What Is Input Tax Credit in GST?

Input tax credit is eligible GST charged on business purchases that a registered taxpayer may set off against output tax on sales. Section 16(1) of the Central Goods and Services Tax Act, 2017 confers that entitlement for goods and services used or intended to be used in the course or furtherance of business. A business pays input tax on purchases, collects output tax on sales and pays the government the balance after eligible credit is set off.

• Pay GST on purchases: When a business buys raw materials, services or capital goods, it pays input tax to the supplier.
• Collect GST on sales: When the business sells its finished goods or services, it collects output tax from the customer.
• Offset the tax: The business deducts the input tax credit from the output tax and pays only the balance in cash.

GST is therefore borne only on the value each business adds, and not a second time on tax the supplier has already paid.

Input tax is the GST a supplier charges on a purchase, recorded as a rupee amount on the supplier's invoice. Input tax credit is the recipient's entitlement to set eligible input tax against output tax on sales. Section 16 prescribes the conditions for claiming that credit; payment of input tax and possession of an invoice alone are insufficient.

GST comprises separate taxes with separate credit balances. Central tax and State or Union territory tax are charged together on an intra-State supply, resulting in two credit balances. Integrated tax is charged on inter-State supplies and imports of goods. Compensation cess applies to specified goods in addition to GST, and its credit may be used only against cess. Each credit balance is subject to the prescribed order of utilisation.

Section 2(62) of the CGST Act, 2017 defines input tax as central tax, State tax, integrated tax or Union territory tax charged on a supply made to a person. It includes integrated tax on imports of goods and tax paid under reverse charge. Compensation cess is not included in Section 2(62); cess credit is governed by a separate enactment. Input tax "does not include the tax paid under the composition levy". Section 2(63) defines input tax credit as "the credit of input tax".

Classification as inputs, input services or capital goods affects the treatment of credit over time. Section 2(59) defines an input as goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Section 2(60) defines an input service by reference to services used or intended for such business use. Section 2(19) defines capital goods as goods whose value is capitalised in the claimant's books and which are used or intended to be used for business. Classification depends on the accounting treatment of the cost rather than the identity of the asset. The same asset is an input for a business that expenses it and a capital good for a business that capitalises it.

Section 16(1) provides that the amount "shall be credited to the electronic credit ledger of such person", and Section 49(2) provides for credit as self-assessed in the return to be recorded in that ledger. Section 41(1) entitles a registered person to avail eligible input tax credit "as self-assessed, in his return", without advance approval. Section 41(2) requires reversal with interest where the supplier has not paid the tax; its proviso permits re-availment when the supplier pays.

Section 54(3) of the CGST Act, 2017 permits refund of unutilised credit for zero-rated supplies made without payment of tax and for accumulation caused by the rate on inputs exceeding the rate on output supplies. The latter excludes nil-rated or fully exempt supplies and supplies notified by the Government as excluded. Refund remains subject to Section 54's conditions and exclusions. In other cases, credit may be carried forward for utilisation against output tax, subject to required reversals, restrictions and statutory lapse. Section 16(3) denies credit on a tax component on which depreciation has been claimed under the Income-tax Act, 1961. Section 10(4) denies input tax credit to a composition taxable person.

A trader pays ₹8,100 GST on a ₹45,000 purchase and collects ₹12,960 GST on a ₹72,000 sale. Both transactions are taxed at 18%.

• Input tax paid to the supplier: ₹8,100 (18% of ₹45,000)
• Output tax collected from the customer: ₹12,960 (18% of ₹72,000)
• Net GST payable in cash: ₹4,860 (₹12,960 − ₹8,100)

The trader pays ₹4,860 to the government in cash and sets off ₹8,100 of input tax credit against the remaining output tax. The net payment corresponds to tax on the value added rather than tax on the full ₹72,000 sale. An additional eligible purchase in the same period would increase input tax credit above ₹8,100 without changing output tax of ₹12,960.

Monthly invoices at different rates are aggregated separately for each tax type before credit is utilised in the prescribed order of set-off.

The ₹8,100 is posted to an input tax account rather than included in the purchase cost. Input tax credit accounting entries record it as a receivable from the government rather than as part of the cost of the goods.

Any person registered under GST as a regular taxpayer can claim input tax credit on goods and services used for business. Section 16(1) confers the entitlement on a "registered person"; registration is a requirement for claiming credit.

