Input Tax Credit (ITC) is one of the most important parts of the Goods and Services Tax (GST) system. It helps businesses avoid paying tax twice on the same amount — also known as the cascading effect of taxes. With ITC, businesses can claim credit for the GST they’ve already paid on their purchases, which reduces their total tax bill and improves cash flow.

However, not every business or expense qualifies for ITC. There are certain rules, time limits, and conditions you must follow to claim it correctly. In this blog, we’ll explain what Input Tax Credit is, who can claim it, and how the process works, along with key details about eligibility, time limits, and reversal.

What is ITC (Input Tax Credit)?

Input Tax Credit (ITC) in GST is a system that allows businesses to reduce their tax burden by obtaining credit for the GST paid on purchases used in operations. ITC allows a registered individual to claim the tax they have already paid on purchases against the tax they have to pay on their sales. This ensures that the businesses pay tax only on the value added at each point in the supply chain.

Suppose that a manufacturer buys raw materials worth ₹1,00,000 and pays 18% GST of ₹18,000. The manufacturer collects 18% GST of ₹27,000 when the finished product is sold for ₹1,50,000. The manufacturer can claim an ITC of ₹18,000 for the GST paid on the purchase of raw materials, and pay the government the final GST of ₹9,000 (₹27,000 – ₹18,000).

ITC Eligibility Criteria: Conditions to Claim

The Section 16 CGST Act and GST Rules clearly specify the eligibility to claim the Input Tax Credit (ITC) under GST. Here is the ITC eligibility criteria you must meet to qualify for a claim:

• You must have a valid tax invoice, debit note, or document issued by a registered supplier as proof of tax payment.
• The goods or services must have been received.
• If goods are received in instalments, ITC can be claimed only after the final instalment is delivered.
• The supplier must have paid GST to the government, either in cash or through ITC.
• You must have filed all required GST returns, including GSTR-3B, on time.
• The payment for goods or services (including GST) must be made to the supplier within 180 days of the invoice date.

ITC is limited or prohibited on some of the inputs like personal use goods, motor vehicles, exempt supply goods and specified services.

Understanding Blocked Credits Under GST

Blocked credits under GST are types of Input Tax Credit (ITC) that businesses cannot claim as per Section 17(5) of the CGST Act, even if the goods or services are used for business purposes.

These credits increase a company’s overall cost because the GST paid on such items can’t be used to reduce GST liability on sales.

Here are some common examples of blocked credits:

• Motor vehicles, unless used for resale or for transporting passengers or goods.
• Construction of immovable property, except when it’s built for resale.
• Goods or services for personal use or non-business purposes.
• Food, beverages, outdoor catering, beauty, and health services, unless directly related to business.
• Employee welfare costs, such as transport or insurance, are not required unless required by law.
• Club memberships, gyms, and fitness centres.
• Rent-a-cab, life insurance, and health insurance services, unless needed for business operations.

ITC Claim Process: How to Claim Input Tax Credit

Here are the steps you can follow to claim ITC:

1. Obtain a Valid GST Invoice: Ensure that all business purchases are supported by a valid tax invoice, debit note or bill of entry to show that GST has been paid. ITC cannot be asserted without these documents.
2. Verify ITC in GSTR-2B (GSTR-2B Matching): Carry out GSTR-2B matching by comparing ITC information in GSTR-2B, which is an auto-generated monthly statement prepared on the basis of GSTR-1 filings by suppliers.
3. Claim ITC in GSTR-3B: Report eligible ITC when submitting monthly GSTR-3B returns. Only ITC is to be claimed in GSTR-2B to prevent errors and tax notices.
4. Adjust ITC to Output Tax Liability: Use claimed ITC to offset GST payable on outward sales.
5. Keep Proper Records: Record invoices, payments and reconciliations to justify ITC claims in audits and prevent reversals or fines.

Time Limits to Avail Input Tax Credit (ITC)

Time limits are important for ensuring that the credit is not disallowed due to time constraints. Section 16(4) of the CGST Act provides that a registered person is required to claim ITC by either of the following two dates:

• The date on which the GST annual return (Form GSTR-9) of the financial year in question is due; or
• The 30th November of the year after the financial year when the supply was received.

