Input Tax Credit (ITC) – Rules and Compliance
Input Tax Credit (ITC) is one of the most significant features of GST, allowing businesses to claim credit for taxes paid on purchases. This guide covers everything about ITC eligibility, claiming process, and compliance requirements.
What is Input Tax Credit?
Input Tax Credit is the credit that a business can claim for the GST paid on purchases (inputs, input services, and capital goods) used for business purposes. It helps avoid the cascading effect of taxes.
Utilization order (Sections 49A/49B)
Use ITC in this order: exhaust IGST first; then use CGST and SGST/UTGST as per cross‑utilization rules. IGST must be fully utilized before using CGST or SGST/UTGST for other heads.
Eligibility for ITC
Who Can Claim ITC?
| Taxpayer Category | ITC Eligibility | Conditions |
|---|---|---|
| Regular Taxpayers | ✅ Yes | All purchases for business use |
| Composition Dealers | ❌ No | Cannot claim any ITC |
| Unregistered Persons | ❌ No | Registration mandatory for ITC |
| Input Service Distributors | ✅ Yes | Only for distribution to recipients |
Eligible Purchases for ITC
Raw Materials and Consumables
- Raw materials used in manufacturing
- Packing materials
- Consumables and stores
- Fuel used in manufacturing process
- Spare parts for machinery
Conditions:
- Must be used for business purposes
- Should not be for personal consumption
- Supplier must be GST registered
Services Used for Business
- Transportation services
- Professional and consultancy services
- Repair and maintenance services
- Rent (if not exempted)
- Advertising and marketing services
Restrictions:
- Services for personal use not eligible
- Certain services like health insurance have restrictions
- Food and beverage services (with exceptions)
Plant, Machinery, and Equipment
- Manufacturing equipment
- Office furniture and fixtures
- Computers and IT equipment
- Vehicles used for business (conditions apply)
- Construction of factory/office
Special Rules:
- ITC can be claimed in the year of receipt
- Reversal required if sold within 5 years
- Different rules for construction services
Conditions for Claiming ITC
Mandatory Conditions (Section 16)
Condition 1: Possession of Valid Tax Invoice
- Original tax invoice or debit note
- Invoice details should be complete and accurate
- Electronic invoices are acceptable
Condition 2: Receipt of Goods/Services
- Actual receipt of goods or services
- Deemed receipt provisions apply in certain cases
- Proof of delivery/completion may be required
Condition 3: Payment to Supplier (within 180 days)
- Pay the supplier within 180 days from invoice date
- If unpaid, reverse ITC with interest; you may re‑avail on payment
Condition 4: Supplier furnishes outward supplies
- Supplier furnishes invoice/debit note in GSTR‑1/IFF
- ITC is eligible only when the document appears in your GSTR‑2B for the period (Rule 36(4))
Condition 5: Time limit and recipient filing
- Claim in GSTR‑3B for the tax period when it appears in GSTR‑2B and other conditions are met
- Time limit: up to the due date for the return of November of the next FY, or filing of annual return, whichever is earlier (Section 16(4))
Blocked/Restricted ITC
Completely Blocked ITC
The following items are not eligible for ITC:
| Category | Description | Reason |
|---|---|---|
| Motor Vehicles | Cars, two-wheelers (except specified uses) | Personal use presumption |
| Food & Beverages | Office canteen, employee welfare | Personal consumption |
| Outdoor Catering | Events, parties, entertainment | Not for business purpose |
| Health Services | Employee health check-ups | Personal benefit |
| Cosmetics | Beauty products, personal care | Personal use |
| Travel Benefits | Club memberships, personal travel | Personal enjoyment |
Exceptions to Blocked Credit
ITC is available on blocked items if:
- Used for making further taxable supplies
- Used for transportation of passengers
- Used for training or education services
- Obligatory for employer to provide under law
Proportionate ITC Restrictions (Rules 42/43)
| Scenario | ITC Treatment | Calculation Method |
|---|---|---|
| Exempt Supplies | Proportionate reversal | (Exempt turnover / Total turnover) × Total ITC |
| Personal Use | Complete reversal | 100% ITC reversal |
| Mixed Use | Proportionate reversal | Based on usage ratio |
ITC Claiming Process
Monthly Claiming Process
Step 1: Verify GSTR-2B
- Check auto‑drafted ITC statement (2B)
- Match with your purchase records
- Identify discrepancies
Step 2: Reconcile Purchases
- Match invoices with GSTR‑2B data
- Note missing entries
- Communicate with suppliers for missing filings
Step 3: Claim in GSTR-3B
- Claim ITC in Table 4 of GSTR-3B
- Split between CGST, SGST, and IGST
- Ensure total matches with eligible amount
Step 4: Maintain Records
- Keep all tax invoices
- Maintain ITC register
- Document any reversals or adjustments
Time Limits for ITC
| Action | Time Limit | Consequences of Delay |
|---|---|---|
| Claiming ITC | By due date of November return of next FY (or annual return date, earlier) | ITC lapses beyond time limit |
| Payment to Supplier | Within 180 days of invoice | ITC reversal with interest |
| Return Filing | Monthly due dates | Penalty and interest |
ITC Reversal Scenarios
Mandatory Reversal Cases
-
Non-payment to Supplier
- Reversal after 180 days of invoice date
- Interest: 18% per annum from date of claim
-
Supply Becomes Exempt
- Proportionate reversal required
- Calculate based on exempt turnover ratio
-
Personal Use of Goods/Services
- Complete reversal of ITC
- Additional tax if personal use
-
Capital Goods Disposal
- Reversal of remaining ITC (within 5 years)
- Formula: (60 - months used) × ITC / 60
Reversal Calculation Examples
Example 1: Non-payment Reversal
- Invoice Date: April 15, 2024
- ITC Claimed: ₹10,000
- Payment Due: October 12, 2024 (180 days)
- If not paid by due date: Reverse ₹10,000 + Interest
Example 2: Capital Goods Disposal
- ITC Claimed: ₹60,000 (2 years ago)
- Months Used: 24
- Reversal Amount: (60-24) × 60,000 / 60 = ₹36,000
Special Provisions
ITC eligibility via GSTR‑2B (no provisional buffer)
From 01‑01‑2022, ITC is restricted to invoices/debit notes appearing in GSTR‑2B. Provisional buffers (like 5%/20%) are not available.
