GST Complete Guide

Input Tax Credit (ITC) under GST

Everything about ITC in one place: how to claim it, when to reverse it, which credits are blocked, how RCM works, and how to set off IGST, CGST and SGST credit in GSTR-3B.

1. What is Input Tax Credit (ITC)?

ITC is the GST you paid on purchases (goods, services, capital goods) used for business. You deduct it from the GST you collect on sales, so GST is paid only on the value you add.

Example: a trader

Buys goods for ₹10,000 + 18% GST (₹1,800) and sells them for ₹15,000 + 18% GST (₹2,700).

Item	Amount
GST collected on sale	₹2,700
Less: ITC on purchase	− ₹1,800
GST payable to Government	₹900

₹900 is exactly 18% of the ₹5,000 profit margin.

Cascading effect: without ITC, the ₹1,800 becomes a cost and the trader pays "tax on tax". ITC removes this.

Full business flow example

Manufacturer sells ₹1,00,000 + GST ₹18,000→Wholesaler sells ₹1,50,000 + GST ₹27,000→Retailer sells ₹2,00,000 + GST ₹36,000→Customer pays ₹2,36,000

GST paid to Government: Manufacturer ₹18,000, Wholesaler 27,000 − 18,000 = ₹9,000, Retailer 36,000 − 27,000 = ₹9,000. Total = ₹36,000, the GST on the final sale value.

2. Basic conditions to claim ITC

Miss any one of these and the credit can be denied.

You hold a valid tax invoice.
You have received the goods or services.
The supplier has paid the tax to the Government, shown by the invoice appearing in your GSTR-2B.
You have filed GSTR-3B.
You pay the supplier within 180 days.
You claim before 30 November following the financial year, or before filing the annual return, whichever is earlier.

3. ITC Reversal under GST

ITC reversal means reducing or giving back credit that is no longer eligible or must be reversed under GST rules.

Simple example

Item	Amount
Purchase GST / ITC claimed	₹18,000
ITC to be reversed	− ₹3,000
Net eligible ITC	₹15,000

1. Supplier not paid within 180 days

If value + GST is not paid to the supplier within 180 days of the invoice date, the applicable ITC must be reversed.

Example: ITC ₹18,000 → reverse the applicable ITC if payment is not made in 180 days.

2. Common ITC: taxable and exempt supplies

ITC on common inputs used for both taxable and exempt supplies must be reversed for the exempt portion, as per the prescribed calculation.

Example: Common ITC ₹20,000, exempt share ₹5,000 → reverse ₹5,000.

3. Supplier credit note

If the supplier issues a credit note reducing taxable value or GST, your ITC reduces accordingly.

Example: Original GST ₹18,000, credit note GST ₹3,600 → reverse ₹3,600.

4. Blocked or ineligible ITC

Certain goods and services are restricted from ITC. If wrongly claimed, correct it.

Example: GST on a blocked expense ₹36,000 → reverse ₹36,000.

Key points

Reversal reduces the ITC available to pay output GST.
Check eligibility before claiming.
Some reversals are temporary: the credit can be re-availed once the conditions are satisfied.
Reconcile Purchase Register + GSTR-2B + ITC reversal before filing GSTR-3B.

Eligible ITC − ITC Reversal = Net ITC Available

4. Blocked Credit under GST

Blocked credit is GST paid on goods or services for which ITC is not allowed, even though GST is charged on the invoice. The main provisions are in Section 17(5) of the CGST Act, 2017.

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Motor vehicles

Generally blocked when used for personal transportation.

Car bought for office staff use

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Food and catering

Food, beverages and outdoor catering are generally blocked, subject to exceptions.

Staff lunch or catering

✈️

Employee travel

Certain travel benefits for personal travel are restricted.

Flight tickets for an employee's vacation

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Club and fitness

Club, health and fitness centre memberships are generally blocked.

Gym membership for employees

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Insurance and rent-a-cab

Certain rent-a-cab, life and health insurance credits are restricted, subject to exceptions.

Health insurance premium for employees

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Immovable property

Works contract or construction of immovable property is generally blocked, subject to exceptions.

