Standard Operating Procedure No.6 for Input Tax Credit (ITC)

1. Document Overview

Title: Standard Operating Procedure No. 6 for Input Tax Credit (ITC)

Issuing Department: Department of Posts (PAF Wing)

---

2. Table of Contents

Sl. No.	Topic	Page No.
1	Brief Introduction	2
2	Eligibility of ITC under GST Law	3–7
3	Section 17(5) – Blocked Credits	7–10
4	Place of Supply Rules and ITC Eligibility	10–11
5	ITC on Inputs/Input Services and Its Reversal	11–14
6	ITC on Capital Goods and Its Reversal	15–18
7	Disposal of Capital Assets – GST Treatment	19
8	End-to-End Process for ITC Compliance	20–25

---

3. Introduction

• ITC is a core mechanism under GST, allowing registered persons to offset taxes paid on inward supplies against outward tax liability.
• DoP must ensure accurate ITC management under the "One State One GSTIN" framework to avoid reversals, interest, and penalties.

---

4. Eligibility for ITC (Section 16)

Basic Conditions:

• Possession of a valid tax invoice/debit note.
• Invoice details furnished by supplier in GSTR-1/IFF.
• Goods/services actually received.
• Tax paid to government by supplier.
• Recipient has filed returns under Section 39.

Additional Conditions:

• Goods received in lots: ITC only after last lot received.
• Payment within 180 days, else ITC reversed with interest.
• Depreciation claimed on tax component → ITC not allowed.
• Time limit: ITC must be availed by November 30 of following FY or before annual return filing.

---

5. Blocked Credits (Section 17(5))

Item	Exceptions / Conditions Where ITC is Allowed
Motor vehicles (≤13 seats)	Used for supply, passenger transport, driving training
Vessels & aircraft	Used for supply, passenger/goods transport, training
Related insurance, repair, maintenance	If vehicle/vessel/aircraft used for permitted purposes
Food, beverages, health services, etc.	If used for making outward taxable supply of same category
Club membership, health club	Only if obligatory under law
Travel benefits to employees	Only if obligatory under law
Works contract for immovable property	Only if used for further supply of works contract service
Construction of immovable property	Not allowed
Goods/services under composition scheme	No exceptions
Goods/services for CSR	No exceptions
Personal consumption, gifts, lost goods	No exceptions

---

6. Place of Supply & ITC Eligibility

• Principle: ITC eligibility depends on Place of Supply (POS) rules.
• Key Rule: If POS and supplier location are in same state, but recipient is in another state → ITC not available.
• Example: Hotel stay in Mumbai billed to Chennai office → ITC ineligible.
• Solution: Use GSTIN of state where service is consumed.

---

7. ITC on Inputs/Input Services & Reversal (Rule 42)

Formula:

• T = Total ITC
• T1 = ITC for non-business use
• T2 = ITC for exempt supplies
• T3 = Blocked credits
• C1 = T – (T1 + T2 + T3)
• T4 = ITC for taxable supplies
• C2 = C1 – T4
• D1 = (E ÷ F) × C2
• D2 = 5% of C2
• C3 = C2 – (D1 + D2)

Reporting: Declare in GSTR-3B Tables 4A–4D.

---

8. ITC on Capital Goods & Reversal (Rule 43)

Usage Type & ITC:

• Exclusively exempt → No ITC
• Exclusively taxable → Full ITC
• Common use → Avail full ITC, reverse proportionate amount monthly

Reversal Formula:

• Tc = ITC credited
• Tm = Tc ÷ 60 months
• Te = (E ÷ F) × Tm

Monthly Compliance: Add Te to output tax liability.

---

9. Disposal of Capital Assets

• Payment Required: Higher of:
  1. ITC attributable to remaining useful life
  2. GST on transaction value
• Formula: ITC remaining = (C × Remaining months) ÷ 60
• Scrap Disposal: GST only on transaction value, no ITC reversal.

---

10. End-to-End ITC Compliance Process

1. Identify Eligibility at Receipt – DDO verifies invoice and supply nature.
2. Ensure Correct GSTIN on Invoices – Vendor must use correct state-specific GSTIN.
3. Verify Vendor Compliance – PAO checks GSTR-1 filing and tax payment.
4. Avail ITC Based on GSTR-2B – Only invoices appearing in GSTR-2B are eligible.
5. Reverse ITC as Required – Under Rules 37, 42, 43, and Section 17(5).
6. Reclaim Reversed ITC – When conditions are met, declare in GSTR-3B.
7. Utilize ITC in Prescribed Order – IGST → CGST → SGST/UTGST.
8. Monthly Three-Way Reconciliation – Books vs. GSTR-2B vs. GSTR-3B.
9. File GSTR-3B Accurately – Report ITC, reversals, reclaims in Tables 4A–4D.
10. Annual Reconciliation – Prepare GSTR-9 and GSTR-9C.
11. Record Retention – Maintain documents for 72 months.
12. Internal Controls & Monitoring – Regular audits, vendor checks, compliance reviews.

Download PDF from PoToolsBlog