ITC on Imports
- IGST on Imports: Full ITC available
- Basic Customs Duty: No ITC available
- IGST on Import Services: ITC available subject to conditions
Input Service Distributor (ISD)
- Head office can distribute ITC to branches
- Only input services eligible for distribution
- Pro-rata distribution based on turnover
Compliance and Documentation
Record Maintenance Requirements
Books and Records to Maintain:
- Purchase register with GST details
- ITC availed and utilized register
- Reversal register for blocked credits
- Bank statements and payment records
- Supplier-wise ledger accounts
Retention Period:
- 72 months from the due date of filing annual return (longer if proceedings are pending)
- Electronic records acceptable
- Regular backup recommended
ITC Register Format:
- Invoice details (number, date, value)
- Supplier GSTIN and name
- HSN/SAC codes
- Tax amounts (CGST, SGST, IGST)
- ITC claimed and utilized
- Balance ITC available
Monthly Reconciliation:
- Opening balance + ITC claimed - ITC utilized = Closing balance
- Match with GSTR-3B filings
- Identify and rectify discrepancies
Essential Documents:
- Original tax invoices
- Delivery challans and receipts
- Payment vouchers and bank statements
- Import documents (BOE, shipping bills)
- Contracts and agreements
- Board resolutions for policy decisions
Digital Documentation:
- Scan and store documents digitally
- Ensure readability and authenticity
- Regular data backup
- Cloud storage with access controls
Audit and Scrutiny Points
Common Audit Issues
-
Mismatch in ITC Claims
- Difference between GSTR‑2B and ITC claimed
- Explanation and supporting documents required
-
Blocked Credit Claims
- ITC claimed on ineligible items
- Penalty and interest implications
-
Timing Differences
- ITC claimed before receipt of goods/services
- Late payment to suppliers
-
Documentation Gaps
- Missing or incomplete invoices
- Inadequate proof of business use
Best Practices for Audit
- Maintain detailed records with proper indexing
- Regular internal audits and reconciliations
- Timely communication with suppliers
- Professional consultation for complex cases
Recent Updates and Amendments (selected)
- 01‑01‑2022: Rule 36(4) – ITC restricted to GSTR‑2B entries; no additional provisional ITC
- 01‑08‑2023: E‑invoicing threshold reduced to ≥ ₹5 crore aggregate turnover
- Ongoing: CBIC advisories emphasize 2B‑based reconciliation
Stay Updated: GST laws are frequently amended. Regular review of notifications and circulars is essential for compliance.
Practical Tips for ITC Management
Monthly Checklist
- Week 1: Collect and verify all invoices
- Week 2: Update accounting records and reconcile with GSTR-2A
- Week 3: Calculate eligible ITC and prepare GSTR-3B
- Week 4: File returns and make payments
Technology Solutions
- GST Software: Use certified GST software for automation
- API Integration: Connect with GST portal for real-time data
- Mobile Apps: Quick access for verification and filing
- Cloud Storage: Secure document storage and retrieval
Risk Mitigation
- Regular supplier verification and communication
- Periodic internal audits
- Professional training for accounts team
- Insurance for compliance risks
Conclusion
Input Tax Credit is a powerful tool for reducing tax burden, but it comes with strict compliance requirements. Understanding the eligibility conditions, claiming process, and maintaining proper documentation is crucial for maximizing benefits while ensuring compliance.
Key Success Factors:
- Timely and accurate record maintenance
- Regular reconciliation and verification
- Proactive communication with suppliers
- Continuous learning and updates on law changes
For complex scenarios or specific industry requirements, consult with GST experts or refer to the latest CBIC notifications and circulars.
References
- Sections 16 & 17 of CGST Act; Rules 36, 42, 43 of CGST Rules
- Sections 49A/49B – ITC utilization order
- CBIC notifications/advisories on GSTR‑2B‑based ITC (effective 01‑01‑2022)