Blocking of ITC has become a major concern for businesses in India under the GST system. Companies rely on Input Tax Credit to manage working capital and maintain healthy cash flow. However, blocked credits can disrupt operations and increase financial stress. Let’s see what ITC blocking means, why it happens, and how businesses can manage the risks.
Understanding Blocking of ITC Under GST:
Businesses rely on Input Tax Credit to reduce tax liability. However, the GST law allows the government to restrict or block ITC in specific cases. For example, ITC may be blocked if suppliers fail to file GSTR-1 or if invoices do not match the GST portal data.
In addition, the law also blocks ITC on certain goods and services by default, such as motor vehicles used for personal purposes. These restrictions aim to reduce tax evasion. Yet, they also create challenges for compliant taxpayers.
The Scale of ITC Blocking: How Big Is the Risk?
As of October 2021, the GST Network (GSTN) reported that roughly ₹14,000 crore of ITC was blocked across about 66,000 businesses. That number — while headline-grabbing — represents only 0.38% of average ITC utilised by all taxpayers in a year. Still, for an individual business, the impact can be severe. Particularly for small and medium enterprises, a blocked ITC — even if temporary — means lost liquidity.
Moreover, even though Rule 86A envisages blocking only available credit (i.e., ECL balance) and not future credits, some cases of “negative blocking” (i.e., blocking beyond available balance) have arisen and been challenged in courts.
Impact on Business Cash Flow and Compliance:
Blocking of ITC disrupts working capital cycles. Businesses that expected to offset incoming GST against output tax must now pay in cash. This affects liquidity, procurement, production, and delivery timelines. For example, a manufacturing firm may have budgeted for raw material costs net of ITC. When that ITC is blocked, the firm’s cost structure changes — possibly forcing price increases, delaying orders, or borrowing working capital.
Compliance burden also rises. Firms must maintain robust documentation for every input invoice, ensure timely filing, and reconfirm supplier compliance (for example, that supplier has paid GST). Otherwise, even genuine ITC can be disallowed or blocked. In addition, businesses need to track whether blocked credits are lifted — under Rule 86A, blocking is supposed to be temporary and may be reversed once the investigation ends or evidence is cleared.
How Businesses Can Manage ITC Blocking Risks:
Companies can reduce the impact of blocking of ITC with stronger internal controls. For example, they can use automated GST reconciliation software to match invoices faster. In addition, businesses should onboard compliant vendors and monitor their filing history.
Regular GST return reviews also help detect errors early. Moreover, training finance teams on updated GST rules improves accuracy. When ITC is blocked incorrectly, companies should file representations and maintain clear evidence to support claims. With GST audits becoming more rigorous, proactive risk management is essential. Therefore, strong record-keeping, digital compliance tools, and supplier scorecards can protect your ITC availability.
Conclusion:
Blocking of ITC significantly affects cash flow, compliance, and business stability. However, with strong vendor management and timely reconciliation, companies can reduce risks and maintain smooth operations. n today’s GST regime, blocked ITC is the new normal — plan for it or pay heavily for it.
– Ketaki Dandekar (Team Arthology)
Read more about Blocking of ITC here – https://cleartax.in/rule-86a-itc