Office building construction

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Personal use

Goods or services for personal consumption are not eligible.

Household items

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Gifts and free samples

ITC on goods given as gifts or free samples is generally not available.

Free products to customers

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Lost, stolen, destroyed

Restricted on goods lost, stolen, destroyed, written off or disposed of as gifts or free samples.

Stock lost in a fire

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Certain other supplies

Beauty treatment, health services, cosmetic or plastic surgery and similar supplies are restricted, subject to exceptions.

Cosmetic surgery services

Easy rule: GST charged on the invoice ≠ ITC automatically available. Check eligibility and Section 17(5) before claiming. Blocked ITC: do not claim, and reverse it if wrongly claimed.

5. Reverse Charge Mechanism (RCM)

RCM means the recipient (buyer) pays GST directly to the Government instead of the supplier, for supplies notified under GST.

Common RCM examples

Legal services: received by a business from an advocate.
GTA services: specified goods transport services.
Director services: specified services by a director to a company or body corporate.
Motor vehicle renting: certain specified renting services.
Sponsorship services: certain sponsorship services received by specified recipients.

RCM applies only where the relevant GST notification and conditions cover the particular supply.

Example: legal service (₹10,000)

Item	Amount
Service value	₹10,000
GST @ 18%	₹1,800
CGST 9%	₹900
SGST 9%	₹900

For a ₹50,000 advocate fee, GST @ 18% is ₹9,000 (CGST ₹4,500 + SGST ₹4,500), treated the same way.

How to show RCM in GSTR-3B

Show the RCM liability in Table 3.1(d): CGST ₹900 and SGST ₹900. Pay ₹1,800 through the Cash Ledger.
Claim the ITC in Table 4(A)(3) after payment, if eligible: CGST ₹900 and SGST ₹900. ITC claimed = ₹1,800.

6. ITC Set-off Rules: how to use your credit

Credit must be used in a fixed order. IGST credit first, then CGST or SGST/UTGST credit.

Never crosses: CGST credit cannot pay SGST/UTGST liability, and SGST/UTGST credit cannot pay CGST liability.

Rule 1: order of utilisation

(a) IGST credit is used first for IGST liability. Any balance can pay CGST and SGST/UTGST liabilities in any order, before CGST or SGST/UTGST credit is used.
(b) CGST credit is used first for CGST liability. Any balance can pay IGST liability. CGST credit is used only if IGST credit is not available.
(c) SGST/UTGST credit is used first for SGST/UTGST liability. Any balance can pay IGST liability (if no CGST credit is available). It is used only if IGST credit is not available.
(d) CGST credit cannot pay SGST/UTGST liabilities.
(e) SGST/UTGST credit cannot pay CGST liabilities.

Rules 2 to 7

Rule 2: ITC cannot be used to pay reverse charge liabilities.
Rule 3: ITC can be used to pay tax only.
Rule 4: ITC cannot be used for TDS, TCS, interest, penalty, fee or others.
Rule 5: The amount used cannot be more than the balance in the Electronic Credit Ledger.
Rule 6: A unique transaction number is generated on the Common Portal for every debit or credit to the electronic cash, credit or liability ledger, and it shows in the matching ledgers.
Rule 7: Credit of Input Cess can be set off only against output Cess liability. There is no inter-head adjustment for Cess ITC.

ITC at a glance

Topic	What to remember
ITC	GST paid on business purchases, deducted from output GST. Needs invoice, receipt, GSTR-2B match, GSTR-3B filing, payment within 180 days and claim within the time limit.
ITC reversal	Eligible ITC − reversal = net ITC. Reverse for non-payment in 180 days, exempt supplies, credit notes and blocked credit.
Blocked credit	Section 17(5) items such as vehicles, food, club membership, personal use and gifts. Do not claim; reverse if claimed.
RCM	Recipient pays GST in cash (Table 3.1(d)), then claims ITC if eligible (Table 4(A)(3)).
Set-off	IGST first, then CGST/SGST. CGST and SGST never cross. ITC pays tax only, not RCM, interest, penalty or fees. Cess credit sets off against Cess only.