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In the hotel and restaurant business, when we expand operations by purchasing additional land and undertaking construction for our own property, GST is paid to the vendors on such expenses. However, Input Tax Credit (ITC cannot be claimed) on these expenses as per GST regulations.
Accordingly, a reverse entry needs to be passed to neutralize the ITC impact. The same scenario has been illustrated in the attached screenshot.
At present, these adjustments have to be managed manually in Tally, as there is no in-built provision in the software to handle such non-ITC-eligible purchases automatically.
As per GST rules, ITC can be claimed only on those goods or services that are directly used for providing taxable outward supplies.
For example:
ITC is eligible on services that are directly related to hotel or restaurant operations.
ITC is not eligible on certain capital goods or blocked credits, such as the purchase of a car for factory or business use, construction of immovable property for own use, etc.
Currently, the software does not provide a dedicated mechanism to distinguish and manage such non-ITC-eligible purchases at the time of entry, which results in these transactions being handled manually in the accounting system.
GST Section 17(5) defines "blocked credits," restricting Input Tax Credit (ITC) on specific goods and services like passenger vehicles (under 13 seats), food/beverages, club memberships, and construction of immovable property, even if used for business, to prevent misuse, though exceptions exist for certain business activities like re-sale or providing the same services. Understanding these disallowed expenses is crucial for avoiding penalties, as it overrides general ITC rules and applies to personal or non-business-related expenses.
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Admin In Charge posted 5 days ago Admin
Thank you for sharing such a detailed explanation and real-world use case.
You are absolutely right that, as per GST Section 17(5), certain expenses fall under blocked credits where Input Tax Credit (ITC) cannot be claimed, even if they are incurred for business purposes. For hospitality businesses, scenarios like construction of own property or specific capital expenditures are quite common, and managing the reversal impact manually can indeed be time-consuming and prone to error.
At present, the system does not have a dedicated provision to automatically classify and handle non-ITC-eligible purchases at the time of entry. As you correctly mentioned, many users currently manage these adjustments through manual accounting entries in external systems.
We truly appreciate you highlighting this gap along with the regulatory context. The suggestion to allow tagging of purchases as ITC eligible vs. blocked credit, along with proper reporting visibility, would certainly help improve compliance and reduce manual effort for many businesses.
While we cannot commit to a timeline at this stage, community inputs like yours play an important role in shaping future improvements. Please keep sharing such practical use cases they help us make the system stronger and more aligned with real operational needs.
Thank you again for your valuable contribution to the community.
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