Input Tax Credit

Input Tax Credit (ITC) refers to the tax paid on purchases for business purposes that can be deducted while paying output tax.

• When you purchase goods/services from a registered dealer, you pay tax (input tax).
• On sales, you collect output tax from buyers.
• The input tax is adjusted against the output tax, and only the balance is paid to the government.

Example:

• Raw material purchase: ₹100 + 18% GST = ₹18 input tax.
• Sale price: ₹200 + 28% GST = ₹56 output tax.
• Net tax payable = ₹56 – ₹18 = ₹38 (not full ₹56).

To claim ITC, the following must be met:

• Valid tax invoice is available.
• Goods/services are received.
• Supplier has paid tax to the government.
• Recipient has filed GSTR-3B.
• Invoice/debit note paid within 180 days.
• ITC can be claimed only for taxable supplies used in business.
• No ITC if depreciation is claimed on the tax component of capital goods.
• Claim must be made within:

• 30th November of the following financial year, or

• Date of filing annual return (whichever is earlier).

• ITC claims must match GSTR-2B (Rule 36(4)).
• Not available for composition scheme taxpayers.

• Only for business purposes.
• Not for:

• Personal use.

• Exempt supplies.

• Items blocked under CGST Section 17(5).

• Motor vehicles (except for resale, transport, cab services).
• Catering, health, or fitness expenses (unless mandated by law).
• Club or gym memberships.
• Health/life insurance (unless government-mandated).
• Construction of immovable property.
• Goods lost, destroyed, stolen, or given away as gifts.

• Earlier of:

• 30th November of next financial year, or

• Date of filing annual return.

• Practically, GSTR-3B of October (due 20th November) is the real deadline to avoid late fee.

• Tax invoice from supplier.
• Bill of supply (for small invoices or reverse charge).
• Debit note (if issued).
• Bill of entry (imports).
• Credit note/invoice from Input Service Distributor (ISD).

ITC on Capital Goods

• Allowed on machinery, equipment, buildings used for business.
• Not allowed if:

• Exclusively for exempt goods.

• Exclusively for personal use.

• Depreciation claimed on GST component.

ITC on Job Work

• Principal manufacturer can claim ITC on goods sent to job workers.
• Goods must return within:
• 1 year (inputs),
• 3 years (capital goods).

ITC by Input Service Distributor (ISD)

• ISD collects ITC on services and distributes it to company branches.
• Distribution follows CGST, SGST/UTGST, IGST categories.

ITC on Business Transfer/Merger

• ITC can be transferred to new entity during merger/transfer.

• IGST Credit → first against IGST, then CGST, then SGST/UTGST.
• CGST Credit → first against CGST, then IGST.
• SGST/UTGST Credit → first against SGST/UTGST, then IGST.

Step 1 – Common Credit Calculation
C1 = Total input tax – (T1 + T2 + T3)
Where:

• T1 = exclusively for non-business.
• T2 = exclusively for exempt supplies.
• T3 = ineligible credits.

C2 = Common ITC available for apportionment = C1 – T4
(T4 = exclusively for taxable supplies).

Step 2 – ITC attributable to exempt supplies
D1 = (E ÷ F) × C2
(E = exempt turnover, F = total turnover).

Step 3 – ITC attributable to non-business use
D2 = 5% of C2.

Step 4 – Eligible ITC
C3 = C2 – (D1 + D2).

• Report all eligible ITC in GSTR-3B.
• Reverse ITC used for exempt/non-business purposes.
• Deduct reversed ITC to arrive at net claimable ITC.
• Remove blocked ITC (Sec 17(5) items).
• Enter net ITC in GSTR-3B.

Note:

• Rule 36(4) → provisional ITC claim restricted to 105% of ITC in GSTR-2B.
• Exception: Imports, ISD invoices, Reverse Charge transactions.