• Regular registered taxpayers: Entitled to full credit, subject to the Section 16 conditions and the Section 17(5) bars.
• Composition dealers: Not entitled, because Section 10(4) denies input tax credit to anyone paying tax under the composition scheme.
• Input Service Distributors: Entitled to receive and distribute credit on common input services to their branches.
• Non-resident taxable persons: Section 17(5)(f) allows credit only on goods they import, not on domestic inward supplies.
• Unregistered persons: Not entitled to claim input tax credit on GST charged to them.

A head office receiving invoices for input services for or on behalf of its separately registered branches, which are distinct persons under Section 25, must register as an Input Service Distributor (ISD) and distribute the credit under Section 20 and Rule 39. Credit attributable only to one branch goes to that branch; common credit is distributed among the relevant branches in the prescribed proportions. Rule 36(1)(e) of the CGST Rules, 2017 permits a branch to claim on the ISD invoice even where it did not receive the original supplier invoice. Separate companies in a corporate group are not distinct persons of the same supplier merely because they belong to that group.

Registration as an Input Service Distributor is not optional for an office that receives such invoices. Section 24(viii) lists an Input Service Distributor among the persons required to register "whether or not separately registered under this Act". Section 20(1) then requires that office to distribute the credit on the invoices it receives for or on behalf of distinct persons. Section 20(2) limits what may be distributed to the credit of central tax or integrated tax, including tax paid under reverse charge by a distinct person registered in the same State as the distributor. Under Section 20(3), central tax is distributed as central tax or integrated tax, and integrated tax as integrated tax or central tax. State-tax distribution is governed by the corresponding State provisions and the distribution requirements in Rule 39.

Section 10(4) prohibits a composition dealer from collecting tax from customers and denies the dealer input tax credit. A customer cannot claim input tax credit on a purchase from that dealer. Suitability of the composition scheme depends on turnover and customer type: the dealer cannot claim input tax credit, and registered business customers cannot claim credit on purchases from the dealer.

Section 18(1)(a) of the CGST Act, 2017 entitles a person who applies for registration within thirty days of becoming liable and is granted registration to credit on eligible inputs held in stock on the day immediately preceding the liability date, including inputs contained in semi-finished and finished goods. Eligibility for ITC on stock held before registration depends on those conditions. Voluntary registration under Section 18(1)(b) permits credit on eligible input stock held on the day before registration is granted. Neither clause permits credit on pre-registration services or capital goods. Section 18(2)'s one-year invoice limit and Rule 40's declaration requirements also apply.

Manufacturers, traders and service providers are subject to the same Section 16 conditions and Section 17(5) restrictions. Purchases affected by those restrictions include canteen and staff welfare expenses for manufacturers, goods lost, stolen or given away by traders, and employee travel benefits and club memberships for service providers, subject to the statutory exceptions.

• Manufacturer: Claims on raw materials, consumables, plant and machinery, and inward freight; the bar applies to canteen and staff welfare.
• Trader: Claims on stock in trade, inward freight and warehousing; the bar applies to goods lost, stolen or given as samples.
• Service provider: Claims on professional fees, office rent, software subscriptions and telecom; the bar applies to employee travel and club membership.

Section 17(5) restrictions apply by purchase category. The same clause applies to a manufacturer and a service provider purchasing the same canteen service. Differences in purchase frequency affect the amount of expenditure subject to that clause.

The applicable Section 17(5) restriction depends on the purchase rather than on the business type.

Sections 49(5), 49A and 49B, read with Rule 88A, govern the amount and order of credit utilisation. Eligibility for a purchase is subject to the seven grouped Section 16 requirements and Section 17(5). Section 16(4) prescribes the claim deadline. GSTR-2B records the invoice details communicated to the recipient.

• Calculation questions: How much credit, how it is set off, and what is paid in cash, under Sections 49(5), 49A and 49B and Rule 88A.
• Eligibility questions: Whether the seven Section 16 conditions are met on a given invoice, and whether Section 17(5) blocks the purchase outright.
• Timing questions: Whether the claim is within the Section 16(4) time limit for the financial year to which the invoice pertains.
• Supplier questions: Whether invoice details have been communicated in the recipient's GSTR-2B and the applicable requirements when the supplier has not filed.

The seven grouped requirements concern registration, prescribed documents, receipt, supplier reporting and tax payment, the claim deadline, the recipient's return and payment to the supplier. Each applies to input tax credit under Section 16 of the CGST Act, 2017.

