Input Tax Credit (ITC) is the tax paid on purchases made by a business, which can be availed as a deduction at the time of paying output tax liability. This mechanism is designed to avoid the cascading effect of taxes (tax on tax). It is not merely a tax compliance checkbox; rather, it helps reduce the output tax liability of the taxpayer.
For example, (for illustrative purposes only, not the actual GST rate)
Business’s purchases and sales are as follows:
- Purchases: Rs. 10,000 (cost: Rs. 9,000 and tax: Rs. 1,000)
- Sales: Rs. 15,000 (cost: Rs. 13,000 and tax: Rs. 2,000)
- Outward tax liability: Rs. 2,000.
Since tax amounting to Rs. 1,000 has already been paid on purchases on our purchases, which will be reflected in our GSTR-2B, ITC for such amount can be claimed in GSTR-3B. Therefore, our output tax liability will reduce to Rs. 1,000 (Rs. 2000-Rs. 1000 {ITC}), and we will only be required to pay this net amount of Rs. 1,000 to the government.
Levy Of GST And ITC Claim
GST law levies CGST, SGST/UTGST, and IGST on the supply of goods or services or both. It does not mandate a direct correlation between inputs/ input services and the final product/services. Any eligible ITC can be used to pay tax on any output supply. Furthermore, ITC is availed and utilised in the following manner:
First, IGST ITC is fully utilised to set off output tax liability. It is used to first set off the liability of IGST, and thereafter utilised to set off the CGST or SGST/UTGST liability in any proportion or order.
Then, CGST ITC is utilised to set off the CGST liability, and then the IGST liability. It cannot be used to set off the liability of SGST/ UTGST.
Similarly, SGST/ UTGST ITC is utilised to set off SGST/ UTGST liability and then IGST liability. It cannot be used to set off CGST liability.
In short,
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Eligibility & Conditions For Taking ITC
Any registered person can avail ITC of tax paid (i.e., ITC) on inward supply of goods or services or both, when the inputs are used or intended to be used in the course or furtherance of business.ITC claimed is credited to the Electronic Credit Ledger, which can be accessed on the GST Portal.
But there are some prerequisites/ requirements that the taxpayer needs to fulfil to avail ITC as per the GST Law. He shall make sure that:
- He has a tax invoice or any other specified tax-paying document
- He has received goods or services(including bill-to -ship-to supplies)
- Tax is actually paid by the supplier to the government for such invoices
- He has furnished a return in GSTR-3B
- If inputs are received in lots or instalments, credit can be availed only when the last lot of inputs is received
- Payment is made within 180 days from the date of invoice (as mandated under Rule 37); otherwise, ITC will be reversed)
- He is not making supplies under the composition scheme.
- ITC appearing in GSTR-2B should align with the purchase register.
- Such ITC is claimed only for taxable supplies and purchases made.
- No ITC on Capital goods can be availed if depreciation is claimed on the tax component under the Income Tax Act,1961
- ITC should generally be restricted to invoices appearing in GSTR-2B as per system-based controls and departmental practice (ITC claimed in GSTR-3B is not beyond the ITC available in GSTR-2B)
- ITC is claimed within the time limit, i.e., claimed on or before 30th November of the next financial year or date of relevant annual return filing, whichever is earlier.
Notes:
180-day limit: Rule 37 mandates that payment should be made within 180 days from the date of invoice, or else the ITC claimed on such invoices will be reversed (added to the output tax liability of the taxpayer). Once payment is made. ITC can be reclaimed on such invoices. If payment is made in part (not made in full), only a proportionate credit will be available.
Availability And Unavailability
ITC can be availed for goods or services or both, used or intended to be used in the course or furtherance of business or in furtherance of business. However, ITC is not available in the following cases:
- When inputs are exclusively used for personal use,
- cannot be availed for exempt supplies
- Blocked credits: supplies for which ITC is not available under Section 17(5) of the CGST Act, 2017
Blocked Credits As Per Section 17(5)
ITC is not available in the following cases:
- Motor vehicles & conveyance: motor vehicles for transportation of persons having a seating capacity of not more than 13 persons (including the driver), vessels, and aircraft
- Insurance & Repairs: services for general insurance, repair, and maintenance related to blocked motor vehicles, vessels, or aircraft.
- Food & Personal services: outdoor catering, food and beverages, beauty treatment, health services, cosmetic/plastic surgery, leasing/ renting of motor vehicles.
