Also known as: Input Tax Credit · GST input credit
The mechanism that lets a GST-registered business set off the GST it paid on purchases against the GST it owes on sales, reducing cash outflow.
Input Tax Credit (ITC) is the cornerstone mechanism of the Indian GST system. When a registered business buys goods or services from another registered supplier, it pays GST on the purchase; when it makes its own taxable supplies, it charges GST to its customers. ITC lets the business set off the GST it paid on purchases against the GST it collected on sales, so only the net value-add is remitted to the government in cash.
Section 16 of the CGST Act lays out the four conditions for claiming ITC — (1) possession of a tax invoice or debit note from a registered supplier, (2) actual receipt of the goods or services, (3) the supplier must have filed their GSTR-1 so the invoice appears in your GSTR-2B, and (4) you must have paid the supplier within 180 days of invoice date or reverse the ITC under Rule 37. All four conditions are tested for each invoice independently.
Section 17(5) blocks ITC on specified expenses — motor vehicles below 13-seater (with exceptions for transport businesses), food and beverages, outdoor catering, beauty treatment, health services, club memberships, life and health insurance (with exceptions for statutorily mandated coverage), travel benefits to employees on vacation, and works contract services for construction of immovable property. ITC on such expenses must be reversed even if you initially claimed it.
Mismatches between your purchase register and your GSTR-2B are the single biggest source of GST notices. ReadyBooks.ai runs an AI-powered reconciliation between the two on every 2B publication date, flags suspicious differences, and recommends an action — wait, follow up with the supplier, or reverse under Rule 37.