GST and Input Tax Credit on Expenses: How TaxBuddy Categorises Eligible ITC
- Rajesh Kumar Kar
- Jan 22
- 8 min read
Input Tax Credit under GST plays a direct role in reducing the tax cost for businesses, but only when expenses are classified correctly. Many ITC claims fail not because the tax was ineligible, but because expenses were miscategorised or overlooked under GST rules. Certain business inputs qualify fully, others require partial reversal, while some are blocked altogether under Section 17(5) of the CGST Act. With frequent GST updates and tighter scrutiny, understanding how ITC applies to everyday expenses has become essential. Platforms like TaxBuddy help businesses stay compliant by systematically identifying eligible and ineligible ITC based on current GST provisions.
Table of Contents
What Is Input Tax Credit Under GST and Why It Matters
Input Tax Credit refers to the GST already paid on purchases used for business purposes, which can be adjusted against GST collected on sales during GST filing. Instead of treating tax on expenses as a cost, GST allows eligible businesses to reduce their net tax liability through ITC at the time of GST filing. This mechanism prevents tax cascading and improves working capital efficiency. When claimed correctly and reflected accurately in gst filing, ITC ensures that tax is levied only on value addition. However, incorrect classification or missed conditions during gst filing can turn eligible credits into liabilities, making ITC management a critical compliance area for businesses.
Conditions to Claim Eligible ITC on Expenses
GST law allows ITC only when specific conditions are satisfied. The taxpayer must be registered under GST and possess a valid tax invoice or debit note issued by a registered supplier. Goods or services should be actually received, and the supplier must have paid the tax to the government. The recipient should have filed the relevant GST returns, and payment to the supplier must be made within 180 days from the invoice date. ITC is allowed only to the extent expenses are used for business purposes and taxable supplies.
Eligible ITC Expenses Under GST Rules
ITC is generally allowed on expenses that are directly or indirectly used in the course of business. These include raw materials, trading goods, machinery, plant and equipment, office rent, professional fees, software subscriptions, advertising expenses, repair and maintenance services, and job work inputs. Capital goods also qualify for ITC, subject to prescribed rules on usage and adjustment. The key requirement is that the expense should support taxable outward supplies and should not fall under blocked credit provisions.
Ineligible and Blocked ITC Under Section 17(5) of CGST Act
Section 17(5) blocks ITC on specific categories regardless of business use. These include motor vehicles (with limited exceptions), food and beverages, beauty and health services, club memberships, rent-a-cab services, employee travel benefits, life and health insurance unless mandated by law, and works contract services for the construction of immovable property. ITC is also not allowed on goods lost, stolen, destroyed, written off, or given as gifts. Supplies under the composition scheme and personal consumption expenses are fully ineligible.
Mixed-Use Expenses and Proportionate ITC Reversal
Certain expenses are used partly for business and partly for non-business or exempt supplies. In such cases, the GST law requires a proportionate reversal of ITC. Only the portion attributable to taxable business use can be retained. Common examples include common office expenses, utilities, and shared services. Proper calculation and periodic reversal are mandatory to remain compliant. Failure to reverse ineligible portions can result in interest and penalties during audits.
How TaxBuddy Categorises Eligible and Ineligible ITC
TaxBuddy categorises ITC by analysing expense invoices against GST eligibility rules. Business-related expenses that meet all ITC conditions are identified as eligible, while blocked credits under Section 17(5) are automatically flagged as ineligible. Expenses with mixed usage are marked for proportionate reversal. The system applies invoice-level checks, usage logic, and GST rule mapping to reduce manual classification errors and ensure that only compliant ITC is claimed.
ITC Reconciliation With GSTR-2B and Compliance Checks
ITC can be claimed only when supplier invoices appear in GSTR-2B. TaxBuddy reconciles purchase data with GSTR-2B to identify missing invoices, excess claims, or mismatches. It also tracks the 180-day payment rule, time limits for ITC claims, and reversal requirements. These automated checks help businesses correct issues before filing GSTR-3B, reducing exposure to notices and interest demands.
Set-Off Rules for Input Tax Credit Under GST
GST prescribes a strict order for utilising ITC. IGST credit must be fully utilised first, followed by CGST and SGST as per permitted combinations. CGST credit can be used against IGST and CGST, while SGST credit can be used against IGST and SGST. Cross-utilisation between CGST and SGST is not allowed. Correct application of set-off rules ensures accurate tax payment and avoids short payment liabilities.
Common ITC Mistakes Businesses Make on Expenses
Businesses frequently lose eligible Input Tax Credit or face reversals not because of intent, but due to routine compliance gaps around expense classification and reconciliation. One of the most common mistakes is claiming ITC on blocked expenses such as employee food, travel perks, club memberships, or motor vehicles used for personal purposes. Even when these costs appear business-related, GST law restricts credit under Section 17(5), and such claims are often flagged during scrutiny.
Another major issue arises with mixed-use expenses. Common inputs like office utilities, shared services, or common administrative costs are partly used for taxable business activities and partly for exempt or non-business purposes. Many businesses fail to calculate and reverse the ineligible portion of ITC, leading to excess claims that later require reversal with interest. This becomes especially problematic when exempt turnover increases during the year.
Ignoring GSTR-2B reconciliation is another frequent compliance lapse. Businesses often claim ITC based on purchase invoices without verifying whether the supplier has correctly reported the transaction. When invoices do not appear in GSTR-2B, the claimed ITC becomes ineligible, even if GST has been paid to the supplier. Such mismatches are easily detected during departmental audits and can trigger notices.
