Input Tax Credit Under GST: Rules Every Business Should Know

Input tax credit (ITC) is at the heart of GST. It lets you reduce the GST you pay on sales by the GST you have already paid on purchases. Claimed correctly, it lowers your tax cost; claimed wrongly, it leads to notices, interest and penalties.

Conditions to claim ITC

• You hold a valid tax invoice or debit note.
• You have received the goods or services.
• The supplier has reported the invoice in their GSTR-1, so it appears in your GSTR-2B.
• The supplier has actually paid the tax to the government.
• You have filed your own returns.

Match with GSTR-2B every month

GSTR-2B is an auto-generated statement of credit based on your suppliers’ filings. Claim ITC in GSTR-3B in line with GSTR-2B. If a supplier has not reported an invoice, follow up with them before claiming.

Blocked credits

Some purchases are not eligible for ITC, even if used in business, including:

• Motor vehicles for personal transport (with some exceptions)
• Food and beverages, outdoor catering, beauty treatment and health services (with exceptions)
• Membership of clubs and fitness centres
• Goods or services for personal use
• Works contract services for building immovable property (except plant and machinery)
• Goods lost, stolen, destroyed or given away as free samples

Time limit

ITC for an invoice must be claimed by the due date set in the law for the financial year, or the date of filing the annual return, whichever is earlier. Missing this deadline means the credit is lost.

When ITC must be reversed

• If you do not pay your supplier within the prescribed period.
• If inputs are used for exempt supplies or personal purposes.
• If the supplier’s registration is cancelled retrospectively or tax is unpaid.

Best practices

• Deal with compliant suppliers and check their GSTIN status.
• Reconcile purchases with GSTR-2B every month.
• Keep invoices and payment records organised.

Our GST return filing service includes monthly ITC reconciliation. Read also GST returns explained.

Why Choose Vaidam Consultancy?

Our team of chartered accountants, company secretaries and legal professionals handles the paperwork so you can focus on growing your business.

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Frequently Asked Questions

Q1. Can I claim ITC without a GSTR-2B entry?

Generally no. Credit should be claimed in line with what appears in GSTR-2B.

Q2. Is ITC available on a car used for business?

Usually not for passenger vehicles, except in specific cases such as dealers or transport businesses.

Q3. What happens if I do not pay the supplier on time?

The ITC must be reversed with interest, and can be reclaimed when payment is made.

Q4. Can a composition dealer claim ITC?

No. Composition dealers are not allowed to claim input tax credit.