Input Tax Credit
What is Input Tax Credit?
Input Tax Credit (ITC) is a provision under the Goods and Services Tax (GST) system that allows businesses to reduce the GST they pay on sales by claiming credit for the GST they have already paid on business purchases.
Why is Input Tax Credit important?
ITC allows businesses to offset the GST paid on eligible purchases against the GST collected on sales, ensuring tax is levied only on the value added at each stage of the supply chain. This prevents the cascading effect of taxes, where tax is charged on previously taxed amounts. By reducing net GST liability, ITC improves cash flow and lowers the overall cost of doing business.
It also encourages businesses to maintain proper invoices, accurate records, and timely GST compliance, since ITC can be claimed only when prescribed conditions are fulfilled. As a result, ITC promotes transparency, strengthens compliance across the supply chain, and contributes to a more efficient and competitive tax system.
How does Input Tax Credit work?
1. A registered business makes a taxable purchase
The business buys goods or services for use in its operations and pays GST on the purchase. This GST paid is the input tax.
2. Certain conditions must be met before the credit can be claimed
Under Section 16 of the CGST Act, the business can claim ITC only if it possesses a valid tax invoice, has received the goods or services, and the corresponding input tax credit is reflected in its GSTR-2B statement based on the supplier's GST return filings. The business must also have filed its GSTR-3B return.
3. The credit is set off against output tax
Once eligible, the ITC is used to reduce the GST payable on the business's own sales and only the balance, if any, is paid in cash.
4. Some purchases are excluded, and claims have a deadline
Section 17(5) of the CGST Act permanently blocks credit on certain categories, such as personal motor vehicles and employee food and beverages, even when other conditions are met.
Example
A furniture manufacturer buys raw materials worth ₹5,00,000 and pays GST of ₹90,000 at 18%. In the same period, it sells finished furniture worth ₹8,00,000 and collects GST of ₹1,44,000. Since the ₹90,000 paid on raw materials qualifies for ITC, the manufacturer sets it off against the ₹1,44,000 collected and pays only the balance of ₹54,000 in cash, instead of the full amount.
Key points to remember
- ITC is the GST already paid on business purchases, which can be set off against the GST collected on sales.
- It prevents the cascading of tax and ensures GST is charged only on the value a business adds.
- Claiming ITC requires a valid invoice, receipt of goods or services and the credit reflecting in GSTR-2B.
- Certain purchases, such as personal vehicles and employee catering, are permanently blocked from ITC under Section 17(5).
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ITC for a financial year must be claimed by 30th November of the following financial year or the date of filing the annual return for that year, whichever is earlier. After this, the credit lapses permanently.
ITC is credit a business can claim once Section 16 conditions are met. Blocked credit refers to categories under Section 17(5) that can never be claimed, regardless of other conditions.
No. A valid tax invoice or debit note is required and the credit must also appear in the business's GSTR-2B.
Yes, generally in full in the month of purchase, subject to reversal if the goods are later used for exempt supplies or personal purposes.
If the supplier does not comply with the prescribed GST return requirements, the corresponding ITC may not be available to the recipient until the applicable conditions under GST law are met.
