Input Tax
Credit
ITC is the backbone of GST — it prevents cascading of taxes and ensures you only pay tax on the value you add. Learn what ITC is, the 3 types, cross-utilization rules, when ITC is blocked, proportionate reversal, and Sec 2(62) definition.
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What is Input Tax Credit?
The Core Definition
ITC eliminates the cascading effect of taxes.
Three Types of ITC
ITC is available on three categories of inward supplies. All three are treated similarly for ITC purposes:
Input
Goods (Except Capital Goods) used in Business
Input Services
Services used for Business Purpose
Capital Goods
Goods Capitalized in books (e.g. Machinery — M/c)
→ Treated Similarly for ITC Purpose
Whether it is a raw material (Input), a service (Input Services), or a fixed asset (Capital Goods), the ITC mechanism and rules apply in the same manner for all three categories.
Key ITC Rules
Can’t Share Across States
ITC is state-specific. Statewise Registration means ITC earned in one state cannot be used in another state.
Recipient Pays + Claims
The registered recipient pays GST on purchases and claims that amount as ITC against their output liability.
RCM — Same Month
ITC on RCM transactions must be claimed in the same month in which RCM GST is paid to the government.
Composition Scheme — No ITC
Businesses registered under the Composition Scheme are not eligible for ITC on any purchases.
Cross-Utilization of ITC
Different types of ITC (IGST, CGST, SGST) can be used to set off specific output liabilities. The rules are strict — not all combinations are permitted:
| ITC Available | Can Set Off Against | Cannot Set Off Against |
|---|---|---|
| IGST | IGST → CGST → SGST (in this order) | — (No restriction) |
| CGST | CGST → IGST | ❌ Cannot set off SGST |
| SGST | SGST → IGST | ❌ Cannot set off CGST |
🧠 Key Rule to Remember
- IGST ITC is the most flexible — can pay any liability (IGST first, then CGST, then SGST)
- CGST and SGST cannot cross-set-off each other — CGST ITC cannot pay SGST liability and vice versa
- Both CGST and SGST ITC can however be used to pay IGST liability
NO ITC vs YES ITC
When ITC is Blocked
- If outward supply is Exempt Supply — no ITC on inputs used for exempt outputs
- No GST on Sale → No ITC — if output doesn’t attract GST, input ITC is not available
ITC Available Even If Zero Rated
- Zero Rated Supplies — GST on output is zero, but ITC is still allowed
- Export of Goods/Services — zero rated, ITC available + refund possible
- Supply to SEZ — treated as zero rated, full ITC available
Timing of ITC Claim
📅 As Soon as Goods/Services are Received
ITC can be claimed as soon as the goods or services are received by the registered person — provided the supplier has filed their return and the invoice is reflected in the recipient’s GSTR-2B. The earlier ITC is claimed, the sooner the cash flow benefit is realised.
Proportionate Reversal of ITC
When the same inputs (goods/services or Capital Goods) are used for both taxable and exempt supplies, ITC cannot be claimed in full. Only the portion attributable to taxable supplies is allowed:
Input / CG → Taxable Output
Inputs used for making taxable outward supplies. GST is charged on the output.
Input / CG → Exempt Output
Inputs used for making exempt outward supplies. No GST on the output.
📌 Practical Impact
If a business has mixed outputs (partly taxable, partly exempt), it must calculate the proportion and reverse the ITC attributable to exempt supplies. The formula uses the ratio of exempt turnover to total turnover for the period.
Waste / By-Product Rule
🏭 Full ITC — Even if Input Goes to Waste
- Full ITC is available even if some input is lost in the manufacturing process (waste)
- Even if some input produces a Non-Taxable By-Product (e.g., Sludge from a factory), the ITC on the original input is still fully claimable
- The logic: the primary purpose of the input is for business/taxable supply — incidental waste/by-products do not disqualify the ITC
- Example: A factory uses chemicals (paying GST). Some chemicals become sludge (non-taxable by-product). Still — full ITC on the chemicals is available.
What is “Input Tax” — Sec 2(62)
Before claiming ITC, we must understand what constitutes “Input Tax” under the law. Section 2(62) of the CGST Act defines it clearly with specific inclusions and exclusions:
What is Input Tax
- CGST paid on purchases
- SGST paid on purchases
- IGST paid on purchases
- UTGST paid on purchases
- IGST on Imports — tax paid at customs
- Tax under RCM — GST paid as recipient under Reverse Charge
What is NOT Input Tax
- GST paid under Composition Scheme — composition tax is not “input tax” and cannot generate ITC
- Since composition dealers pay a flat rate and cannot pass on ITC, their tax payment does not qualify
🧠 ITC Part 1 — Complete Summary
- ITC = Credit of GST paid on purchases — used to offset output GST liability
- 3 Types: Input (goods), Input Services, Capital Goods — all treated equally
- Can’t share across states — Statewise registration, RCM same month, Composition = No ITC
- Cross-Utilization: IGST → any; CGST → IGST only; SGST → IGST only; CGST ↔ SGST NOT allowed
- NO ITC: Exempt supply, No GST on output | YES ITC: Zero rated (exports, SEZ)
- Timing: As soon as goods/services received
- Proportionate Reversal: ITC on exempt supply must be reversed
- Waste/By-Product: Full ITC even if input becomes non-taxable waste
- Sec 2(62): Input Tax = CGST + SGST + IGST + UTGST + IGST on imports + RCM tax. Excludes Composition tax.
