GST Section 38 Explained: Inward Supplies & Input Tax Credit Rules

Section 38 of the CGST Act, 2017, governs the communication of inward supply details and eligibility for input tax credit (ITC), a cornerstone of the GST framework. Significantly amended by the Finance Acts of 2022 and 2025, this section now emphasizes a more dynamic and compliance-driven approach to ITC, moving away from a purely auto-generated system towards the upcoming Invoice Management System (IMS).

Sub-section (1) ensures electronic access to supply details, while sub-section (2) outlines both eligible and restricted ITC, targeting fraud through conditions based on supplier compliance and transaction authenticity. The Finance Act, 2025, reinforces taxpayer accountability by removing “auto-generated” references and enabling flexible rule-making, supported by tools like GSTR-2A and GSTR-2B for ITC reconciliation. These reforms aim to strengthen transparency, reduce revenue leakage, and ensure that only genuine credits are availed, demanding greater diligence from businesses in maintaining accurate records and supplier verifications.

GST Section 38: Decoding Inward Supplies and Input Tax Credit in the Evolving Landscape

Section 38 of the Central Goods and Services Tax (CGST) Act, 2017, plays a pivotal role in the Goods and Services Tax (GST) regime, specifically governing the communication of details of inward supplies and the crucial aspect of input tax credit (ITC). This section has undergone significant revisions, particularly with the Finance Act, 2022, and further amendments introduced by the Finance Act, 2025. These changes aim to enhance transparency, streamline compliance, and curb fraudulent ITC claims, a persistent challenge in the GST framework.

Section 38(1): Electronic Communication of Supply Details and ITC

The foundational premise of Section 38(1) is to ensure that recipients of supplies receive electronic access to the details of outward supplies furnished by their registered suppliers under sub-section (1) of section 37, along with other prescribed supplies. Crucially, this sub-section mandates the availability of a statement containing the details of input tax credit.

Historically, this statement was referred to as “auto-generated.” However, a significant amendment by the Finance Act, 2025, has omitted the expression “auto-generated” from sub-section (1). This change reflects a broader shift towards the upcoming Invoice Management System (IMS) functionality, where taxpayers will likely be responsible for regenerating and re-computing their ITC statements, moving away from a purely auto-populated system. The details are to be made available in a prescribed form and manner, within a specified time, and subject to certain conditions and restrictions.

Section 38(2): Composition of the ITC Statement and Restrictions

Sub-section (2) of Section 38 delves into the composition of the statement referred to in sub-section (1), outlining both the details of available ITC and, more importantly, the conditions under which such credit cannot be availed, either wholly or partly. The Finance Act, 2025, has further refined this sub-section by omitting the expression “auto-generated” here as well and inserting the word “including” after “by the recipient” in clause (b) to make it more inclusive.

The statement consists of:

(a) Details of inward supplies in respect of which credit of input tax may be available to the recipient: This clause specifies the positive list of inward supplies for which the recipient is eligible to claim ITC. This forms the basis for the taxpayer’s eligible credit.

(b) Details of supplies in respect of which such credit cannot be availed, whether wholly or partly, by the recipient: This crucial clause outlines various scenarios where ITC, despite being reflected in the system, may not be claimed by the recipient. These restrictions are primarily aimed at combating tax evasion and ensuring that ITC is availed only on legitimate transactions. The conditions include:

