What is Input Tax Credit?
Credit for GST already paid on inputs, set off against GST payable on outputs.
What is Input Tax Credit?
Input tax credit is the mechanism that allows a registered person to reduce the GST payable on outward supplies by the GST already paid on inward supplies used in the course or furtherance of business. It is what makes GST a tax on value addition rather than a cascading tax on the full transaction value at every stage. Entitlement is conditional — possession of a valid tax invoice, actual receipt of the goods or services, tax having been paid to the government, and the return having been furnished.
At a glance
Also known as
Key conditions
Studied in
Think of it like…
Think of a chain of shopkeepers each paying tax only on the value they add. Each one holds a receipt for the tax the previous shopkeeper already paid, and hands it to the government as part-payment of their own bill. Break one receipt in the chain and someone pays twice on the same value.
How Input Tax Credit works
- Verify the conditions are met. Possession of a tax invoice, receipt of the goods or services, tax actually paid to the government, and the prescribed return furnished.
- Check for blocked credits. Certain categories are specifically ineligible regardless of business use — these are the most heavily examined provisions.
- Apportion where partly used. Where inputs serve both business and non-business, or taxable and exempt supplies, credit must be apportioned in the prescribed manner.
- Utilise in the prescribed order. The order of set-off across IGST, CGST and SGST is prescribed, and cross-utilisation between CGST and SGST is not permitted.
Value addition, taxed once
- 1Purchase of inputs ₹1,00,000 + GST ₹18,000 → ITC available ₹18,000
- 2Sale of output ₹1,50,000 + GST ₹27,000 → output liability ₹27,000
- 3Net GST payable in cash = ₹27,000 − ₹18,000 = ₹9,000
- 4Tax effectively borne on value added of ₹50,000
- 5Without ITC the same value would have been taxed twice
Where it shows up
- Reducing cash outflow. Credit set-off is the primary determinant of how much GST is actually paid in cash each period.
- Pricing decisions. Blocked credits become a real cost and must be built into pricing rather than passed through.
- Vendor selection. Non-compliant vendors can cost the recipient its credit, making compliance a commercial criterion.
- Exempt supply businesses. Entities making exempt supplies face apportionment and reversal, materially affecting their cost base.
Common mistakes
- Claiming credit on blocked categories such as specified motor vehicles or personal consumption
- Overlooking reversal requirements where payment to the supplier is not made within the prescribed period
- Missing apportionment where inputs are used partly for exempt supplies
- Utilising credit in an order other than the one prescribed
Related concepts
Have questions?
Find answers.
Still unsure about something? We're happy to help you figure it out.
Talk to usWhat are blocked credits?
Specified categories of inward supply on which input tax credit is not available regardless of business use — for example certain motor vehicles, personal consumption and specified construction. Apply the list in force for your attempt.
What happens if the supplier does not pay the tax?
Credit depends on tax having been paid to the government and reflected as prescribed. This is why vendor compliance is treated as a commercial risk, not merely an administrative one.
Is credit available on exempt supplies?
No. Credit attributable to exempt supplies is not available and must be apportioned and reversed in the prescribed manner.
Understanding Input Tax Credit is the start. Using it in a question is the test.
Generate practice questions on this concept, get full solutions, and have your written answers evaluated step by step.
Start your CA journey- Free to start
- Worked solutions
- All 3 CA levels