• GST Registration: Only a person registered under GST can claim input tax credit; composition dealers cannot.
• Valid Documents: The claimant must hold a prescribed tax-paying document, such as a supplier's tax invoice or debit note, or a bill of entry for import IGST.
• Receipt of Goods/Services: The goods or services must actually have been received, or the last instalment received.
• Tax Paid to Government: The tax charged must have been paid to the government. Supplier invoice reporting and communication are separately required where Section 16(2)(aa) applies.
• Time Limits: Claim by 30 November following the financial year or the annual return date, whichever is earlier.
• Return Filed: The claimant must have furnished the GSTR-3B return for the tax period concerned.
• Payment Within 180 Days: Where Rule 37 applies, failure to pay the supplier the value and tax within 180 days requires payment or reversal of credit proportionate to the unpaid amount, with interest payable under Section 50.

The document, receipt, tax-payment and return requirements are prescribed by Section 16(2). Section 16(2)(a) requires possession of a tax invoice, debit note or other prescribed tax-paying document. Clause (aa) requires the supplier to furnish the invoice or debit-note details in the statement of outward supplies and those details to be communicated to the recipient. Clause (b) requires receipt of the goods or services. Clause (c) requires payment of the tax charged to the government, in cash or through admissible credit. Section 16(2)(d) requires the recipient to furnish a return under Section 39. Section 16(4) prescribes the time limit, and the second and third provisos to Section 16(2), read with Rule 37, govern payment to the supplier and re-availment. The applicable document, receipt, reporting and tax-payment requirements must be satisfied for the supply.

Section 16(2)(ba) also requires that credit communicated to the recipient under Section 38 "has not been restricted". This restriction forms part of the requirement for credit communicated in GSTR-2B. Section 38(2)(b) specifies supplies for which credit is communicated as restricted: supplies from newly registered persons within a prescribed period; persons who have defaulted in paying tax for a prescribed period; persons whose declared output tax exceeds tax paid by a prescribed limit; and persons who have availed credit beyond their entitlement. Sub-clause (v) specifies default in discharging liability under Section 49(12). Sub-clause (vi) specifies "such other class of persons as may be prescribed". These restrictions can affect credit because of the supplier's compliance on other invoices even where the recipient's invoice is otherwise correct.

The Explanation to Section 16(2)(b) deems receipt where goods are delivered to a third person on the recipient's direction, whether or not that person acts as an agent. It applies to delivery before or during movement of the goods, by transfer of documents of title or otherwise, and to services provided to another person on the recipient's direction and account. Goods delivered elsewhere on the recipient's direction are deemed received even though they did not arrive at the recipient's premises. Drop-shipped consignments are an example.

Where goods against a single invoice are received in lots or instalments, the first proviso to Section 16(2) permits credit only on receipt of the last lot or instalment. A premature claim must be reversed; interest under Section 50(3) applies if that wrongly availed credit was also utilised, as calculated under Rule 88B(3). For plant supplied over several months under one invoice, the invoice may pertain to one financial year and the last lot to the next. Receipt of the last lot determines when credit is available, while the Section 16(4) deadline is determined by the invoice's financial year.

Section 16(2)(c) requires payment of the tax charged to the government, and Section 16(2)(aa) requires the supplier to furnish invoice details in GSTR-1. Rule 36(4) requires those details to be furnished by the supplier and communicated to the recipient in GSTR-2B. Rule 37A applies separately where the supplier reports the invoice but does not furnish the corresponding GSTR-3B. If that return remains unfiled by 30 September following the financial year in which the recipient availed the credit, the recipient must reverse it in a GSTR-3B filed on or before the following 30 November. Failure to reverse by that date makes the amount payable with interest under Section 50. If the supplier files later, the recipient may re-avail the credit in a return for a later tax period. An invoice may therefore appear in GSTR-2B while reversal is required because the supplier has not filed GSTR-3B. Checking that filing status before payment identifies this requirement.

Section 16(3) denies input tax credit on the tax component of capital goods and plant and machinery where depreciation has been claimed on that component under the Income-tax Act, 1961. A business cannot claim both depreciation and input tax credit on the same tax amount. Capitalising GST with the asset and claiming depreciation on the full amount prevents an ITC claim on that GST. The accounting treatment determines whether GST is included in the depreciable cost; input tax credit on capital goods requires that depreciation not be claimed on the tax component.

The 180-day period is measured from the supplier's invoice date. The second proviso to Section 16(2) requires payment of the value of the supply and tax within that period. Otherwise, Rule 37 requires payment or reversal of credit proportionate to the unpaid amount, with interest payable under Section 50, in GSTR-3B for the tax period immediately following the 180 days. Supplies on which tax is payable under reverse charge are excluded. Rule 37 deems supplies made without consideration under Schedule I to have been paid for, including qualifying stock transfers between two registrations of the same person. Its second proviso also deems paid an amount added to value under Section 15(2)(b): an amount the supplier is liable to pay in relation to the supply but which the recipient has incurred and which was not included in the price actually paid or payable. That amount does not require a separate payment to the supplier for the 180-day condition.

