Input Tax Credit under GST: Section 16 Guide 2025

 Section 16 of the Central Goods and Services Tax (CGST) Act, 2017, forms the base for India’s Input Tax Credit (ITC) system. It helps avoid tax-on-tax by allowing credit of GST paid on inputs and services used for business. In 2025, it remains a key compliance area under the GST regime, with several amendments refining its scope.​

Role and Objective

Section 16 ensures that GST is applied only to the ‘value addition’ part of business activities. It allows every registered person to claim credit for tax paid on business inputs. This provision prevents double taxation and supports a transparent tax chain from supplier to end consumer.

Structure of Section 16

The section is divided into subsections (1) to (6), each covering a specific eligibility or condition for availing ITC. It outlines who can claim credit, time limits, compliance criteria, and restrictions.​

Section 16(1): Entitlement to ITC

A registered person may claim credit for GST paid on goods or services used for business. The credit is added to the electronic credit ledger. The taxpayer must ensure that the input is used in the course or furtherance of business. Businesses under the composition scheme cannot claim ITC.​

Section 16(2): Conditions for ITC

A taxpayer must fulfill specific conditions before claiming input tax credit:

1. Possession of a valid tax invoice or debit note issued by a registered supplier.
2. Actual receipt of goods or services.
3. Tax must have been paid to the government by the supplier.
4. The recipient must file GST returns under Section 39.​

For goods delivered in parts, ITC is allowed after the last lot is received.

Section 16(3): Restriction on Capital Goods

If depreciation is claimed under the Income Tax Act on the tax component of a capital asset, no ITC is allowed on that portion. This ensures no double deduction is taken for the same tax element.​

Section 16(4): Time Limit for ITC

Credit must be claimed by the earlier of:

• 30th November following the end of the financial year, or
• Filing of the annual return (GSTR-9).

The 2025 amendments clarified this rule further to ensure uniformity in application and reduce disputes on late claims.​

Section 16(5): Transitional and Special ITC

This subsection allows retrospective ITC entitlement for earlier years (FY 2017–2021) if returns were filed before 30th November 2021.​

Section 16(6): ITC on Revoked Registration

If a registration is canceled and later restored, ITC can be reclaimed on invoices issued before cancellation, subject to conditions laid down by GST rules.​

The 180-Day Payment Rule

If the buyer fails to pay the supplier (including GST) within 180 days from invoice date, ITC must be reversed with interest. The credit can be reclaimed after full payment. This rule promotes timely settlement and improves supplier liquidity.​

Blocked Credits and Exceptions

ITC cannot be claimed for certain expenses like food, beverages, club memberships, or health services, unless used for resale or mandated by law. The policy intends to prevent misuse of business credits for personal consumption.​

Amendments under Finance Act 2025

Effective from October 1, 2025, the Finance Act 2025 introduced digital compliance updates such as:

• Invoice Management System (IMS) to match supplier and buyer invoices online.
• Pre-condition to reverse ITC in case of credit notes issued by suppliers.
• Alignment of terms like “plant and machinery” for consistency in Section 17.​

These changes aim to make ITC tracking automated and transparent, ensuring credit flows only through verified transactions.

Compliance and Technology

GSTN has developed tools like GSTR-2B and IMS for automated ITC reconciliation. Taxpayers can now accept, reject, or hold invoices digitally before GSTR-3B filing. Only accepted invoices are considered eligible for ITC under Section 16.​

Judicial Interpretations

Courts have emphasized that ITC is a “concession” and not an absolute right. Taxpayers must meet all statutory conditions before claiming credit. Non-compliance with documentation or timing can lead to reversal and penalty.​

Practical Challenges

Businesses often face issues like mismatch between supplier (GSTR-1) and recipient returns (GSTR-3B), late filing, or denied ITC when suppliers default. The 2025 changes and digital tools aim to reduce such mismatches by real-time invoice validation.​

Importance for Businesses

Compliance with Section 16 ensures:

• Proper flow of credit in supply chains.
• Reduction in cascading tax effect.
• Accurate reconciliation of input and output tax.
• Avoidance of penalties and blocked working capital.​

Key Takeaways

1. Claim ITC only when all Section 16 conditions are met.
2. Track supplier compliance through GSTR-2B.
3. Avoid claiming ITC on blocked items.
4. Use digital reconciliation to prevent mismatch.
5. Follow payment deadlines to maintain eligibility.

Conclusion

Section 16 of the CGST Act remains central to India’s GST framework. The 2025 updates strengthen transparency through automation and tighter compliance checks. For businesses, adhering to Section 16 is vital not only for claiming credit but for sustaining trust and efficiency in India’s tax system