Manufacturing accounting is fundamentally different from trading or service accounting. When raw materials undergo CNC machining, pressing, surface coating, subcontracted job-work, assembly, and inspection, the chain of custody for GST Input Tax Credit (ITC) gets messy. In Pune's manufacturing clusters—spanning Chakan, Bhosari, Talegaon, and Ranjangaon—we regularly review books where companies either forfeit millions in legitimate credits or claim blocked credits that result in heavy interest under Section 50. Below are the 6 specific GST input credit mistakes we uncover most often in manufacturing units, and how our firm helps plant controllers rectify them.
1. Tooling, Dies, and Moulds: Treatment as Inputs vs Capital Goods
Automotive and engineering vendors frequently develop dedicated tooling, jigs, and moulds for Tier-1 and OEM clients. Two major errors occur here: either capitalizing the mould while failing to spread ITC under the 60-month useful life framework (Rule 43), or expensing tooling development as an operational consumable without matching the billing mechanics of the OEM contract. If the OEM provides the mould on FOC (Free of Cost) basis, issues around amortization under Section 15(2)(b) and credit entitlement become a primary target during departmental audits.
2. Missing the 1-Year / 3-Year Job Work Goods Return Deadline
Under Section 143 of the CGST Act, inputs sent to a job-worker must be brought back or supplied from the job-worker's premises within 1 year. For capital goods, this window is 3 years. If the goods are not returned within this period, the law treats it as a 'deemed supply' by the principal on the very day the goods were originally sent out.
✓The Deemed Supply Trap: The manufacturer must pay GST on the original value plus 18% interest running all the way back to the initial delivery challan date.
✓ITC-04 Filing Gaps: Half-yearly Form GST ITC-04 returns tracking inputs and capital goods at subcontracting units are frequently neglected.
✓Subcontractor WIP Tracking: Job workers often retain offcuts or intermediate components without formal scrap return challans.
3. Blocked Credits Under Section 17(5) on Plant Infrastructure
Section 17(5)(c) and (d) block input tax credit on works contracts and construction goods when used for construction of 'immovable property'—other than plant and machinery. In our experience, manufacturing accounts teams often fail to make the legal distinction between civil works and plant foundations:
✓Eligible: Heavy machinery foundations, specialized overhead crane rails, industrial ducting, and electrical transformer installations directly affixed to machinery.
✓Ineligible / Blocked: General factory building sheds, administrative office interiors, boundary walls, and canteen civil structures.
✓The Risk: Booking single composite contractor bills under 'Factory Improvement' without itemizing plant foundations invites complete disallowance during scrutiny.
4. Scrap, Evaporation, and Normal vs Abnormal Process Loss
During casting, forging, and sheet metal fabrication, scrap generation is inevitable. Under Section 17(5)(h), ITC must be reversed on goods lost, stolen, destroyed, or written off. Assessing authorities frequently demand ITC reversals on input materials corresponding to the volume of scrap generated. Manufacturers must establish documented 'Input-Output Norms' (Standard Costing Sheets) demonstrating that metal scrap is a normal process byproduct, not destroyed or written-off material, and that GST has been duly paid on outward scrap sales.
5. Neglecting Rule 42 & 43 Apportionment on Common Credits
Many engineering plants manufacture dutiable components while also executing job-work for SEZ units, selling non-taxable scrap, or generating exempt dividend/interest income. In such environments, common inputs (factory electricity, security services, testing laboratories) cannot be claimed 100%. Rule 42 (for inputs/services) and Rule 43 (for capital assets) mandate monthly and annual proportional reversals. Failure to perform annual recomputations before November 30 creates automatic interest liability.
The Monthly 5-Point ITC Protocol for Plant Controllers
1. Reconcile GSTR-2B invoice-by-invoice before approving supplier payments. 2. Audit delivery challans against Section 143 job-work aging sheets every 90 days. 3. Itemize plant foundations separately from civil works in CAPEX purchase orders. 4. Maintain standard BOM scrap tolerance certifications. 5. Run annual Rule 42/43 true-up calculations.
This article is intended for general informational purposes and should not be considered as professional tax, legal, or financial advice.
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