The third proviso permits the recipient to re-avail credit after paying the supplier.

Section 16(1) confers entitlement on a person with GST registration, while Section 10(4) denies credit to a person paying tax under the composition scheme. Section 16(1) does not specify the moment at which registration must subsist; Section 18(1) permits credit on stock held before registration in defined cases. Clause (a) applies to stock held on the day before liability begins. Clause (b) applies to voluntary registration under Section 25(3). Clauses (c) and (d) apply when a person ceases to pay composition tax or an exempt supply becomes taxable. Section 18(2) prohibits credit under Section 18(1) after one year from the tax invoice date.

GST on rent, professional fees, advertising, repairs, telecom and freight is recoverable where the expenditure is for business:

• Office and factory rent: GST charged by the landlord on commercial rent is recoverable where the premises are used for business.
• Professional fees: Credit is available on legal, audit, consultancy and other professional services obtained for business.
• Advertising and marketing: Credit is available on agency fees, media buying and printing where the expenditure is for business.
• Repairs and maintenance: GST on maintaining premises, plant and equipment is recoverable, subject to the construction bar.
• Telecom and internet: Credit is available on tax charged for business connections, leased lines and cloud subscriptions.
• Freight and logistics: Credit is available on inward transport, warehousing and courier charges relating to business supplies.

Before claiming credit on an invoice, check registration, the document, receipt, supplier compliance, the deadline, the return and supplier payment.

• Registered and eligible? Regular credit requires GST registration and is unavailable under the composition scheme. For eligible stock held before registration, check the applicable Section 18(1) conditions, its one-year invoice limit and Rule 40.
• Prescribed document and reporting satisfied? Check the applicable document particulars, including GSTIN requirements, under Rule 36. Where invoice or debit-note details must be furnished under Section 37(1), they must be reported by the supplier and communicated in GSTR-2B. Import IGST is supported by a bill of entry.
• Goods or services received? Delivery to a third party on your instruction counts; a part-received consignment does not until the last lot arrives.
• Supplier reported and paid the tax? Check invoice reporting under Section 16(2)(aa) and payment of the tax to the government under Section 16(2)(c). Where a reported invoice appears in GSTR-2B but the corresponding supplier GSTR-3B remains unfiled, Rule 37A prescribes reversal and later re-availment.
• Within the claim deadline? Identify the financial year to which the invoice pertains, then check 30 November following that year or the annual-return filing date, whichever is earlier.
• Your own GSTR-3B filed? A claim is made by filing, so an unfiled GSTR-3B for the period means the credit has not been taken.
• Supplier paid within 180 days? Record the 180th day from the invoice date; failure to pay requires payment or reversal of proportionate credit with interest under Rule 37.

Rule 36 of the CGST Rules, 2017 specifies the documents for claiming input tax credit: a tax invoice, debit note, bill of entry, Input Service Distributor invoice or credit note, or a self-invoice for a reverse-charge supply from an unregistered supplier.

• Tax invoice: The invoice issued by the supplier under Section 31 for the supply of goods or services.
• Debit note: A debit note issued by the supplier where the taxable value or tax was originally understated.
• Bill of entry: The bill of entry filed with Customs, which is the document for IGST paid on imports.
• ISD invoice: The invoice or credit note issued by an Input Service Distributor distributing common input service credit.
• Self-invoice: The invoice the recipient issues for supplies received under reverse charge from an unregistered supplier.

Rule 36(2) requires the applicable prescribed particulars under Chapter VI. Rule 36(4)'s supplier-reporting and GSTR-2B conditions apply to invoices and debit notes whose details must be furnished under Section 37(1), rather than to every document listed in Rule 36(1). The proviso to Rule 36(2) permits a claim despite other missing particulars where the document contains the tax charged, description, total value, supplier's GSTIN, recipient's GSTIN and place of supply for an inter-State supply. A formatting omission alone does not prevent credit where those required particulars are present.

GST on an import of goods is charged as integrated tax and collected by Customs. The claiming document is the bill of entry or another document prescribed under the Customs Act for assessment of import IGST, rather than a domestic supplier's tax invoice. Rule 60(7)(iii) provides for import IGST details to be included in GSTR-2B; those details do not arise from a supplier's GSTR-1. A delivery note, purchase order or bank advice is not a prescribed claiming document under Rule 36.

