Input Tax Credit (ITC) under GST

For finance professionals, optimizing every rupee is crucial. Managing tax liabilities and improving cash flow are key responsibilities, and this is where Input Tax Credit (ITC) becomes more than just a compliance requirement. ITC is an effective tool that helps reduce tax outflow and enhance liquidity. However, to fully benefit from ITC, it is important to understand the rules, deal with exceptions, and manage complex reversals under GST law.

What is Input Tax Credit? (With Example)

Input Tax Credit (ITC) is the credit for the tax paid on business purchases, which can be deducted from the tax due on sales.

How it works:
When you purchase goods or services from a registered supplier, you pay tax on those purchases. When you sell your goods or services, you collect tax from customers. The tax paid on purchases is adjusted against the tax collected on sales. You then pay the remaining amount (output tax minus input tax) to the government. This process is known as availing or utilizing input tax credit.

Example:
Suppose you are a manufacturer:

Tax on final product (output tax): ₹450
Tax paid on inputs (purchases): ₹300

You can claim ₹300 as input tax credit and pay the remaining ₹150 in cash to the government.

Who Can Claim ITC?

Input Tax Credit (ITC) can be claimed only by individuals or entities registered under GST, provided they meet all the prescribed conditions.

Conditions to Claim Input Tax Credit under GST

To avail ITC, the following conditions must be satisfied:

The taxpayer must possess a valid tax invoice or debit note.
The goods or services mentioned in the invoice must have been received.
The recipient must have filed their GSTR-3B return.
The supplier should have paid the tax collected to the government.
Payment for the invoice or debit note must be made within 180 days of the invoice date.
If goods are received in parts, ITC can only be claimed after the final installment is received.
ITC is available only on taxable supplies, and the purchases must be used for business purposes.
ITC cannot be claimed if depreciation is claimed on the tax component of capital goods.
ITC must be claimed within the specified time limit, which is the earlier of:
- 30th November of the year following the financial year in which the invoice was issued, or
- The date of filing the annual return.
As per CGST Rule 36(4), ITC claimed in GSTR-3B must match the details reflected in GSTR-2B.
The taxpayer should not be registered under the composition scheme.

What Can Be Claimed as ITC?

ITC can only be claimed for goods or services used for business purposes.

When ITC Cannot Be Claimed

ITC is not available for goods or services used for:

Personal consumption
Exempt supplies
Supplies listed under Section 17(5) of the CGST Act, where ITC is specifically disallowed

Eligible and Ineligible Input Tax Credit

Section 17(5) of the CGST Act provides an exclusion list that specifies certain transactions and expenses for which ITC cannot be claimed. Any items not mentioned in this list are generally eligible for ITC.

Examples of Ineligible Input Tax Credit

Some common cases where ITC cannot be claimed include:

Motor Vehicles: Used for personal purposes (exceptions apply for resale, commercial use, or mandated cab services).
Food and Beverages: Expenses on catering, health, and similar services unless required by law.
Membership Fees: Payments for clubs or gym memberships.
Insurance: Health and life insurance premiums, except where mandated by the government.
Construction Expenses: Costs related to building immovable property.
Lost or Destroyed Goods: Goods that are damaged, destroyed, or given as gifts.

Documents Required to Claim ITC

To claim ITC, the following documents are necessary:

Tax invoice issued by the supplier of goods or services.
Debit note issued by the supplier, if applicable.
Bill of entry for imported goods.
Special invoices issued under specific circumstances, such as a bill of supply for amounts less than ₹200 or in reverse charge cases under GST.
Invoice or credit note issued by an Input Service Distributor (ISD) following GST invoice rules.
Bill of supply issued by the supplier for goods, services, or both.

Special Cases of ITC

The GST law defines specific rules for claiming ITC in certain scenarios, including capital goods, job work, Input Service Distributors (ISD), banks, and business transfers.

ITC for Capital Goods

ITC is available on capital goods under GST. However, it cannot be claimed in the following cases:

Capital goods used exclusively for producing exempt supplies.
Capital goods used exclusively for non-business or personal purposes.

Note: ITC is not allowed if depreciation has already been claimed on the tax component of the capital goods.

ITC on Job Work

A principal manufacturer may send goods to a job worker for further processing. For example, a shoe manufacturer may send semi-finished shoes (the upper part) to a job worker to fit the soles. In this case, the principal manufacturer can claim ITC on the tax paid for purchasing the goods sent for job work.

ITC is allowed when goods are sent to a job worker from:

The principal’s place of business.
Directly from the supplier’s place of supply of the goods.

