GST Input Tax Credit Changes 2026: New Eligible Expenses Explained

Businesses often pay GST on purchases, services and equipment used for their operations. While Input Tax Credit allows eligible businesses to adjust this tax against their GST liability, certain expenses are restricted under Section 17(5) of the CGST Act.

The 57th GST Council Meeting recommended removing several of these restrictions and expanding refunds for accumulated ITC.

These recommendations form part of the wider GST reforms announced in October 2026. You can read the complete update in our detailed article on the 57th GST Council Meeting 2026: Key Decisions, New Rules & Changes. 

Important: These are the proposed changes and not yet implemented, consult with our expert for updated information. 

What Are the New GST ITC Rules in 2026?

The GST Council recommended amendments to Section 17(5) and Section 54(3) of the CGST Act, 2017, along with related rules, to increase ITC eligibility and simplify refunds.

The key proposed changes are:

The final scope of these changes will depend on the notified amendments. Expenses must still satisfy other applicable ITC conditions.

Changes in Blocked ITC Under Section 17(5)

Section 17(5) of the CGST Act identifies goods and services for which Input Tax Credit is restricted, even when a business incurs the expense.

The GST Council recommended relaxing selected restrictions to allow more businesses to recover GST paid on genuine business expenses.

1. ITC on Health and Life Insurance

The Council recommended removing restrictions on ITC for health and life insurance. This proposal is particularly relevant to employers purchasing group insurance policies for employees.

Example: Suppose a company purchases an eligible group health insurance policy costing ₹2,00,000 plus 18% GST.

• Insurance premium: ₹2,00,000
• GST paid: ₹36,000
• Potential ITC benefit: ₹36,000

Under the proposed amendment, the company may be able to claim eligible credit instead of treating GST as an additional expense.

However, the final legislation will determine which insurance arrangements qualify. Businesses should not assume that every insurance policy or employee-dependent cover automatically becomes eligible.

2. ITC on Outdoor Catering Services

The Council recommended removing specified ITC restrictions on outdoor catering. This may benefit companies that incur catering expenses for business purposes, such as employee meals or workplace catering arrangements.

However, eligibility will continue to depend on the final amendment and other ITC conditions, including whether expenses are for business purposes or personal consumption.

3. ITC on Free Samples

Under the existing provisions of Section 17(5)(h), ITC is generally blocked on goods disposed of as gifts or free samples. The Council recommended removing the restriction relating to free samples.

This could benefit businesses that distribute product samples for marketing, promotions or product trials.

Example: A skincare brand distributes 1,000 free product samples to potential customers.

Under the proposed amendment, the brand may be able to retain eligible ITC on the goods used for sampling, subject to the final provisions.

Businesses should distinguish free samples from gifts and other promotional supplies, as the final rules will determine the exact treatment.

4. ITC on Expired, Destroyed or Written-off Goods

The Council also recommended removing ITC restrictions for goods destroyed or written off following expiry of their shelf life, where such treatment is required by law.

This proposal could benefit sectors such as:

• Pharmaceuticals
• Food and beverages
• Cosmetics and personal care
• Other businesses dealing in products with statutory expiry requirements

For example, a pharmaceutical manufacturer may have to destroy stock after its legally prescribed expiry date.

Under the recommended changes, ITC relief may become available in qualifying cases. The proposal should not be interpreted as allowing ITC on all lost, stolen, damaged or voluntarily written-off goods.

5. ITC on Telecommunication Towers and Pipelines

The Council also recommended relaxing restrictions relating to:

• Telecommunication towers.
• Pipelines laid outside factory premises.

These changes may benefit telecommunications, manufacturing and infrastructure businesses that incur significant GST costs on such assets.

Eligibility will depend on the precise statutory amendments and applicable classification of the assets.

GST Refund on Input Services Under Inverted Duty Structure

Another important recommendation concerns refunds of accumulated ITC under the inverted duty structure. An inverted duty structure generally arises when the GST rate on eligible input goods is higher than the GST rate on outward supplies, resulting in the accumulation of unutilised ITC.

Under the existing Rule 89(5), refund calculations for inverted duty structure do not include ITC on input services or capital goods in Net ITC. The Council recommended including eligible ITC on input services in the refund calculation.

Proposed applicability: ITC availed on or after 1 November 2026.

Example: When Would the New Refund Benefit Apply?

Consider a manufacturer with the following purchases and sales:

Because the GST rate on input goods is higher than the rate on finished goods, an inverted duty structure exists.

Under the proposed change, eligible ITC on professional services may also be included in the Net ITC used for calculating the refund, subject to the final rules.

