Input Tax Credit (ITC) is the heart of GST. It allows you to reduce the tax you pay on your sales (output tax) by the tax you have already paid on your purchases (input tax).
ITC ensures that tax is levied only on the 'value addition' at each stage, preventing the cascading effect (tax on tax).
Means the CGST, SGST, IGST, or UTGST charged on any supply of goods or services made to you. It also includes IGST on imports and tax paid under reverse charge.
It does not include tax paid under the composition scheme.
Means the credit of the 'Input Tax'.
To be eligible to take ITC, two fundamental conditions must be met:
ITC on goods/services for personal use is not allowed.
You must satisfy ALL of the following conditions to claim ITC:
You must have a tax invoice, debit note, or other prescribed tax-paying document.
The details of that invoice/debit note must be furnished by your supplier in their GSTR-1 and must appear in your GSTR-2B.
You must have actually received the goods or services.
In a "Bill to Ship to" model, the person who orders the goods is deemed to have received them, even if they are shipped to a third party.
The tax charged on your purchase must have been actually paid to the government by your supplier.
You must have furnished your own return (GSTR-3B) under Section 39.
If you receive goods against an invoice in lots or installments, you can take ITC only upon receipt of the last lot or installment.
This is a very important condition for retaining your ITC.
You must pay the supplier the value of the supply plus the tax within 180 days from the date of the invoice.
If you don't pay within 180 days, the ITC you availed must be reversed (paid back) along with interest. You can re-avail the credit once you make the payment.
There is a deadline to claim ITC for any financial year.
ITC on an invoice or debit note for a financial year can be availed by the 30th of November of the following financial year, OR the date of filing the annual return for that year, whichever is earlier.
For a debit note, the relevant financial year is the year in which the debit note is issued, not the year of the original invoice.
What if you use inputs for both taxable and exempt supplies?
You can only claim ITC that is attributable to your taxable supplies (including zero-rated supplies).
Similarly, if inputs are used for both business and non-business purposes, you can only claim ITC attributable to the business purpose.
This requires apportionment of common credit.
Section 17(5) provides a specific list of goods and services on which ITC is NOT available, even if they are used for business.
This is a negative list for ITC and is very important for exams.
ITC is blocked on motor vehicles for transportation of persons with a seating capacity of not more than 13 persons (including the driver).
ITC is also blocked on:
This is a major area of blocked credit.
Exception: ITC is available if it's an input service for further supply of works contract service (sub-contracting).
ITC is also not available on:
Section 18 deals with situations where a business's status changes, affecting its eligibility for ITC.
In these cases, you can claim ITC on stock held on the day before the change.
When you become newly eligible for ITC, you can claim it on:
If you switch from the normal scheme to the composition scheme, or if your taxable supply becomes exempt, you must reverse the ITC you've taken.
If you sell capital goods on which you have taken ITC, you must pay an amount.
You must pay the higher of:
An Input Service Distributor (ISD) is an office of a business (like a head office) that receives tax invoices for input services and distributes the credit to its other branches/units having the same PAN.
To facilitate the distribution of credit on common, centralized expenses (like advertising, software licenses) to the locations that actually use the services.
Credit is distributed on a pro-rata basis.
The turnover ratio is based on the preceding financial year. If a recipient had no turnover in the previous year, the last quarter for which turnover is available is used.
An ISD distributes credit by issuing an ISD Invoice to the recipient units.
Once you have ITC in your Electronic Credit Ledger, there is a specific order in which you must use it to pay your output tax liabilities.
Cross-utilisation is allowed but with strict rules.
The ITC of IGST must be utilised first, and it must be completely exhausted before using CGST or SGST credit.
After IGST credit is fully used:
After IGST credit is fully used:
Important: SGST credit can only be used for IGST liability after CGST credit has been fully exhausted.
A proper officer can block the use of ITC from the electronic credit ledger if they have reason to believe it has been availed fraudulently or is ineligible.
This rule restricts the use of ITC for discharging output tax liability for certain taxpayers.
Applies to registered persons whose value of taxable supplies (other than exempt and zero-rated) in a month exceeds ₹50 lakh.
Such persons cannot use ITC to pay more than 99% of their output tax liability. At least 1% must be paid in cash.
The 1% cash payment rule does not apply if: