Input Tax Credit (ITC) under GST Explained

The Goods and Services Tax (GST) input tax credit is one of the most significant and business-friendly components of India’s GST regime. It not only avoids cascading taxes but also helps businesses improve their cash flow and effectively reduce their tax liability.

However, while the benefits are clear, understanding the rules, eligibility criteria, and conditions for claiming Input Tax Credit (ITC) can be challenging for many taxpayers.

This article aims to explain what GST input tax credit is, how it works, who can claim it, and the key compliance factors that must be followed.

What is GST Input Tax Credit?

GST input tax credit refers to the credit a registered taxpayer can claim for the GST paid on the purchase of goods and services that are used for business purposes. Simply put, when you pay tax on purchases(inputs), you can deduct that amount from the tax payable on your sales(output).

For example, if you paid ₹10,000 as GST on raw materials and collected ₹15,000 GST on your final product, you only need to pay ₹5,000 to the government after adjusting the ITC.

Why it matters

Without ITC, there would be cascading taxes – GST would be levied on top of the other GST already paid. ITC ensures tax is charged only on net value addition, which benefits businesses and encourages compliance.

Eligibility to Claim GST Input Tax Credit

To claim GST input tax credit, the following basic conditions must be fulfilled:

You must be a registered taxpayer under GST.
You must possess a valid tax invoice or debit note issued by a registered supplier.
Goods or services must be received.
The supplier must have filed GST returns and paid the tax to the government.
The invoice details must be reflected in GSTR-2B (auto-generated return).
Payment to the supplier must be made within 180 days of the invoice date.

Additionally, ITC can be claimed only on goods or services used for business. No ITC is allowed for personal use or for making exempt supplies.

Conditions for availing Input Tax Credit

As per Section 16 CGST Act, the following conditions must be met:

Valid Tax Document

You must hold a tax invoice, debit note, or relevant import document from a registered supplier.

Receipt of Goods or Services

ITC can be claimed only after physically receiving goods or services(including partial shipments, but the last lot triggers ITC)

Tax Paid to Government

GST should have been paid by your supplier(either in cash via their own ITC)

GST Return Filing

Both the supplier and recipient must have filed GST returns (GSTR-1, GSTR-3B) that reflect the transaction.

Payment to Supplier within 180 Days

You must pay the supplier (invoice + GST) within 180 days from the invoice date. Otherwise, the ITC must be reversed with interest. You can claim it later once payment is made.

Claim Period Limit
ITC must be claimed by the earlier of:

The due date of the September return following the end of the financial year or
Filing the annual return.

What Credits Are Not Eligible?

Section 17(5) of the CGST Act and Rule 42 outline blocked credits, including:

Purchase for personal use or exempt supplies.
Motor vehicles(unless used for further supply or training)
Food and beverages, outdoor catering, and club memberships.
Travel benefits for employees(except official travel).
Goods destroyed, lost, or given free as samples.
Goods/services for business/promotional gifts or CSR activities.

Input Tax Credit on Capital Goods & Common Credits

Businesses can claim ITC on capital goods(machinery, equipment, etc.), provided they are capitalised and not claimed as depreciation. The credit is reversed at a rate of 5% per quarter over 5 years.
For input services shared across multiple GST locations, as an Input Service Distributor (ISD), the flow of credit is appropriately distributed. Since April 1, 2025, using ISD is mandatory for credits to multiple GSTINs under the same PAN.

Setting Off ITC against GST Liability

GST is collected and credited under three heads: IGST, CGST, SGST. Utilisation follows a prescribed order under Section 49(5):

IGST credit to IGST liability
Remaining IGST to CGST and then SGST
CGST credit to CGST liability
SGST credit to SGST liability

Cross-utilisation ensures the effective use of available credits.

Recent Updates & Legal Developments for Input Tax Credit

Supreme Court Ruling (May 2025): GST appeal pre-deposits can be made using existing Input Tax Credit (ITC), thereby enhancing liquidity in litigation.
Since April 1, 2025, ISD usage has been mandatory for distributing common Input Tax Credit (ITC) across multiple Goods and Services Tax (GST) registrations.
With e-invoicing and an Invoice Management System, the recipient receives an auto-generated Form GSTR-2B to reconcile Input Tax Credit (ITC).

Conclusion

The GST input tax credit facilitates a two-way, three-dimensional flow of credit, thereby reducing the compliance burden for businesses. With proper record-keeping, regular reconciliation, and knowledge of blocked credits, companies can significantly benefit from the GST tax system and achieve greater financial efficiency.