What is Input Tax Credit?
Input Tax Credit (ITC) is the GST you pay on your purchases (inputs) that you can set off against the GST you collect on your sales (outputs). It is the mechanism that prevents tax from cascading at every stage of the supply chain — you only pay tax on the value you add.
In practice, your net GST payable each month is simply: output tax (on sales) minus input tax credit (on eligible purchases). Getting ITC right is the single biggest lever on your working capital — every rupee of credit you miss is a rupee of extra tax paid out of pocket.
ITC is not automatic. You only get credit for purchases that meet every condition below AND that your supplier has correctly reported. A missing invoice in your GSTR-2B almost always means you cannot claim that credit (yet).
The conditions for claiming ITC
Section 16(2) of the CGST Act lays down the conditions. You can claim ITC only when ALL of these are met:
- You hold a valid tax invoice or debit note from a GST-registered supplier.
- You have actually received the goods or services. For goods delivered in lots, credit is available only on receipt of the last lot.
- The supplier has reported the invoice in their GSTR-1, so it appears in your auto-generated GSTR-2B [Section 16(2)(aa)].
- The supplier has actually paid the tax to the government [Section 16(2)(c)]. Note that these last two are separate conditions — an invoice showing up in your GSTR-2B does not by itself prove the supplier remitted the tax.
- You have filed your own GSTR-3B for the period in which you claim the credit.
The supplier-side conditions are where most credit is lost. If your supplier forgets to file their GSTR-1, their invoice never reaches your GSTR-2B, and you cannot legally claim that credit until they fix it.
GSTR-2B: your single source of truth for ITC
GSTR-2B is a static, auto-drafted statement generated on a fixed date each month. It lists every inward supply your suppliers reported. The rule is simple: claim ITC only on invoices that appear in your GSTR-2B. Reconciling your purchase register against GSTR-2B every month is the most important compliance habit a business can build — it catches missing supplier filings before they cost you credit.
The 180-day payment rule
If you claim ITC on a purchase but do not pay your supplier (invoice value plus tax) within 180 days of the invoice date, you must reverse that credit along with interest. The good news: once you do pay, you can re-claim the credit — provided you are still within the Section 16(4) claim window for that invoice (see below). This rule exists to stop businesses from claiming credit on bills they never intend to settle.
Blocked credits under Section 17(5)
Some purchases are specifically blocked from ITC even if you meet all four conditions. The most common blocked credits are:
| Category | ITC status |
|---|---|
| Motor vehicles for transport of persons (approved seating capacity up to 13, including the driver) | Blocked, unless used for further supply, transport of passengers, or driving training |
| Food & beverages, outdoor catering, club / health / fitness memberships | Blocked, unless used to make an outward taxable supply of the same category, or where legally obligatory for the employer |
| Works contract & construction of immovable property | Blocked, except for plant and machinery |
| Goods/services for personal consumption | Blocked |
| Free samples, gifts, goods lost / stolen / written off | Blocked |
Knowing these saves you from claiming credit you would later have to reverse with interest in a notice.
The deadline to claim ITC
You cannot claim old credit indefinitely. ITC for a financial year must be claimed by the earlier of: 30th November of the following financial year, or the date you file that year's annual return. Miss the window and the credit lapses permanently — another reason monthly reconciliation beats a year-end scramble.
How ReadyBooks.ai helps
ReadyBooks.ai records the GST on every purchase bill automatically and tags each line with its HSN/SAC and tax rate. The GST dashboard shows your output tax, input tax, and net payable in the GSTR-3B format, so you always know your real liability. When you reconcile against GSTR-2B, mismatched or missing supplier invoices are easy to spot — so you claim every rupee you are entitled to and nothing you are not.
GST rules, rates, and thresholds are revised periodically. Confirm the current position on the GST portal or with your chartered accountant before filing.