Rule 36(3) bars credit on tax paid pursuant to an order confirming a demand for fraud, wilful misstatement or suppression of facts under Section 74. That restriction does not apply merely because tax was paid to settle any dispute. For invoices and debit notes required to be reported under Section 37(1), Rule 36(4) requires the supplier to furnish details in GSTR-1, as amended in GSTR-1A if any, or through the invoice furnishing facility, and those details to be communicated in GSTR-2B under Rule 60(7). Possession of an invoice alone does not satisfy that reporting condition.

Section 31(3)(f) requires a registered person liable under Section 9(3) or 9(4) to issue an invoice within the prescribed period for goods or services received from a supplier unregistered on the receipt date. Its Explanation includes within "supplier who is not registered" a supplier registered solely to deduct tax under Section 51. Such a supplier's GSTIN does not remove the recipient's self-invoicing obligation. Rule 36(1) permits a claim on the self-invoice "subject to the payment of tax". Credit cannot be claimed on that supply before the self-invoice is issued; issuing it late delays the claim because the prescribed document is not yet available.

Input tax credit is claimed in Table 4 of the recipient's GSTR-3B for the tax period, after checking eligibility and the required reversals.

1. Check eligibility. Confirm the supply meets all seven Section 16 conditions and is not blocked by Section 17(5).
2. Review GSTR-2B, and use the Invoice Management System if you choose to. GSTN describes IMS as an optional facility on which each invoice may be accepted, rejected or kept pending.
3. Reverse what does not qualify. Exclude blocked credits and reverse the proportion attributable to exempt supplies or personal use under Rules 42 and 43.
4. Report the figures in GSTR-3B Table 4. Report total credit from GSTR-2B, both eligible and ineligible, in 4(A), reversals in 4(B) and net credit in 4(C).
5. Pay the balance and keep the records. Set the credit off against output tax, pay any shortfall from the electronic cash ledger, and retain the documents.

Eligibility for input tax credit remains subject to Section 16 and Rule 36 when the Invoice Management System (IMS) is used. Rule 60(7) provides for GSTR-2B to include supplier details furnished in GSTR-1, GSTR-1A, the Invoice Furnishing Facility, GSTR-5 and GSTR-6, together with import IGST on bills of entry. Section 127 of the Finance Act, 2025 amended Section 38 with effect from 1 October 2025. An IMS acceptance does not establish that all statutory conditions for credit have been met.

GSTN describes IMS as "an optional facility introduced from October 2024 on GST Portal". In its advisories, GSTN states that credit on a rejected record will not be available in GSTR-2B and that a record left untouched is deemed accepted. Rule 36(4)(b) requires details to be communicated to the recipient in GSTR-2B, so rejection makes the credit unavailable for that month even though IMS action is not itself a statutory condition. GSTN stated in its advisory of 8 October 2025 that IMS did not change auto-population and GSTR-2B continues to be generated automatically on the 14th. Monthly GSTR-2B reconciliation against the purchase register is needed before filing the return, whether or not IMS is used.

Rule 42 requires identifiable ineligible amounts to be deducted before common credit is apportioned. Total input tax for the period is T; T1 is attributable exclusively to non-business purposes, T2 exclusively to exempt supplies, and T3 to purchases blocked by Section 17(5). Credit recorded in the electronic credit ledger is C1 = T − (T1 + T2 + T3). T4 is credit attributable exclusively to taxable supplies, including zero-rated supplies. Common credit is C2 = C1 − T4. Its exempt portion is D1 = (E / F) × C2, using exempt turnover and total turnover in the State for the period. Where common inputs or input services are used partly for non-business purposes, D2 = 5% of C2. D1 and D2 are reversed in GSTR-3B or through DRC-03; the remaining eligible common credit is C3 = C2 − (D1 + D2). Rule 42 requires monthly calculations with annual finalisation under Rule 42(2), except for the separate real-estate project treatment. Rule 43 governs capital goods: exclusive non-business or exempt use does not qualify for credit, exclusive taxable use including zero-rated supplies qualifies, and common use requires the prescribed monthly attribution. Rule 43 provides that "the validity of the useful life of such goods shall extend up to five years from the date of the invoice". The common capital-goods calculation uses a sixty-month useful life. Applicability depends on the use of the purchases and the relevant category; exempt turnover alone does not require every business to apply both rules.

Table 4(A) of GSTR-3B records total credit from GSTR-2B, eligible and ineligible, separately for integrated tax, central tax, State or Union territory tax and cess, as specified in paragraph 4.3(A) of Circular No. 170/02/2022-GST. Credit time-barred under Section 16(4) and credit denied because an intra-State recipient is located in a different State or Union territory from the place of supply are excluded from auto-population and reported in 4(D)(2).

Reversals are reported in Table 4(B), classified by whether credit can be reclaimed. Permanent reversals under Rules 38, 42 and 43 and Section 17(5) are reported in 4(B)(1). Reclaimable reversals under Rule 37 for non-payment within 180 days and under Sections 16(2)(b) and 16(2)(c) are reported in 4(B)(2). Credit reversed in 4(B)(2) is re-availed in 4(A)(5) when the condition is met and disclosed in 4(D)(1). Table 4(C) equals 4(A) less 4(B)(1) and 4(B)(2); that net amount is credited to the electronic credit ledger.

A reversal must be declared in 4(B) of Table 4 of GSTR-3B, rather than netted against the credit reported in 4(A). Reporting a smaller amount in 4(A) does not separately record the reversal.

Reverse-charge tax must be paid before the corresponding credit can be claimed. Rule 36(1) permits a claim on the self-invoice "subject to the payment of tax". The recipient discharges that tax from the electronic cash ledger rather than the credit ledger. No provision defers the claim beyond payment; input tax credit on reverse charge may be claimed once the tax is discharged, subject to the other eligibility conditions.

Section 16(4) of the CGST Act, 2017 prescribes the time limit for claiming input tax credit on an invoice or debit note. Input tax credit must be claimed by 30th November following the end of the relevant financial year, or the date of filing the annual return, whichever is earlier.

The financial year an invoice belongs to is fixed by the date on the document, and not by the date the goods arrived or the date the invoice was booked. An invoice dated 12 August 2025 falls in FY 2025-26, so the credit must be taken by 30 November 2026, unless GSTR-9 for FY 2025-26 is filed before that date, in which case the earlier date applies. Credit cannot be claimed after the earlier of those dates.

For monthly filers, the October 2026 GSTR-3B is normally the last monthly return available for claiming FY 2025-26 credit before 30 November 2026. For quarterly filers, the July-to-September quarter is normally the last completed quarter before that date. An eligible claim in a belated return for an earlier period must also be filed within the Section 16(4) deadline; the return's period label alone does not determine timeliness. Earlier filing of GSTR-9 ends the ordinary claiming period on its filing date, subject to the specified relief in Sections 16(5) and 16(6). An annual return filed in August therefore requires the ordinary claim by that filing date.

Section 16(4) is measured from the financial year to which the invoice or the debit note pertains, and it names the two documents separately. The year for a debit note is therefore the year of the debit note rather than the year of the invoice it relates to. A supplier who under-charged in an earlier year can issue a debit note now, and the customer claims the additional tax in the year of that note.

Sections 16(5) and 16(6) provide specified relief from Section 16(4), subject to their respective conditions and time limits. Section 16(5) applies to specified earlier financial years; Section 16(6) applies where cancelled registration is restored through revocation. Section 150 of the Finance (No. 2) Act, 2024 bars refund of tax already paid or credit already reversed because of Section 16(4), even where Section 16(5) or 16(6) now permits the credit. Paragraph 4 of Circular No. 237/31/2024-GST states that restriction. The rectification procedure under Section 148, prescribed by Notification No. 22/2024-Central Tax dated 8 October 2024, was available for six months from that date; that period has expired.

Section 17(5) of the CGST Act, 2017 blocks credit on specified purchases even where Section 16 conditions are met. Common categories include passenger vehicles, food and beverages, club and fitness memberships, employee vacation travel, immovable-property construction, and goods lost, stolen or given away, subject to the statutory exceptions.

• Motor vehicles: Credit is blocked on passenger vehicles seating 13 or fewer including the driver, except for further supply, passenger transport or driving training.
• Food, beverages and outdoor catering: Blocked unless used for an outward taxable supply of the same category or as an element of a taxable composite or mixed supply, or a law obliges the employer to provide them to employees.
• Club and fitness memberships: Blocked on membership of a club or a health and fitness centre, unless a law obliges the employer to provide it.
• Employee travel benefits: Credit is blocked on employees' vacation travel benefits, including leave or home travel concessions, except where a law obliges the employer to provide those benefits.
• Works contract and own-account construction: Blocked for construction of immovable property other than plant and machinery; works contract services used for a further supply of works contract service are also excepted.
• Lost, stolen, destroyed or gifted goods: Blocked, including goods written off and free samples.

