Module 7: Input Tax Credit (ITC)
Mapped to BSC/N8106 v1.0 | NOS Performance Criteria: PC4, PC5, PC6
1. Concept of Input Tax Credit (ITC)
Input Tax Credit (ITC) is the mechanism that allows a registered person to reduce the tax
paid on inputs (purchases) from the tax payable on outputs (sales). It prevents cascading
effect of taxation by ensuring tax is charged only on value addition. Under Section 16(1) of
the CGST Act, every registered person is entitled to take credit of input tax charged on any
supply of goods or services or both which are used or intended to be used in the course or
furtherance of business. This concept is central to the working of GST and helps keep the tax
system neutral. The tax paid on raw materials, input services, and capital goods can be
claimed as ITC and adjusted against output GST.
Benefits include:
- Prevents cascading of tax
- Reduces cost of production
- Promotes compliance
- Enhances competitiveness
Example: A manufacturer buys inputs worth ₹1,00,000 + 18% GST. He sells the product for
₹2,00,000 + 18% GST. He can offset the input tax of ₹18,000 against the output liability of
₹36,000, paying only ₹18,000 in cash.
2. Eligibility for ITC under GST
As per Section 16(2) of the CGST Act, ITC can be claimed only when the following conditions
are met:
1. The claimant is a registered person under GST.
2. Possesses a valid tax invoice or debit note.
3. Has received the goods or services.
4. The tax charged in respect of such supply has been actually paid to the Government.
5. The return (GSTR-3B) has been furnished.
6. Payment must be made to the supplier within 180 days from invoice date.
Further, ITC must be claimed before the earlier of:
- Due date of return for September of the following financial year, or
- Date of filing annual return.
Example: Mr. A receives goods in July 2024, files GSTR-3B, and pays supplier within 180
days. He can claim ITC by 30th Nov 2025 (if annual return filed later).
If the supplier doesn’t upload invoice in GSTR-1, the ITC is ineligible till it reflects in GSTR-
2B.
3. Blocked Credits under Section 17(5)
Section 17(5) specifies a list of goods and services on which ITC is disallowed. These
include:
- Motor vehicles (unless used for transportation, training, etc.)
- Food and beverages, outdoor catering, beauty treatment
- Club membership and health services
- Works contracts for construction of immovable property
- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample
- Travel benefits to employees unless obligatory
These restrictions ensure ITC is claimed only for business-related inputs.
4. Reversal of Input Tax Credit
ITC reversal is required when:
- Goods/services are partly used for exempted supplies or personal use
- Payment not made to supplier within 180 days
- Input goods/services become ineligible
Rules 42 and 43 provide proportionate reversal method for common credits. Reversal is
also needed if goods are sold, lost, destroyed, or if credit notes are issued.
Formula (Rule 42):
Reversal = Common Credit × (Exempt Turnover ÷ Total Turnover)
Example:
If total turnover is ₹10 lakh, exempt turnover is ₹2 lakh, and common ITC is ₹50,000, then
reversal = ₹50,000 × (2/10) = ₹10,000.
5. Electronic Cash and Credit Ledger
Every registered person under GST has the following electronic ledgers:
1. Electronic Cash Ledger – Reflects the deposit of cash for tax/interest/penalty.
2. Electronic Credit Ledger – Reflects eligible ITC available to offset output tax.
Key Differences:
- Cash Ledger: Used for all payments (tax, interest, late fees)
- Credit Ledger: Can be used only for paying output GST
Entry in GSTR-3B and PMT-06 updates these ledgers. Any excess balance in cash ledger can
be claimed as refund. However, ITC in credit ledger can only be utilized, not refunded unless
under inverted duty.
