Input Tax Credit is the mechanism that prevents GST from being charged multiple times as goods and services move through a supply chain. When a registered business buys goods or services for use in its own business, it pays GST on that purchase. ITC lets the business subtract that already-paid GST from the GST it collects on its own sales, so it only pays the government the net difference. To claim ITC, several conditions must be met: the business must hold a valid tax invoice, the supplier must have actually filed and paid that GST to the government (visible via GSTR-2B matching, the sole basis for ITC eligibility since January 2022), the goods or services must be received, and the credit must be claimed within the statutory time limit, the earlier of 30 November following the relevant financial year or the date the annual return is filed. (The Finance (No. 2) Act 2024 added a retrospective relief, Sections 16(5) and 16(6), extending the ITC claim deadline to 30 November 2021 specifically for FY2017-18 through FY2020-21, so older periods aren't automatically time-barred under the standard rule.) ITC cannot be claimed on certain blocked categories, such as motor vehicles for personal use, food and beverages (except in specific cases), or goods lost or given as free samples. Mismatches between what a business claims as ITC and what its suppliers have actually reported are one of the most common triggers for GST notices, which is why reconciling purchase records against GSTR-2B every month is standard practice for compliant businesses.
Example: A manufacturer buys ₹1,00,000 of raw material and pays ₹18,000 GST on it. It later sells the finished product and collects ₹30,000 GST from its customer. It can claim the ₹18,000 as ITC and pay only the ₹12,000 difference to the government.
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