Step-by-Step Guide to Claim Input Tax Credit in GST

What is Input Tax Credit (ITC)?

Input Tax Credit is the GST feature that allows businesses to claim the credit for the GST paid on the purchase of goods or services made for business purposes. It allows businesses to offset the GST they have paid against the GST they collect from customers. ITC ensures that tax is paid only on the value addition at each stage of the supply chain, thus avoiding double taxation.

If a manufacturer pays GST on raw materials and then collects GST on the sale of finished goods, the GST paid on raw materials can be deducted from the GST collected on sales. For example, if a manufacturer pays INR 10,000 GST on procuring raw materials and collects INR 15,000 GST on the sale of finished products, the manufacturer can claim an ITC of INR 10,000 and pay only INR 5,000 as net GST. This mechanism prevents the cascading effect of taxes. It also reduces the overall tax burden and ensures transparency in the taxation system.

 

Who Can Claim Input Tax Credit in ITC?

The mechanism of input credit tax in GST helps registered taxpayers reduce their overall liability by allowing credit for taxes already paid on inputs. However, claiming ITC requires meeting certain conditions under GST rules:

1. A valid tax invoice must be available.
2. Goods or services must be received.
3. GSTR-3B should be filed by the recipient.
4. Suppliers must pay the tax to the government.
5. Payment towards the invoice or debit note must be made within 180 days from the invoice date.
6. For goods received in instalments, ITC can be claimed only after receiving the final lot.
7. ITC applies only to taxable supplies used for business purposes.
8. ITC cannot be claimed if depreciation is applied to the tax component of a capital good.
9. ITC must be claimed within the earlier of the following:
   1. 30^th November of the year after the financial year of the invoice/debit note.
   2. Date of filing the annual return.
10. ITC claims in GSTR-3B must match GSTR-2B as per CGST Rule 36(4).
11. Businesses under the composition scheme cannot claim ITC.

 

What Can Be Claimed as ITC?

Under GST, businesses can claim input tax credit on certain taxes paid while availing goods or services for business purposes. These include:

1. Central GST (CGST): Paid on intra-state or intra-union territory purchases
2. State GST (SGST): Paid on intra-state purchases.
3. Union Territory GST (UTGST): Paid on intra-union territory Purchases
4. Integrated GST (IGST): Paid on inter-state purchases or imports.

 

Eligible and Ineligible ITC

Input tax credits is not available in certain cases (exclusion list) as per Section 17 (5) of the Central Goods and Services Tax (CGST) Act, 2017. All other transactions outside this list qualify for ITC.

 

Ineligible ITC

1. Motor vehicle - No ITC for personal use (allowed for resale, commercial use, or mandated cab services).
2. Food & Beverages: ITC is not available for catering, health, or related services unless legally required.
3. Membership Fees: No ITC on club or gym memberships.
4. Insurance: Health and life insurance excluded, except when mandated by law.
5. Construction Expenses: ITC is not allowed for building immovable property.
6. Lost or Destroyed Goods: No ITC on damaged, lost, or gifted items.

 

Documents Required for Claiming ITC

The following are the documents required for claiming ITC:

1. Tax invoice issued by the supplier of goods and services
2. Tax Invoice issued by recipient along with proof of payment of tax
3. A debit note issued by the supplier as per the provisions of Section 34, if applicable
4. Bill of entry for imports or similar document as prescribed under the Customs Act
5. A credit note/document issued by the Input Service Distributor for any subsequent adjustments.

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GST Rules for Claiming Input Tax Credit¹

1. Input credit tax in GST (ITC) allows registered taxpayers to reduce their tax liability by claiming credit on taxes paid for inputs.
2. To claim ITC, you must have a valid tax invoice or prescribed document, and the goods or services must be received.
3. The supplier should have discharged the tax; otherwise, the recipient cannot claim ITC.
4. The recipient has to file GSTR-3B in the relevant period to claim ITC.
5. Payment towards the invoice or debit note must be made within 180 days of the invoice date; otherwise, ITC must be reversed under Rule 37⁵.
6. If goods are supplied in instalments, ITC is allowed only once the final lot is received.
7. ITC applies only to taxable supplies made for business, not personal or exempt supplies.
8. ITC cannot be claimed if depreciation is claimed on the GST component of capital goods.
9. ITC must be claimed before the earlier of: 30 November of the next financial year or the date of filing the annual return.
10. The amount of ITC claimed in GSTR-3B must reconcile with GSTR-2B, i.e., claims should match eligible credits appearing in 2B.
11. Taxpayers under the composition scheme are ineligible to claim ITC.
12. Under Section 17(5) of the CGST Act, ITC is not available on specified items, and they are called blocked credits.

