Why Input Tax Credit Rules Need a Rethink in 2025
The input tax credit rules (ITC) under GST are once again under scrutiny. As businesses across India face working capital crunches and operational delays, tax experts and industry bodies are calling for bold reforms to unlock cash flow and reduce compliance stress.
What Is Input Tax Credit (ITC)?
Under the GST framework, input tax credit allows taxpayers to reduce the tax paid on inputs (purchases) from the tax payable on outputs (sales). However, multiple layers of conditions, restrictions, and departmental interpretations often make it difficult to fully avail this benefit.
Key Challenges Faced by Businesses
- Credit blocked if vendor doesn’t file GSTR-1 or GSTR-3B on time.
- Rule 36(4) restricts ITC to invoices reflected in GSTR-2B only.
High Litigation & Disallowances
- Minor mismatches or technical errors lead to notices and ITC reversal.
- Inconsistent treatment by officers across states.
Working Capital Crunch
- Genuine buyers suffer cash blockage due to non-compliance by sellers.
- MSMEs most affected, especially in tier-2 and tier-3 cities.
Legal Provisions to Know
| Rule/Section | What it Says | Real Impact |
|---|---|---|
| Section 16 of CGST Act | Prescribes eligibility conditions for claiming ITC | Compliance-heavy with strict documentation |
| Rule 36(4) | Restricts ITC to eligible invoices in GSTR-2B | Leads to mismatch-related disallowances |
| Section 38 (Amended) | Auto-population from supplier returns | Buyer has no control over supplier filing |
| Recent Circulars | Clarify blocking/unblocking of ITC (e.g., Rule 86A) | Used to curb fake invoicing, but often misapplied |
What Reforms Are Being Demanded?
1. Decouple Buyer’s Credit from Seller’s Filing
- Allow ITC if invoice and payment are genuine, even if seller defaults.
- Align with Supreme Court ruling in Arise India Ltd. under VAT regime.
2. Simplify Reconciliation Process
- Auto-suggest or accept tolerance of 5–10% variation in GSTR-2B vs books.
- Reduce manual reconciliation burden for small businesses.
3. Uniform Application Across States
- Avoid state-wise discrepancies in ITC treatment.
- Issue central guidelines for adjudication consistency.
4. Faster Refunds for Exporters
- Remove procedural delays under Rule 96 and Rule 89.
- Focus on processing within 30 days as per Section 54 timelines.
Expert View: A Practical Take
“GST was meant to be a seamless credit system. But today, businesses are penalised for their suppliers’ faults. We need accountability, yes—but not at the cost of genuine trade.”
— CA Raghav Ahuja, GST Consultant, Bengaluru
CBIC’s Recent Steps – But Are They Enough?
- CBIC Circular No. 183/15/2022-GST: Clarified issues around ITC on debit notes and invoice timelines.
- Amendments via Finance Act, 2022: Tweaked ITC eligibility under Section 16.
- GST Council Meetings: Discussions ongoing on improving compliance tech and easing reconciliation.
However, the implementation gap continues to hurt honest taxpayers.
FAQ on Input Tax Credit Rules
Q1. Can I claim ITC if my supplier hasn’t filed GSTR-1?
No, as per Rule 36(4), only invoices appearing in your GSTR-2B are eligible.
Q2. What if I have proof of payment and invoice?
You may raise a grievance but ITC can still be denied unless reflected in GSTR-2B.
Q3. Are reforms expected in FY 2025-26?
Sources suggest the GST Council is considering easing restrictions, but no formal proposal yet.
Summary
Input tax credit rules in India are under review as businesses face cash flow issues due to strict conditions. Experts demand decoupling buyer eligibility from supplier compliance.
Conclusion: Businesses Need Breathing Room
Rigid ITC rules are stifling operational efficiency and trust in the GST regime. While fraud prevention is crucial, genuine taxpayers need simpler, fairer rules. It’s time to reform ITC provisions for better ease of doing business.