ITC Provided by Input Service Distributor (ISD)

An Input Service Distributor (ISD) is typically the head office, branch, or registered office of a GST-registered entity. The ISD collects input tax credit on purchases made and distributes it to various recipients (branches) under different heads such as CGST, SGST/UTGST, IGST, or cess.

ITC on Transfer of Business

In cases of business amalgamations, mergers, or transfers, the input tax credit available with the transferor is passed on to the transferee at the time of business transfer.

ITC for Banks and Financial Institutions

Banks and financial institutions can claim ITC on taxable supplies, but a special calculation method applies. The law allows them to claim 50% ITC on inputs, capital goods, and input services. This provision addresses the mixed nature of supplies in banks, as they deal with both taxable and exempt financial services.

Time Limit to Claim Input Tax Credit under GST

Input tax credit must be claimed in GSTR-3B within the time limits specified under GST law. For invoices or debit notes issued in a financial year, the ITC can be claimed up to the earlier of:

30th November of the year following the financial year, or
The date of filing the annual return for that financial year.

Note: Although 30th November is the official deadline, ITC is reported in GSTR-3B. Therefore, the due date of the GSTR-3B return is usually considered the practical deadline without incurring a late fee. For example, the GSTR-3B return for October of the following year is due by 20th November. If missed, pending ITC for that financial year can still be claimed in the same GSTR-3B filed on or before 30th November, subject to late fees.

Example: An invoice dated 30th December 2023 was issued to ABC Company. If the annual return for FY 2023-24 has not yet been filed, the company can claim ITC on this invoice by 30th November 2024. The ITC can be reported in the GSTR-3B for October 2024, which is due on 20th November 2024.

How to Claim ITC?

To claim Input Tax Credit (ITC), a thorough reconciliation between your purchase register, Invoice Management System, and GSTR-2B is necessary. All regular GST taxpayers must report their ITC in their monthly GST return, Form GSTR-3B, specifically in Table 4. This table captures a summary of eligible ITC, ineligible ITC, ITC reversed, and ITC reclaimed during the tax period.

Important Notes on Table 4 of GSTR-3B

Since July 2022, the format of Table 4 has been updated. Currently, Table 4(A)(5) automatically populates the total ITC figure from GSTR-2B, including ineligible or unavailable ITC. If this total ITC is not properly separated and reversed in Table 4(B), ineligible ITC may incorrectly be included in the taxpayer’s net ITC claim.

Any ineligible or unavailable ITC should be correctly reversed, and if ITC is reclaimed from previous tax periods in the current period, it must be reported as well. This ensures an accurate calculation of net eligible ITC.

Importance of Accurate ITC Reporting

Declaring correct ITC values in Table 4 is crucial because it directly impacts the government’s computation of net tax liability and GST dues. Incorrect reporting can lead to discrepancies with GSTR-2B, potentially resulting in notices or penalties.

The government has introduced initiatives to reconcile data reported in GSTR-3B with GSTR-2B in real-time and further with GSTR-9 during audits. Examples include automated scrutiny of returns and notifications through DRC-01C for discrepancies.

Reversal of Input Tax Credit (ITC)

Input Tax Credit (ITC) can only be claimed on goods and services used for business purposes. If inputs are used for non-business (personal) purposes or to make exempt supplies, ITC must be reversed. Additionally, there are other scenarios where ITC reversal is required.

Cases Where ITC Must Be Reversed

Non-payment of invoices within 180 days: ITC must be reversed for invoices not paid within 180 days of issue.
Credit note issued to ISD by the seller: If a credit note is issued by the supplier to the head office, the corresponding ITC must be reversed.
Inputs used partly for business and partly for exempt/personal purposes: ITC for the portion of inputs used for personal or exempted purposes must be reversed proportionately.
Capital goods used partly for business and partly for exempt/personal purposes: Similar to inputs, ITC must be reversed proportionately for capital goods.
ITC reversed is less than required: After filing the annual return, if total ITC on inputs used for exempt/non-business purposes exceeds the ITC reversed during the year, the difference must be added to output tax liability along with applicable interest.

Reversal details are reported in GSTR-3B. Businesses must properly segregate ITC between business and personal use to ensure accurate calculation.

ITC Reconciliation Explained

Reconciliation is essential to ensure correct ITC claims, reducing the risk of penalties or GST registration issues. Businesses should download GSTR-2B data and match it with their draft GSTR-3B and purchase register.

ITC claimed in GSTR-3B must match the supplier’s GSTR-1 and the Invoice Management System (IMS). Once the supplier saves the document, it flows from GSTR-1/IFF/1A to the recipient’s IMS, and after filing, it is populated in the recipient’s GSTR-2B. If no action is taken, invoices are automatically accepted and added to GSTR-2B.

Reconciliation between GSTR-2B and the purchase register is critical. Failing to use IMS can increase the risk of notices due to over-claimed ITC.

