{"id":23711,"date":"2025-06-06T11:23:38","date_gmt":"2025-06-06T05:53:38","guid":{"rendered":"https:\/\/open.money\/blog\/?p=23711"},"modified":"2025-06-12T12:21:23","modified_gmt":"2025-06-12T06:51:23","slug":"itc-in-gst","status":"publish","type":"post","link":"https:\/\/open.money\/blog\/itc-in-gst\/","title":{"rendered":"Understanding Input Tax Credit (ITC) in GST: Insights from the Optotax Podcast"},"content":{"rendered":"\n<p><span style=\"font-weight: 400;\">Input Tax Credit (ITC) remains one of the most critical \u2014 and often misunderstood \u2014 components under India\u2019s <strong><a href=\"https:\/\/www.gst.gov.in\/\" target=\"_blank\" rel=\"noopener\">Goods and Services Tax (GST)<\/a><\/strong> regime. From compliance missteps to procedural nuances, ITC can significantly impact a business\u2019s 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\u2019s top indirect tax experts.<\/span><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p><span style=\"font-weight: 400;\">Featuring<\/span><\/p>\n\n\n\n<p>CA Deepak Kumar Jain<\/p>\n\n\n\n<p class=\"has-text-align-left\"><span style=\"font-weight: 400;\">Founder, Accolet Advisors Pvt. Ltd.<\/span><span style=\"color: #0000ff;\"><span style=\"font-weight: 400;\"><br><\/span><\/span><span style=\"font-weight: 400;\">Chartered Accountant | Company Secretary | Law Graduate<\/span><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"has-text-align-left\"><span style=\"font-weight: 400;\">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 <a href=\"http:\/\/indiagst.com\/\" data-type=\"link\" data-id=\"http:\/\/indiagst.com\/\" target=\"_blank\" rel=\"noopener\">IndiaGST.com<\/a> and is a founding partner at LexEtAl, a global legal and tax advisory collective.<\/span><\/p>\n<\/blockquote>\n\n\n<p><iframe loading=\"lazy\" title=\"Losing Input Tax Credit Without Realizing It? | Podcast Teaser ft. CA Deepak Kumar Jain\" width=\"1200\" height=\"675\" src=\"https:\/\/www.youtube.com\/embed\/30JT-2kKk5o?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Unsigned Invoices &amp; ITC Eligibility<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">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&#8217;t invalidate the ITC claim if the business can:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Prove receipt of goods or services.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Demonstrate accounting in the books, and<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Show that payment was made.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">From a compliance lens, it&#8217;s advisable to request signed invoices, especially above certain thresholds &#8211; 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.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Importance of Place of Supply in ITC<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">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:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><b>Bill-to-ship-to mismatch<\/b><span style=\"font-weight: 400;\">: If a customer picks up goods from a supplier\u2019s premises and provides evidences for movement of goods, the POS is the place of delivery upon movement.&nbsp; In case the invoice shows the seller\u2019s state as POS instead of delivery state where the buyer has registration, credit would be denied for incorrect POS.<br><\/span><\/li>\n\n\n\n<li><b>Import of goods<\/b><span style=\"font-weight: 400;\">: 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.<br><\/span><\/li>\n\n\n\n<li><b>Property leasing or managed services<\/b><span style=\"font-weight: 400;\">: Renting property in another state requires registration in that state. If not done, credit on associated expenses (including GST paid) is ineligible.<\/span><span style=\"font-weight: 400;\"><br><br><\/span><\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p><span style=\"font-weight: 400;\">The core principle:<\/span><\/p>\n\n\n\n<p>Credit is only available in the state where the supply is consumed and where the recipient is registered.<\/p>\n<\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">ITC on &#8216;Buy 2, Get 1 Free&#8217; Offers<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Promotional schemes like \u201cBuy 2, Get 1 Free\u201d may appear beneficial for sales, but from a GST perspective, any item given free of cost is considered a <\/span><b>non-taxable supply<\/b><span style=\"font-weight: 400;\">, blocking ITC on that item.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">However, <a href=\"https:\/\/cbic-gst.gov.in\/pdf\/circular-cgst-92.pdf\" target=\"_blank\" rel=\"noopener\">Circular No. 92 (March 2019)<\/a> clarified that such schemes may be treated as \u201cBuy 3 at the price of 2,\u201d 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 \u2018free\u2019 to truly be free.<\/span><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Business takeaway: Avoid schemes labeled \u201cfree\u201d.<\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Instead, design bundled offers that clearly state \u201cinclusive\u201d pricing to stay compliant across laws and retain ITC.<\/span><\/p>\n<\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Commercial Credit Notes \u2013 A Hidden Compliance Trap<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Businesses often issue <\/span><b>financial or commercial credit notes<\/b><span style=\"font-weight: 400;\"> (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 \u201cvalue paid and tax payable thereon.\u201d<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If a commercial credit note reduces only the taxable value (and not tax), the ITC under the \u201cMischief Rule\u201d could add to cost for the recipient, as the supplier pays for tax but not the value thereon.