6. Calculation of ITC
To calculate eligible ITC:
Step 1: Segregate taxable and exempt purchases
Step 2: Remove blocked credits under Sec 17(5)
Step 3: Apply proportionate formula if mixed use
Example:
- Inputs for taxable supply: ₹1,00,000 @18% = ₹18,000 (ITC allowed)
- Inputs for exempt supply: ₹50,000 @5% = ₹2,500 (ITC not allowed)
- Motor vehicle purchase: ₹5,00,000 @28% = ₹1,40,000 (blocked)
→ Eligible ITC = ₹18,000
7. Utilization of ITC: Order and Restrictions
Section 49A and 49B specify order of utilization:
1. IGST to be utilized first for IGST, then CGST, then SGST
2. CGST to CGST, then IGST
3. SGST to SGST, then IGST
Cross utilization between CGST and SGST is not allowed.
Example:
- IGST liability: ₹20,000
- CGST: ₹10,000
- SGST: ₹10,000
- Available ITC: IGST ₹25,000
→ Adjust ₹20,000 towards IGST, ₹5,000 for CGST, rest CGST/SGST to be paid in cash.
8. ITC Matching and Reconciliation
GSTR-2B is the auto-generated statement of eligible ITC. If supplier doesn’t file GSTR-1 or
mismatches invoice, ITC claim fails.
Steps:
- Match purchase register with GSTR-2B monthly
- Identify mismatches, follow up with supplier
- Reclaim disallowed ITC when corrected
Tools like Excel reconciliation or ERP systems help automate matching.
9. ITC on Capital Goods and Job Work
Capital goods are assets capitalized in books. ITC is allowed if used for business.
Depreciation should not be claimed on GST portion.
For job work:
- Principal can claim ITC on goods sent to job worker.
- ITC not reversed if returned within 1 year (inputs) or 3 years (capital goods).
Example:
Machinery purchased for ₹10,00,000 + ₹1,80,000 GST. Capitalized correctly without
claiming GST in depreciation: ITC ₹1,80,000 allowed.
10. ITC in Special Scenarios
1. Composition Scheme: No ITC allowed
2. Import of Goods: IGST paid can be claimed as ITC
3. Exports: ITC allowed even if supply is zero-rated
4. SEZ Supplies: Supplier can claim ITC
5. ISD Mechanism: Distribute common ITC to branches
6. ITC on Reverse Charge: Allowed only after tax paid
7. Transitional ITC: Claimed using TRAN-1, TRAN-2 during GST rollout period
Worksheets and Assessments
Worksheet 1: Identify Eligible ITC
Instructions: Evaluate whether ITC is eligible for the following transactions. Mark 'Yes' or
'No' and justify your answer.
Transaction GST Amount ITC Eligible Reason
(Yes/No)
Purchase of raw ₹18,000
materials for
manufacturing
Motor vehicle ₹56,000
purchased for
director
Office furniture for ₹10,800
new branch
Free gifts ₹2,500
distributed to
customers
Catering services for ₹4,000
employees
Worksheet 2: Reversal of ITC (Rule 42)
Given:
- Total Turnover: ₹15,00,000
- Exempt Turnover: ₹3,00,000
- Common ITC: ₹60,000
Calculate the proportionate reversal required as per Rule 42.
Answer: Reversal = Common ITC × (Exempt Turnover / Total Turnover)
Assessment Questions and Answers
1. Q1. Define Input Tax Credit and its objective.
A1. ITC allows a registered taxpayer to claim credit of input tax paid on purchases. The
objective is to eliminate cascading effect and ensure tax is charged only on value addition.
2. Q2. Mention any three ineligible items under Section 17(5).
A2. Motor vehicles (unless for transportation), club memberships, and goods given as free
samples.
3. Q3. What is the order of ITC utilization under GST?
A3. IGST first against IGST, then CGST, then SGST. CGST only against CGST and IGST. SGST
only against SGST and IGST.
4. Q4. Can ITC be claimed on capital goods?
A4. Yes, provided GST is not capitalized under depreciation.
5. Q5. What is the time limit to avail ITC?
A5. Earlier of the due date of September return of next financial year or date of filing annual
return.