- Membership & Travel: membership in clubs, health and fitness centres, travel benefits for employees (e.g., LTA)
- Construction Services: works contract services for the construction of immovable property (other than plant and machinery).
- Goods/Services for Own Construction: goods or services acquired for constructing immovable property on one’s own account, even if used for business.
- Goods or services used for personal consumption
- ITC not available for taxes paid under section 74/129/130: fraud, confiscation, detention, seizure, or for release of goods in transit
- Goods destroyed, stolen, lost, gifted, or distributed as free samples.
- If the supplier is registered under the composite scheme, ITC cannot be claimed. As a composite dealer does not collect tax on supplies.
- Inward supplies received by a non-resident taxable person.
- ITC on CSR expenses is generally disallowed based on CBIC circulars and AAR rulings, though the issue remains subject to judicial interpretation
Some Exceptions (When ITC Is Allowed)
- Further Supply: if a motor vehicle, vessel, or aircraft is used to make a taxable outward supply of the same category.
- ITC on blocked items (like food, catering, rent-a-cab) is allowed if it is used by a registered person for making an outward taxable supply or if an employer must provide them to employees under any law.
- Plant and Machinery: Construction of “plant and machinery” (defined as apparatus/equipment used for business, excluding land/building) is eligible.
- ITC is allowed on goods imported by a non-resident taxable person
- Composite Supply: If blocked services form part of a composite or mixed supply, the exception applies only if the inward supply is used to make an outward taxable supply of the same category. The composite supply concept does not override blocked credit.
Miscellaneous Special Cases
ITC for capital goods & more: Section 16(3)
Normally, ITC is available. But, it is not available in the following cases:
- Capital goods used exclusively for making exempted goods
- Capital goods used exclusively for non-business (personal) purposes
- If depreciation were claimed on the tax component of such capital goods
ITC on Job Work: Section 19
When a principal sends goods for further processing to a job worker, ITC is allowed when goods are:
- Sent from the principal place of business, or
- Directly sent from the place of supply of such goods (supplier’s place)
But ITC is to be reversed/ not allowed when such goods are not returned by the job worker within 1 year (3 years in the case of capital goods).
ITC Provided By ISD (Input Service Distributor): Section 20
ISD may be the head office, branch office, or registered office of a registered person under GST.
ISD distributes input service ITC to all recipients (branches) under different heads like CGST, SGST/UTGST, IGST, or cess
ITC For Banks & Financial Institution: Section 17(4)
They can claim ITC but must follow a unique calculation method i.e.
- 50% ITC claims on inputs, capital goods, and input services for banks and financial institutions.
- This is due to the mixed nature of taxable and exempt supplies, popular among banks, as they also handle exempt financial services
- This option, once exercised, must be followed regularly.
- It does not apply to inter-branch transactions
ITC On Transfer Of Business: Section 18
In case of sale, amalgamation, mergers, demerger, lease, transfer, or change in ownership of the business. The unutilized ITC in the E-Cr. Ledger of the registered person can be transferred to the new entity.
ITC In Case Of RCM
ITC can be availed by a registered person (regular taxpayer under GST) who is liable to pay tax under the Reverse Charge Mechanism (RCM), provided that:
- Such inputs are used for business purposes,
- Tax is paid in cash through the electronic cash ledger
- Self-invoice is generated by the recipient as per Section 31(3)(f)
RCM paid on import of services by taxpayers is also eligible for an ITC claim.
However, ITC is not available to dealers under the composition scheme for RCM and goods or services used for personal use.
Conclusion
ITC is a crucial mechanism under GST, enabling businesses to claim credit for taxes paid on inputs and thereby reducing the cascading effect of taxation. While it promotes compliance and improves tax efficiency, its practical application is far from simple. Although ITC may appear straightforward on the surface, in practice, it involves strict adherence to statutory provisions, rules, and procedural requirements to avoid reversals and disputes.
In essence, ITC is not merely a benefit but also a responsibility requiring accuracy, consistency, and disciplined compliance. Proper understanding and efficient management of ITC can significantly optimise tax liability and improve cash flow, making it a vital component of every business’s GST strategy.
Refrences
https://cleartax.in/s/gst-input-tax-credit
https://paytm.com/blog/gst/the-complete-guide-to-reversing-input-tax-credit-under-gst-rules
https://cleartax.in/s/rule-37-of-cgst-sgst-rules-itc-reversal-180-days
Author Details: Simon Jain