Eligible GST ITC: Conditions, Timelines & Post-IMS Reality (FY 2025-26)

Summary:Input Tax Credit (ITC) eligibility under GST has shifted from being invoice-centric to being driven by statutory compliance and portal-based validation. While Section 16(1) grants the substantive right to ITC, Section 16(2), Section 38, and the mandatory Invoice Management System (IMS) from 1 April 2026 require recipients to satisfy multiple cumulative conditions, including invoice reflection in GSTR-2B, supplier tax payment, receipt of goods or services, filing of GSTR-3B, and compliance with Section 38 restrictions. IMS now determines ITC eligibility based on recipient actions such as accepting, rejecting, or keeping invoices pending, with inaction deemed acceptance. The article also explains time limits under Section 16(4), historical relief under Sections 16(5) and 16(6), blocked credits under Section 17(5), apportionment rules, credit note reversals, and practical compliance steps. It emphasizes that proactive IMS monitoring and supplier compliance have become critical for safeguarding ITC claims within prescribed statutory timelines.

Eligible Input Tax Credit under GST: Conditions, Timelines and the Post-IMS Reality (FY 2025-26)

Introduction: Possession of a tax invoice no longer settles the question of whether input tax credit is eligible. For most of GST’s first seven years a buyer could treat the invoice in hand as the anchor of the claim and reconciliation as a downstream housekeeping task. That assumption has now been reversed at the level of statute and portal both. Section 16 still sets the substantive test, but the conditions in Section 16(2), the restriction routed through Section 38, and the Invoice Management System (IMS) made mandatory from 1 April 2026 together mean that eligibility is decided largely outside the buyer’s own books — in what the supplier has reported and what the recipient has accepted on the portal. This article sets out the eligibility framework as it stands for FY 2025-26, with the provision, the form and the timeline at each step.

1. The substantive entitlement — Section 16(1)

Section 16(1) of the CGST Act, 2017 grants every registered person the right to take credit of input tax charged on any supply of goods or services, or both, that are used or intended to be used in the course or furtherance of business. Three threshold requirements sit inside this single sentence: the claimant must be registered (a person under the composition scheme of Section 10 is excluded), the input tax must have been charged on an inward supply, and the supply must carry a business nexus. The credit, once eligible, is provisionally credited to the electronic credit ledger under Section 41 and is then subject to the conditions that follow.

2. The cumulative conditions — Section 16(2)

Section 16(2) opens with a non-obstante clause, which means its conditions override the general entitlement in sub-section (1). All of them must be satisfied; credit fails if any single condition is unmet.

Two clauses deserve emphasis because they have shifted the burden decisively onto the recipient. Clause (aa), inserted by the Finance Act 2021 with effect from 1 January 2022, made GSTR-2B reflection a condition of eligibility rather than a matching aid. Clause (ba) links eligibility to Section 38, which — as discussed below — has itself been rewritten to run through IMS.

The condition in clause (c), that the supplier must have actually deposited the tax, remains the most contested in litigation. The line of authority — D.Y. Beathel Enterprises, the Calcutta High Court in Suncraft Energy, and against the assessee in Aastha Enterprises — turns on whether a bona fide recipient who has paid the supplier can be denied credit for the supplier’s default. The practical answer for a working file is that the recipient should be able to demonstrate genuineness of the transaction and payment, but cannot assume immunity from reversal.

The two provisos and the depreciation bar

The first proviso to Section 16(2) defers credit where goods are received in lots or instalments against a single invoice: the credit is available only on receipt of the last lot. The second proviso requires reversal of the credit, with interest, where the recipient fails to pay the supplier the value of the supply together with tax within 180 days of the invoice date; the credit can be re-availed once payment is made. Separately, Section 16(3) bars credit on the tax component of capital goods and plant and machinery where depreciation on that component has been claimed under the Income-tax Act — the assessee must choose one benefit, not both.

3. The time limit — Section 16(4) and the retrospective relief in 16(5) and 16(6)

Section 16(4) sets the outer limit for availing credit as the earlier of two dates: the due date for furnishing the GSTR-3B for the month of October following the end of the financial year, or the date of filing the relevant annual return. For invoices and debit notes relating to FY 2024-25, the effective cut-off was therefore 30 November 2025. After that date the credit lapses, however genuine the underlying purchase.

The Finance (No. 2) Act 2024 inserted sub-sections (5) and (6) to provide a one-time relaxation. Sub-section (5) extended the window for FY 2017-18 to FY 2020-21, allowing credit on invoices of those years to be taken in any GSTR-3B filed up to 30 November 2021. Sub-section (6) addressed the position of taxpayers whose registration was cancelled and later revoked, allowing them a fresh window to claim credit for the intervening period. CBIC Circular No. 237/31/2024-GST clarified the operation of both, including that no refund is available where tax was already paid or credit already reversed. Practitioners should treat 16(5)/(6) as a closed, historical relief — useful for cleaning up legacy disputes and appeals, not a continuing entitlement.

