How does Input Tax Credit (ITC) work under GST in India?

Input Tax Credit (ITC) is the mechanism under GST that lets you reduce the GST you owe (output tax) by the amount of GST you have already paid on your business purchases (input tax). It prevents the cascading effect of tax-on-tax.

How ITC works:

If you sell goods with ₹18,000 GST collected and your purchases had ₹12,000 GST paid, you only deposit ₹6,000 to the government (₹18,000 minus ₹12,000).

Conditions for claiming ITC:

• You must have a valid tax invoice or debit note from your supplier
• You must have received the goods or services
• The supplier must have filed their GSTR-1 (your purchase appears in your GSTR-2B)
• The supplier must have paid the tax to the government
• You must have filed your own GSTR-3B
• The goods/services must be used for business purposes (or partly for business)

ITC that CANNOT be claimed:

• Motor vehicles and conveyances (with some exceptions for transport businesses)
• Food, beverages, outdoor catering, beauty treatment, health services, cosmetic surgery
• Membership of clubs, health and fitness centres
• Rent-a-cab, life/health insurance (unless employer is obligated to provide)
• Travel benefits for employees on vacation
• Works contract services for construction of immovable property
• Goods/services for personal consumption

GSTR-2B and ITC matching:

GSTR-2B is an auto-generated statement showing ITC available to you based on your suppliers' filings. Since January 2022, you can only claim ITC if it appears in your GSTR-2B. Any ITC not reflected in 2B due to supplier non-filing needs to be followed up with the supplier.

Time limit: ITC for a financial year must be claimed by November 30 of the following year, or before filing the annual return, whichever is earlier.

ITC reversal: If you do not pay your supplier within 180 days of the invoice date, you must reverse the ITC claimed. You can re-claim it once payment is made.