Finance Act, 2025, section 124 substituted "plant and machinery" for "plant or machinery" in clause (d) retrospectively from 1 July 2017, reversing the Supreme Court's reading in Safari Retreats. Section 124 came into force on 1 October 2025, appointed by Notification 16/2025-Central Tax of 17 September 2025, which fixed that date for clauses (ii) and (iii) of section 121, sections 122 to 124 and sections 126 to 134 of the Finance Act, 2025. The substitution commenced on that date with retrospective effect from 1 July 2017.

The substitution amended Section 17(5)(d), which applies to goods and services used for own-account construction of immovable property, including construction in the course or furtherance of business. Clause (c) applies to works contract services for such construction, except an input service for a further supply of works contract service. Explanation 1 to the two clauses includes reconstruction, renovation, additions, alterations and repairs within construction to the extent capitalised. Clause (d) excepts only plant and machinery.

The Explanation to Section 17 excludes land, buildings and other civil structures from "plant and machinery", so the substituted words determine the credit on construction of immovable property.

Section 17(5) comprises clauses (a) to (i), including (aa), (ab) and (fa). Clause (aa) restricts credit on vessels and aircraft, with exceptions for further supply, transportation of passengers, training and transportation of goods. Clause (e) blocks credit on goods or services taxed under the Section 10 composition levy. Clause (fa) blocks credit on goods or services used for corporate social responsibility obligations under Section 135 of the Companies Act, 2013. Clause (g) blocks credit for personal consumption. Clause (i) blocks tax paid under Section 74 for periods up to FY 2023-24. Rule 36(3) also restricts claiming documents for such tax, without a financial-year limitation. Neither provision names Section 74A, which governs periods from FY 2024-25 onwards; they therefore specify no corresponding fraud-demand restriction for those years.

The Explanation to Section 17 defines "plant and machinery" as apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making outward supplies. It includes the foundation and the structural supports. It excludes land, buildings and other civil structures, telecommunication towers, and pipelines laid outside factory premises. The definition expressly excludes buildings; Section 124's substitution makes that exclusion applicable to clause (d).

Section 17(5)(a) permits credit for further supply of the specified motor vehicles, transportation of passengers and training in driving those vehicles. A vehicle subject to that restriction is ineligible when purchased for another purpose, even for business use. The threshold is an approved seating capacity of not more than thirteen persons including the driver, irrespective of the seats fitted. Section 17(5)(ab) blocks credit for general insurance, servicing, repair and maintenance of those cars and motor vehicles. Its proviso permits credit where the vehicles are used for the specified purposes or the recipient manufactures or insures them.

Credit for food and beverages is available where the inward supply is used for an outward taxable supply of the same category or as an element of a taxable composite or mixed supply. A caterer can therefore claim credit on food purchased for catering, whereas an office cannot claim on its food purchases under that exception. A separate proviso permits credit on these goods or services where a law in force obliges the employer to provide them to employees.

Employee-use vehicles and group insurance remain subject to the specific restrictions and exceptions in Section 17(5). A recommendation does not itself change those restrictions. Amendments require enactment and commencement before the amended entitlement applies.

GST rates are notified on the GST Council's recommendation. Section 16 confers the entitlement to credit. A rate change, including the GST 2.0 rate reform, changes the tax a business collects and pays without amending Section 16.

Credit must be reversed or paid back in specified circumstances, including non-payment to the supplier within 180 days under Rule 37, supplier non-filing under Rule 37A, ineligible or common-use amounts under Rules 42 and 43, and cancellation, composition or wholly exempt supplies under Rule 44. A supplier's GST credit note may also require reversal of attributable credit. The treatment and reporting depend on the applicable provision. Interest on wrongly availed credit under Section 50(3) depends on utilisation; separate requirements, including Rule 42's annual shortfall interest under Section 50(1), must be checked.

Rules 42 and 43 require monthly calculations using the tax period's figures. Rule 42(1)(i) defines E as exempt supplies "during the tax period" and F as total turnover "during the tax period"; Rule 43(1)(g) uses the same terms. Where there is no turnover or the information is unavailable, the last available E/F ratio is used.

Rule 42(2) requires annual finalisation of the sub-rule (1) calculation before the due date for the September return following the financial year. A shortfall requires reversal with interest under Section 50(1) from 1 April of the succeeding year; an excess may be reclaimed as credit. Both adjustments are due in a return for a month no later than September following the year end. Rule 43 has no equivalent annual finalisation requirement for an ordinary business.

