Input tax credit (ITC) under GST, explained

Input tax credit (ITC) lets a GST-registered business subtract the GST it paid on business purchases from the GST it charges on its sales. It then pays the government only the difference. That is what makes GST a tax on the value each business adds, rather than a tax charged again at every step. The credit is conditional, though. If your supplier doesn’t report the invoice, if you don’t pay the supplier within 180 days, or if you miss the annual deadline, you can lose it.

This is a general explainer, not tax advice. For your own claims, check with a chartered accountant or GST practitioner.

How the credit works: an illustrative example

The figures below are made up to show the mechanism. They are not drawn from any real business.

A trader in Pune buys stock for ₹1,00,000 plus 18% GST and sells it within Maharashtra for ₹1,50,000 plus 18% GST.

Step	Value	GST at 18%
Purchase from supplier	₹1,00,000	₹18,000 paid to supplier
Sale to customer	₹1,50,000	₹27,000 collected from customer
Net GST paid to government	—	₹27,000 − ₹18,000 = ₹9,000

The ₹9,000 is exactly 18% of the ₹50,000 of value the trader added. The supplier has already paid the other ₹18,000 to the government. Because this sale is within one state, both the ₹27,000 and the ₹18,000 would be split equally between CGST and SGST.

Without the credit, the trader would pay ₹27,000 on top of the ₹18,000 already embedded in the purchase. That stacking of tax on tax, known as cascading, is what GST was designed to remove.

The credit sits in your electronic credit ledger on the GST portal and is used against your output tax when you file GSTR-3B. Businesses under the composition scheme are outside this chain. They cannot claim credit, and their buyers cannot claim credit on purchases from them. Our guide to how GST works for small businesses explains that trade-off.

The conditions in section 16

Section 16 of the CGST Act gives the credit only on purchases used, or intended to be used, “in the course or furtherance of business”. It then sets conditions that must all be met:

You hold a tax invoice or debit note from a registered supplier.
Your supplier has reported it. The supplier must have included the invoice in their sales return (GSTR-1, or the Invoice Furnishing Facility for quarterly filers), and it must have been communicated to you. In practice, it has to appear in your GSTR-2B, the auto-generated monthly statement of credit available to you. Rule 36(4) bars credit on invoices that don’t appear there.
You have received the goods or services. Goods delivered to someone else on your instructions count. If goods arrive in instalments, the credit is available only when the last lot arrives.
The tax has actually been paid to the government, and the credit has not been restricted in your statement.
You have filed your own return (GSTR-3B).

The second and fourth conditions are the hard ones, because they depend on your supplier’s behaviour. A supplier who collects GST from you but doesn’t file or pay can leave you without the credit. That is why many businesses check GSTR-2B every month and follow up on missing invoices before paying suppliers.

If you claim depreciation under income tax on the GST portion of a capital asset’s cost, you cannot also claim that GST as credit (section 16(3)).

Blocked credits: section 17(5) in summary

Some purchases never qualify for credit, even when they’re for business. Section 17(5) lists them. In summary:

Motor vehicles for carrying people with 13 seats or fewer (including the driver), plus their insurance, servicing and repair. The exceptions are businesses that resell such vehicles, transport passengers or run driving schools. Similar rules apply to vessels and aircraft.
Food and beverages, outdoor catering, beauty treatment, health services, cosmetic surgery, and life and health insurance. Credit is allowed if you supply the same category yourself, or if the employer is legally required to provide it to employees.
Club, health and fitness memberships, and travel benefits for employees on vacation, such as leave travel concession.
Construction of immovable property on your own account, including works contracts. Plant and machinery is excluded from this block, and so are works contractors supplying works contracts onward.
Goods or services used for personal consumption.
Goods lost, stolen, destroyed, written off, given as gifts or given as free samples.
Goods or services used for corporate social responsibility obligations.
Tax paid under the composition scheme, and tax paid after a fraud demand under section 74 for periods up to 2023-24.

The list has legal detail and exceptions not covered here. If a large purchase falls near one of these lines, get advice before claiming.

Time limits: when the window closes

Under section 16(4), you cannot claim credit on an invoice or debit note after 30 November following the end of the financial year it relates to, or after you file the annual return for that year, whichever comes first.

For example, credit on an invoice dated February 2026 (financial year 2025-26) must generally be claimed in a return filed by 30 November 2026. An invoice your supplier uploads late, after that date, can mean credit lost for good.

There is a limited exception in section 16(6). If your registration was cancelled and later restored, you get a window to claim credit for the period in between.

Reversal if you don’t pay your supplier within 180 days

The second proviso to section 16(2) adds a payment discipline. If you don’t pay your supplier the invoice value plus tax within 180 days of the invoice date, you must give back the credit you claimed, with interest.

Rule 37 sets out the mechanics:

You reverse the credit in the GSTR-3B for the tax period immediately after the 180 days end.
If you paid part of the invoice, you reverse only the proportion that is unpaid.
Once you pay the supplier, you can claim the credit again, and the 30 November time limit doesn’t apply to that re-claim.
The rule doesn’t apply to purchases taxed under reverse charge.

For businesses that stretch supplier payments to manage cash flow, this rule turns slow payment into a GST cost as well as a supplier-relations problem.

Credit and the 2025 rate changes

The September 2025 overhaul cut many rates to 5% while many inputs stayed at 18% (our GST pillar guide covers the new rates). That can leave some businesses with more credit than they can use against their output tax, a problem called an inverted duty structure. The GST Council’s 56th meeting recommended paying 90% of refund claims for accumulated credit of this kind on a provisional, risk-assessed basis from 1 November 2025, to ease the cash strain.

The point: Input tax credit is the mechanism that makes GST fair to businesses, but it is only as good as your paperwork and your suppliers’ compliance. Check that invoices appear in GSTR-2B, pay suppliers within 180 days, know which purchases are blocked, and claim before 30 November after the year ends.

Input tax credit explained