🚫 Understanding Ineligible Input Tax Credit (ITC) & Reverse Charge Mechanism (RCM) – A Year-End GST Guide for Businesses

Bhagya Lakshmi
Mar 31
3 min read

As the financial year comes to a close, it's time to clean up the books, reconcile purchases, and ensure GST compliance. One critical area that deserves focused attention is the treatment of Ineligible ITC under Section 17(5) and expenses liable under Reverse Charge Mechanism (RCM).

Let’s break down both — with a practical, year-end checklist.

🔍 What Is Section 17(5) of the CGST Act?

Section 17(5) lists blocked credits — expenses for which Input Tax Credit (ITC) cannot be claimed, even if they are for business purposes. These must be reversed in GSTR-3B.

📌 List of Ineligible ITC (Blocked Credits under Section 17(5))

#	Nature of Expense	ITC Allowed?	Notes
1	Motor vehicles (personal/employee use)	❌	Allowed only for certain business categories (e.g., transport, driving schools)
2	Rent-a-cab, life & health insurance	❌	Allowed only if obligatory under law or outward taxable supply
3	Food & beverages, catering	❌	Allowed if used for taxable supply of similar services
4	Club memberships, gyms, fitness centers	❌	Completely blocked
5	Cosmetic surgery, beauty treatment	❌	Unless used to supply similar services
6	Works contract services (construction)	❌	ITC blocked unless used for further supply of such services
7	Construction of immovable property	❌	Even if for business – like buildings, offices, showrooms
8	Employee travel benefits (LTA, holidays)	❌	Not eligible under any condition
9	Gifts and free samples	❌	Blocked even if given for marketing or goodwill
10	Goods lost, stolen, destroyed, or written off	❌	Includes fire damage, wastage, pilferage

🚫 Other Scenarios Where ITC Must Be Reversed

Vendor payment not made within 180 days – Reverse proportionate ITC (Rule 37).
Invoice not reflecting in GSTR-2B – ITC shouldn't be claimed unless it appears.
Invoices claimed after the time limit (Section 16(4)) – For FY 2023-24, deadline is Nov 30, 2024.
Personal expenses or mixed-use expenses – ITC restricted to business portion only.

🔁 Reverse Charge Mechanism (RCM) – What to Check at Year-End

Under RCM, the recipient (you) is liable to pay GST in cash and can claim ITC only after payment.

✅ Common RCM Scenarios:

#	Nature of Expense	RCM Applicable?	Notes
1	Legal fees from individual advocates or firms	✅	GST must be paid under RCM
2	GTA (Goods Transport Agency) services	✅	If the business is recipient of goods transport
3	Director remuneration (non-salary)	✅	Applicable where director is not under employer-employee relationship
4	Import of services	✅	GST to be paid in cash under IGST
5	Purchase from unregistered dealers (URD)	✅	In specific cases only, as per notification
6	Renting of Immovable Property (from unregistered to registered person)	✅	Effective from October 2024

🔄 RCM Year-End Checklist:

Review all expense heads for RCM applicability.
Ensure GST is paid in cash under RCM.
Claim ITC only after payment is made.
Maintain self-invoices and payment challans for audit support.

🧾 Final Wrap-Up: Year-End Actions

✅ Reconcile Purchase Register with GSTR-2B
✅ Reverse ineligible ITC under Section 17(5)
✅ Identify RCM liabilities and pay GST in cash
✅ Track vendor payments beyond 180 days for ITC reversal
✅ Ensure compliance with Section 16(4) deadlines
✅ Maintain supporting documents for ITC claimed and reversed

💡 Why This Matters

GST compliance is not just about filing returns — it’s about filing the right values. Inaccurate ITC claims, missed RCM entries, or delayed reversals can result in: