Input Tax Credit (ITC) — Pay Less, Legally

It was Wednesday afternoon. Meera had just finished entering Bisht Ji's purchase invoices into ERPLite. "Sharma Sir, Bisht Ji paid Rs 42,000 in GST on his purchases this month. And he collected Rs 58,000 in GST on his sales. Does he really have to pay Rs 58,000 to the government?" Sharma Sir smiled. "No, Meera. He only pays the difference. Rs 58,000 minus Rs 42,000. That's Rs 16,000. The rest is already paid. This is called Input Tax Credit — ITC. It's the heart of GST. And today, you will understand it completely."

The Core Idea of ITC

Input Tax Credit is the single most important concept in GST. If you understand ITC, you understand why GST is better than the old tax system.

Here is the idea in one sentence:

You paid GST when you bought something. You collected GST when you sold something. You only pay the government the DIFFERENCE.

Let us write this as a formula:

GST to pay = GST collected on sales - GST paid on purchases
           = Output Tax - Input Tax Credit

That's it. The GST you paid on your purchases is your Input Tax Credit. You use it to reduce the GST you owe to the government.

Why is it Called "Input" Tax Credit?

In business:

• Inputs = what you buy to run your business (raw materials, goods for resale, services)
• Output = what you sell

The tax on your inputs (purchases) is your "Input Tax." You get "Credit" for it — meaning it reduces your tax bill.

Think of it like this: Imagine you're at a chai shop. You give the shopkeeper a Rs 100 note. The chai costs Rs 30. He gives you Rs 70 back as change. ITC is like that change — you already paid some GST through your purchases, so the government gives you "change" by reducing your final tax bill.

Step-by-Step: How ITC Works

Let us trace ITC through Bisht Ji's business with real numbers.

Bisht Ji's January Purchases (What He Bought)

Bisht Ji's total Input Tax (GST paid on purchases) = Rs 32,200.

Bisht Ji's January Sales (What He Sold)

Bisht Ji's total Output Tax (GST collected on sales) = Rs 37,500.

The ITC Calculation

GST payable to government = Output Tax - Input Tax Credit
                          = Rs 37,500 - Rs 32,200
                          = Rs 5,300

Without ITC, Bisht Ji would pay Rs 37,500 to the government. With ITC, he pays only Rs 5,300. He saves Rs 32,200 — legally! This is not tax evasion. This is how the system is designed to work.

How ITC is Set Off: CGST, SGST, IGST

ITC is not just one pool. The credit you earn is split by type (CGST, SGST, IGST), and there are rules about which credit can be used against which tax.

The Set-Off Rules

The key rule to remember: CGST credit cannot be used against SGST, and SGST credit cannot be used against CGST. This is because CGST is a Central tax and SGST is a State tax — they cannot cross over directly.

Detailed Set-Off for Bisht Ji (January)

Let us first calculate the ITC by type:

Input Tax (ITC earned):

Output Tax (tax collected on sales):

Step-by-step set-off:

Step 1: Use IGST credit first (Rs 22,500)

• Against IGST output: Rs 15,000. Remaining IGST credit = Rs 7,500.
• Against CGST output: Rs 7,500. Remaining IGST credit = Rs 0.

Step 2: Use CGST credit (Rs 4,850)

• Against remaining CGST output: Rs 11,250 - Rs 7,500 = Rs 3,750. Use Rs 3,750 of CGST credit. Remaining CGST credit = Rs 1,100.
• Remaining CGST credit (Rs 1,100) can be used against IGST (but IGST is already zero). So Rs 1,100 carries forward.

Step 3: Use SGST credit (Rs 4,850)

• Against SGST output: Rs 11,250. Use Rs 4,850. Remaining SGST output = Rs 6,400.

Step 4: Calculate what Bisht Ji actually pays in cash

Bisht Ji pays Rs 6,400 in cash. He carries forward Rs 1,100 of CGST credit to next month.

Note: Don't worry if the set-off seems complicated. ERPLite does this calculation automatically. But it is important to understand the logic so you can verify the numbers.

Conditions for Claiming ITC

You cannot claim ITC on just any purchase. There are strict conditions. If even one condition is not met, your ITC claim will be rejected.

The Five Conditions

Condition 1: You must have a valid tax invoice (or debit note)

No invoice = no ITC. The invoice must contain all mandatory fields — supplier GSTIN, HSN code, tax breakup, etc. (We covered these in Chapter 18.)

If Bisht Ji buys spices from a farmer who is not registered for GST and does not give an invoice with GSTIN, Bisht Ji cannot claim ITC on that purchase.

Condition 2: You must have actually received the goods or services

You cannot claim ITC on goods that are still in transit or not yet delivered. The goods must be in your possession (or your agent's possession).

If Bisht Ji orders 1,000 kg of turmeric and only 800 kg arrives (200 kg lost in transit), he can claim ITC only on the 800 kg that he actually received.

Condition 3: The supplier must have filed their GST return

This is a crucial condition. The GST you paid on your purchase must show up in the supplier's GSTR-1 (sales return). If the supplier collects GST from you but doesn't file their return, you lose your ITC.

This is why Sharma Sir always tells clients: "Buy from registered, compliant suppliers."

Condition 4: You must have filed your own return

You can only claim ITC when you file your GSTR-3B. If you don't file your return, you don't get the credit.

Condition 5: Payment must be made within 180 days

If you have not paid the supplier within 180 days from the invoice date, you must reverse the ITC (give it back). Once you pay, you can reclaim it.

Imagine Bisht Ji buys Rs 1,00,000 of chilli from AP Mirchi Traders in January but doesn't pay them until August (more than 180 days). He would have to reverse the ITC in the month when 180 days are up. When he finally pays, he can reclaim it.

Summary of Conditions

Blocked Credits — When ITC is NOT Allowed

Even if all five conditions above are met, there are certain purchases where ITC is blocked by law. You simply cannot claim ITC on them, no matter what.

List of Blocked Credits (Section 17(5) of CGST Act)

Examples for Bisht Ji

• Bisht Ji buys a car for Rs 8,00,000 plus GST. ITC blocked. He cannot claim the GST on the car because motor vehicles are blocked credits (unless the car is used for transportation of goods, which a sedan is not).

• Bisht Ji orders samosas and chai for a client meeting. Cost: Rs 2,000 plus GST. ITC blocked. Food and beverages for employees/guests is a blocked credit.

• Bisht Ji buys a packaging machine for Rs 3,00,000 plus GST. ITC allowed! Machinery used for business is not in the blocked list. This is a legitimate business expense.

• Bisht Ji buys turmeric for resale. ITC allowed! Goods purchased for resale are fully eligible for ITC.

ITC Reversal — When You Must Return ITC

Sometimes you claim ITC initially but later need to reverse (return) it. Here are the common situations:

Situation 1: Non-Payment Within 180 Days

We already covered this. If you don't pay the supplier within 180 days, reverse the ITC. Reclaim it when you pay.

Situation 2: Goods Used for Exempt + Taxable Supplies

If Bisht Ji uses some inputs to make both taxable supplies (packaged spices, 5% GST) and exempt supplies (unbranded loose spices, 0% GST), he must proportionally reverse ITC for the exempt portion.

For example: If 20% of his sales are exempt, he must reverse approximately 20% of his common ITC.

Situation 3: Credit Note Received from Supplier

If the supplier issues a credit note (for returns, discount, etc.), Bisht Ji's ITC must be reduced accordingly.

Situation 4: Inputs Used for Personal Purposes

If Bisht Ji takes some spices home for personal use, he must reverse ITC on those spices. Business inputs used for personal purposes do not qualify for ITC.

The Matching Concept — GSTR-2A / GSTR-2B

"How does the government know if my ITC claim is valid?" Meera asked.

Sharma Sir explained: "The government matches your claims with your suppliers' filings."

Here is how it works:

1. Your supplier files GSTR-1 (details of their sales). Your purchase invoices appear in their sales data.
2. This data automatically populates into your GSTR-2A (a dynamic, real-time statement) and GSTR-2B (a static, monthly statement).
3. When you file GSTR-3B and claim ITC, the government checks: Does your ITC claim match what appears in GSTR-2B?

If there is a mismatch — for example, you claim ITC of Rs 10,000 on a purchase from Supplier X, but Supplier X never reported that sale in their GSTR-1 — the government will flag it.

