Input Tax Credit (ITC) is the backbone of GST — it ensures that GST is levied only on the 'value added' at each stage of supply. Claiming ITC correctly is both a right and a compliance obligation. Wrong ITC claims can attract penalties, interest, and demand notices. Here's everything you need to know.
Conditions to Claim ITC (Section 16 of CGST Act)
- You must be a registered GST taxpayer (regular, not composition)
- You must hold a valid tax invoice or debit note from the supplier
- The supplier must have filed GSTR-1 and the invoice must appear in your GSTR-2B
- The goods/services must have been received by you
- The tax charged must have been paid by the supplier to the government
- You must have filed your GST return (GSTR-3B) for the period
- ITC on capital goods (depreciable under Income Tax) — ITC must not already be claimed as depreciation
Blocked Credits Under Rule 17(5) — ITC NOT Allowed
| Category | ITC Blocked? | Exception |
|---|---|---|
| Motor vehicles (< 13 seats) | Yes | No exception unless in transport business / car dealer |
| Food, beverages, beauty treatment | Yes | Unless obligatory for business (employee canteen > 250 workers) |
| Membership of clubs/health/fitness centres | Yes | None |
| Life/health insurance for employees | Yes | Unless obligatory under law or specified contracts |
| Works contract for construction of immovable property | Yes | Exception: plant and machinery used in construction |
| Goods/services for personal consumption | Yes | None |
| Free samples / gifts | Yes | None |
GSTR-2B — How ITC Is Now Verified
From October 2022, ITC can only be claimed to the extent it reflects in GSTR-2B (auto-drafted static statement from supplier's GSTR-1/IFF). Provisional ITC beyond GSTR-2B is no longer allowed. Process: Download GSTR-2B each month → reconcile with your purchase register → claim only matched ITC in GSTR-3B Table 4.
ITC Reversal Conditions
- Goods/services used partially for personal/exempt use (pro-rata reversal)
- Non-payment to supplier within 180 days — ITC reversed with interest; re-claim when payment made
- Goods destroyed, lost, stolen, or written off — ITC reversed
- Credit note received from supplier — reduce ITC in GSTR-3B
- Ineligible ITC accidentally claimed — reverse with 18% interest
ITC on Capital Goods
Full ITC is available on capital goods (machinery, equipment) used exclusively for business in the same year of purchase — no amortization over the useful life like under income tax. However, if capital goods are used for both exempt and taxable supplies, ITC must be reversed proportionally. Also, if you claim ITC on capital goods, you CANNOT claim depreciation on the GST component under Income Tax Act — choose one benefit.