Understanding Input Tax Credit (ITC) in GST

For finance professionals, efficient tax liability management and strong cash flow are paramount. Input Tax Credit (ITC) is more than just a compliance requirement; it is a vital mechanism that helps businesses optimize tax costs and improve liquidity. Fully leveraging ITC necessitates a deep understanding of its regulations, various exceptions, and complex reversal procedures under Goods and Services Tax (GST) law. This guide provides a comprehensive overview to help your business maximize its ITC benefits.

Recent Updates

September 17, 2025

The CBIC has announced recommendations from the 56th GST Council meeting. Key changes to the GSTR-9 form include new ITC rows (A1, A2, H1, etc.) and enhanced clarity for reclaimed ITC, referencing CGST Rules 37, 37A, 38, 39, 42, and 43. Starting November 1, 2025, the CBIC will introduce a revised system for providing 90% provisional refunds for inverted duty structures and zero-rated supplies, based on system-driven data analysis and risk assessment.

February 1, 2025 (Budget 2025)

1. Amendments to Section 34 of the CGST Act, 2017: The Finance Minister modified the proviso to sub-section (2) to explicitly mandate the reversal of corresponding ITC when a credit note is issued. This means that if a supplier issues a credit note to reduce their tax liability, the recipient must reverse any associated ITC previously claimed.
2. Amendments to Section 38 of the CGST Act, 2017: Section 38(1) is being amended to remove the term "auto-generated," suggesting that the ITC statement (GSTR-2B) might not be entirely system-generated in the future. Businesses may need to validate and reconcile invoices and ITC using an Invoice Management System (IMS) instead of relying solely on automated data. Additionally, a new clause (c) in Section 38(2) empowers the government to specify further details for the ITC statement through rules.

What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) refers to the tax paid on purchases for a business that can be claimed as a deduction when paying tax on output.

When a business acquires goods or services from a registered dealer, it pays taxes on that purchase. Upon selling its own products or services, the business collects tax. The ITC mechanism allows the business to adjust the tax paid on purchases against the tax collected on sales, with only the balance liability (tax on sales minus tax on purchases) being remitted to the government.

For example, consider a manufacturer:

1. Tax payable on the final product (output) is Rs 450.
2. Tax paid on raw materials (inputs) is Rs 300.
3. The manufacturer can claim an input credit of Rs 300 and deposit the remaining Rs 150 as tax to the government.

Who can claim ITC?

A person registered under GST can claim ITC provided all prescribed conditions are met.

The conditions for claiming an input tax credit under GST include:

1. Possession of a valid tax invoice.
2. Receipt of the said goods or services.
3. Filing of GSTR-3B by the recipient.
4. Verification that the tax charged has been paid to the government by the supplier.
5. The recipient must have paid for the invoice or debit note within 180 days from its issue date.
6. If goods are received in installments, ITC can only be claimed upon receipt of the final lot.
7. ITC is applicable only for taxable supplies of goods or services, and the purchases must be utilized for business furtherance.
8. No ITC is allowed if depreciation has been claimed on the tax component of a capital good.

The ITC documented in an invoice or debit note must be claimed within the specified time limit, which is the earlier of these two dates:

1. November 30 of the financial year following the year in which the document was issued.
2. The date of filing the annual return.

Furthermore:

1. CGST Rule 36(4) mandates that ITC claims in GSTR-3B must align with the details reflected in GSTR-2B.
2. The claimant must not be supplying goods or services under the composition scheme.

What can be claimed as ITC?

ITC can only be claimed for business-related purposes.

ITC is not available for goods or services exclusively used for:

1. Personal consumption.
2. Exempted supplies.
3. Supplies for which ITC is specifically prohibited under CGST Section 17(5).

Eligible and Ineligible Input Tax Credit

Section 17(5) of the CGST Act outlines an exclusion list, specifying transactions and businesses that are outside the scope of ITC claims. ITC cannot be claimed on these items. All other items, not on this list, are generally eligible for ITC claims.

Some instances of ineligible input tax credit include:

• Motor Vehicles: Those used for personal purposes (with exceptions for resale, commercial use, or mandated cab 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 or given as gifts.

Documents Required 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.
• An invoice issued under specific conditions, such as a bill of supply for amounts less than Rs.200, or in situations where the reverse charge mechanism applies under GST law.
• An invoice or credit note issued by an Input Service Distributor (ISD), adhering to GST invoice rules.
• A bill of supply issued by the supplier of goods and services or both.

Special Cases of ITC

The GST law outlines specific ITC claim rules for various scenarios, including capital goods, job work, Input Service Distributors (ISD), banks, and business transfers.

ITC for Capital Goods

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

i. Capital goods used exclusively for manufacturing exempted goods. ii. Capital goods used exclusively for non-business (personal) purposes.

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

ITC on Job Work

A principal manufacturer might send goods to a job worker for further processing. For instance, a shoe manufacturer sending partially finished shoes (upper parts) to job workers for sole attachment. In such cases, the principal manufacturer can claim credit for the tax paid on the purchase of these goods sent for job work.

ITC is permissible when goods are dispatched to a job worker under two conditions:

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

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

ITC Provided by Input Service Distributor (ISD)

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

ITC on Transfer of Business

In cases of amalgamations, mergers, or business transfers, the transferring entity (transferor) will have available ITC, which is then passed on to the acquiring entity (transferee) at the time of business transfer.