4. The IMS overlay — how eligibility is now decided on the portal

This is the structural change that distinguishes FY 2025-26 from every year before it, and the part most worth a practitioner’s attention.

Section 38 of the CGST Act was substituted by Notification No. 16/2025-Central Tax dated 17 September 2025, and the procedure was codified by the CGST (Fourth Amendment) Rules, 2025 vide Notification No. 18/2025-Central Tax dated 31 October 2025. The effect is that ITC is now legally tied to the records a recipient accepts, or is deemed to accept, in the Invoice Management System. The conditions in Section 16(2), the substituted framework of Section 38 and the operational role of the Invoice Management System (IMS) mean that the practical availability of input tax credit now depends substantially on supplier compliance and system-generated data, rather than on the recipient’s own records alone.

The mechanics matter because they convert inaction into a substantive consequence:

Two practical traps follow directly from this design. First, “inaction is acceptance”: an invoice left unactioned before GSTR-2B is generated on the 14th is treated as accepted, so a supplier’s keying error — a value entered as one lakh instead of ten thousand — will inflate the recipient’s credit unless caught in IMS. Second, once GSTR-3B for the period is filed, the IMS action for that period is locked; a wrongly rejected invoice cannot be pulled back into that period’s 2B and must wait for the supplier to re-report it in a later period, again within the 16(4) window.

Running alongside IMS is the hardening of GSTR-3B itself. Tables 3.1 and 3.2 (outward supplies) have been hard-locked since July 2025. The “Zero Mismatch” position now blocks the filing of GSTR-3B where the ITC claimed exceeds what GSTR-2B supports. From December 2025 the portal additionally blocks filing where reverse-charge liabilities are unpaid or where there is a negative balance in the Electronic Credit Reversal and Re-claimed Statement (ECRS). Hard-locking of the ITC field (Table 4) is on the GSTN roadmap as a further phase, with certain reversal and reclaim fields expected to remain manually computed because of their complexity.

5. Apportionment — Section 17(1) and 17(2)

Even where Section 16 is satisfied, only the business-and-taxable portion of the credit is eligible. Section 17(1) restricts credit to the extent inputs are used for business purposes; Section 17(2) restricts it to the extent attributable to taxable and zero-rated supplies, requiring reversal of the portion relating to exempt supplies. The mechanics of the reversal are in Rules 42 and 43 of the CGST Rules for inputs/input services and capital goods respectively. For a client with a mix of taxable and exempt turnover, this is an annual computation that must be trued up by the September following the financial year.

6. Blocked credits — Section 17(5)

Section 17(5) lists supplies on which credit is unavailable irrespective of business use. The principal categories:

On clauses (c) and (d), note the Finance Act 2025 amendment that substituted “plant and machinery” for the earlier expression “plant or machinery” in clause (d), given retrospective effect from 1 July 2017. This was the legislative response to the Supreme Court’s reading in Safari Retreats, and it narrows the room for treating a constructed building as creditable “plant” on a functionality test. Any open position relying on Safari Retreats should be reassessed against the amended language.

7. Credit notes and real-time reversal

The Finance Act 2025 amended the proviso to Section 34(2) to make explicit that a supplier’s reduction of liability through a credit note is contingent on the recipient reversing the corresponding credit already availed. The direction of travel has continued into Budget 2026, which mandates that the recipient’s reversal mirror the supplier’s credit-note value, with IMS as the channel through which the recipient acts on the credit note. The takeaway for the recipient’s file is that a credit note can no longer be treated as the supplier’s problem alone — it carries an automatic reversal obligation on the buyer’s side.

8. A practitioner’s working sequence

For FY 2025-26, the eligibility check that I run on a purchase before treating its credit as available reduces to a short, ordered sequence:

1. Is there a valid tax document and has the supply been received? [16(2)(a), (b)]

2. Does the invoice appear in GSTR-2B, and have we actioned it in IMS before the 14th? [16(2)(aa), (ba); Section 38]

3. Is the supply outside the Section 17(5) blocked list, and correctly apportioned under 17(1)/(2) where use is mixed?

4. Will the supplier be paid within 180 days, and have we filed GSTR-3B for the period? [second proviso; 16(2)(d)]

5. Are we within the 16(4) outer limit?

The credit is “eligible” only when all five answers hold. The shift since IMS became mandatory is that step 2 has moved from a month-end reconciliation to a weekly discipline — the only lever a recipient now has sits inside IMS, before GSTR-2B is generated.

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Disclaimer: This article reflects my understanding of the relevant provisions of the CGST Act, 2017, the rules and notifications issued thereunder as they stand on the date of writing, and is intended for general information and academic discussion only. It does not constitute professional advice or a solicitation of work in any form. Statutory positions, notifications and portal functionality continue to evolve; readers should verify the current position and obtain specific professional advice before acting on any part of this article. The author accepts no liability for any action taken on the basis of the contents herein.