Understanding Input Tax Credit (ITC)
Input Tax Credit (ITC) is the tax that a business pays on purchases (inputs, capital goods, and input services) which can be used to reduce the GST liability on sales (output). It's a fundamental mechanism that prevents cascading of taxes and ensures that tax is paid only on value addition.
What is Input Tax Credit?
ITC allows businesses to claim credit for the GST paid on business purchases. This credit can be set off against the GST liability on outward supplies. The basic principle is:
Net GST Payable = Output GST - Input Tax Credit
For example: If your output GST is ₹50,000 and ITC is ₹30,000, you only pay ₹20,000 to the government.
Eligibility Conditions for ITC
- Possession of Tax Invoice: You must have a valid tax invoice or debit note issued by a registered supplier
- Receipt of Goods/Services: The goods or services must have been received (partial receipt allows proportionate ITC)
- Tax Payment by Supplier: The supplier must have paid the tax to the government
- Filed Returns: Both buyer and seller must have filed their GST returns
- Used for Business: The purchases must be used for business purposes or for making taxable supplies
Blocked Credits - Section 17(5) CGST Act
Certain purchases are specifically blocked from claiming ITC, regardless of business use:
| Blocked Item |
ITC Blocked |
Exceptions |
| Motor Vehicles (< 13 passengers) |
50% blocked |
Used for specified purposes like transportation, driving schools, rental |
| Food and Beverages |
100% blocked |
If outward supply is of same (e.g., restaurants, caterers) |
| Outdoor Catering |
100% blocked |
If outward supply is of same category |
| Beauty Treatment, Health Services |
100% blocked |
If outward supply is of same category |
| Membership of Club, Health & Fitness |
100% blocked |
Obligation to provide as employer |
| Travel Benefits (Air, Rail, Road) |
100% blocked |
Obligation to provide as employer or further supply of same |
| Life Insurance, Health Insurance |
100% blocked |
Obligation to provide as employer or insurance company |
| Works Contract for Construction |
100% blocked |
Plant and machinery, input service |
| Goods/Services for Personal Use |
100% blocked |
No exceptions |
Time Limit for Claiming ITC
Important Deadline: ITC must be claimed within the earlier of:
- Before filing GSTR-3B for September of the following financial year, OR
- Before filing Annual Return for that financial year
Example: For purchases made in FY 2023-24, ITC must be claimed by September 2024 (or Annual Return date if earlier).
ITC Reversal Scenarios
In certain situations, you need to reverse (pay back) ITC already claimed:
- Non-payment by Supplier: If supplier doesn't pay tax within 180 days
- Exempt Supplies: If goods/services used for exempt supplies
- Personal Use: If goods/services used for non-business purposes
- Credit Notes: When buyer issues credit note for return of goods
- Section 17(5) Items: If blocked category items were wrongly claimed
Common ITC Mistakes to Avoid
- Claiming without Invoice: Always ensure valid tax invoice before claiming
- Ignoring GSTR-2B: Only claim ITC that appears in your GSTR-2B auto-populated statement
- Missing Time Limit: Track purchase dates and claim within deadline
- Wrong Classification: Ensure proper classification between capital goods, inputs, and input services
- Blocked Credits: Don't claim ITC on Section 17(5) items
- Personal Use: Separate business and personal expenses clearly
- Proportionate Reversal: For mixed supplies (taxable + exempt), calculate proportionate reversal correctly
ITC Reconciliation Best Practices
- Match GSTR-2B with purchase register monthly
- Follow up with suppliers for any mismatches
- Maintain proper documentary evidence for all ITC claims
- Calculate blocked credits accurately using this tool
- File GSTR-3B on time to avoid interest on late payment
- Conduct periodic ITC audits to identify and correct errors
Frequently Asked Questions
What is the maximum ITC I can claim?
