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Income Tax Services

A reference guide to income tax work for individuals, professionals and businesses in Varanasi and across India — what it covers, who typically needs support, how an engagement usually proceeds, and where to find more detail on our income tax services.

Input Tax Credit (ITC) & Reconciliation

GST Services · Varanasi

Input Tax Credit (ITC) & Reconciliation

A note on how input tax credit is established, matched and reported under GST, and how Sagar S Gupta & Co., Chartered Accountants in Varanasi, approaches ITC reconciliation as part of routine GST compliance. For a broader view of GST support from the firm, see Comprehensive GST Solutions for Businesses & Startups.

01 — Overview

What input tax credit is, and why it is reconciled

Input tax credit (ITC) is the mechanism under GST that allows a registered person to set off the tax paid on business purchases against the tax payable on outward supplies. It prevents tax from being charged on tax at each stage of the supply chain, provided the conditions in the CGST Act and Rules are met.

ITC reconciliation is the periodic comparison of the credit a business intends to claim against the credit reflected on the GST portal, and against its own books. Because eligibility depends on a valid tax invoice, receipt of goods or services, the supplier having reported the invoice, and payment of tax by the supplier, reconciliation is the step where these conditions are checked rather than assumed.

In practice, GST credit matching involves three documents: the auto-drafted statement in GSTR-2B, the business’s own purchase registers, and the credit claimed in the monthly GSTR-3B return. The sections below describe each of these and how they relate.

02 — The three sources

GSTR-2B, purchase registers and GSTR-3B

GSTR-2B

GSTR-2B is a static, auto-drafted ITC statement generated for each tax period from the returns filed by suppliers. It lists eligible and ineligible credit, and credit that may be availed in a later period. Because it does not change once generated, it serves as the fixed reference point for the period’s credit.

Purchase registers

The purchase register is the business’s own record of inward supplies: supplier GSTIN, invoice number and date, taxable value, tax amounts and the nature of the purchase. Purchase-register matching compares these entries line by line with GSTR-2B to identify credit that is booked but not reported, and the reverse.

GSTR-3B

GSTR-3B is the monthly or quarterly summary return in which ITC is actually availed and tax is paid. Table 4 reports eligible ITC, ITC reversed and net ITC available, along with ineligible credit. The figures declared here are expected to be supportable from GSTR-2B and the books; differences between the three are the subject of ITC reconciliation.

03 — Eligibility

Blocked credit, ineligible credit and reversals

Not every tax charge on a purchase qualifies as credit. Appearing in GSTR-2B indicates that a supplier has reported an invoice; it does not by itself establish that the recipient is entitled to the credit.

Blocked or ineligible credit

Section 17(5) of the CGST Act lists supplies on which credit is blocked, irrespective of whether they are reported by the supplier. Commonly encountered categories include:

  • motor vehicles for passenger transport, subject to the stated exceptions;
  • food and beverages, outdoor catering, beauty treatment and similar services, unless obligatory for the supplier or an outward supply of the same category;
  • membership of a club, health and fitness centre;
  • goods or services used for construction of immovable property, other than plant and machinery, on own account;
  • goods or services used for personal consumption, and goods lost, stolen, destroyed or given as gifts or free samples.

Credit may also be ineligible where it relates to exempt supplies or non-business use, in which case it is excluded from availed ITC in GSTR-3B.

Reversals

Credit that was validly availed may later need to be reversed. Reversals under GST generally arise in these situations:

  • non-payment to the supplier within 180 days of the invoice date, under Rule 37;
  • proportionate reversal for inputs used partly for exempt or non-business supplies, under Rules 42 and 43;
  • credit notes received from suppliers that reduce the original tax liability;
  • inputs written off, lost or destroyed, and other events specified in Section 17 and Rule 38.

Reversals are declared in GSTR-3B and, where the law provides, may be re-availed once the underlying condition is satisfied. Keeping a dated record of each reversal supports this.

04 — Common mismatches

Common mismatch issues in GST credit matching

Differences between purchase registers and GSTR-2B usually trace back to a limited set of causes. Identifying the category of a difference determines what, if anything, needs to be corrected.