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Adding to the confusion:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">A circular permitting ITC on financial credit notes was later <\/span><b>withdrawn.<\/b><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">There\u2019s no clarity from the department on whether such transactions are risk-free.<\/span><\/li>\n<\/ul>\n\n\n\n<p><b>What businesses should do:<\/b><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Treat commercial credit notes as <\/span><b>exceptions<\/b><span style=\"font-weight: 400;\">, not standard practice.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Structure discounts in advance and issue proper GST credit notes wherever possible.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Medical Insurance \u2013 When ITC Is Actually Allowed<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Though Section 17(5) generally blocks ITC on medical insurance, there are clear exceptions:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">If insurance is provided as a <\/span><b>statutory obligation<\/b><span style=\"font-weight: 400;\"> under any labour law (e.g., Factories Act, Shops and Establishments Act), ITC is <\/span><b>allowed<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">The <\/span><b>requirement for board notification<\/b><span style=\"font-weight: 400;\"> was removed in February 2019, making the employer&#8217;s obligation the only deciding factor.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">During COVID, a Ministry of Home Affairs guideline (April 2020) mandated insurance for all workers.<\/span><\/li>\n<\/ul>\n\n\n\n<p><b>Recommended approach:<\/b><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Intimate the GST department about your legal interpretation.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Claim ITC with documentation showing it&#8217;s a statutory obligation.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">In case of a dispute, reverse credit if needed, especially for <\/span><b>exporters<\/b><span style=\"font-weight: 400;\">, where credit refunds are relevant.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">CSR-Linked GST Expenses: ITC Not Allowed<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">CSR spending, although mandatory, is <\/span><b>not linked to the taxable output<\/b><span style=\"font-weight: 400;\"> of a business. Hence, it fails the test of being \u201cin the course or furtherance of business.\u201d This has been clarified through:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Amendments in Finance Act 2023<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Section 17(5) expressly blocking ITC on CSR-related GST<\/span><\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p><span style=\"font-weight: 400;\">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 <\/span><b>cannot be claimed as credit<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">ITC on Gift Hampers, Diaries, and Business Promotion Items<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Items like pens, gift boxes, or hampers distributed to clients or distributors, even for business promotion, may <\/span><b>not be eligible for ITC<\/b><span style=\"font-weight: 400;\"> as they are:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Supplied <\/span><b>without consideration<\/b><span style=\"font-weight: 400;\">, and<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Not used internally by the business.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">Under Section 17(5), goods given as <\/span><b>samples or gifts<\/b><span style=\"font-weight: 400;\"> block ITC. Even if not explicitly labeled as gifts, if there&#8217;s no sale, it may qualify as a <\/span><b>non-taxable supply<\/b><span style=\"font-weight: 400;\">, which disallows credit.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Businesses must distinguish between used by them for business or bought and supplied by them without consideration, because <\/span><b>the distinction affects ITC eligibility.<\/b><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Construction for Leasing \u2013 Safari Retreats Overridden<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Earlier, the <\/span><i><span style=\"font-weight: 400;\">Safari Retreats<\/span><\/i><span style=\"font-weight: 400;\"> Supreme Court ruling allowed ITC on construction of commercial properties (like malls) meant for leasing. However, the <\/span><b>Finance Act 2025 introduced a retrospective amendment<\/b><span style=\"font-weight: 400;\">, explicitly disallowing ITC on:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Construction-related goods and services.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Even when the immovable property is meant for rental use.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">This amendment <\/span><b>nullifies the Safari Retreats decision<\/b><span style=\"font-weight: 400;\">, and businesses can no longer rely on it as legal precedent.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">ITC on Vendor Invoices Accounted After 180 Days<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">If vendor invoices are accounted after 180 days of issuance, the business <\/span><b>cannot claim ITC immediately<\/b><span style=\"font-weight: 400;\">, even after payment.