Quick Answer: Input Tax Credit (ITC) allows GST-registered businesses to reduce output GST liability by the GST paid on business purchases. ITC is available on goods and services used for business — not for personal use, exempt supplies, or blocked credits under Section 17(5) (motor vehicles for non-business use, food, club memberships, etc.).
Input Tax Credit — A Complete Guide
ITC is the mechanism that prevents cascading taxes under GST. When you purchase goods or services for your business, the GST you pay on those purchases can be credited against the GST you collect on your sales. Only the net difference is paid to the government.
ITC Eligibility and Blocked Credits
Not all GST paid qualifies for ITC. Section 17(5) specifically blocks credit on certain categories:
- Motor vehicles for personal use (cars, bikes)
- Food and beverages, outdoor catering
- Health services, club memberships, beauty treatment
- Works contract for construction of immovable property
- Goods or services for personal use of employees
Frequently Asked Questions
If a business makes both taxable and exempt supplies, ITC must be proportionally reversed (Rule 42). The reversal = Total ITC × (Exempt Sales / Total Sales). This ensures ITC is not claimed on inputs used for exempt outputs.
ITC can be claimed when: the goods/services are received, the supplier has filed their GSTR-1 and the amount appears in your GSTR-2B, the tax invoice is in hand, and payment to the supplier is made within 180 days of the invoice date.