GSTR-2A vs GSTR-2B

In practice: Before filing GSTR-3B, Sharma Sir always asks Negi Bhaiya to download Bisht Ji's GSTR-2B and compare it with the purchase register in ERPLite. Any mismatch must be investigated.

Hands-On: Calculating Bisht Ji's Monthly ITC in ERPLite

Negi Bhaiya showed Meera how to check ITC in ERPLite.

Step 1: Open the GST Report

Go to Reports > GST Reports > Input Tax Credit Summary.

Select the period: January 2026.

ERPLite shows a summary:

Step 2: Compare with GSTR-2B

Download GSTR-2B from the GST portal for Bisht Ji. Compare each invoice:

All invoices matched! Bisht Ji can safely claim Rs 32,200 as ITC.

Step 3: Check for Blocked Credits

Meera noticed one more purchase entry: "Office Lunch — Rs 1,200 + GST Rs 216."

Negi Bhaiya said, "Good catch! Food and beverages are blocked credits. We should NOT include this Rs 216 in our ITC claim. Let me mark it as 'ITC Not Available' in ERPLite."

In ERPLite, when entering a purchase invoice, there is an option for each line item:

• ITC Eligible: Yes / No

For the lunch expense, set it to No. ERPLite will exclude it from ITC calculations.

Step 4: View the Net Payable

Go to Reports > GST Reports > Tax Liability Summary.

Bisht Ji needs to pay Rs 6,400 in cash to the government this month. And Rs 1,100 of CGST credit carries forward to February.

Quick Recap

• ITC (Input Tax Credit) = GST you paid on purchases. You use it to reduce the GST you owe on sales.
• Formula: GST payable = Output Tax - Input Tax Credit.
• IGST credit is set off against IGST first, then CGST, then SGST. CGST and SGST credits cannot cross over to each other.
• Five conditions for claiming ITC: valid invoice, goods received, supplier filed return, you filed return, paid within 180 days.
• Blocked credits: motor vehicles, food, personal items, club memberships, construction, etc.
• ITC reversal happens when: non-payment within 180 days, goods used for exempt supplies, credit note received, or personal use.
• GSTR-2B is the reference document for ITC claims. Always reconcile before filing.
• In ERPLite, mark blocked credit items as "ITC Not Available" so they are excluded from ITC calculations.

Practice Exercise

Exercise 1: Calculate the ITC

Bisht Ji's February purchases:

February sales output tax:

Carry-forward from January: CGST Rs 1,100.

Questions:

1. What is the total eligible ITC? (Remember blocked credits!)
2. Calculate the net payable for each tax type (IGST, CGST, SGST).
3. Is there any ITC carry forward to March?

Exercise 2: Blocked or Allowed?

For each purchase below, write whether ITC is ALLOWED or BLOCKED:

1. A delivery van for transporting spices
2. Tea and snacks for office staff
3. A laptop for the accountant
4. Construction of a new warehouse
5. Raw spices for resale
6. Printer cartridges for the office
7. A gym membership for Bisht Ji
8. Courier charges for sending goods to customers

Exercise 3: ITC Reversal

Bisht Ji bought Rs 2,00,000 worth of cumin from Gujarat Seeds Ltd in September. GST paid: Rs 10,000. He claimed ITC in September.

• In March (180+ days later), he still has not paid Gujarat Seeds Ltd.
• What should he do with the ITC?
• If he pays them in April, what happens?

Exercise 4: GSTR-2B Mismatch

When reconciling February's GSTR-2B, Meera finds that one supplier (Haldwani Packaging, invoice HP/290, GST Rs 3,600) does not appear in GSTR-2B. What should she do? List at least 3 steps.

Fun Fact

ITC is not unique to India. Most countries with a VAT (Value Added Tax) system have a similar concept. In the European Union, it's called "VAT deduction." In Australia, it's called "GST credit." The idea is the same everywhere — businesses should only pay tax on the value they add, not on what was already taxed. The concept was first introduced by a French tax official named Maurice Laure in 1954. So the next time you calculate ITC for Bisht Ji, remember — you're using an idea that a Frenchman invented over 70 years ago!