Input tax credit under GST

India's Goods and Services Tax (GST) system was introduced to unify the country's indirect taxation and eliminate cascading taxes. A key feature of GST is the Input Tax Credit (ITC), which allows businesses to reduce their tax liability by claiming credit for the tax paid on purchases. Understanding ITC in GST can help businesses optimise cash flow and ensure compliance with tax regulations.

This article provides a comprehensive overview of what Input Tax Credit is under GST, who can claim it, the conditions for eligibility, documentation requirements, and how to claim ITC. Read on to learn more about Input Tax Credit under GST and streamline your tax payments.

What is input tax credit (ITC) under GST?

The ITC full form in GST refers to Input Tax Credit, which is the credit a business receives for the GST paid on purchases of goods or services used for business purposes. This credit can be used to offset the GST payable on sales (output tax liability). ITC is a core feature of GST, ensuring seamless tax flow throughout the supply chain.

Here's a quick example to understand what is input tax credit in GST: A manufacturer purchases raw materials worth ₹1 lakh and pays 18% GST (₹18,000). The manufacturer can use this ₹18,000 as ITC to reduce their tax liability when selling finished products. If the manufacturer collects ₹30,000 as GST from customers, they can use the ₹18,000 ITC to offset the tax liability, reducing the final GST payable to ₹12,000. The key benefit of ITC in GST is that it helps businesses reduce tax costs, improving profitability and cash flow.

Eligible and ineligible input tax credit

While ITC is available for most business-related purchases, there are some exceptions. Businesses must be aware of the eligible and ineligible ITC in GST to avoid errors in claiming credit

Eligible ITC

A business can claim ITC for the GST paid on:

• Raw materials and consumables used in manufacturing
• Goods and services purchased for resale
• Capital goods used for business
• Services essential for business operations, such as consultancy and legal fees
• GST paid on imports (excluding Basic Customs Duty)

Ineligible ITC

ITC in GST cannot be claimed for:

• Motor vehicles (except for transportation, training, or resale)
• Food, beverages, outdoor catering (unless used for taxable supplies)
• Beauty treatments, health services, plastic surgery (unless part of taxable supply)
• Membership fees for clubs, fitness centres
• Travel benefits given to employees (such as leave or home travel concessions)
• Goods and services used for personal consumption
• Works contract services for the construction of immovable property

Understanding these ITC eligibility rules helps businesses avoid compliance issues and financial penalties.

Input tax credit on capital goods

Capital goods are tangible assets such as machinery, tools, equipment, and vehicles that are used to produce goods or provide services in a business. Under Input Tax Credit under GST, companies can claim ITC on capital goods, which helps reduce the overall cost of acquiring long-term assets and improves financial liquidity. However, ITC on capital goods is subject to specific conditions and restrictions to prevent misuse.

Key conditions for claiming ITC on capital goods:

• The capital goods must be used for business operations. ITC is available only if the capital goods are directly used for taxable business activities; assets used for exempted or non-business purposes do not qualify.
• The tax paid on capital goods should not be capitalised as depreciation. If GST paid on capital goods is claimed as depreciation under the Income Tax Act, ITC cannot be claimed to prevent double benefits.
• If a business uses capital goods partly for personal and partly for business use, ITC can be claimed only for the business portion. The ITC must be proportionately calculated based on the actual business usage of the asset, ensuring compliance with tax regulations.
• If capital goods are sold within five years, the ITC claimed must be reversed proportionately. The proportionate reversal is based on the number of years the asset was used for business before being sold, transferred, or disposed of.

