Section 38 and 16 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.
Everyone knows GSTR-2B decides what credit you can take. Fewer people know why, and the statutory chain matters when a credit you expected does not appear.
Section 16(2)(ba), inserted by the Finance Act, 2022 with effect from 01.10.2022, adds a condition: "the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted." Section 38, substituted from the same date, requires an auto-generated statement containing details of inward supplies, split into credit that may be availed and credit that may not be availed — the latter on grounds specified in sub-section (2)(b). GSTR-2B is that statement.
The chain
s.16(2)(aa) — the supplier must have furnished the invoice details in the statement of outward supplies, and those details must have been communicated to the recipient. This is the "it must appear in GSTR-2B" condition.
s.16(2)(ba) — and the credit so communicated must not have been restricted.
Two separate conditions. The first is about appearance; the second is about flagging. An invoice can appear and still be restricted.
What section 38 provides
s.38(1) — the details of outward supplies furnished by the supplier, and of such other supplies as may be prescribed, shall be made available electronically to the recipients in an auto-generated statement.
s.38(2) — the auto-generated statement shall consist of:
(a) details of inward supplies in respect of which credit may be available, and
(b) details of supplies in respect of which such credit cannot be availed, whether wholly or partly, by the recipient, on account of the details of the said supplies being furnished by a supplier —
- (i) within such period of taking registration as may be prescribed;
- (ii) who has defaulted in payment of tax and where such default has continued for such period as may be prescribed;
- (iii) the output tax payable by whom, in accordance with the statement of outward supplies furnished by him, exceeds the output tax paid by him in the return by such limit as may be prescribed;
- (iv) who has, during such period as may be prescribed, availed credit exceeding that available in accordance with clause (a) by such limit as may be prescribed;
- (v) who has defaulted in discharging his tax liability in accordance with s.49(12) subject to such conditions and restrictions as may be prescribed; or
- (vi) such other class of persons as may be prescribed.
Reading the six grounds
They are all about the supplier's behaviour, and they are risk indicators rather than substantive disqualifications:
(i) Newly registered suppliers. A registration only weeks old that starts issuing high-value invoices is the classic pattern in circular trading.
(ii) Persistent default in payment of tax. A supplier reporting supplies but not paying.
(iii) GSTR-1 exceeding GSTR-3B beyond a limit. The same mismatch that Rule 88C addresses through DRC-01B.
(iv) Availing credit in excess of what is available. A supplier taking more credit than its own GSTR-2B supports — addressed through Rule 88D and DRC-01C.
(v) Default in discharging liability under s.49(12), the provision empowering restrictions on utilisation of the credit ledger.
(vi) Any other prescribed class.
What to do when credit is restricted
It is not a permanent denial. The restriction reflects a supplier-side condition that can be cured. Where the supplier files, pays, or corrects the mismatch, the credit becomes available.
Do not take it and argue later. Section 16(2)(ba) is a condition of entitlement. Taking restricted credit is wrongly availed credit, with the interest and penalty consequences that follow.
Identify the ground. GSTR-2B flags the restriction; the underlying reason usually maps to one of the six. Approaching the supplier with the specific issue is more effective than a general request.
Track it for reclaim. Once the restriction lifts, the credit becomes available subject to s.16(4) — so a long-running restriction can run into the 30 November deadline.
Commercial protection. The same contractual devices that address Rule 37A work here: warranties on filing and payment, withholding of the tax component, indemnities. Rule 37A: supplier non-filing →
The related enforcement rules
Rule 88C — where GSTR-1 liability exceeds GSTR-3B liability by the prescribed amount and percentage, the supplier is intimated in Part A of DRC-01B and must, within seven days, either pay the difference with interest through DRC-03 or explain it on the portal.
Rule 88D — where the credit availed in GSTR-3B exceeds the credit available in GSTR-2B by the prescribed limit, the taxpayer is intimated in Part A of DRC-01C and must, within seven days, pay the difference or explain it.
Both are pre-notice, system-driven interventions. Failure to respond can lead to Rule 59(6) blocking the ability to file the next GSTR-1.
Key takeaways
- s.16(2)(ba) conditions credit on the details not having been restricted under s.38.
- s.38 requires an auto-generated statement split into available and not available credit — GSTR-2B.
- The six grounds in s.38(2)(b) all relate to supplier-side risk indicators.
- A restriction is curable, not permanent, but the credit must not be taken while it subsists.
- The s.16(4) deadline continues to run while a restriction is in place.
- Rules 88C and 88D are the related system-driven interventions, using DRC-01B and DRC-01C.
Read next
- Four Conditions for Claiming ITC Under Section 16(2)
- Rule 37A: When Your Supplier Files GSTR-1 but Not GSTR-3B
- ITC Matching: How GSTR-2B Auto-Populated Credit Works
- GSTR-2A vs GSTR-2B: Which to Use for ITC
Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).