If your GST liability is coming out higher than expected, one of the first things to check is whether your Input Tax Credit is being blocked or reversed. Many businesses claim ITC correctly on purchase invoices but still end up paying more tax than they should — simply because the credit was restricted by law or entered incorrectly in Tally Prime.
This guide explains exactly why ITC gets blocked under GST, which situations require a reversal, and the step-by-step process to record it in Tally Prime.
What Is Blocked ITC Under GST?
Section 17(5) of the CGST Act lists specific goods and services on which Input Tax Credit cannot be claimed at all. These are commonly called “blocked credits.” Even if you have a valid tax invoice and have paid the supplier, the law does not allow you to use this ITC to offset your GST liability.
Blocked ITC is permanent. It cannot be reclaimed later, unlike ITC that is reversed due to non-payment to the supplier.
Common Reasons Why ITC Gets Blocked
1. Purchases Covered Under Section 17(5)
The following categories are blocked by default under GST law:
- Motor vehicles (cars, bikes) used for personal or non-business purposes
- Food, beverages, outdoor catering, and club memberships
- Health insurance, life insurance (except for employees under a legal obligation)
- Works contract services used for construction of immovable property
- Goods or services used for personal consumption
- Travel benefits given to employees — leave travel, home travel concession
2. Supplier Has Not Filed Returns
If your supplier has not reported the invoice in their GSTR-1, the invoice will not appear in your GSTR-2B. ITC on such invoices is provisionally blocked until the supplier files their return.
3. Non-Payment to Supplier Within 180 Days
Under Rule 37 of the CGST Rules, if you have not paid your supplier within 180 days of the invoice date, the ITC already availed must be reversed. Once you make the payment, you can reclaim it.
4. Partial Business Use
If goods or services are used partly for business and partly for personal purposes, only the proportionate business portion is eligible. The rest must be reversed under Rule 42 or Rule 43.
5. Exempt Supplies
If you make both taxable and exempt supplies, ITC related to exempt supplies must be reversed proportionally as per Rule 42.
ITC Blocked vs ITC Reversed — The Key Difference
| Basis | Blocked ITC (Section 17(5)) | Reversed ITC (Rule 37, 42, 43) |
|---|---|---|
| Nature | Permanently disallowed | Temporarily or partially disallowed |
| Can it be reclaimed? | No | Yes, in certain situations |
| Reason | Category of goods/service | Non-payment, partial use, exempt supplies |
| GST law reference | Section 17(5) CGST Act | Rule 37, 42, 43 CGST Rules |
| Entry in Tally | Expense/asset, not ITC ledger | Journal voucher with reversal entry |
How to Handle Blocked ITC in Tally Prime
When you purchase goods or services that fall under Section 17(5), you should not record the GST amount as ITC at all. Instead, the tax amount should be added to the cost of the purchase.
Step 1. Go to Gateway of Tally > Vouchers > Purchase (F9).
Step 2. Enter the supplier details, invoice number, and date.
Step 3. In the ledger selection, do not select any GST input ledger (IGST Input, CGST Input, SGST Input). Instead, book the entire invoice amount — including the GST portion — to the purchase or expense ledger directly.
Step 4. This treats the tax as part of the cost, which is the correct treatment for blocked ITC.
If you have already posted the entry with ITC and need to correct it, pass a journal entry to debit the purchase/expense ledger and credit the respective GST input ledger.
How to Reverse ITC in Tally Prime (Rule 37 — Non-Payment Within 180 Days)
This is the most common reversal situation. If you claimed ITC on a purchase invoice but have not paid the supplier within 180 days, follow these steps.
Step 1. Go to Gateway of Tally > Vouchers > Journal (F7).
Step 2. Change the voucher type to “Journal” if not already selected.
Step 3. Debit the relevant purchase or expense ledger (to increase your cost).
Step 4. Credit the respective GST input ledger:
- Credit CGST Input if it was an intra-state purchase
- Credit SGST Input for the corresponding SGST amount
- Credit IGST Input if it was an inter-state purchase
Step 5. Enter the narration clearly — for example: “ITC reversed on Invoice No. XYZ dated DD/MM/YYYY as payment not made within 180 days as per Rule 37.”