The 180-day payment condition is also commonly overlooked. If payment to the supplier is not made within the prescribed period, ITC must be reversed along with interest. Many businesses track purchases but fail to link ITC eligibility with actual payment timelines, resulting in unintentional non-compliance.
Personal or exempt-use expenses being included in ITC claims is another recurring error. Expenses related to exempt supplies or non-business activities do not qualify for ITC, yet they are often bundled into common expense heads. Without proper segregation, this leads to excess credit claims.
The incorrect application of set-off rules further complicates compliance. Businesses sometimes adjust CGST and SGST credits in an incorrect order or attempt cross-utilisation that is not permitted under GST law. These mistakes lead to short payment of tax and interest liabilities, even when sufficient credit exists overall.
Delayed reconciliation and lack of periodic review compound these issues. Errors that could have been corrected during monthly filings accumulate over time and typically surface during audits, assessments, or GST investigations. At that stage, reversals are accompanied by interest and, in some cases, penalties, making proactive ITC management essential for businesses.
Conclusion
Effective ITC management depends on correct expense classification, timely reconciliation, and strict adherence to GST rules. As compliance requirements evolve, automation and rule-based checks play a key role in reducing errors and protecting cash flow. For anyone looking for assistance in tax filing and GST compliance, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted plans to suit different compliance needs. The self-filing option is designed for individuals and businesses that are comfortable managing their tax data independently, with system-driven checks to reduce errors. The expert-assisted plan is structured for users who prefer professional support, where tax experts review documents, validate claims, and handle filings end to end. This flexibility allows taxpayers to choose a filing approach based on complexity, time availability, and risk comfort.
Q2. Which is the best site to file ITR?
The Income Tax Department’s e-filing portal is the official platform for filing income tax returns in India. However, many taxpayers prefer private platforms that simplify the filing process through guided workflows, automated data checks, and professional assistance. Platforms like TaxBuddy provide structured filing, built-in validations, and expert support, which help reduce errors, mismatches, and post-filing issues, especially for taxpayers with complex income or compliance requirements.
Q3. Where to file an income tax return?
Income tax returns can be filed directly on the Income Tax Department’s official e-filing portal. Alternatively, returns can also be filed through authorised platforms such as TaxBuddy, which integrate return preparation, validation, and submission in a single workflow. These platforms are particularly useful for individuals and businesses seeking guided filing, automated checks, and post-filing support.
Q4. Can ITC be claimed on office rent?
ITC on office rent is generally allowed when the rented premises are used exclusively for business purposes, and GST is charged on the rent. The expense must not fall under blocked credit provisions related to works contracts for the construction of immovable property. Proper documentation, including a valid tax invoice and proof of business use, is essential to claim ITC on office rent without disputes during audits.
Q5. Is GST paid on software purchases eligible for ITC?
GST paid on software purchases or subscriptions is typically eligible for ITC when the software is used for business operations. This includes accounting software, compliance tools, productivity platforms, and other digital services that support taxable supplies. The key requirement is that the software must be used for business purposes and supported by a valid GST invoice from a registered supplier.
Q6. What happens if supplier payment is delayed beyond 180 days?
If payment to a supplier is not made within 180 days from the invoice date, the ITC claimed on that invoice must be reversed. The reversed amount is added to the output tax liability along with applicable interest for the delay period. Once payment is made to the supplier, the ITC can be reclaimed. Monitoring payment timelines is critical to avoid interest costs and compliance issues.
Q7. Are employee food and travel expenses eligible for ITC?
Employee-related expenses such as food, beverages, travel benefits, and club memberships are generally blocked under Section 17(5) of the CGST Act. ITC is allowed only in limited cases where such expenses are mandated by law or when the business itself provides similar taxable services. In most routine employment scenarios, ITC on these expenses is not permitted and must be excluded from claims.
Q8. How does TaxBuddy handle ITC mismatches?
TaxBuddy reconciles purchase invoices with GSTR-2B to identify mismatches, missing invoices, or excess claims. The system highlights discrepancies before GSTR-3B filing, allowing corrective action such as follow-ups with suppliers or reversal of ineligible credits. This proactive reconciliation reduces the risk of notices, interest, and penalties arising from incorrect ITC claims.
Q9. Is ITC available on capital goods?
ITC on capital goods is allowed when such assets are used for business purposes and taxable supplies. Machinery, equipment, and plant qualify for ITC, subject to GST rules and usage conditions. However, ITC is not available on capital goods used exclusively for exempt supplies or personal use. Accurate classification and tracking of capital assets are important for long-term compliance.
Q10. What are mixed-use expenses under GST?
Mixed-use expenses are those used partly for business and partly for non-business or exempt activities. Examples include common utilities, shared office resources, or services used across taxable and exempt supplies. GST law requires proportionate reversal of ITC for the non-eligible portion. Only the portion attributable to taxable business use can be retained as ITC.
Q11. Can incorrect ITC claims lead to penalties?
Incorrect ITC claims can result in reversal of credit along with interest and penalties during audits or assessments. Claims on blocked credits, personal expenses, or mismatched invoices are common triggers for scrutiny. Repeated or intentional misclaims may also attract higher penalties and prolonged litigation. Accurate classification and timely reconciliation help mitigate these risks.
Q12. Has the ITC claim deadline changed recently?
Recent regulatory updates have extended certain ITC claim deadlines, allowing taxpayers additional time to claim eligible credits for prior periods. Despite these extensions, regular reconciliation and timely corrections remain essential. Delayed action can still result in missed credits or compliance issues, especially where supplier data is not updated in GSTR-2B.