  • Invoice not reported by the supplier. The purchase is booked but absent from GSTR-2B because the supplier has not filed or has not declared the invoice.
  • Period differences. An invoice dated in one month appears in GSTR-2B of a later month, or the reverse.
  • Invoice number or date variations. Prefixes, leading zeros, hyphens or typing errors prevent automatic matching.
  • GSTIN errors. The invoice was reported against a different registration or a mistyped GSTIN.
  • Value or tax-head differences. IGST has been charged instead of CGST and SGST, or the taxable value differs by rounding or discounts.
  • Credit and debit notes. Notes appear in GSTR-2B without a corresponding entry in the books, or the reverse.
  • Amendments. A supplier amends an earlier invoice, so the original and revised figures both need to be traced.

05 — Records and checks

Records and checks that support ITC

Section 16 of the CGST Act makes possession of a valid tax invoice or debit note, receipt of the goods or services, payment of tax by the supplier and filing of GSTR-3B the basic conditions for credit. A defensible ITC position rests on records that evidence each of these.

  • tax invoices, debit notes and bills of entry, filed in a retrievable order;
  • proof of receipt, such as delivery challans, e-way bills and goods received notes;
  • payment records to suppliers, with dates, for the 180-day check;
  • a purchase register that captures GSTIN, invoice details and tax heads accurately;
  • monthly GSTR-2B downloads retained alongside the reconciliation statement;
  • a reconciliation between ITC in the books, GSTR-2B and GSTR-3B Table 4, with differences explained;
  • a ledger of reversals and re-availed credit, with the reason for each entry;
  • a check of the Section 16(4) time limit before credit is claimed late.

06 — Workflow

A practical ITC reconciliation workflow

The sequence below reflects how ITC reconciliation is commonly organised each tax period, ahead of filing GSTR-3B.

  1. Close the purchase register. Confirm that all inward invoices, credit notes and import documents for the period are recorded.
  2. Download GSTR-2B. Retain the statement for the period once it is generated, in both summary and detailed form.
  3. Match. Compare supplier GSTIN, invoice number, date, value and tax heads between the register and GSTR-2B.
  4. Classify differences. Sort each difference as a timing difference, a data error, a missing supplier filing or a possible ineligibility.
  5. Apply eligibility rules. Remove blocked credit, identify reversals and note credit that depends on a later supplier filing.
  6. Compute ITC for GSTR-3B. Arrive at eligible ITC, reversals and net ITC, and tie the total to the reconciliation.
  7. Carry forward open items. Maintain a running list of unmatched invoices and review it each period until each is resolved.
  8. Annual tie-out. Before the annual return, reconcile the year’s ITC across GSTR-3B, GSTR-2B and the books.

07 — FAQ

Frequently asked questions

What is ITC reconciliation under GST?

It is the comparison of input tax credit recorded in the purchase registers with the credit shown in GSTR-2B and the credit claimed in GSTR-3B, so that differences are identified, explained and, where necessary, corrected.

Is all credit shown in GSTR-2B eligible?

No. GSTR-2B reflects what suppliers have reported. Eligibility still depends on the recipient’s use of the supply, the conditions in Section 16 and the blocked-credit list in Section 17(5).

What happens if an invoice is in the purchase register but not in GSTR-2B?

Credit on such an invoice is generally not available until the supplier reports it. The invoice is usually held as an open item and reviewed in later periods, within the time limit in Section 16(4).

When must ITC be reversed?

Common triggers are non-payment to the supplier within 180 days, use of inputs for exempt or non-business supplies, credit notes, and inputs that are lost, destroyed or written off. The relevant provisions are in Section 17 and Rules 37 to 43.

How often should GST credit matching be done?

Matching is typically carried out every tax period, after GSTR-2B is generated and before GSTR-3B is filed, with a consolidated review at year end as part of overall GST compliance.

This page is general information on input tax credit and ITC reconciliation under GST. It is not advice on any particular situation, and the provisions referred to are subject to amendment, notifications and circulars. For queries about your specific circumstances, please Contact Us.