ITC for Banks and Financial Institutions

Banks and financial institutions are permitted to claim ITC on taxable supplies, but they must adhere to a specific calculation method. The law allows them to claim 50% ITC on inputs, capital goods, and input services. This unique provision addresses the common scenario where banks also offer exempt financial services, resulting in a mix of taxable and exempt supplies.

Time Limit to Claim Input Tax Credit under GST

Input Tax Credit can be claimed in GSTR-3B by the expiry of the deadline set by GST law. The time limit for claiming ITC on an invoice or debit note issued in a financial year is the earlier of these two dates:

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

While November 30 of the subsequent year is the formal deadline, since ITC is reported in GSTR-3B, the due date for GSTR-3B (typically October's return due November 20) is practically considered the deadline for claiming ITC without late fees. If a taxpayer misses filing the October GSTR-3B by November 20, they can still claim pending ITC for a financial year in that return if filed on or before November 30, though late fees may apply.

For example, an invoice was issued on December 30, 2023, to ABC Company. If they have not yet filed their annual returns for FY 2023-24, they can claim the ITC on this invoice before November 30, 2024. However, they should claim such ITC in the GSTR-3B for October 2024, which is due on November 20, 2024.

How to Claim 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 their input tax credit amount in Table 4 of their monthly GST returns (Form GSTR-3B). Table 4 requires a summary of eligible ITC, ineligible ITC, ITC reversed, and ITC reclaimed during the tax period.

The format of Table 4 in GSTR-3B was updated in July 2022. Currently, Table 4(A)(5) automatically populates the total ITC figure from GSTR-2B, which includes ineligible or unavailable ITC. If this total ITC is not properly categorized and reversed in Table 4(B), it will incorrectly contribute to the taxpayer’s net ITC claims. Therefore, any ineligible or unavailable ITC must be identified and correctly reversed. If ITC from previous tax periods is reclaimed in the current period, it should also be reported to arrive at the precise net eligible ITC figure.

Accurately declaring ITC values in Table 4 is critical as it directly impacts the government's calculation of net tax liability and GST dues. Inaccuracies in this table can lead to discrepancies with GSTR-2B, potentially resulting in notices and penalties.

The government is actively working on correlating data reported in GSTR-3B with GSTR-2B instantly upon filing, and subsequently with GSTR-9, as part of GST departmental audits. The introduction of real-time scrutiny of returns and automated intimations via DRC-01C are examples of these initiatives.

The latest format of Table 4 is presented below:

Previously, taxpayers could claim any amount of provisional ITC until October 9, 2019. However, the government later restricted provisional ITC, ultimately eliminating it from January 1, 2022, onwards. Consequently, taxpayers can now only claim ITC if it is reflected in their GSTR-2B. This makes matching the purchase register with GSTR-2B essential for all ITC claims.

Reversal of Input Tax Credit

ITC can only be claimed for business-related goods and services. If these are used for non-business (personal) purposes or for making exempt supplies, ITC cannot be claimed. Additionally, there are other scenarios where ITC must be reversed.

ITC will be reversed in the following situations:

1. Non-payment of Invoices within 180 Days: ITC will be reversed for invoices that were not settled within 180 days from their issue date.
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 ITC previously reduced must be reversed.
3. Inputs Partially for Business and Exempt Supplies or Personal Use: For businesses that use inputs for both business and non-business (personal) purposes, or for both taxable and exempt supplies, the ITC attributed to the personal use or exempt supply portion must be reversed proportionately.
4. Capital Goods Partially for Business and Exempt Supplies or Personal Use: This is similar to the above point, but specifically applies to capital goods.
5. ITC Reversed is Less Than Required: This is assessed after the annual return is filed. If the total ITC on inputs used for exempted or non-business purposes exceeds the ITC actually reversed during the year, the difference will be added to the output tax liability, and interest will be applicable.

Details of ITC reversal are furnished in GSTR-3B. For more insights into segregating ITC for business and personal use and related calculations, refer to our article.

ITC Reconciliation Decoded

ITC reconciliation is vital for businesses to ensure they are claiming accurate input tax credits, thereby mitigating legal risks such as penalties or GST registration cancellation. The process involves downloading GSTR-2B data from the government portal and comparing it against the details prepared in the draft GSTR-3B. Any discrepancies must be identified and corrected.

ITC claimed by a person in GSTR-3B must align with the details provided by their supplier in GSTR-1, which then appear in the Invoice Management System (IMS) and subsequently flow into GSTR-2B upon acceptance. Once a supplier saves a document, it moves from GSTR-1/IFF/1A to the recipient's IMS. After the supplier files their respective GSTR-1/IFF/1A, the document populates into the recipient's GSTR-2B. If no action is taken by the recipient, the invoice is automatically accepted and added to GSTR-2B. Therefore, performing GSTR-2B versus purchase register reconciliation for ITC actions is crucial. Neglecting to use IMS exposes businesses to a higher risk of notices from tax authorities due to potential over-claimed ITC.

In the event of any mismatch between GSTR-3B, the purchase register, and GSTR-2B, communication regarding discrepancies will be sent to both the supplier and recipient after the GSTR-3B filing. For a detailed explanation of the reasons for ITC mismatches and the procedure for applying to reclaim ITC, please consult our article.