Input tax credit for manufacturers: capital goods, common credits, blocked credits and the time limit

A unit in Ambad that pays ₹60 lakh of GST on inputs and services each month, and loses 3% of that credit, loses ₹21.6 lakh a year. For a manufacturer, input tax credit (ITC) is working capital.

The rules sit in sections 16 to 18 of the Central Goods and Services Tax Act 2017 and the related CGST Rules. Credit is claimed in Form GSTR-3B against invoices that appear in GSTR-2B, and reversals are reported in Table 4 of the same return. Credit for any invoice of 2025-26 must be claimed by 30 November 2026, or by the date the 2025-26 annual return is filed, if earlier. Losses usually arise from small reversals that were never computed and from invoices that missed this deadline. Credit taken on items the law blocks is a further cause.

Five areas account for most credit errors in factories. Capital goods, common credits under rules 42 and 43 and blocked credits are discussed first; routine reversals and the time limit follow. The article is intended for finance heads and accountants who prepare GSTR-3B every month, and it states the law as at 1 October 2026.

1. The conditions for any credit

Section 16(2) of the Central Goods and Services Tax Act 2017 allows credit only where you:

• hold a tax invoice or debit note;
• have received the goods or services (goods delivered to a job worker on your direction count);
• can see the invoice in Form GSTR-2B, because your supplier has reported it (section 16(2)(aa) and rule 36(4));
• have a supplier who has actually paid the tax; and
• have filed your own return.

Two further conditions apply at a later stage. The supplier must be paid within 180 days, and the credit must be claimed within the time limit in section 16(4).

2. Capital goods: full credit on day one

Capital goods are goods capitalised in your books and used in the business. Under GST, credit on them is taken in full in the month of receipt, provided the other conditions are met.

Three points matter for factories:

• Do not claim depreciation on the tax. Section 16(3) denies credit if depreciation on the GST component has been claimed under the Income-tax Act. Capitalise the machine net of GST if you take the credit.
• Machines that arrive in parts. Where a machine arrives in lots against one invoice, credit is available on receipt of the last lot.
• Selling an old machine. Section 18(6) and rule 44(6) require you to pay the higher of (a) the credit taken, reduced by five percentage points for every quarter or part of a quarter since the invoice date, and (b) the tax on the sale price.

3. Blocked credits under section 17(5)

Some credits are blocked outright, whatever the business purpose. The table lists those that arise most often in factories.

The position on buildings requires care. In Chief Commissioner of CGST v. Safari Retreats (October 2024), the Supreme Court read "plant or machinery" in section 17(5)(d) more widely than "plant and machinery". The Finance Act 2025 replaced "plant or machinery" with "plant and machinery" with effect from 1 July 2017. The amendment was brought into force from 1 October 2025 by Notification No. 16/2025-Central Tax dated 17 September 2025. For a manufacturer, the practical line is unchanged. The machine is eligible, together with its foundation and structural supports. The shed around it remains blocked.

4. Common credits: rules 42 and 43 in plain numbers

Most engineering and auto-component units make only taxable supplies, so all their credit is available. The formulas below matter when a unit also makes exempt supplies. In Nashik this is common in food processing and agriculture-linked units, which may sell fresh produce (exempt) alongside processed products (taxable). Exempt supplies include supplies taxed at nil, wholly exempt supplies and non-taxable supplies.

Section 17(2) says credit is restricted to the part attributable to taxable supplies, including zero-rated exports. Rule 42 sets the method for inputs and input services; rule 43 for capital goods.

Rule 42, each month (inputs and input services):

1. Take the total credit for the month, T.
2. Remove credit used only for non-business purposes (T1), only for exempt supplies (T2), and blocked credit (T3). The rest is C1.
3. Remove credit used only for taxable supplies (T4). What remains is the common credit, C2.
4. Reverse the exempt share: D1 = (E ÷ F) × C2, where E is the value of exempt supplies and F is total turnover in the state for the month.
5. Where common items are also partly used for non-business purposes, reverse a further D2 = 5% of C2.

Rule 42, after the year ends. Recompute D1 and D2 on the full year's figures. If the annual reversal is higher than the monthly total, pay the difference with interest from 1 April of the following year. If lower, take the difference back as credit. Both must be done before the due date of the September return following the year.

Rule 43 (capital goods):

• Capital goods used only for taxable supplies: full credit.
• Capital goods used only for exempt supplies or non-business purposes: no credit.
• Common capital goods: the credit goes to the ledger in full, but it is treated as earned over a useful life of five years (60 months). Each month, Tm = credit ÷ 60, and the exempt share Te = (E ÷ F) × Tm is added to output tax.

Two refinements are relevant. First, interest on deposits and loans is excluded from E, so a manufacturer's fixed deposit interest does not create a reversal. Second, a machine first used only for exempt supplies and later used for both can bring its credit in, reduced by five percentage points for each quarter or part of one.

