Input Tax Credit (ITC)

What it means

Input tax credit (ITC) is the GST you pay on business purchases, such as raw material, stock, rent, professional fees or machinery, that you can reduce from the GST you collect on your sales. It makes sure tax is paid only on the value you add, not again and again at every stage.

How it works

Under section 16 of the CGST Act, you can claim ITC only if all these conditions are met:

• You hold a valid tax invoice or debit note.

• You have actually received the goods or services.

• The supplier has filed GSTR-1 and the invoice appears in your GSTR-2B.

• The supplier has paid the tax to the government.

• You have filed your own GSTR-3B.

Time limit: ITC for a financial year must be claimed by 30 November of the next year or the date of filing the annual return, whichever is earlier. Credit is also blocked on some items under section 17(5), such as food and beverages, most motor cars, club memberships, personal use items and construction of immovable property for own use.

Example

A Surat textile trader buys fabric for ₹5,00,000 plus 18% GST of ₹90,000. It sells finished goods for ₹8,00,000 plus 18% GST of ₹1,44,000.

1. GST collected on sales: ₹1,44,000.

2. Less ITC on purchases: ₹90,000.

3. Net GST payable in cash: ₹1,44,000 minus ₹90,000 = ₹54,000.

If the fabric supplier had not uploaded the invoice, the ₹90,000 would not appear in GSTR-2B and the trader would have to pay the full ₹1,44,000 until the supplier corrects it.

Key points to remember

• Reconcile your purchase register with GSTR-2B every month before filing GSTR-3B.

• If you do not pay the supplier within 180 days of the invoice date, the credit must be reversed with interest, and can be reclaimed once you pay.

• Credit for the year 2025-26 is lost if not claimed by 30 November 2026.

• Wrongly claimed ITC attracts interest at 18% plus penalty, so do not claim on blocked items.

• Use the Invoice Management System on the portal to accept, reject or keep pending supplier invoices.