Expense-Side GST Review: RCM, Blocked Credit and ISD

Expense explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Every expense ledger raises the same three questions — is the credit eligible, is tax payable on it under reverse charge, and does the credit belong to this registration at all? The third question changed in April 2025.

"From financial year 2025-26 onwards, the distribution of common input tax credit on input services through the Input Service Distributor (ISD) mechanism has become mandatory, pursuant to the substitution of Section 20 of the CGST Act by the Finance Act, 2024 (notified w.e.f. 01.04.2025)… cross-charge can no longer be used as a substitute for distributing common input service credits across GSTINs."

The five conditions, and the one that is checked last

Before any expense-head question, the Handbook restates the entry test — possession of "the tax invoice or debit note, or any other document"; receipt of the goods or services; "the tax charged in respect of supply has been paid to the Government by the vendor"; the entity "should have furnished the returns under section 39"; and "Such ITC must appear in their GSTR-2B."

"Claim of ITC without fulfilling the above conditions can result in disputes and in turn lead to penalties and interest."

Blocked credits on the expense side

Food, beverages, outdoor catering, health services, life and health insurance. "GST on supply of food and beverages is not allowed as input tax credit as the same is for personal consumption and not in furtherance of business." The example: "ABC Ltd. arranges refreshments/ tea/ coffee as part of staff welfare to its employees. It will not be able to claim ITC."

With the same-category exception: credit is available "when inward supply of goods or services… of a particular category is used by a registered person for making an outward taxable supply of the same category… or as an element of a taxable composite or mixed supply."

Club, health and fitness centre membership, and employee travel benefits. "Mr. A, a Managing Director has taken membership of a club and the company pays the membership fees, ITC will not be available to the company or Mr. A." And "A Ltd. offers a travel package to its employees for personal holidays — ITC… will not be allowed."

Personal use of assets, goods or services — blocked.

Maintenance of passenger vehicles — blocked "except in case of vehicles with a seating capacity of more than 13 persons (including driver)" or the other statutory exclusions.

And the correction path if wrongly claimed: "If any ineligible credits are identified as availed in FORM GSTR-3B, the auditor must ensure they are properly reversed along with applicable interest under Section 50, and the tax cost is correctly expensed off to the Statement of Profit and Loss." Fixed asset blocked credit →

The reverse charge scan

Under section 9(3) on notified goods and services "irrespective of whether the supplier is registered or not", and under section 9(4) for "certain categories of supplies received by specified registered persons from unregistered suppliers."

"The above list is illustrative and not exhaustive" — reference is to Notification No. 4/2017-Central Tax (Rate) for goods and Notification No. 13/2017-Central Tax (Rate) for services under section 9(3), with section 9(4) entries under separate notifications.

Two entries deserve a note at finalisation. The security services entry turns on the supplier not being a body corporate — so the vendor master, not the invoice, decides. And the last entry, renting from an unregistered person, catches ordinary commercial premises taken from an individual landlord, which is frequently missed because there is no GST on the rent bill to prompt it.

Import of services is the other limb: supplier outside India, recipient in India, place of supply in India. The Handbook's example — a US architecture firm designing a Bangalore office for ₹10,00,000 — attracts RCM in the hands of the Indian recipient.

And the audit step is a sweep, not a sample: "scrutinise the statement of profit and loss and review all expense heads for services which may be liable to GST under reverse charge", then reconcile RCM and import-of-service figures in GSTR-3B against the financial statements.

Employees: recoveries, perquisites and gifts

Recoveries are taxable. "Where recoveries are made from employees for the provision of such facilities, the same are liable to GST, as the recovery of consideration from the employee gives rise to a taxable supply from the employer to the employee" — subsidised canteen, sponsorship or membership fees, medi-claim, uniforms, shoes, equipment, subsidised cab, guest house. Reference is to Circular No. 172/04/2022-GST dated 06.07.2022.

Unless the facility is statutory. "canteen services provided by a factory to its workers, which are mandated under the Factories Act, 1948, will not be subject to GST even if partial recovery is made."

Perquisites under the employment contract are outside GST — "rent-free accommodation, company car, etc. — are treated as a part of the employee-employer relationship and are generally not subject to GST, irrespective of their value."

Gifts have a cliff, not a slab. "gifts made by an employer to an employee not exceeding ₹50,000 in value per employee per financial year are not treated as a supply… However, where the value of gifts exceeds ₹50,000 per employee per financial year, the entire value (not merely the excess) becomes subject to GST", with credit reversal under section 17(5)(h).

And a deduction is not a supply: a deduction from salary as a penalty for deliberate damage to machinery is not taxable, "as the employer-employee relationship subsists."

ISD: the change that reopens last year's credit

"Prior to this amendment, the ISD mechanism was optional and many multi-GSTIN organisations were distributing common input service credits informally through a cross-charge arrangement."

Now: "All organisations with multiple GST registrations are… required to obtain ISD registration and distribute common ITC on input services only through the ISD mechanism in accordance with Rule 39."

And the exposure: "Where common ITC is not distributed through ISD and is instead availed entirely in one GSTIN, such credit is legally susceptible to disallowance — either in full or at least to the extent of the undistributed portion pertaining to other GSTINs. This would result in a tax liability along with interest and could have a material impact on the true and fair view."

"Either in full" is not rhetorical. The credit was availed by a registration that was not entitled to it, and the fallback position — disallowance of the other GSTINs' share — is the taxpayer's best case, not the default.

The auditor's checks: ISD registration obtained; common input service credit identified and distributed under section 20 read with rule 39; cross-charge discontinued from FY 2025-26; and the rule 39 formula and timelines complied with.

Key takeaways

• Credit requires five conditions, ending with the amount appearing in GSTR-2B.
• Staff refreshments, club memberships, employee holiday packages and personal-use items are blocked; the exception is outward supply of the same category.
• Wrongly availed credit is reversed with interest under section 50 and expensed to the profit and loss account.
• The RCM scan covers section 9(3) notified supplies, section 9(4) unregistered-supplier supplies and import of services.
• Security services turn on the supplier not being a body corporate; renting from an unregistered person is frequently missed.
• Review all expense heads, then reconcile RCM and imports in GSTR-3B to the accounts.
• Employee recoveries are taxable, except where the facility is statutorily mandated.
• Contractual perquisites are outside GST at any value; gifts above ₹50,000 per employee per year are taxed on the entire value.
• ISD is mandatory from FY 2025-26 — section 20 substituted by the Finance Act, 2024, notified 01.04.2025.
• Cross-charge is no longer a substitute, and undistributed common credit is at risk of full disallowance.

Read next

• CARO 2020, Tax Audit and the Year-End GST Questions
• GST on Trade Receivables and Payables at the Year End
• Review of Fixed Assets under GST During Finalisation

Disclaimer: Positions stated as on 5 September 2026, based on sections 9, 16, 17(5), 20 and 50 of the CGST Act, 2017, Schedules I and III thereto, rule 39 of the CGST Rules, 2017, Notifications No. 4/2017 and 13/2017-Central Tax (Rate), Circular No. 172/04/2022-GST and the Finance Act, 2024, as reproduced in the ICAI Handbook on Finalisation of Accounts with GST Perspective (Second Edition, June 2026).