What is Input Tax Credit: Key Aspects of ITC in GST

06 Oct 2023

In the intricate framework of the Goods and Services Tax (GST), the Input Tax Credit (ITC) emerges as a critical mechanism. This system efficiently counters the GST levied on input costs against the GST on outputs, minimizing the tax load for businesses and enhancing their competitive edge.

Defining Input Tax Credit (ITC) in GST

The Input Tax Credit, known in short as ITC, is a credit system where companies can deduct the GST charged on their inputs from the GST due on their outputs. This approach reduces the cascading effect of taxes, ensuring businesses are taxed only on the value-added aspects of their offerings.

Input Tax Credit: A Practical Example

Imagine a local bookstore that sources books from a publisher.

  1. The bookstore procures books valued at ₹10,000 and is charged a GST of 18%, amounting to ₹1,800.
  2. When these books are subsequently sold to customers for ₹15,000, the GST applied is ₹2,700 (18% of ₹15,000).
  3. Now, rather than remitting the entire ₹2,700 as GST, the bookstore can utilize the previously paid ₹1,800 as a credit.
  4. This means the net GST liability for the bookstore becomes merely ₹900 (₹2,700 – ₹1,800).

Through this example, it’s evident that the Input Tax Credit ensures that businesses aren’t burdened with redundant tax levies, paying only for the added value.

Key Features of Input Tax Credit

  1. Broad Scope: ITC can be claimed on nearly all goods and services, barring those explicitly exempted from GST.
  2. Capital Goods Benefit: Capital goods, pivotal for many enterprises, also qualify for ITC. For a comprehensive understanding, refer to ITC 04 filing.
  3. Flexibility with Supply Types: Both taxable and exempt supplies can claim ITC. However, for exempted ones, proration is applied.
  4. Timeliness: GST guidelines specify a timeframe for claiming ITC to prevent undue delays.

The Process to Claim Input Tax Credit under GST

To avail ITC, businesses must:

  1. Obtain a valid tax invoice from the supplier.
  2. Ensure this invoice is reflected in the GSTR-2A return.
  3. File the GSTR-3B return, incorporating the ITC claim within.

For an in-depth understanding, visit the GST returns filing guide.

Distinguishing Between Eligible and Ineligible Input Tax Credits

Eligible ITC encompasses:

  • GST on business-oriented goods and services.
  • GST on capital assets.
  • GST on inputs intended for both taxable and exempt supplies, adjusted accordingly.

Ineligible ITC includes:

  • GST on items destined for personal use.
  • GST on exempted goods and services.
  • GST on purchases from unregistered vendors.

Synergy of Input Tax Credit and Income Tax Filings

Though ITC doesn’t directly reflect in income tax returns, its influence on business finances is undeniable. By curtailing the COGS, ITC indirectly elevates profit margins. A boost in profits often leads to heightened income tax liabilities. For SMEs navigating these intricacies, the GST audits guide could be invaluable.


The Input Tax Credit (ITC) is a linchpin in the GST regime. It offers businesses an effective means to reduce their tax burden. Those in finance or managing businesses must deeply understand ITC to harness the maximum tax benefits under GST. For further insights or official GST-related resources, always refer to the GST Portal.