Input Tax Credit (ITC)
Credit for GST already paid on business purchases, which can be set off against GST payable on sales, so tax is effectively paid only on the value added at each stage.
In short
- Lets a business offset GST paid on purchases against GST collected on sales, paying only the net difference.
- Requires the supplier to have actually filed their return and deposited the tax, not just issued a valid invoice.
- Certain categories, like motor vehicles and personal consumption items, are restricted regardless of business use.
Input tax credit is the mechanism that keeps GST from cascading, tax being charged on tax, as goods and services move through a supply chain. A business that pays GST on its purchases (inputs) can claim credit for that tax and use it to offset the GST it collects on its own sales (output), paying the government only the net difference.
Claiming ITC correctly depends on several conditions: the supplier must have actually filed their own return and paid the tax, the buyer must hold a valid tax invoice, the goods or services must be used for business purposes, and specific restrictions under GST law apply to certain categories, like motor vehicles or personal consumption items, regardless of business use. A significant share of GST disputes and notices trace back to ITC claimed on invoices where the supplier didn't actually deposit the corresponding tax, which is why matching purchase records against GSTR-2B has become a standard monthly compliance step.
Also referred to as: ITC, input tax credit.
Frequently asked questions
Can I claim ITC on any business purchase?
Only if the conditions are met: the supplier has filed their return and deposited the tax, you hold a valid invoice, and the purchase is for business use. Certain categories are restricted even then.
What happens if my supplier doesn't deposit the tax they collected from me?
Your ITC claim on that invoice can be denied or reversed, which is why matching purchases against GSTR-2B before claiming credit has become standard practice.
Can I claim ITC on a motor vehicle bought for the business?
Generally no, except for specified cases like vehicles used for further supply, transportation of goods, or driving training, regardless of genuine business use.
Disclaimer
This glossary entry is for general informational purposes only and does not constitute professional tax, legal, or financial advice. Rules and rates change, so consult a qualified Chartered Accountant for advice specific to your situation.