Rule 43(2) finalisation applies only to real-estate projects under paragraph 5(b) of Schedule II and is calculated over the project's life. For ordinary common capital goods, Rule 43(1)(e) attributes credit to each tax period as Tm = Tc / 60. Clause (g) prescribes the exempt-turnover proportion for the tax period, subject to its provisos. Clause (h) requires the attributable amount Te to be added to output tax with applicable interest "during every tax period of the useful life".

Rule 44(1) prescribes the calculation for inputs and capital goods held in stock on cancellation of registration under Section 29(5), entry into the composition scheme or supplies becoming wholly exempt under Section 18(4). After payment under Section 18(4), its proviso provides that "the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse". Reversal for inputs is proportionate to the invoices on which credit was claimed; for capital goods it is based on remaining useful life, taking useful life as five years. The amount is declared in FORM GST ITC-03 for Section 18(4) and in FORM GSTR-10 for cancellation. Where input-stock invoices are unavailable, Rule 44(3) requires an estimate based on prevailing market prices at the event date. Rule 44(5) requires a practising chartered accountant or cost accountant to certify those estimated details. The amount must be calculated before the relevant declaration is filed. On supply of capital goods or plant and machinery on which credit was taken, Section 18(6) separately requires payment of the reduced credit amount or tax on the transaction value, whichever is higher, subject to its specified scrap exception. Rules 40(2) and 44(6) prescribe calculations for that supply; Rule 44(6)'s proviso requires the calculated amount to form part of output tax liability and be reported in GSTR-1 where it exceeds the transaction-value tax.

Section 126 of the Finance Act, 2025 substituted the proviso to Section 34(2) of the CGST Act. For a registered recipient, the supplier cannot reduce output tax liability on a credit note unless the recipient has reversed the attributable credit. For an unregistered recipient, reduction is barred where the incidence of tax has been passed on to another person. The supplier's reduction therefore depends on the registered recipient's reversal or, for a B2C credit note, on whether tax was passed on.

Where supplies became wholly exempt under the September 2025 rate changes, existing credit could be used against liability for supplies made up to 21 September 2025, with reversal from 22 September 2025 under the applicable CGST provisions. A reduction to a lower taxable rate did not by itself require reversal of validly availed credit; it remained usable against output tax subject to Section 49 and the Rules.

A reversal of input tax credit is computed separately for each applicable requirement: the unpaid proportion under Rule 37, the prescribed common-credit attribution under Rules 42 and 43, stock and remaining useful life for Rule 44(1) events, and attributable credit on a GST credit note. Capital-goods supply is subject to the separate Section 18(6) comparison between reduced credit and transaction-value tax.

Input tax credit is calculated as the total eligible GST on inward supplies for the period, less every reversal required for that period. Setting it off follows a fixed order of utilisation. IGST credit must be exhausted first, against IGST liability and then against CGST or SGST in any order, and CGST and SGST credit may be used only after the IGST balance is nil. CGST credit can never be set against SGST liability, or SGST credit against CGST liability. The liability remaining after credit utilisation is paid in cash through the electronic cash ledger.

Under Section 49(3), a taxpayer may use the electronic cash ledger to pay tax, interest, penalty, fees or any other amount under the Act. Section 49(4) permits use of the electronic credit ledger "towards output tax", subject to prescribed conditions and restrictions. Interest, late fee and penalty must be paid in cash irrespective of the credit balance. A business with credit that cannot be utilised may therefore still need cash when filing.

Rule 86B restricts a registered person whose monthly taxable supplies, excluding exempt and zero-rated supplies, exceed ₹50 lakh from discharging more than 99 per cent of output tax through the credit ledger, subject to its exceptions. The income-tax exception applies where the registered person, proprietor, karta, managing director or the specified two partners, whole-time directors, managing-committee members or trustees have paid more than ₹1 lakh in each of the last two financial years for which the Section 139(1) filing limit has expired. The refund exceptions require more than ₹1 lakh in the preceding financial year under Section 54(3)'s specified zero-rated or inverted-duty categories, rather than any unutilised-credit refund. Other exceptions include cash discharge exceeding one per cent of cumulative output tax liability through the current month, Government departments, public sector undertakings, local authorities and statutory bodies. Rule 86B's proviso (f) excepts non-manufacturers only for goods specified in Rule 31D on which the supplier paid tax on the retail sale price basis. The Commissioner or an authorised officer may remove the restriction after the prescribed verification and safeguards. