS.
- Import of goods: Using the wrong GSTIN (e.g., Maharashtra [being port State] instead of Karnataka [being factory location]) at the time of clearance leads to credit landing in the wrong state.
- Property leasing or managed services: Renting property in another state requires registration in that state. If not done, credit on associated expenses (including GST paid) is ineligible.
The core principle:
Credit is only available in the state where the supply is consumed and where the recipient is registered.
ITC on ‘Buy 2, Get 1 Free’ Offers
Promotional schemes like “Buy 2, Get 1 Free” may appear beneficial for sales, but from a GST perspective, any item given free of cost is considered a non-taxable supply, blocking ITC on that item.
However, Circular No. 92 (March 2019) clarified that such schemes may be treated as “Buy 3 at the price of 2,” thereby making the ITC claimable on all three items. That said, this interpretation clashes with Legal Metrology and Consumer Protection laws, which require anything marked ‘free’ to truly be free.
Business takeaway: Avoid schemes labeled “free”.
Instead, design bundled offers that clearly state “inclusive” pricing to stay compliant across laws and retain ITC.
Commercial Credit Notes – A Hidden Compliance Trap
Businesses often issue financial or commercial credit notes (without GST) for discounts or post-sale adjustments. While common, they pose a risk under Section 16(2) of the CGST Act, which links ITC to the “value paid and tax payable thereon.”
If a commercial credit note reduces only the taxable value (and not tax), the ITC under the “Mischief Rule” could add to cost for the recipient, as the supplier pays for tax but not the value thereon.
Adding to the confusion:
- A circular permitting ITC on financial credit notes was later withdrawn.
- There’s no clarity from the department on whether such transactions are risk-free.
What businesses should do:
- Treat commercial credit notes as exceptions, not standard practice.
- Structure discounts in advance and issue proper GST credit notes wherever possible.
Medical Insurance – When ITC Is Actually Allowed
Though Section 17(5) generally blocks ITC on medical insurance, there are clear exceptions:
- If insurance is provided as a statutory obligation under any labour law (e.g., Factories Act, Shops and Establishments Act), ITC is allowed.
- The requirement for board notification was removed in February 2019, making the employer’s obligation the only deciding factor.
- During COVID, a Ministry of Home Affairs guideline (April 2020) mandated insurance for all workers.
Recommended approach:
- Intimate the GST department about your legal interpretation.
- Claim ITC with documentation showing it’s a statutory obligation.
- In case of a dispute, reverse credit if needed, especially for exporters, where credit refunds are relevant.
CSR-Linked GST Expenses: ITC Not Allowed
CSR spending, although mandatory, is not linked to the taxable output of a business. Hence, it fails the test of being “in the course or furtherance of business.” This has been clarified through:
- Amendments in Finance Act 2023
- Section 17(5) expressly blocking ITC on CSR-related GST
Even if CSR activities (e.g., donations, educational programs, or medical equipment) benefit society, they are not part of business operations. Thus, the GST on such spends cannot be claimed as credit.
ITC on Gift Hampers, Diaries, and Business Promotion Items
Items like pens, gift boxes, or hampers distributed to clients or distributors, even for business promotion, may not be eligible for ITC as they are:
- Supplied without consideration, and
- Not used internally by the business.
Under Section 17(5), goods given as samples or gifts block ITC. Even if not explicitly labeled as gifts, if there’s no sale, it may qualify as a non-taxable supply, which disallows credit.
Businesses must distinguish between used by them for business or bought and supplied by them without consideration, because the distinction affects ITC eligibility.
Construction for Leasing – Safari Retreats Overridden
Earlier, the Safari Retreats Supreme Court ruling allowed ITC on construction of commercial properties (like malls) meant for leasing. However, the Finance Act 2025 introduced a retrospective amendment, explicitly disallowing ITC on:
- Construction-related goods and services.
- Even when the immovable property is meant for rental use.
This amendment nullifies the Safari Retreats decision, and businesses can no longer rely on it as legal precedent.
ITC on Vendor Invoices Accounted After 180 Days
If vendor invoices are accounted after 180 days of issuance, the business cannot claim ITC immediately, even after payment.
This is because:
- ITC is initially allowed without payment, but
- If payment isn’t made within 180 days, the credit must be reversed and reclaimed only after payment.
Compliance tip:
Ensure ERP systems are configured to flag such delayed invoices and avoid premature credit claims.
Mutual Fund Sales – Do They Trigger ITC Reversal?
Income from the sale of mutual funds (securities) is an exempt supply under GST. Hence, proportionate reversal of common ITC is required under Rule 42.
However, only 1% of the mutual fund sale value is considered exempt turnover for this purpose — as per Explanation 2 to Chapter 5 of the Rules.
Many businesses overlook this small but crucial compliance requirement, risking interest and penalties during audits.
Capital Goods vs. Inputs – Accounting Policy vs. GST Law
If a company purchases an item like a DG set worth ₹4.5 lakh, but its internal capitalization threshold is ₹5 lakh, it may expense the item in its books. However, under GST, it still qualifies as capital goods based on nature and utility, not accounting treatment.
Why this matters:
- Exporters cannot claim refunds on ITC related to capital goods.
- ITC reversal is required for capital goods when disposed off within 5 years.
Best practice:
Maintain a separate record for items of capital nature that are fully expensed, and treat them as capital goods for GST, even if they are not capitalized in accounting.
Vendor Non-Compliance – Who Bears the Burden?
Even if a business does everything right — verifies GSTIN, receives goods, makes payment, maintains documentation — ITC can still be denied if the vendor fails to file returns or pay tax.
Though many courts have recognized ITC as a substantive right, businesses must still comply with the letter of the law, which increasingly emphasizes vendor-level compliance.
What finance teams should do:
- Include GST compliance clauses in vendor agreements.
- Monitor supplier filing status (e.g., GSTR-1, 2B visibility).
- Grade or flag vendors based on compliance history.
With proposed GST rating systems and stricter departmental scrutiny, businesses must treat vendor compliance as a risk factor, not just a formality.
Final Word
Input Tax Credit is not just a technical tax concept — it’s a real cash flow lever for businesses. But claiming it incorrectly, or missing out on eligible credits due to avoidable mistakes, can lead to heavy losses or disputes.
By understanding how to navigate complexities like documentation, POS mismatches, promotional schemes, and blocked credits, finance teams can protect their margins and stay audit-ready.