Does a Higher GST Rate on Services Alone Qualify?

No, for example, if a business purchases raw materials at 5%, sells finished goods at 5% and uses professional services taxed at 18%, it would not qualify for an inverted duty structure refund merely because the service tax rate is higher.

The Ministry of Finance clarified that inverted duty structure eligibility will continue to be determined by comparing the tax rates on input goods and outward supplies.

The proposed change expands the ITC included in the refund calculation for eligible taxpayers; it does not make every business with expensive input services eligible for an inverted duty refund.

GST Refund on Capital Goods Under New Rules

The GST Council also recommended expanding refund eligibility for accumulated ITC on capital goods. Capital goods are business assets, such as machinery and equipment, whose value is capitalised in the books of account and which are used or intended to be used for business operations.

The Council proposed including eligible ITC on capital goods in refund calculations for:

1. Zero-rated supplies made without payment of tax under a bond or Letter of Undertaking (LUT).
2. Eligible refunds arising from an inverted duty structure.

Proposed applicability: Capital goods ITC availed on or after 1 April 2027.

Will the Entire ITC on Machinery Be Refunded Immediately?

No, the Council recommended spreading capital goods ITC over 60 months, with one-sixtieth attributable to each month beginning with the month in which the ITC is available.

Example: Refund Calculation on Capital Goods

Suppose a manufacturing company purchases eligible machinery and avails ITC of ₹6,00,000 on or after 1 April 2027.

In this example, ₹10,000 would be attributable to each month for the relevant refund calculation.

This does not mean that the company will automatically receive a refund of ₹10,000 every month. The actual refund depends on the applicable formula, eligible turnover, unutilised ITC, statutory restrictions and other conditions.

Only admissible ITC can be included, and applicable reversals must be considered.

Difference Between Claiming GST ITC and Getting an ITC Refund

Businesses should understand that ITC eligibility and ITC refund eligibility are not the same.

For example, a business may be eligible to claim ITC on machinery and use it against output tax liability, but this does not automatically mean that it can receive the same amount as a refund.

The new capital goods and input services proposals are specifically important for businesses that qualify for the prescribed refund categories.

How Will GSTR-2B and GSTR-3B ITC Reporting Change?

The Council also recommended improvements to GST return reconciliation and ITC reporting. The proposed changes include:

• Better alignment of ITC reported in GSTR-3B with ITC available in GSTR-2B.
• A mechanism for correcting ITC mismatches.
• An Electronic Credit Reversal and Reclaim Statement for tracking reversed and reclaimed ITC.
• Improvements to the Invoice Management System (IMS), including the treatment of pending documents.
• A separate electronic statement to track GST paid under the Reverse Charge Mechanism (RCM) and corresponding ITC.

The Council recommended implementing the revised return-based correction mechanism from the April 2027 GST return, subject to consultation and final approval.

The purpose is to improve reporting accuracy and reduce unnecessary mismatch-related notices.

What Should Businesses Do Before Claiming ITC Under the New Rules?

Businesses should review their current ITC records and prepare for the proposed changes without claiming any new benefit prematurely.

• Review blocked ITC: Identify expenses relating to insurance, catering, free samples and other categories covered by the recommendations.
• Verify documents: Maintain valid tax invoices, expense records and supporting evidence.
• Check eligibility: Confirm that the expense satisfies the applicable business-use and ITC conditions.
• Monitor ITC reversals: Track reversals and reclaims in accordance with GST requirements.
• Identify refund opportunities: Review whether the business qualifies for zero-rated supply or inverted duty structure refunds.
• Track implementation: Apply the revised rules only when the relevant amendments and notifications become effective.

Businesses should also retain appropriate evidence for destroyed or expired goods and maintain clear records of machinery purchases and their corresponding ITC.

Need help reviewing ITC eligibility, reconciling GSTR-2B with GSTR-3B or identifying eligible GST refund claims? Startup Movers provides GST and indirect tax services to help businesses manage GST compliance and credit-related issues.

When Will the GST ITC Changes 2026 Come Into Effect?

The 57th GST Council recommendations contain different proposed timelines.

The proposed applicability dates are not substitutes for the relevant legal amendments or notifications.

Businesses must verify that the relevant provisions have legally taken effect before claiming newly permitted ITC or refunds.

Conclusion

The GST Input Tax Credit changes recommended in October 2026 could allow businesses to recover GST on more expenses and improve refunds of accumulated ITC on input services and capital goods.

However, these benefits remain subject to the final legal provisions. Businesses should review their existing credits, maintain proper records and monitor implementation to claim eligible ITC without compliance risks. Connect with Startup Movers and our expert will guide you in ITC filing.