Accounting Treatment for Unutilized Ineligible ITC Availed in Prior Periods

According to Section 17(5) of the CGST Act, 2017, Input Tax Credit (ITC) is not available for motor vehicles used for official purposes, with some exceptions such as further supply of such motor vehicles, transportation of passengers, and providing training on driving such vehicles. If ITC is blocked on the purchase of an asset, it is added to the asset’s cost, and depreciation is calculated accordingly.

However, if a company mistakenly avails ITC in earlier years and discovers the error in a subsequent year, it must adjust the prior period balances to rectify the error and reflect its impact on the current period’s financial statements.

In this discussion, we explore the accounting treatment for cases where a company has mistakenly availed ITC, which was later identified by auditors as ineligible, necessitating a reversal and adjustment of recorded profits.

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