Step 6. Accept and save the entry.
Once you make the payment to the supplier, you can pass a reverse of this entry to reclaim the ITC.
How to Reverse ITC for Partial Business Use (Rule 42)
If you are using goods or services partly for business and partly for personal or exempt purposes, calculate the eligible portion and reverse the balance.
Step 1. Calculate the ITC reversal amount based on the ratio of exempt turnover to total turnover.
Step 2. Go to Gateway of Tally > Vouchers > Journal (F7).
Step 3. Debit the input tax reversal ledger or the relevant expense ledger.
Step 4. Credit the GST input ledgers (CGST, SGST, or IGST) for the reversal amount.
Step 5. Add a clear narration mentioning Rule 42 reversal for the relevant period.
This entry needs to be done monthly or at the time of filing GSTR-3B.
Where Does ITC Reversal Reflect in GSTR-3B?
When you reverse ITC in Tally Prime, the amount should reflect in Table 4(B) of GSTR-3B — “ITC Reversed.” Tally Prime automatically picks up journal entries tagged to GST input ledgers as reversals when you generate the GSTR-3B report, provided the ledgers are configured correctly.
To verify: Go to Gateway of Tally > GST Reports > GSTR-3B. Check Table 4 to confirm the reversal amounts appear correctly before filing.
Reclaiming Reversed ITC After Supplier Payment
Once you pay the supplier whose ITC was reversed under Rule 37, you are eligible to reclaim that credit in the same month of payment.
Step 1. Go to Gateway of Tally > Vouchers > Journal (F7).
Step 2. Debit the respective GST input ledger (CGST, SGST, or IGST) for the reclaim amount.
Step 3. Credit the purchase or expense ledger you had debited during reversal.
Step 4. Add narration: “ITC reclaimed on payment made to supplier for Invoice No. XYZ.”
This reclaimed ITC will appear in Table 4(A)(5) of GSTR-3B under “All other ITC.”
Frequently Asked Questions
Q. Can I claim ITC on a car purchased for business use?
Only if the car is used exclusively for taxable business activities such as transportation of goods, further supply of vehicles, or imparting motor driving training. For general business use or employee transportation, it is blocked under Section 17(5).
Q. What happens if I miss reversing ITC within 180 days?
The ITC reversal becomes mandatory. Interest at 18% per annum is applicable on the uncorrected ITC from the date it was originally claimed. It is always better to reverse proactively and reclaim once paid.
Q. If my supplier files GSTR-1 late and the invoice appears in a later GSTR-2B, can I still claim ITC? Yes. The ITC can be claimed in the month the invoice appears in your GSTR-2B, subject to the annual ITC claim deadline. Tally Prime will allow you to link it to the correct purchase entry.
Q. Does Tally Prime automatically track the 180-day payment deadline?
No. Tally Prime does not auto-flag unpaid invoices that are approaching the 180-day limit. You need to maintain a separate tracker or periodically check outstanding bills through the Outstandings report under Gateway of Tally > Display More Reports > Statements of Accounts.
Q. Is there any ITC available on CSR expenditure?
No. The CBIC has clarified that ITC on expenditure incurred for Corporate Social Responsibility under Section 135 of the Companies Act is blocked under Section 17(5)(h) as it is not for business purposes.
Q. Can reversed ITC be reclaimed after the financial year ends?
For reversals under Rule 37 (non-payment), yes — you can reclaim once payment is made, even in the next financial year. However, for other reversals under Rule 42/43, re-computation is done at year-end and adjustments are reflected in the annual return GSTR-9.
Final Word
Blocked and reversed ITC is one of the most overlooked areas of GST compliance. Getting it wrong — either by claiming what you should not, or not reclaiming what you are entitled to — directly affects your tax outgo and can attract notices from the GST department during scrutiny.
In Tally Prime, the entries are straightforward once you know the correct ledger mapping. The key is to identify the reason for the block or reversal first, then apply the right journal entry. Always add a clear narration to every reversal entry so your records are audit-ready.
For more step-by-step GST and Tally guides, visit bizwithtech.com.
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