Input Tax Credit (ITC) is the credit of GST paid on inputs (goods/services) that a registered business can use to offset its output GST liability. It is the mechanism that prevents the cascading effect of taxes and is governed primarily by Sections 16-18 and Rules 36-44 of the CGST Act/Rules.
Conditions for Claiming ITC (Section 16)
All four conditions must be simultaneously met:
- Valid document: Tax invoice, bill of entry, debit note, or ISD invoice from a registered supplier
- Receipt of goods/services: Actual receipt (not just invoice). For installment deliveries, ITC available when last installment received.
- Tax paid: Supplier must have paid the tax to the government (verified via GSTR-2B auto-population from supplier GSTR-1)
- Return filed: Recipient must have filed GSTR-3B for the relevant period
Additional condition (Rule 36(4)): ITC can be claimed only to the extent invoices appear in GSTR-2B. 100% restriction — ITC is available only invoice-by-invoice match (since January 2022 full implementation).
Blocked Credits Under Section 17(5)
Regardless of eligibility, ITC is NOT available on the following ("blocked credit"):
| Category | Exception (where ITC IS allowed) |
|---|---|
| Motor vehicles (capacity ≤ 13 persons) | Used for transport of passengers (taxi service), driving school, further supply of vehicles |
| Food, beverages, club memberships, health/fitness | Used for same category outward supply (e.g., restaurant providing food) |
| Works contract services for immovable property | For plant and machinery (not building/civil structure) |
| Goods/services for personal consumption | None |
| Goods lost/stolen/written off/gifted/free samples | None |
| Tax paid under composition scheme | None |
ITC Reversal — Key Rules
Rule 42 — Inputs and Input Services
If inputs or input services are used for both taxable and exempt supplies, ITC must be partly reversed:
- ITC on exclusively taxable inputs: fully available
- ITC on exclusively exempt inputs: fully reversed
- ITC on common inputs: reversed proportionately = Common ITC × (Exempt turnover / Total turnover)
Rule 43 — Capital Goods
Capital goods used partly for exempt supplies: ITC reversed @ 1/60th per month (5-year life) of total ITC × (exempt turnover / total turnover). Balance retained as credit.
Section 17(1)/(2) — Partial Exemption
If a person makes both taxable and exempt supplies, ITC is available only on the proportion attributable to taxable supply. The formula is applied at the annual filing stage (GSTR-9).
Section 16(2)(b) — Supplier Payment Failure
If recipient does not pay the supplier within 180 days of invoice date, the ITC claimed must be reversed (added back to output tax liability). ITC can be re-availed once payment is made.
ITC on Specific Categories
| Category | ITC Available? |
|---|---|
| Capital goods | Yes (full credit in year of purchase), reversed if partly exempt |
| Imports (IGST paid at customs) | Yes, as ITC of IGST |
| Reverse Charge Mechanism (RCM) | Yes, ITC of GST self-paid under RCM available same period |
| Zero-rated supplies (exports) | Yes, refund of accumulated ITC available |
| Purchases from unregistered supplier | No ITC (RCM may apply in certain cases) |
GSTR-2B Reconciliation Best Practices
- Download GSTR-2B on the 14th of each month after it is generated
- Compare with purchase register to identify invoices not in GSTR-2B (supplier not filed GSTR-1)
- Follow up with suppliers to file GSTR-1 and include the invoice
- Do not claim ITC on invoices not in GSTR-2B — avoid demand notices
- Annually reconcile ITC in GSTR-3B with GSTR-2A/2B at GSTR-9 stage
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