Input Tax Credit (ITC) under the GST regime is a key compliance and working-capital tool for registered businesses. When claimed correctly, ITC reduces the actual cash outflow on GST liabilities and improves business profitability. However, incorrect or unsupported ITC claims routinely trigger GST notices, assessments under Section 73/74 of the CGST Act, and even enforcement action for fraud. Recent trends show significant tax-evading ITC networks being busted by the GST Intelligence, leading to arrests under Sections 69 and 132 of the CGST Act.

This article explains the authentic statutory requirements for eligible ITC, practical steps to avoid mismatches and assessments, and the tangible benefits of right-angled ITC claims under the CGST law for 2025.

Legal Framework for ITC Eligibility – CGST Act & Rules

Section 16 – Eligibility and Conditions

Under Section 16 of the CGST Act, 2017, a registered person is entitled to ITC only if all of the following conditions are satisfied:

Possession of a tax invoice/debit note issued by a supplier registered under GST.
Receipt of goods or services as per the tax invoice.

Tax charged has been paid to the government (either in cash or through ITC by the supplier) — per Section 16(2)©.

The ITC is claimed in the return for the period in which the invoice/debit note is reflected in auto-drafted statements like GSTR-2B.

Key GST Act & Rules Governing Valid ITC Claims

Section 16(2)©:

ITC claim is valid only if the supplier has paid GST on the underlying supply, either himself or through allowed credit, and such supply details have been furnished on the GST portal.

Section 38 – Communication of Inward Supplies & ITC Linkage

Amended Section 38 (as proposed) mandates:

The supplier’s outward supply details must reflect in the recipient’s auto-generated GSTR-2B for credit to be claimed.

ITC may be restricted if the supplier has not filed GSTR-1/GSTR-3B, has mismatches in liability, or is non-compliant with prescribed conditions.

This is now the primary statutory basis for restricting ITC claims based on the supplier’s compliance.

Rule 36(4) – Eligible ITC vs Unmatched ITC

Under Rule 36(4) of the CGST Rules, ITC can only be claimed to the extent it appears in GSTR-2B (post-January 2022 regime). No provisional claim is allowed for invoices not reflected in the auto-drafted statement.

Section 16(4) – Time Limit

ITC must be claimed either:

By the due date of filing the annual return (GSTR-9) for the relevant financial year; or
By 30 November of the following year — whichever is earlier.

Common Causes of ITC Mismatch & GST Notices

Mismatches typically arise when:

The supplier delays or fails to upload invoices in GSTR-1.

ITC is claimed from suppliers who have not discharged tax or filed returns.

Invoices are claimed before they reflect in GSTR-2B.

Ineligible items under Section 17(5) are claimed (e.g., personal use items).

Mismatch triggers automated notices where GST authorities issue discrepancy reports under Section 42 of the CGST Act, and if unresolved, ITC must be reversed with interest under Section 50(1).

Practical Steps to Avoid Mismatches & GST Assessments

Reconcile ITC Monthly

Reconcile purchase records and supplier filings — verify that all invoices claimed in your GSTR-3B are reflected in your GSTR-2B before filing. Use digital reconciliation tools where possible.

Verify Supplier Compliance

Ensure that each supplier:

Has an active GST registration.
Files GSTR-1 and GSTR-3B on time.
Has paid GST shown in their GSTR-3B before you claim it.
Match ITC with GSTR-2B
GSTR-2B — once generated — is static and authoritative. Do not claim credit beyond what appears here.
Maintain Documentary Evidence
Retain tax invoices, delivery challans, contracts, and proof of receipt for all goods/services. Ensure every invoice contains mandatory particulars as per Section 31.
Avoid Blocked Credit

Do not claim ITC on items specifically barred by Section 17(5) (e.g., motor vehicles for personal use, specific entertainment expenses).

Monitor Returns & Communications

Respond promptly to mismatch notices and reconcile with suppliers proactively to avoid escalations into assessments under Section 73/74.

Benefits of Right-Angled ITC Claims

Cash Flow Optimization

Correct ITC claims reduce net GST payable — preserving working capital and supporting operational liquidity.

Audit & Assessment Risk Reduction

Complete reconciliation and supplier compliance reduce the likelihood of GST assessments, notices, and litigation, and avoid reversal of credits with interest.

Better Compliance Profile

Regular ITC reconciliation enhances corporate compliance scores and reduces rating-linked scrutiny by GST authorities.

Business Trust & Supply Chain Discipline

Clients and partners view consistent compliance as a marker of governance — which can be a commercial differentiator in supplier selection and contractual negotiations.

Takeaway for Clients & Professionals

For Business Owner:

Treat ITC not as an accounting entry but as a strategic compliance asset. Regularly reconciling ITC with the GST portal, ensuring timely supplier filings, and maintaining complete documentation will protect your business from assessments, penalties, and litigation.

For Professionals:

Advising clients on robust ITC compliance not only reduces their tax risk but also positions you as a trusted adviser. Incorporating automated reconciliation tools and a monthly review process will mitigate mismatches and strengthen GST compliance governance.

Posted on: December 29th, 2025