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Input Tax Credit (ITC) under GST

Category: GST

Input Tax Credit (ITC) under GST: Rules & Conditions

🔍 What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) refers to the credit that a registered taxpayer can claim for the GST paid on purchase of goods or services used in the course or furtherance of business.

For example, if you are a manufacturer and you pay GST on raw materials, you can claim that tax as a credit against your output GST liability on the final product.

✅ Eligibility Conditions for Availing ITC [Sec 16(1) & 16(2) of CGST Act]

To avail ITC, the following basic conditions must be fulfilled:

  1. Possession of valid tax invoice or debit note issued by a registered supplier.

  2. Receipt of goods or services or both.

    • Includes goods received by agent or job worker on behalf of principal.

  3. Tax must have been paid by the supplier to the government.

    • Either in cash or by utilizing their input tax credit.

  4. Filing of GST returns (GSTR-3B) by the recipient.

  5. Matching of ITC in GSTR-2B:

    • ITC can be claimed only if it appears in the recipient’s GSTR-2B.

  6. Use of goods/services for business purpose.

    • ITC is not available for goods/services used for personal consumption.

  7. ITC cannot be claimed if depreciation is claimed on the tax component of capital goods under the Income Tax Act.

📅 Time Limit for Availing ITC [Sec 16(4)]

ITC for any invoice or debit note must be claimed by the earlier of:

❌ Blocked Credits – Section 17(5) of CGST Act

ITC cannot be claimed in the following cases:

  1. Motor vehicles (with exceptions for certain uses like transportation of goods, training, etc.)

  2. Food and beverages, outdoor catering, beauty treatment, health services, etc.

    • Unless used for making outward taxable supplies of the same category.

  3. Membership of clubs, health & fitness centres.

  4. Rent-a-cab, life and health insurance, unless mandated by law.

  5. Goods lost, stolen, destroyed, written off or given as free samples/gifts.

  6. Construction of immovable property (except plant and machinery).

  7. Works contract services for construction of immovable property (except where it's input to another works contract).

📜 Documents Required to Claim ITC [Rule 36 of CGST Rules]

  1. Tax Invoice / Debit Note issued by a registered supplier.

  2. Bill of Entry (for imports).

  3. Invoice for inward supply from unregistered person (under reverse charge).

  4. ISD Invoice (Input Service Distributor).

🔢 Utilization Order of ITC [Section 49A & Rule 88A]

  1. IGST credit → used first for IGST, then CGST/SGST.

  2. CGST credit → used for CGST, then IGST (not for SGST).

  3. SGST credit → used for SGST, then IGST (not for CGST).

⚠️ Restrictions on ITC under Rule 37

If the recipient fails to make payment to the supplier within 180 days from the date of invoice, the ITC claimed must be reversed along with interest.

ITC can be re-availed upon payment to the supplier.

🔍 Matching ITC with GSTR-2B

As per Rule 36(4), ITC can only be availed if it appears in GSTR-2B. No provisional credit is allowed. Ensure:

🧾 ITC on Reverse Charge Mechanism (RCM)

In RCM cases:

🏢 Special Cases of ITC

1. Input Service Distributor (ISD)

2. Job Work

3. Credit on Capital Goods

4. ITC on Exempt + Taxable Supplies

🔄 Reversal of ITC (Key Scenarios)

ReasonSection / RuleAction
Non-payment within 180 daysRule 37Reverse ITC + interest
Exempt + Taxable SupplyRule 42/43Proportionate reversal
Personal UseSec 17(1)Reversal
Goods lost/stolenSec 17(5)No ITC

⚠️ Penalty for Wrong ITC Claim

🧩 Best Practices for ITC Compliance

📘 Recent Updates (as of 2024-25)

← ITC on used vehicle sales Reverse Charge Mechanism (RCM) →