• (i) Supplies from newly registered persons: ITC cannot be availed if the details of the supplies are furnished by a registered person within such prescribed period of taking registration. This aims to mitigate risks associated with fly-by-night operators.
• (ii) Supplies from tax defaulters: If the supplier has defaulted in payment of tax, and such default has continued for a prescribed period, the recipient may be restricted from availing ITC on supplies from such a defaulter. This incentivizes suppliers to be compliant and places a burden on recipients to exercise due diligence.
• (iii) Supplies from persons with GSTR-1 vs. GSTR-3B mismatch: Where the output tax payable by the supplier, as declared in their statement of outward supplies (GSTR-1) for a prescribed period, exceeds the output tax actually paid by them during the said period by a prescribed limit, the recipient’s ITC may be restricted. This targets suppliers who declare sales but fail to pay the corresponding tax.
• (iv) Supplies from persons availing excess ITC: If the supplier, during a prescribed period, has availed ITC exceeding the credit they are legitimately entitled to (as per clause (a)) by a prescribed limit, the recipient’s ITC on supplies from such a supplier may be restricted. This seeks to disincentivize suppliers from making fraudulent ITC claims.
• (v) Supplies from persons defaulting in tax liability discharge under Section 49(12): This provision restricts ITC if the supplier has defaulted in discharging their tax liability in accordance with the provisions of sub-section (12) of section 49, subject to prescribed conditions and restrictions. Section 49(12) deals with the order of utilization of electronic credit ledger and electronic cash ledger for payment of tax.
• (vi) Supplies from such other class of persons as may be prescribed: This is a broad enabling clause, allowing the government to introduce further restrictions on ITC in the future for specific classes of persons, as deemed necessary to prevent revenue leakage.

(c) Such other details as may be prescribed: A significant insertion by the Finance Act, 2025, this clause provides an enabling provision to include any other relevant details in the ITC statement as may be prescribed by the authorities. This offers flexibility to adapt the statement’s content to evolving compliance needs and to combat emerging fraudulent practices.

Relevant Rules and Forms for Section 38

The implementation of Section 38 is facilitated by specific rules and forms:

Rule 60: Form and manner of ascertaining details of inward supplies: This rule provides the procedural framework for how the details of inward supplies are to be ascertained and made available.

FORM GSTR-2: Historically, this form was intended for details of inward supplies of goods or services. However, its functionality has largely been superseded by auto-drafted statements.

FORM GSTR-2A: This is a dynamic auto-drafted statement that provides input tax credit (ITC) details based on supplier data. It updates continuously as suppliers upload documents.

FORM GSTR-2B: Auto-drafted ITC Statement: Introduced to provide a static and consistent view of ITC for a given tax period. It is generated on the 14th of every month based on the invoices and debit/credit notes filed by suppliers in their GSTR-1, GSTR-5, and GSTR-6 returns. GSTR-2B plays a crucial role in enabling taxpayers to claim accurate ITC by clearly segregating eligible and ineligible credit, and it includes advisories for taxpayer actions.

Impact of Finance Act, 2025, and Future Outlook

The amendments introduced by the Finance Act, 2025, particularly the removal of the term “auto-generated” from Section 38(1) and 38(2), signify a move towards a more proactive role for taxpayers in managing their ITC. This change is directly linked to the development of the Invoice Management System (IMS), which is expected to empower businesses with real-time tracking and matching of invoices, enabling them to detect mismatches early and maintain cleaner compliance records.

The Finance Act, 2025, also aims to strengthen the GST framework by:

• Clarifying ITC on construction: The amendment to Section 17(5) clarifies that ITC on construction of immovable property is restricted only when it is not for “plant and machinery,” providing relief to manufacturing units. This applies retrospectively from July 1, 2017.
• Legal recognition of buyer’s action on credit notes: A seller can reduce GST liability via a credit note only if the buyer reverses the corresponding ITC. This promotes coordination and prevents misuse.
• Track-and-trace mechanism: The introduction of a unique identification marking system for certain goods aims to enhance supply chain transparency and combat tax evasion.

Conclusion

Section 38 of the CGST Act, 2017, in its current and amended form, is a critical provision for the seamless flow of input tax credit, which is the backbone of the GST system. The continuous evolution of this section, notably through the Finance Acts of 2022 and 2025, underscores the government’s commitment to creating a more robust, transparent, and fraud-resistant GST environment.