 

Time Limit to Claim Input Tax Credit

The time limit for claiming ITC under the Goods and Services Tax (GST) regime is clearly defined under Section 16(4) of the CGST Act, 2017. A registered person can claim ITC for an invoice or debit note pertaining to a financial year up to the date of filing the annual return or 30^th November of the following financial year, whichever is earlier.

 

Reversal of Input Tax Credit

ITC must be reversed in cases like:

1. Non-payment to the supplier within 180 days.
2. Inputs and capital goods used for exempt or non-business purposes.
3. Credit note issued to Input Service Distributor (ISD) by seller etc.

The reversed amount must be added to the output tax liability in the relevant return.

 

Claiming and reconciling ITC in GST²

Claiming and reconciling input tax credit ensures businesses only claim valid credits and avoid mismatches or notices.

 

Central Goods and Services Tax (CGST)³

CGST is levied by the Central Government on intra-state supplies. ITC on CGST can be claimed for purchases made within the same state or union territory.

 

State Goods and Services Tax (SGST)³

SGST is levied by the State Governments on transactions that take place within the same state. A portion of the input tax credit for SGST is claimable alongside CGST when the supply and use occur in the same state.

 

Interstate Goods and Services Tax (IGST)⁴

IGST applies to inter-state transactions and imports. ITC under IGST can be set off first; excess IGST credit can then be used against CGST or SGST liability in a defined order.

 

Key Takeaways

1. Input tax credit allows businesses to claim credit for taxes paid on goods and services used for business purposes.
2. ITC prevents the cascading effect of taxation by offsetting input GST against output GST liability.
3. Claiming input tax credit requires valid invoices, supplier tax payment, and timely filing of GSTR-3B returns.
4. ITC is not available for personal expenses, blocked categories, or where depreciation is claimed on the tax component.
5. Reconciliation of ITC in GSTR-3B with GSTR-2B ensures compliance and smooth tax credit utilisation.

 

Conclusion

Input credit tax in GST is a cornerstone of the framework, promoting efficiency in the supply chain and reducing overall tax burdens. It offers businesses significant relief by eliminating the cascading effect of taxes. However, its benefits come with strict conditions, eligibility rules, documentation, and timelines. Understanding these requirements helps businesses remain compliant, optimise tax management, and fully leverage the advantages of GST.

 

FAQs

 

1. How can I claim GST input tax credit (ITC)?

Claim ITC by filing GSTR-3B with valid invoices, actual receipt of goods/services, and verification from GSTR-2B.⁵

 

2. Is it possible to claim ITC after 2 years?

No. ITC must be claimed within the earlier of: 30 November following the financial year or the date of the annual return.⁵

 

3. How is ITC calculated under GST?

To calculate ITC, calculate the GST paid on eligible purchases used as inputs. Multiply the GST paid by the eligible input percentage and find the total ITC.

 

4. What is the limit of ITC utilisation?

Eligible registered persons cannot claim ITC exceeding 99% of the output tax liability.⁶

Source –

1. https://cleartax.in/s/input-tax-credit-under-gst
2. https://cleartax.in/s/adjustment-of-input-tax-credit-under-gst
3. https://cleartax.in/s/what-is-sgst-cgst-igst
4. https://cleartax.in/s/gst-input-tax-credit-utilisation
5. https://cleartax.in/s/rule-37-of-cgst-sgst-rules-itc-reversal-180-days
6. https://cleartax.in/s/rule-86b-under-gst-restriction-on-itc-utilisation