Input Tax Credit Rules Need Reform for Better Cash Flow
The input tax credit rules under GST have been a pain point for businesses.
Under GST, businesses can claim credit for the tax paid on purchases (inputs) used in the course of business.
Why Are Businesses Struggling With ITC?
- Mismatch issues in GSTR-2B and GSTR-3B
- Blocked credits under Rule 38, 42, 43, and Section 17(5)
- Time limits under Section 16(4) restrict year-end claims
These hurdles force businesses to park more working capital, affecting liquidity and financial planning.
What Reforms Are Being Demanded?
Here’s what industry associations and experts are recommending:
| Current Problem | Suggested Reform |
|---|---|
| ITC blocked if supplier doesn’t file GSTR-1 | Allow provisional ITC based on valid invoice |
| Strict time limits under Section 16(4) | Extend or relax timelines for ITC claims |
| Excess ITC reversal due to RCM mismatch | Clarify treatment and automate reconciliation |
| Complicated Rule 42 & 43 for common inputs | Simplify apportionment rules for service businesses |
| Ambiguity in blocked credits (e.g., CSR) | Issue detailed clarifications or remove inconsistencies |
Legal References & Government Response
- Section 16(2)(aa) of the CGST Act links ITC to GSTR-1 filing by suppliers.
- Rule 36(4) restricts ITC beyond eligible invoices shown in GSTR-2B.
As of May 2025, no major relief has been notified.
Simplify Before You Penalise
“The ITC framework should reward compliance, not penalise buyers for supplier defaults. Automating reconciliation and provisional credit will ease working capital stress.”
— A CA partner at a mid-sized audit firm
Frequently Asked Questions (FAQs)
Q1. Can I claim ITC if my supplier hasn’t filed GSTR-1?
No, as per Section 16(2)(aa), ITC is available only if the supplier has furnished the invoice in GSTR-1 and it’s reflected in GSTR-2B.
Q2. What is the deadline to claim ITC for FY 2024-25?
ITC must be claimed before 30th November 2025 or the filing date of the September 2025 return, whichever is earlier.
Summary
Input tax credit rules under GST are restricting cash flow for Indian businesses. The industry wants reforms like provisional ITC, relaxed timelines, and simplified rules to ease working capital stress and boost compliance.
Time for a More Flexible ITC System
ITC should not become a compliance trap. Businesses need a system that supports genuine transactions, not one that punishes for others’ defaults. At Efiletax, we help businesses manage GST returns, reconcile ITC, and stay compliant.