For businesses, understanding these provisions and staying updated with the associated rules and forms, particularly the transition towards IMS, is paramount for ensuring accurate ITC claims and maintaining GST compliance. While the changes aim to curb fraudulent practices, genuine businesses must be diligent in their operations and reconciliations to avoid any unintended denial of legitimate input tax credit.

FAQs on Section 38 of the CGST Act, 2017

What is Section 38 of the CGST Act, 2017?
Section 38 deals with the communication of inward supply details and conditions for availing input tax credit (ITC) under the GST regime.

What changes were introduced in Section 38 by the Finance Act, 2025?
The 2025 amendment removed the term “auto-generated” from both sub-sections and introduced greater taxpayer responsibility through the upcoming Invoice Management System (IMS).

What is the purpose of Section 38(1)?
Section 38(1) ensures recipients receive electronic statements containing details of outward supplies filed by suppliers, along with eligible ITC information.

What is the significance of omitting “auto-generated” from Section 38?
Removing “auto-generated” indicates a shift towards dynamic ITC statements where taxpayers must actively manage and verify input credits using IMS.

What does Section 38(2) cover?
It outlines the composition of the ITC statement, including both eligible and ineligible ITC, and specifies conditions under which ITC cannot be claimed.

Which supplies are restricted for ITC under Section 38(2)?
ITC may be denied for supplies from newly registered persons, tax defaulters, mismatches in supplier filings, excessive ITC claims by suppliers, and others as prescribed.

What is IMS (Invoice Management System)?
IMS is a proposed system that will enable real-time tracking and matching of invoices, empowering taxpayers to manage ITC more proactively and accurately.

What is GSTR-2A and how does it relate to Section 38?
GSTR-2A is a dynamic, auto-populated statement showing inward supplies based on supplier data, helping recipients verify their ITC claims.

What is GSTR-2B and how is it different from GSTR-2A?
GSTR-2B is a static monthly ITC statement generated on the 14th of each month, offering a consistent snapshot of eligible and ineligible ITC for that period.

Are there any rules supporting Section 38?
Yes, Rule 60 of the CGST Rules prescribes the manner and form in which inward supply details are communicated for ITC purposes.

What is the impact of GSTR-1 and GSTR-3B mismatch on ITC?
If the tax declared in GSTR-1 by a supplier exceeds tax paid in GSTR-3B by a prescribed limit, the recipient’s ITC on such supplies may be restricted.

How does default in tax payment by suppliers affect the recipient’s ITC?
If a supplier defaults in paying tax for a prescribed period, the recipient may be restricted from claiming ITC on those supplies.

What is the role of Section 49(12) in ITC restriction?
If the supplier fails to discharge tax liability as per the order in Section 49(12), the recipient’s ITC on such supplies may be denied.

Can the government prescribe new ITC restrictions in future?
Yes, Section 38(2)(b)(vi) allows the government to specify further classes of suppliers from whom ITC may be restricted, as deemed necessary.

What does clause (c) inserted in 2025 signify?
Clause (c) allows authorities to prescribe additional details to be included in the ITC statement, enabling adaptive compliance control.

How should businesses respond to these changes?
Businesses must enhance their reconciliation processes, verify supplier compliance, and adapt to IMS for accurate and lawful ITC claims.

What happens if a supplier issues a credit note but the buyer does not reverse ITC?
As per 2025 changes, sellers can reduce GST liability via credit notes only if the buyer correspondingly reverses the ITC, ensuring coordinated action.

Are these changes beneficial for genuine taxpayers?
Yes, the reforms aim to prevent ITC fraud while promoting transparency, which benefits compliant businesses by fostering a fair tax environment.

From when are these amendments effective?
Most amendments from the Finance Act, 2025, take effect from a notified date, with some clarificatory provisions applied retrospectively (e.g., July 1, 2017).

How does Section 38 support the broader GST compliance framework?
It strengthens ITC accuracy, curbs fraud, and aligns inward supply communication with transparent, tech-driven systems like IMS and GSTR-2B.