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">This is because:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">ITC is initially allowed without payment, but<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">If payment isn\u2019t made within 180 days, the credit must be <\/span><b>reversed<\/b><span style=\"font-weight: 400;\"> and reclaimed <\/span><b>only after payment<\/b><span style=\"font-weight: 400;\">.<br><\/span><\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Compliance tip:<\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Ensure ERP systems are configured to flag such delayed invoices and avoid premature credit claims.<\/span><\/p>\n<\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Mutual Fund Sales \u2013 Do They Trigger ITC Reversal?<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Income from the sale of mutual funds (securities) is an <\/span><b>exempt supply<\/b><span style=\"font-weight: 400;\"> under GST. Hence, proportionate reversal of common ITC is required under Rule 42.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">However, only <\/span><b>1% of the mutual fund sale value<\/b><span style=\"font-weight: 400;\"> is considered exempt turnover for this purpose \u2014 as per Explanation 2 to Chapter 5 of the Rules.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Many businesses overlook this small but crucial compliance requirement, risking interest and penalties during audits.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Capital Goods vs. Inputs \u2013 Accounting Policy vs. GST Law<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">If a company purchases an item like a DG set worth \u20b94.5 lakh, but its internal capitalization threshold is \u20b95 lakh, it may expense the item in its books. However, <\/span><b>under GST<\/b><span style=\"font-weight: 400;\">, it still qualifies as <\/span><b>capital goods<\/b><span style=\"font-weight: 400;\"> based on nature and utility, not accounting treatment.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Why this matters:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><b>Exporters cannot claim refunds<\/b><span style=\"font-weight: 400;\"> on ITC related to capital goods.<\/span><\/li>\n\n\n\n<li><b>ITC reversal is required<\/b><span style=\"font-weight: 400;\"> for capital goods when disposed off within 5 years.<\/span><\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Best practice:<\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Vendor Non-Compliance \u2013 Who Bears the Burden?<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Even if a business does everything right \u2014 verifies GSTIN, receives goods, makes payment, maintains documentation \u2014 ITC can still be denied if the <\/span><b>vendor fails to file returns or pay tax<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Though many courts have recognized ITC as a <\/span><b>substantive right<\/b><span style=\"font-weight: 400;\">, businesses must still comply with the letter of the law, which increasingly emphasizes vendor-level compliance.<\/span><\/p>\n\n\n\n<p><b>What finance teams should do:<\/b><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Include GST compliance clauses in vendor agreements.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Monitor supplier filing status (e.g., <strong><a href=\"https:\/\/open.money\/blog\/what-are-gstr-1-and-gstr-3b\/\">GSTR-1<\/a>,<\/strong> 2B visibility).<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Grade or flag vendors based on compliance history.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">With proposed GST rating systems and stricter departmental scrutiny, businesses must treat <\/span><b>vendor compliance as a risk factor<\/b><span style=\"font-weight: 400;\">, not just a formality.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Final Word<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Input Tax Credit is not just a technical tax concept \u2014 it\u2019s 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.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Watch the Podcast:&nbsp;<\/span><\/h2>\n\n\n\n<h4 class=\"wp-block-heading\">Episode 1<\/h4>\n\n\n\n<p class=\"has-text-align-left\"><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/H2C4bcM_bE0?feature=shared\" width=\"560\" height=\"314\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n","protected":false},"excerpt":{"rendered":"This article is based on the Optotax Podcast featuring CA Deepak Kumar Jain. It simplifies GST &#038; ITC with examples for finance &#038; compliance professionals.","protected":false},"author":66,"featured_media":23884,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"csco_singular_sidebar":"","csco_page_header_type":"","csco_page_load_nextpost":"","footnotes":""},"categories":[517],"tags":[521,708,743],"class_list":{"0":"post-23711","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-gst","8":"tag-gst","9":"tag-input-tax-credit","10":"tag-itc","11":"cs-entry"},"_links":{"self":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts\/23711","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/users\/66"}],"replies":[{"embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/comments?post=23711"}],"version-history":[{"count":9,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts\/23711\/revisions"}],"predecessor-version":[{"id":23895,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts\/23711\/revisions\/23895"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/media\/23884"}],"wp:attachment":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/media?parent=23711"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/categories?post=23711"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/tags?post=23711"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}