Reversals under rules 42 and 43, and blocked credits under section 17(5), are shown in Table 4(B)(1) of GSTR-3B.

5. A worked example: a food-processing unit near Dindori

The figures are illustrative. No real business is described.

A food-processing company near Dindori grades and sells fresh grapes (exempt) and makes processed products (taxable). In one month of 2026-27:

• Taxable turnover ₹2,40,00,000; exempt turnover ₹60,00,000. So F = ₹3,00,00,000 and E ÷ F = 20%. Interest on its fixed deposits is left out.

Rule 42 for the month:

So ₹3,40,000 of the month's ₹28,00,000 is not available: ₹2,00,000 never earned (T2 and T3) and ₹1,40,000 reversed as D1.

Rule 43 for a new grading line. The company installs a grading and sorting line for ₹1,00,00,000 plus GST of ₹18,00,000. The line handles both fresh grapes and grapes going to processing, so it is a common capital good.

• The ₹18,00,000 goes to the credit ledger.
• Tm = ₹18,00,000 ÷ 60 = ₹30,000 a month.
• Te = 20% × ₹30,000 = ₹6,000 a month, added to output tax.
• If the exempt share stays at 20%, the reversal over five years totals ₹3,60,000.

A processing line used only for taxable products, with GST of ₹9,00,000, gets full credit. Cold-room racking used only for fresh grapes, with GST of ₹1,80,000, gets none.

The annual true-up. Over 2026-27 the monthly D1 reversals add up to ₹16,20,000. On the full year, common credit is ₹84,00,000 and the exempt share is 18%, so the correct D1 is ₹15,12,000. The company has over-reversed ₹1,08,000 and can take it back, in a return filed before the due date of the September 2027 return. Had the annual figure been higher, the shortfall would carry interest from 1 April 2027.

Selling the processing line early. Suppose the processing line is sold 2 years and 1 month after its invoice, for ₹40,00,000. That is 9 quarters or parts of quarters, so the credit is reduced by 45 points: ₹9,00,000 × 55% = ₹4,95,000. Tax on the sale at 18% is ₹7,20,000. The company pays the higher figure, ₹7,20,000, as tax on the sale.

6. Reversals that factories often miss

• Unpaid suppliers after 180 days. Under the second proviso to section 16(2) and rule 37, credit on an invoice not paid within 180 days of its date must be reversed, with interest where applicable. It can be taken again on payment. Retention money and disputed bills are the usual cases.
• Suppliers who did not file. Under rule 37A, if a supplier has not filed GSTR-3B for the period by 30 September after the year ends, credit taken on that supplier's invoices must be reversed by 30 November. It comes back when the supplier files.
• Credit notes from suppliers. A credit note for a price reduction or a returned batch reduces your credit, so the purchase team should inform accounts when one is received.
• Lost, destroyed and written-off stock. Expired food products, scrapped rejects written off without sale, and fire or flood losses all require reversal of the credit on the inputs inside them.
• Free samples and gifts. Credit on goods given away free is blocked. Promotional samples to dealers are the common case.

7. The time limit in section 16(4)

Section 16(4) says credit on an invoice or debit note cannot be taken after the earlier of:

• 30 November following the end of the financial year to which the invoice or debit note relates; or
• the date you file the annual return for that year.

For a debit note, the relevant year is the year in which the debit note is issued.

Two practical points follow. Early filing of the annual return shortens your own period for claims. The deadline also applies to the claim in a return, so the last regular return that can carry it is usually the GSTR-3B for October, due on 20 November.

Sub-sections (5) and (6), inserted in 2024, give limited relief for 2017-18 to 2020-21 and for cases where registration was cancelled and later revoked. The limit for current years is unchanged by them.

8. Common errors

• Claiming credit on civil work for a new shed because it was billed with the machinery.
• Depreciation on the GST component of a machine on which credit was also taken.
• Treating the business as fully taxable when it has small exempt sales.
• Never doing the annual rule 42 true-up, so over-reversals are lost and under-reversals build interest.
• No 180-day tracker, so retention money stays credited for years.
• Leaving 2B mismatches for the year-end, after the 30 November window has closed.

What this means for a manufacturer

• Tag every capital purchase as taxable-only, exempt-only or common when it is capitalised, and keep the tag in the fixed-asset register.
• Split building contracts so that machine foundations and structural supports are billed separately from the shed.
• If you have any exempt supplies, run rule 42 every month and rule 43 for each common machine, and diarise the annual true-up before the September return.
• Reconcile GSTR-2B with the purchase register monthly, and chase missing suppliers well before 30 November.
• Keep a 180-day ageing of unpaid supplier invoices, and a list of suppliers with unfiled returns.
• Record lost, destroyed and written-off stock with its input credit, and reverse it in the same month.

This article is general information on the law as at 1 October 2026 and is not advice on any particular case. GST rules and rates change, so check the current text before acting.