Input Tax Credit — how it works under GST

What is Input Tax Credit?

Under GST, a business charges output tax on its sales and pays input tax on its purchases. ITC lets it subtract input tax already paid from output tax payable, remitting only the net to the government. Without ITC, every supply-chain link would pay tax on a base that already includes upstream taxes — the "cascading" or "tax on tax" effect that GST was designed to eliminate.

Worked example

ITC eligibility — Section 16 conditions

All four conditions must be met simultaneously:

1. Valid tax document: Tax invoice, debit note, or other prescribed document from a registered supplier.
2. Goods/services received: Actually received (for goods in instalments, ITC is available only after the last instalment).
3. Tax paid by supplier: Supplier must have declared the invoice and paid tax. ITC is restricted to what appears in GSTR-2B (Rule 36(4)).
4. Own return filed: You must have filed your GSTR-3B.

Additional: if a supplier invoice remains unpaid beyond 180 days, the ITC claimed must be reversed proportionately. It can be re-availed once payment is made.

Blocked credits — Section 17(5)

GSTR-2B matching — the ITC control

GSTR-2B is auto-drafted on the 14th of each month and shows the ITC available to you based on invoices your suppliers filed in GSTR-1/IFF. Since Rule 36(4) was tightened, ITC in GSTR-3B can only be claimed up to the GSTR-2B figure. Claiming more attracts 18% interest per annum on the excess.

Best practice: Download GSTR-2B monthly, reconcile against your purchase register, and chase suppliers whose invoices are missing before the 14th of the following month.

When must ITC be reversed?

• Invoice unpaid >180 days — reverse proportionately; re-avail on payment.
• Used for exempt or personal supply — reverse under Rules 42/43.
• Capital goods partly used for exempt supplies — reverse on 5-year apportionment.
• Supplier issues a credit note — reduce ITC accordingly.
• Registration cancelled — reverse all ITC in electronic credit ledger.

Time limit to claim ITC

Claim ITC by the earlier of:

• Due date of GSTR-3B for September of the next financial year (typically 20 October), or
• Date of filing GSTR-9 for that financial year.

Example: invoice dated 15 July 2023 (FY 2023-24) → claim by 20 October 2024 or GSTR-9 filing date, whichever is earlier. ITC not claimed in time is permanently lost.

Clean purchase records protect your ITC

Every ITC claim must be backed by a valid invoice with the supplier's GSTIN, correct HSN code, and exact tax amount. Errors — wrong GSTIN, missing HSN, incorrect rate — can be rejected in scrutiny, triggering demand and interest. Using BillRaja's GST billing software ensures your purchase orders and invoices are issued with the correct GSTIN, HSN codes, and rates, making GSTR-3B reconciliation straightforward.