Input Tax Credit (ITC) under GST

Know how you can reduce the tax you have already paid with input tax credit under GST.
Business Loan
2 min read
07 August 2023

Input tax credit (ITC) is one of the key features of the Goods and Services Tax (GST) regime. It aims to eliminate the cascading effect of taxes and reduces the cost of doing business.

What is the input tax credit?

Input tax credit means the GST paid by a registered person on the purchase of goods or services that are used for the furtherance of business. The input tax credit can be used to offset the GST liability on the supply of goods or services by the registered person.

For example, if you are a manufacturer and you buy raw materials worth Rs. 10,000 and pay GST of Rs. 1,800 (18%), you can claim an input tax credit of Rs. 1,800. If the finished goods are worth Rs. 15,000 and collects GST of Rs. 2,700 (18%), you can use the input tax credit of Rs. 1,800 to pay only Rs. 900 as GST.

Eligible and ineligible input tax credit

Not all input tax credits are eligible for claim under GST. Some input tax credits are specifically blocked or restricted by the GST law.

Here are some examples of ineligible input tax credits:

  • GST paid on motor vehicles and other conveyances. Except when used for specified purposes such as transportation of goods, passengers, or for imparting training.
  • GST paid on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. Except when used for making an outward taxable supply of the same category or as a part of a mixed or composite supply.
  • GST paid on membership fees for a club, health, and fitness centre.
  • GST paid on travel benefits extended to employees on vacation such as leave or home travel concession.
  • GST paid on goods or services received by a non-resident taxable person, except for those on which interstate goods and Service tax (IGST) is payable.
  • GST paid on goods or services used for personal consumption by the registered person or their employees.
  • GST paid on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

Input tax credit on capital goods

Input tax credit (ITC) on capital goods is a benefit available to taxpayers under the GST regime. It allows them to claim the GST paid on the purchase or import of capital goods, such as machinery, equipment, vehicles, etc., that are used for business purposes. However, there are certain conditions and restrictions for availing ITC on capital goods, such as:

  • The capital goods must be capitalised in the books of accounts and not treated as business expenses.
  • The tax component of the capital goods must not be claimed as depreciation under the Income Tax Act 1961.
  • The ITC on capital goods must be reduced by 5% per quarter from the date of invoice, assuming a life span of five years.
  • The ITC on capital goods cannot be claimed if they are used exclusively for exempt supplies or personal use.

These rules are meant to ensure that the ITC on capital goods is claimed only to the extent of their use in taxable supplies and in furtherance of business.

Who can claim input tax credit under GST?

Any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business subject to certain conditions as under.

  1. Possession of tax invoice: The registered person must possess a valid tax invoice or any other specified tax-paying document to claim the credit.
  2. Receipt of goods or services: The credit can be availed only after the registered person has received the goods or services, including scenarios where the billing and shipping addresses differ.
  3. Actual payment of tax: The tax amount must have been paid by the supplier for the credit to be eligible for the recipient.
  4. Furnishing of return: The registered person should have furnished the necessary return to claim the input tax credit.
  5. Lot-based eligibility: If the inputs are received in lots, the credit can be claimed only when the final lot of inputs is received.
  6. Timely payment to supplier: The recipient must pay the supplier the value of goods or services along with the tax within 180 days from the invoice date. Failure to do so will add the credit amount to the recipient's output tax liability with interest. However, once payment is made, the recipient can claim the credit again. In cases of part payment, proportionate credit will be allowed.

Time limit to claim input tax credit under GST

The time limit to claim input tax credit under GST is earlier of the following two dates:

  • The due date of filing the annual return for that financial year; or
  • The date of filing the monthly return for September of the next financial year.

For example, if a registered person wants to claim an input tax credit for the financial year 2022-23. They must do so before filing the monthly return for September 2023 or filing the annual return for 2022-23, whichever is earlier.

How to claim an input input tax credit under GST?

To claim input tax credit under GST, you must follow these steps:

  1. File a monthly return in form GSTR-3B and declare your output tax liability and input tax credit details.
  2. Verify the input tax credit details in form GSTR-2B, which is an auto-drafted statement based on the returns filed by your suppliers.
  3. Reconcile any discrepancies between the claimed input tax credit and form GSTR-2B and rectify them in the next month’s return.
  4. Ensure that you pay any excess input tax credit claimed along with interest and penalty if applicable.

Input tax credit helps in reducing the tax burden on businesses and ensures a seamless flow of credit in the GST system. By following the rules and procedures for claiming input tax credit, you can avail the benefits of GST and improve your cash flow and profitability.

Items on which input tax credit (ITC) is not allowed

Input tax credit (ITC) is a mechanism under GST that allows a registered person to claim credit for the tax paid on the inward supplies of goods or services or both. However, ITC is not available for all items of expenditure. Some of the items on which ITC is not allowed are:

  • Motor vehicles and other conveyances, except when they are used for further supply, transportation of passengers, providing training, or transportation of goods.
  • Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. Except when they are used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.
  • Membership of a club, health, and fitness centre.
  • Rent-a-cab, life insurance, and health insurance, except when they are mandatory for an employer to provide to its employees under any law or when they are used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.
  • Travel benefits are extended to employees on vacation or home travel concession.
  • Works contract services when supplied for construction of an immovable property, except when it is an input service for further supply of works contract service.
  • Goods or services received by a taxable person for construction of an immovable property on their own account, other than plants and machinery.
  • Goods or services on which tax has been paid under a composition scheme.
  • Goods or services used for personal consumption.
  • Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
  • Any tax paid due to short payment, excessive refund, fraud, suppression, misdeclaration, or confiscation.
  • Goods or services used for making exempt supplies.

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Frequently asked questions

Who is eligible to claim the input tax credit?

Only a person who is registered under GST and uses the purchased goods or services for business purposes can claim input tax credit (ITC). The person must also have a valid tax invoice or debit note, receive the goods or services, pay the tax to the government, and file the return within the time limit.

How to claim the input tax credit (ITC) under GST?

To claim the input tax credit (ITC) under GST, the person must follow these steps:

  • Check the eligibility and conditions for claiming ITC.
  • Ensure that the supplier has filed the tax invoice or debit note in form GSTR-1 and it appears in the person’s form GSTR-2B.
  • Claim the ITC in form GSTR-3B by reducing it from the output tax liability.
  • File the return before the due date or before filing the annual return, whichever is earlier.
How to calculate the input tax credit (ITC) under GST?

To calculate the input tax credit (ITC) under GST, the person must follow these steps:

  • Add up the GST paid or payable for each purchase and expense of goods or services used for business.
  • Multiply the amount by the ITC eligibility percentage, which may vary depending on the use and nature of goods or services.
  • Calculate any adjustments for changes in use, sales, or improvements of goods or services.
  • Utilise the ITC in the following order: IGST, CGST, SGST/UTGST.
What is input tax credit (ITC) eligibility?

Input tax credit (ITC) eligibility is the extent to which a person can claim ITC for the GST paid on purchases of goods or services. It depends on various factors such as:

  • The purpose and use of goods or services: ITC can be claimed only if they are used for business and not for personal consumption or exempt supplies.
  • The possession and receipt of goods or services: ITC can be claimed only if the person has a valid document and has received the goods or services or their instalments.
  • The payment of tax to the government: ITC can be claimed only if the supplier has paid the tax to the government and filed the return.
  • The time limit for claiming ITC is: ITC can be claimed only within a specified period from the date of invoice or debit note or annual return, whichever is earlier.
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