A Comprehensive Guide to Input Tax Credit (ITC) under GST in India

For finance professionals, effective tax liability management and cash flow optimization are crucial. Input Tax Credit (ITC) offers a significant opportunity for businesses to reduce tax costs and improve liquidity. However, leveraging ITC effectively requires a thorough understanding of the regulations, exceptions, and intricate reversal mechanisms within GST legislation. This guide details essential aspects for businesses to maximize their ITC claims.

Recent Regulatory Updates

Recent changes have been introduced concerning Input Tax Credit under GST.

GST Council Meeting Recommendations

On September 17, 2025, the CBIC announced recommendations from the 56th GST Council meeting, impacting the GSTR-9 form. This included new ITC rows (A1, A2, H1, etc.) and clearer instructions for reporting reclaimed ITC, referencing CGST Rules 37, 37A, 38, 39, 42, and 43. Additionally, a revised system for granting 90% provisional refunds for inverted duty structures and zero-rated supplies will be implemented from November 1, 2025, based on data analysis and risk assessment.

Budget 2025 Key Amendments

Effective February 1, 2025, Budget 2025 brought notable amendments:

Section 34 of the CGST Act, 2017

The proviso to sub-section (2) was modified to mandate the reversal of corresponding ITC when a credit note is issued. This means recipients must reverse any ITC previously claimed if the supplier reduces their tax liability via a credit note.

Section 38 of the CGST Act, 2017

Section 38(1) was amended by removing the term "auto-generated," suggesting that the GSTR-2B statement may no longer be fully system-generated. Businesses might need to validate and reconcile invoices and ITC using the Invoice Management System (IMS) instead of solely relying on automated data. A new clause (c) in Section 38(2) also empowers the government to specify further details for the ITC statement through new rules.

Understanding Input Tax Credit (ITC) with an Example

Input Tax Credit (ITC) allows businesses to deduct the tax paid on their purchases from the tax collected on their sales. When a registered dealer acquires goods or services, they pay GST on that purchase. Subsequently, when they sell their own products or services, they collect GST from customers. The core principle of ITC involves offsetting the input tax paid against the output tax collected, with only the remaining tax liability (output tax minus input tax) being remitted to the government.

Consider a manufacturer as an illustration:

• Tax due on the final product (output) is INR 450.
• Tax already paid on raw materials or services (input) is INR 300.
• The manufacturer can claim an input credit of INR 300 and pay only the balance of INR 150 to the government.

Eligibility for Claiming ITC

Individuals registered under GST can claim ITC if they meet all specified conditions:

• Possession of a valid tax invoice.
• Receipt of the goods or services.
• Filing of GSTR-3B by the recipient.
• Payment of the tax charged to the government by the supplier.
• Recipient must have paid for the invoice or debit note within 180 days from the invoice date.
• For goods received in installments, ITC can only be claimed upon receipt of the final lot.
• ITC applies exclusively to taxable supplies of goods or services, and purchases must be used for business purposes.
• No ITC is allowed if depreciation has been claimed on the tax component of a capital good.
• ITC claimed in GSTR-3B must align with details in GSTR-2B, as per CGST Rule 36(4).
• The claimant must not be operating under the composition scheme.
• ITC on documents like invoices or debit notes must be claimed by the earlier of two dates: November 30th of the following financial year or the date of filing the annual returns.

What Can Be Claimed as ITC?

ITC can only be claimed for business purposes. ITC is not available for goods or services used exclusively for:

• Personal consumption.
• Exempt supplies.
• Supplies for which ITC is specifically restricted under CGST Section 17(5).

Eligible and Ineligible Input Tax Credit Categories

Section 17(5) of the CGST Act details an exclusion list, making certain transactions and businesses ineligible for ITC claims. Items not on this list are generally eligible. Examples of ineligible input tax credit include:

• Motor Vehicles: Primarily for personal use (exceptions apply for resale, commercial use, or mandated services).
• Food and Beverages: Catering, health, and similar services, unless legally required.
• Membership Fees: Club or gym memberships.
• Insurance: Health and life insurance, except when mandated by the government.
• Construction Expenses: Costs associated with building immovable property.
• Lost or Destroyed Goods: Items that are damaged, lost, or gifted.

Essential Documents for Claiming ITC

The following documents are necessary for claiming ITC:

• Invoice issued by the supplier of goods or services.
• Debit note issued by the supplier to the recipient (if applicable).
• Bill of entry.
• Invoice issued in specific situations, such as a bill of supply for amounts less than INR 200 or where reverse charge applies under GST law.
• Invoice or credit note issued by an Input Service Distributor (ISD) as per GST invoice rules.
• Bill of supply issued by the supplier of goods and services or both.

Specific ITC Scenarios

GST law outlines particular rules for ITC claims in various situations, including capital goods, job work, Input Service Distributors (ISD), banks, and business transfers.

Input Tax Credit for Capital Goods

ITC is available for capital goods under GST. However, ITC cannot be claimed for:

• Capital goods used solely for manufacturing exempted goods.
• Capital goods used exclusively for non-business (personal) purposes.

Note: No ITC is permitted if depreciation has been claimed on the tax component of capital goods.

Input Tax Credit on Job Work

A principal manufacturer may send goods to a job worker for further processing. For instance, a shoe company might send shoe uppers to job workers to attach soles. In such cases, the principal manufacturer can claim credit for tax paid on the purchase of these goods sent for job work. ITC is allowed when goods are sent to a job worker in two scenarios:

• From the principal's place of business.
• Directly from the supplier's place of supply.

To avail ITC, the goods must be returned to the principal within one year (or three years for capital goods).

