August 1, 2023

Ineligibility of ITC under Section 16(4) of the CGST Act

According to economic times, by 2018, there are 1.03 crore GST Registered businesses. In this GST system, one of the key aspect that simplifies the tax regime and benefits taxpayers is ITC. This allows taxpayers to offset the tax paid on inputs against the tax liability on outputs. A crucial aspect of this Act is Section 16 (4), which governs the eligibility criteria for claiming the input tax credit (ITC). Understanding this provision is essential for businesses to ensure compliance, prevent penalties, and legitimately benefit from the ITC system. In this blog, we will delve into the intricacies of Section 16 (4) of the CGST Act, exploring its key provisions and implications for businesses.

Understanding Section 16 (4) of the CGST Act

Section 16 (4) of the CGST Act stipulates that a registered person can claim input tax credit only if the goods or services received are used in the course or furtherance of their business. Personal use of goods or services disqualifies them from claiming ITC. Moreover, the registered person must possess a tax invoice or debit note from the supplier, containing essential details such as the GSTINs of both parties, the description and value of goods or services, and the amount of tax charged.

Exceptions to the rule include cases where goods or services are used to make taxable supplies. However, ITC cannot be claimed if the goods or services are utilized for exempt or nil-rated supplies. Additionally, timely filing of GSTR-1 and GSTR-3B returns is mandatory for claiming ITC. Failure by the supplier to remit the collected tax to the government also renders the registered person ineligible to claim ITC.

For example Ajay Enterprises arranges for an office party for its employees. Ajay Enterprises will not be able to claim ITC on the food & beverages served.or if ABC Ltd. offers a travel package to its employees for personal holidays. ITC on GST paid by ABC Ltd. for the holiday package will not be allowed. ITC will be allowed for travel for business purposes and any expense for personal purposes will be invalid for ITC. 

Like for example a business owner going on a vacation or on a family trip will be ineligible for ITC.

Key Provisions of Section 16 (4)

Registered Person Eligibility: 

Only registered businesses can claim the input tax credit, ensuring that unregistered entities do not take advantage of the ITC system and cause revenue loss for the government.

Business Use: 

Goods or services must be utilized solely for business purposes, not for personal use, preventing misuse or abuse of the ITC system.

Proper Documentation: 

Maintaining accurate and complete documentation, including invoices and receipts, is crucial for ITC claims. Any discrepancy or incorrect information may lead to claim rejection.

Implications of Section 16 (4)

Enhanced Business Accountability: 

Section 16 (4) ensures that businesses claim ITC for legitimate business purposes, promoting transparency and accountability in the taxation system.

Importance of Documentation: 

Proper documentation is critical for successful ITC claims, necessitating accurate record-keeping of all purchases and expenses.

Compliance Requirements: 

Understanding and complying with Section 16 (4) is vital for businesses to avoid penalties and legal implications.

Practical Tips to Ensure Compliance with Section 16 (4) of CGST Act

Maintain Proper Documentation: 

Accurate record-keeping of invoices, receipts, and relevant documents is essential for successful ITC claims.

Separate Personal and Business Expenses: 

Businesses should maintain separate accounts and records to distinguish personal and business expenses clearly.

Conduct Regular Internal Audits:

Regular audits help ensure compliance with Section 16 (4) and other CGST Act provisions.

Stay updated: 

Being up-to-date with changes in the law ensures compliance with the latest requirements and regulations.

Monitor and Audit ITC Claims: 

Regularly monitoring and auditing ITC claims help identify errors and discrepancies for timely corrections.

Educate Employees: 

Educate employees about ITC compliance and conduct training sessions for updates on the Act.

Section 16 (4) vs ITC in other Countries

Input tax credit provisions vary across different countries. For example, in the US, businesses can claim ITC based on sales tax paid, but the rules vary from state to state. Similarly, the EU allows businesses to claim ITC by offsetting VAT paid on purchases against VAT charged on sales, but rules differ between member states.


Understanding Section 16 (4) of the CGST Act is essential for businesses to comply with the Act and legitimately benefit from the ITC system. By following the practical tips and best practices mentioned in this blog, businesses can ensure compliance, avoid legal implications, and promote transparency in the taxation system. Adhering to proper documentation and staying updated with the latest regulations will enable businesses to navigate the complexities of taxation in India successfully.


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