What is Input Tax Credit?
Input Tax Credit (ITC) is the backbone of the GST system, allowing businesses to claim credit for tax paid on inputs (purchases) against tax payable on outputs (sales). This prevents the cascading effect of taxes, ensuring that tax is paid only on the value added at each stage.
How ITC Works - Simple Example
ITC Eligibility Conditions
To claim ITC under Section 16 of the CGST Act, all the following conditions must be satisfied:
1. Possession of Tax Invoice
Must have a valid tax invoice or debit note issued by a registered supplier
2. Receipt of Goods/Services
Goods/services must have been actually received
3. Supplier Filed Return
Supplier must have filed GSTR-1 and tax must be paid to government
4. Timely Filing
ITC must be claimed in GSTR-3B within prescribed time limit
Time Limit for Claiming ITC
ITC must be claimed by the earlier of:
- • Due date of filing return for September of next financial year (October 20)
- • Date of filing annual return (GSTR-9) for that financial year
ITC not claimed within this period will be lost forever!
Ineligible ITC - Blocked Credits
Section 17(5) of the CGST Act lists specific goods and services where ITC is blocked:
| Category | Examples | Exceptions (ITC Allowed) |
|---|---|---|
| Motor Vehicles | Cars, bikes, trucks | Used for transport of goods/passengers, driving school, rental |
| Food & Beverages | Restaurant bills, catering | When obligatory for employees (as per law), used for business |
| Construction Services | Building renovation, repairs | Plant & machinery (capital goods) |
| Membership & Club | Gym, club fees | None - completely blocked |
| Beauty & Health Services | Spa, salon services | None - completely blocked |
| Goods Lost/Stolen/Destroyed | Theft, fire damage | Normal business wastage (like manufacturing loss) |
GSTR-2A/2B Reconciliation
Reconciliation between your purchase register and GST portal data is critical to ensure you don't claim excess ITC or miss eligible credits.
GSTR-2A (Dynamic)
- • Auto-populated from supplier GSTR-1
- • Changes as suppliers file/amend returns
- • Shows all invoices uploaded by suppliers
- • Not editable by recipient
GSTR-2B (Static - Recommended)
- • Generated monthly on 14th
- • Static statement - doesn't change
- • Segregated into ITC eligible/ineligible
- • Section-wise summary available
- • Use this for claiming ITC
Common Reconciliation Differences
| Difference | Reason | Action |
|---|---|---|
| Invoice in 2B but not in books | Supplier filed but goods not received | Claim only after receipt |
| Invoice in books but not in 2B | Supplier hasn't filed GSTR-1 | Follow up with supplier |
| Amount mismatch | Error in supplier invoice or your entry | Correct and communicate |
| Duplicate invoice | Supplier filed twice or amended | Claim only once |
ITC Reversal Rules
ITC claimed must be reversed in specific scenarios. Failure to reverse attracts interest and penalties.
1. Non-Payment to Supplier (Rule 37)
If payment to supplier is not made within 180 days from invoice date, ITC must be reversed with 18% interest.
2. Exempt/Non-Business Use (Rule 42)
ITC on inputs used for exempt supplies or non-business purposes must be reversed proportionally.
3. Capital Goods for Exempt Supplies (Rule 43)
ITC on capital goods used for exempt supplies must be reversed over 5 years (1/60th per month).
4. Cancellation of Registration
ITC on inputs in stock/semi-finished/finished goods must be reversed on GST registration cancellation.