In case of mismatches between GSTR-3B, purchase register, and GSTR-2B, both supplier and recipient are notified of discrepancies. Businesses can reclaim ITC following the prescribed procedure if differences occur.

Automating ITC Reconciliation and Claims

Automation is key to maximizing ITC claims and avoiding errors. Manual processes can lead to mistakes and differences between GSTR-2B and GSTR-3B, especially with reversals and reclaims.

A technology-driven solution can:

Reconcile IMS + GSTR-2B against the purchase register for a complete view.
Take ITC actions directly, which automatically flow into IMS on the government portal.
Regenerate and download updated GSTR-2B reflecting all ITC actions.
Support multi-GSTIN and multi-PAN data ingestion.
Use AI-powered reconciliation engines for PAN-level matching between GSTR-2B and purchase register.
Auto-populate Table 4 in GSTR-3B based on reconciled ITC, following the latest GST return format.
Ensure each invoice is allocated to the correct subsection for accurate ITC claims.
Provide a detailed calculation trail for all ITC claimed at document and section levels.
Facilitate easy documentation of Table 4 breakup into deferred ITC, ITC for the current month, ITC for previous months, etc.

By leveraging a tech-based compliance platform, businesses can minimize risk, ensure accurate reporting, and streamline their ITC claim process.

Frequently Asked Questions (FAQs) on Input Tax Credit (ITC) in GST

1. What is Input Tax Credit (ITC) in GST with an example?
Input Tax Credit (ITC) allows businesses to reduce their GST liability by claiming credit for GST paid on business-related purchases. For example, if a business pays ₹15,000 GST on purchases and collects ₹20,000 GST on sales, it can claim ₹15,000 as ITC, paying only the remaining ₹5,000 to the government.

2. How to claim Input Tax Credit?
ITC is claimed after reconciling data between the purchase register, Invoice Management System (IMS), GSTR-2B, and draft GSTR-3B. The ITC claimed in a tax period cannot exceed the amount available in GSTR-2B. Any missed ITC due to delayed reporting by the supplier should be communicated promptly. Eligible ITC is then reported in Table 4 of GSTR-3B.

3. What are the conditions to claim Input Tax Credit?
To claim ITC under CGST Section 16, the following conditions must be met:

Possession of a valid tax invoice or debit note.
Receipt of goods or services.
The supplier has paid GST to the government.
Filing of GSTR-3B.
Claiming ITC within the prescribed time limit.

4. On what goods and services can ITC be claimed?
ITC can be claimed on goods and services used for business purposes, specifically for taxable supplies, and not restricted under GST law. Examples include:

Raw materials and inputs
Overhead supplies
Certain capital goods

ITC cannot be claimed for items used for personal purposes, motor vehicles not used commercially, and construction of immovable property.

5. What is Input Tax Credit?
Input Tax Credit is the amount of GST paid on purchases that can be set off against the GST liability on sales.

6. How to check Input Tax Credit in the GST portal?
Available ITC can be checked on the GST portal through the auto-drafted GSTR-2B form.

7. What is the time limit for claiming ITC?
The time limit to claim ITC is the earlier of:

30th November of the year following the financial year in which the invoice was issued, or
The date of filing the annual return for that financial year.

8. Who is eligible for ITC in GST?
All businesses registered as taxable persons are eligible to claim ITC, provided the goods or services are acquired for business purposes and all conditions under GST law are met.

9. Can ITC be claimed on capital goods?
Yes, ITC can be claimed on capital goods used for business purposes. However, ITC is not allowed if the capital goods are used exclusively for exempt supplies or personal use.

10. Can ITC be claimed for inputs sent to a job worker?
Yes, a principal manufacturer can claim ITC on inputs sent to a job worker for further processing. ITC is allowed whether goods are sent from the principal’s premises or directly from the supplier.

11. Is ITC available under the new GST regime?
Yes, ITC is available under both the old and new GST regimes, subject to the prescribed conditions.

12. What happens if ITC is reversed incorrectly?
Incorrect reversal of ITC can lead to discrepancies with GSTR-2B and GSTR-3B, resulting in penalties or notices from the tax authorities.

13. Can ITC be claimed on mixed-use goods?
If goods or services are used partly for business and partly for exempt or personal purposes, ITC must be claimed proportionately.

14. How can ITC reconciliation help businesses?
Reconciliation ensures accurate ITC claims, reduces the risk of penalties, and prevents mismatches between GSTR-2B, GSTR-3B, and the purchase register.

15. Can ITC be claimed on bank and financial services?
Banks and financial institutions can claim 50% ITC on inputs, input services, and capital goods due to the mixed nature of taxable and exempt supplies.