As an example, in order to claim ITC on purchases made in the financial year 2024-25, the last date to claim is the date of filing the annual return of FY 2024-25 or 30th November 2025, whichever is earlier.

Input Tax Credit Reversal Under GST

Reversals of Input Tax Credit (ITC) under GST occur when the credit claimed earlier needs to be added back to the output tax liability, effectively nullifying the benefit availed. This reversal is compulsory in different situations to ensure that credit is only claimed for the legitimate business expenses. The most frequent causes of ITC reversal are:

• Failure to Pay the Supplier: The ITC claim should be reversed in case the recipient does not pay the supplier within 180 days of the invoice date.
• Registration or Scheme Change: Unutilised ITC on stock and capital goods needs to be reversed if GST registration is cancelled or the scheme is changed to a composition scheme.
• Supplier Non-compliance: The recipients will have to reverse the ITC by 30th November if the supplier fails to pay the collected GST to the government by 30th September following the financial year.
• Use of Inputs for Exempt or Non-business Purposes: ITC on goods or services that are partially used in exempt supplies or personal consumption should be reversed proportionately by prescribed formulas (Rules 42 and 43).
• Reversal on Blocked Credits: If ITC is availed on blocked credits that are not allowed in Section 17(5) (e.g. motor vehicles used personally), then reversal must be made.
• Claim of Depreciation: If depreciation is claimed on the GST portion of capital goods under the Income Tax Act, ITC on such tax should be reversed.

Forms and Documents Required for Claiming ITC under GST

Here are the forms and documents required for claiming ITC under GST:

• Valid Tax Invoice by the supplier.
• Debit Note by the supplier.
• Import bill of entry or other document to determine the amount of GST paid on imported goods.
• Invoice issued by Input Service Distributor (ISD) (Where applicable).
• Evidence of delivery of goods or services, such as delivery challans or receipt notes.
• Credit Note issued by the supplier for adjustments
• Form GSTR-3B monthly ITC claim.
• From GST ITC-01 to claim ITC on stock in special cases (new registration, regular to composition scheme, etc.)

Input Tax Credit (ITC) is a pillar of the GST system that assists businesses in avoiding the tax cascading effect. However, ITC is subject to various conditions. Taxpayers should be aware of these conditions to ensure that they do not make any claim that is not permitted. You must also carry out proper GSTR-2B matching and timely filing to claim ITC smoothly and avoid penalties.

Frequently Asked Questions (FAQs)

1. Who is eligible to claim ITC?

An individual registered under GST, who uses goods or services in the course of business and satisfies the prescribed requirements, is entitled to claim ITC.

2. What are the fundamental conditions to claim ITC?

Having a valid tax invoice, receipt of goods/services, payment of tax by the supplier, filing of returns on time and payment to the supplier within 180 days of the invoice.

3. Can you claim ITC on goods or services that are used personally?

No, ITC is not claimable on goods or services that are used for personal use or non-business purposes.

4. What is the time limit to claim ITC?

ITC should be claimed prior to the filing of the annual return or 30th November following the financial year of purchase, whichever is earlier.

5. What would be the case in case of failure to pay the supplier within 180 days?

The ITC claim must be reversed with interest. The credit is reclaimable after payment has been made.

6. Is it possible to claim ITC on capital goods?

Yes, it is possible to claim ITC on capital goods that are used in business, but with some limitations, including that no depreciation should be claimed on the tax component.

7. Is there any blocked credit under GST?

Yes, ITC is blocked on personal use of motor vehicles, food and beverages, club memberships and exempt supplies, goods/services.

8. How can ITC be reversed?

ITC reversal is to be made in cases where credit was claimed and the conditions are not fulfilled, like non-payment to the supplier, use of exempt supplies, or blocked credits.

9. What are special cases of claiming ITC?

New registrations, voluntary registrations, switching composition to the regular scheme, business restructuring, and goods sent to job work are some of the special cases.

10. Is it possible to claim ITC when the supplier has not paid GST to the government?

No, ITC can be claimed only when the supplier has paid the tax to the government.