Input Tax Credit (ITC) Under GST: Conditions, Rules & Example

All businesses pay tax on their purchases and collect tax on their sales. However, certain adjustments can be made to prevent the "cascading effect of taxes" and reduce the overall tax burden. This is where the concept of Input Tax Credit (ITC) becomes important. ITC allows businesses to reduce the tax payable on their sales by offsetting it against the tax already paid on their purchases.

In this blog, we’ll discuss everything you need to know about what an input tax credit is, how it operates under the GST regime, the rules, conditions, examples, and much more. Read on!

What is Input Tax Credit (ITC)?

Input tax credit refers to the credit that a business can claim for the GST (Goods and Services Tax) paid on goods and services used to make the taxable supplies. It is adjusted against your output tax liability.

Example:

• You are a manufacturer and charge a tax of ₹450 while selling your final product. Also, you paid an input tax of ₹300 on raw materials purchased for the manufacturing of the final product.

In this case, you can claim ITC of ₹300 and pay only the remaining ₹150 as tax. This avoids double tax payments and prevents any cash flow challenges.

In simple terms, input tax credit (ITC) is a system that ensures you pay tax only on the value you add, not on the entire sale value.

Who Can Claim ITC Under GST?

Only a registered taxpayer can avail an input tax credit. However, not everybody who purchases goods or services can get the benefit of this facility. Here’s the general eligibility criteria:

• A valid tax invoice or debit note should be issued by the supplier. Without these documents, the ITC facility cannot be availed.

• The received goods or services need to be used for business purposes only and not for personal purposes.

• Auto-generated statements (GSTR-2B) should match the invoice details. This will ensure accuracy in claiming ITC.

• The supplier must have uploaded the invoice in their GSTR-1, and the tax must be paid to the government.

• Payment to the supplier should be made within 180 days from the invoice date. Otherwise, ITC must be reversed until the payment is made.

• The recipient must file the required GST returns, GSTR-3B (monthly/quarterly) and GSTR-9 (annual).

• ITC can be claimed only for inputs used to make taxable supplies, not for exempt or non-business supplies.

What Can Be Claimed as ITC?

ITC is not limited to raw materials. It can also be claimed for other types of business-related goods and services by any registered taxpayer under GST. Eligible items include:

• Raw materials, consumables, or finished goods to be used in production or resale.

• Input services like legal, advertising, transport, or professional services that help in business operations.

• Capital goods like machinery, computers, or equipment, especially those financed through instruments like a Business Loan provided that depreciation is not claimed on the tax component.

• Inward supply of goods or services from other registered suppliers.

• Interstate goods purchased through an e-commerce platform, provided the e-commerce operator and seller are GST-registered and compliant.

Items Where ITC is Not Allowed

Here are some examples of goods and services that are ineligible for input tax credit under Section 17(5) of the CGST Act:

• Motor vehicles and conveyances used for personal purposes (ITC is allowed only when used for further supply, transportation of passengers, or training).

• Food, beverages, outdoor catering, beauty treatment, health services, and travel benefits extended to employees. However, ITC can be claimed if these are required by law or form part of a taxable outward supply.

• Membership of clubs, health and fitness centres.

• Life insurance and health insurance, unless mandated by law or provided as part of a taxable supply.

• Works contract services and construction of immovable property (other than plant and machinery) when used for business.

• Goods lost, stolen, destroyed, written off, or given as gifts or free samples.

• Items used for personal consumption or those used for non-business purposes.

Documents Required to Claim ITC

Here are some of the main documents that you need to claim ITC:

• An invoice issued by the supplier for the supply of goods and services or both, as per the GST law.

• The debit note issued by the supplier to the recipient (if any)

• Bill of entry

• An invoice issued under certain circumstances, like the bill of supply issued instead of tax invoice if the amount is less than Rs 200; or in situations where the reverse charge is applicable as per the GST law.

• An invoice or credit note is to be issued by the Input Service Distributor (ISD) as per the invoice rules under GST.

• A bill of supply issued by the supplier of goods and services or both, as per the invoice rules under GST.

How to Claim ITC Under GST?

To claim ITC in GST:

1. Verify supplier invoices in the auto-generated statement (GSTR-2B).

2. Compare with your purchase records.

3. Claim valid ITC in Table 4 of GSTR-3B.

4. Reject ineligible input tax credit and reverse wrongful entries.

5. Pay only the balance as tax payable.

Accurate filing ensures smooth GST compliance and avoids penalties.

How to Maximise ITC Under GST?

Here are some tips that businesses can follow to ensure they get the maximum ITC possible:

• Maintain supplier bills and purchase records in an up-to-date manner.

• Ensure vendors are GST-compliant and file their returns on time.

• Use technology to monitor ITC and automatically match invoices with GSTR-2B data.

• File monthly (GSTR-3B) and annual (GSTR-9) returns regularly.

• Avoid purchasing goods or services for personal use or non-business purposes.

Following these practices helps businesses maximise ITC and prevent the cascading effect of taxes.

To Conclude

Input Tax Credit (ITC) is one of the most important aspects of India’s Goods and Services Tax (GST) system. It helps reduce tax liability, prevents the cascading effect of taxes, and improves liquidity in the market.

To maximise the benefits of ITC, all registered taxpayers must comply with GST laws, maintain books of accounts, and file returns on time. By being diligent and compliant, businesses can easily save on taxes and contribute to the smooth functioning of the GST system.

FAQs

What happens if I forget to claim ITC in the same financial year?

You can still claim it until the 30th November of the next financial year or before filing the annual return, whichever is earlier.

How is ITC handled if goods are received in multiple instalments?

You can claim ITC only after receiving the last instalment of goods.

Is ITC available on cars used by company directors?

Not unless the cars are used for specified business purposes like resale, transport, or training.

What if there is a mismatch between GSTR-2B and my purchase records?

You must reconcile, identify discrepancies, and correct them before claiming ITC.

Do I need to make separate ITC claims for interstate and intrastate purchases?

No, ITC is automatically adjusted under the appropriate GST heads (CGST, SGST, IGST) in your returns.