Input Tax Credit from Input Service Distributor (ISD)

An Input Service Distributor (ISD) is typically a head office or a branch office of a GST-registered entity. The ISD gathers input tax credit on all purchases and distributes it to its various recipient branches under different categories like CGST, SGST/UTGST, IGST, or cess.

Input Tax Credit on Business Transfer

In scenarios like amalgamations, mergers, or business transfers, any available ITC with the transferor is passed on to the transferee.

ITC for Banks and Financial Institutions

Banks and financial institutions can claim ITC on taxable supplies but must adhere to a specific calculation method. The law permits a 50% ITC claim on inputs, capital goods, and input services for these entities. This special provision addresses the common mix of taxable and exempt financial services offered by banks.

Time Limit for Claiming Input Tax Credit under GST

Input tax credit must be claimed in GSTR-3B by the earlier of these two dates:

• November 30th of the financial year immediately following the year in which the invoice or debit note was issued.
• The date of filing the annual returns for that financial year.

While November 30th is the ultimate deadline, ITC is generally reported in GSTR-3B. Therefore, the due date for GSTR-3B (typically November 20th for October of the following financial year) is often considered the operational deadline without late fees. If a taxpayer misses the GSTR-3B filing deadline for October, they can still claim pending ITC for a financial year in that return if filed on or before November 30th, albeit with late fees.

For example, an invoice dated December 30, 2023, for ABC Company. If ABC Company has not yet filed its annual returns for FY 2023-24, it can claim ITC on this invoice by November 30, 2024. This claim would typically be made in the GSTR-3B for October 2024, due on November 20, 2024.

Procedure for Claiming ITC

Claiming ITC involves a thorough reconciliation of entries across the Invoice Management System, GSTR-2B, and the purchase register. All regular taxpayers must report eligible, ineligible, reversed, and reclaimed ITC amounts in Table 4 of their monthly GSTR-3B returns.

Since July 2022, the format of Table-4 in GSTR-3B has changed. Table 4(A)(5) automatically populates the total ITC from GSTR-2B, which may include ineligible or unavailable ITC. Without proper segregation and reversal in Table 4(B), this total could inaccurately inflate the taxpayer's net ITC claims. Therefore, identifying and reversing ineligible/unavailable ITC is crucial. Any ITC reclaimed from previous tax periods in the current period must also be reported to ensure an accurate net eligible ITC figure.

Accurately declaring ITC values in Table-4 is vital for the government's calculation of net tax liability and GST dues. Inaccuracies can lead to discrepancies with GSTR-2B, potentially resulting in notices and penalties. The government is implementing real-time scrutiny and automated intimations (like DRC-01C) to correlate GSTR-3B data with GSTR-2B and GSTR-9.

Previously, taxpayers could claim a certain percentage of provisional ITC until October 9, 2019. However, this provisional claim was phased out, and from January 1, 2022, onwards, no provisional ITC can be claimed. Taxpayers can now only claim ITC that appears in their GSTR-2B. Consequently, reconciling the purchase register with GSTR-2B is essential for all ITC claims. Not utilizing the IMS increases the risk of notices from tax authorities due to potential over-claimed ITC.

Reversal of Input Tax Credit

ITC is granted exclusively for goods and services acquired for business purposes. If these are used for non-business (personal) activities or for making exempt supplies, ITC cannot be claimed. Additionally, several other situations necessitate ITC reversal:

1. Non-payment of Invoices within 180 Days: ITC claimed for invoices not paid within 180 days of issuance must be reversed.
2. Credit Note Issued to ISD by Seller: If a seller issues a credit note to the Head Office (HO) acting as an ISD, the corresponding reduced ITC must be reversed.
3. Inputs Partly for Business and Partly for Exempted Supplies or Personal Use: Businesses utilizing inputs for both business and non-business (personal) purposes must proportionately reverse the ITC attributable to personal use or exempted supplies.
4. Capital Goods Partly for Business and Partly for Exempted Supplies or Personal Use: Similar to inputs, ITC on capital goods used partially for non-business or exempted purposes must be reversed proportionally.
5. Insufficient ITC Reversal: If the total ITC on inputs for exempted or non-business purposes exceeds the amount actually reversed during the year, the difference is added to the output tax liability, with applicable interest.

Details of ITC reversal must be furnished in GSTR-3B. For a deeper understanding of segregating ITC for business and personal use and related calculations, refer to this article.

Decoding ITC Reconciliation

ITC reconciliation is vital for businesses to ensure accurate claims, minimizing the risk of legal issues such as penalties or GST registration cancellation. This involves downloading GSTR-2B data from the government portal and comparing it with the draft GSTR-3B and the purchase register to identify and rectify discrepancies.

ITC claimed in GSTR-3B must match the details provided by the supplier in their GSTR-1, which then appears in the Invoice Management System (IMS) and subsequently in GSTR-2B. When a supplier saves a document, it flows from GSTR-1/IFF/1A to the recipient's IMS. Upon the supplier filing their GSTR-1/IFF/1A, the document populates into the recipient's GSTR-2B. If no action is taken, the invoice is automatically accepted and added to GSTR-2B. Consequently, performing GSTR-2B versus purchase register reconciliation for ITC actions is critical. Failure to use the IMS exposes businesses to a higher risk of tax authority notices due to potentially over-claimed ITC.

In cases of mismatch between GSTR-3B, the purchase register, and GSTR-2B, the supplier and recipient will be notified after GSTR-3B filing. For a detailed explanation of reasons for ITC mismatch and the procedure for reclaiming ITC, please consult the relevant article.