There is no maximum limit on ITC claim. You can claim 100% of eligible ITC as per GST law. However, you can only claim ITC that:
- Is reflected in GSTR-2B (matches with supplier's GSTR-1)
- Meets all eligibility conditions under Section 16
- Is not blocked under Section 17(5)
- Is claimed within the time limit
Can I claim ITC on motor vehicles?
Generally, only 50% ITC is available on motor vehicles with seating capacity less than 13 persons. However, full ITC can be claimed if the vehicle is used for:
- Further supply of such motor vehicles
- Transportation of passengers (e.g., taxi, bus services)
- Imparting training on driving such vehicles (driving schools)
For goods transport vehicles, full ITC is available as they're not classified under blocked category.
What happens if supplier doesn't pay GST to government?
If your supplier doesn't pay GST to the government, your ITC claim may be affected:
- Invoice won't reflect in your GSTR-2B if not filed by supplier
- Even if claimed, you must reverse ITC within 180 days if supplier doesn't pay tax
- You can reclaim ITC later when supplier pays the tax
- Track your GSTR-2B regularly to identify such cases
Can I claim ITC on food and beverages purchased for office?
Generally, NO. ITC on food and beverages is blocked under Section 17(5) except when:
- Your outward supply itself is of food & beverages (e.g., you run a restaurant, catering business)
- You're providing food as employer obligation (this is debatable and subject to interpretation)
Regular office pantry expenses, employee meals, and guest refreshments typically don't qualify for ITC.
How to calculate proportionate ITC for mixed supplies?
If you make both taxable and exempt supplies, calculate proportionate ITC reversal using this formula:
ITC to Reverse = (Common ITC × Exempt Turnover) ÷ Total Turnover
Example: Total purchases ₹10L (ITC ₹1.8L), Exempt sales ₹20L out of total ₹100L
ITC to reverse = ₹1.8L × (₹20L ÷ ₹100L) = ₹36,000
Eligible ITC = ₹1.8L - ₹36,000 = ₹1,44,000
What is GSTR-2B and how does it affect my ITC claim?
GSTR-2B is an auto-populated ITC statement generated from supplier returns (GSTR-1). Key points:
- Generated on 14th of every month (for previous month)
- Shows all ITC available for you to claim
- Only invoices in GSTR-2B should ideally be claimed in GSTR-3B
- Any mismatch between GSTR-2B and your claim may attract notice
- Reconcile monthly to avoid year-end surprises
Can I claim ITC on capital goods?
Yes, full ITC can be claimed on capital goods (plant, machinery, equipment) if:
- They're used for business purposes
- They're used for making taxable supplies
- All eligibility conditions are met
However, no ITC on:
- Capital goods used for construction of immovable property (except plant & machinery)
- Motor vehicles (subject to 50% restriction as discussed earlier)
What is the time limit for claiming ITC?
ITC must be claimed by the earlier of:
- 30th November of the following financial year (filing GSTR-3B for September), OR
- Date of filing Annual Return (GSTR-9) for that year
Example: For invoices dated April 2023 to March 2024 (FY 2023-24), ITC must be claimed by 30th November 2024.
Important: Earlier it was September, but extended to November from FY 2021-22 onwards.
Can I claim ITC on employee benefits like health insurance?
Generally, NO. Life insurance and health insurance are blocked under Section 17(5) except when:
- You're providing it as an employer obligation (this allows ITC)
- You're an insurance company providing such services further
Group health insurance for employees provided as employment benefit is eligible for ITC as it's an employer obligation.
How to handle ITC on goods returned or credit notes received?
When goods are returned or credit notes received:
- Reduce ITC in the month credit note is received (or when goods returned)
- If ITC was already claimed, reverse the proportionate ITC
- Supplier should issue credit note within prescribed time limits
- Ensure credit note reflects in GSTR-2B before reversing ITC
Report ITC reversal in Table 4(B) of GSTR-3B under "Reversal of ITC on account of credit notes".