Claiming ITC on capital goods allows businesses to reduce their investment costs, manage cash flow efficiently, and reinvest the savings into business expansion or technological upgrades. It also ensures that the tax burden on capital investments is minimised, promoting industrial growth and competitiveness

Documents required for claiming ITC

To claim Input Tax Credit under GST, businesses must maintain proper documentation. which include the following:

• Supplier’s Invoice: The original tax invoice issued by the supplier for the goods or services purchased.
• Bill of Supply: Required for claiming Input Tax Credit (ITC) on purchases from taxpayers under the composition scheme.
• Debit Note: Issued by the supplier for any adjustments to the original invoice.
• Bill of Entry: Required for claiming ITC on imported goods
• Input Service Distributor (ISD) Invoice: If the business receives input services from an ISD, an ISD invoice is needed.

Maintaining accurate records of these documents is crucial for seamless ITC claims and GST compliance.

Who can claim input tax credit under GST?

To claim ITC in GST, businesses must fulfil certain conditions:

• GST Registration: Only GST-registered businesses can claim ITC.
• Possession of Tax Invoice: The business must have a valid invoice or relevant document.
• Receipt of Goods or Services: ITC can be claimed only after the goods or services are received.
• Tax Payment by Supplier: The supplier must have paid the GST to the government.
• Timely Return Filing: The claimant must have filed their GST returns on time.

These criteria ensure that ITC benefits are available only to legitimate business transactions.

Time limit to claim input tax credit under GST

The time limit for claiming ITC in GST is governed by Section 16(4) of the CGST Act, 2017. The deadline for claiming ITC for a particular financial year is the earlier of:

• 30th November of the next financial year, or
• The due date for filing the annual GST return (GSTR-9) for that financial year.

For example, for invoices issued in FY 2022-23, ITC can be claimed before 30the November 2023, or before filing the GSTR-9 for FY 2022-23, whichever is earlier.

How to claim an ITC under GST?

• Verify ITC in GSTR-2B: Check the ITC details in GSTR-2B, which is auto-generated based on suppliers' returns.
• Match invoices: Ensure that invoices recorded in books match those reflected in GSTR-2B.
• File GSTR-3B: Report the total output tax liability and ITC claimed in GSTR-3B.
• Adjust ITC against tax payable: Offset ITC against the output tax liability.
• Follow up on mismatched ITC: Contact suppliers to verify any missing or incorrect invoices and ensure accurate ITC claims.

Latest Updates

GST 2.0 on 17 September 2025

Recommendations from the 56th GST Council Meeting and CBIC Notification: Changes to the GSTR-9 Form: For better readability, new input tax credit (ITC) columns (A1, A2, H1, etc.) have been added. The form now illustrates the proper placement of the returned ITC with references to the central GST rules 37, 37A, 38, 39, 42, and 43. From 1st November 2025, the CBIC will implement a new method for the payment of 90% provisional refunds in cases involving the inverted duty structure and zero-rated supplies of goods and services. The process will be automated, based on data-driven analysis and risk evaluation.

Budget 2025

1st February 2025

Amendment to Section 34 of the CGST Act'17: The Finance Minister has amended the proviso of subsection (2), which has changed the reversal of the matching Input Tax Credit (ITC) to be a mandatory action in a case where a supplier issues a credit note to absorb the tax burden. In other words, if ITC is claimed, the recipient must follow the credit note issued to them for the reversal of the ITC

Amendment to Section 38 of the CGST Act'17: The term "auto-generated" has been removed from Section 38(1), which implies that the ITC statement (GSTR-2B) will not be only system-generated. To achieve this, companies will need to use the Invoice Management System (IMS) for the manual authentication and matching of invoices and ITC instead of the automated one. Moreover, the new sub-clause (c) under Section 38(2) grants more power to the government for the rule-based specification of the ITC statement details.

Conclusion

Understanding input tax credit meaning in GST is essential for businesses to optimise their tax liability and improve cash flow. By ensuring proper compliance, companies can claim legitimate ITC and reduce their GST burden. Keeping accurate records, matching invoices, and filing returns on time are key to maximising the benefits of ITC in GST. For hassle-free financial management, businesses can explore Axis Bank’s Business Banking Solutions, which offer tailored financial products, including GST-compliant accounts and payment solutions.

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