GST Input Tax Credit Rules and Eligibility Criteria (2025 Update)

 

Input Tax Credit (ITC) plays a crucial role in reducing the effective GST burden on businesses by allowing credit for the tax paid on inputs used in supplying goods or services. Understanding the rules and eligibility criteria for ITC is essential to maximize benefits while ensuring compliance under GST law.

What is GST Input Tax Credit?

ITC means the credit of the tax paid on inputs, input services, and capital goods used in the course or furtherance of business. The credit can be set off against the output GST liability, reducing the tax payable

Key Eligibility Criteria for Claiming ITC

To claim ITC under GST, the following conditions must be satisfied:

1. Registration: The claimant must be a registered taxpayer under GST.
2. Possession of Valid Tax Invoice/Debit Note: The taxpayer must have a tax invoice or debit note issued by the registered supplier.
3. Receipt of Goods or Services: The taxpayer must have received the goods or services; however, provisional ITC can be claimed under certain conditions even if goods/services are in transit (within prescribed timelines).
4. Tax Payment by Supplier: The GST charged on purchases must have been paid to the government by the supplier (confirmed through GST returns).
5. Filing GST Returns: The taxpayer must have filed GST returns, including GSTR-3B, with accurate incorporation of inward supply details.
6. Timely Claiming of ITC: ITC must be claimed within a maximum period of one year from the date of the invoice.

Blocked Credits (Where ITC Is Not Available)

Certain goods and services are excluded from ITC, including:

• Motor vehicles for personal use (unless used for further supply)
• Goods/services used for exempt supplies (other than nil-rated/zero-rated)
• Membership of a club, health services, rent-a-cab, life insurance, health insurance (except business use)
• Food, beverages, outdoor catering, beauty treatment, health services (except business use)
• Works contract services for construction of immovable property except under certain conditions
• Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples

ITC Utilisation Rules (Updated as of August 2025)

• Order of Use:
• IGST credit must be utilised first to pay IGST liability, then CGST, then SGST/UTGST.
• CGST can be used only against CGST and IGST liabilities, and SGST/UTGST only against SGST/UTGST and IGST liabilities.
• Full exhaustion of IGST credits is mandatory before using CGST or SGST credits.
• Partial Utilisation Flexibility:
  Taxpayers can utilize IGST credits in any proportion towards CGST and SGST liabilities, provided the IGST credit is fully utilized first.

Practical Steps to Claim ITC

1. Verify Supplier Invoices and GSTR-2B:
   Cross-check invoice-level data against supplier-uploaded details in GSTR-2B to avoid mismatches.
2. Maintain Proper Documentation:
   Keep copies of tax invoices, delivery challans, contracts, and payment proof for audit and compliance.
3. Ensure Timely Filing of Returns:
   File GSTR-3B and other necessary returns accurately before claiming ITC.
4. Reverse Ineligible Credits:
   Reconcile exempt supplies and adjust ITC reversals as per Section 17(5) of the CGST Act.
5. Reconcile Quarterly for Input Service Distributor (ISD) Credits:
   Use GSTR-6 to distribute and claim credit if applicable.

Impact of GST Rate Changes Effective September 2025

• For goods/services exempted from GST from September 22, 2025, taxpayers must reverse related ITC on supplies made after this date.
• ITC availed on purchases before rate change remains valid and can be utilized against output GST liabilities.

Benefits of Proper ITC Claim

• Reduces overall tax liability to government.
• Avoids cash flow stress caused by blocked credits.
• Ensures smooth compliance avoiding penalties and notices.
• Improves business competitiveness by minimizing tax cascading.

Claiming your rightful Input Tax Credit based on up-to-date rules and effective reconciliation helps businesses optimize tax outgo and maintain smooth GST compliance.

Would you like a detailed formula or calculator to help with ITC calculations?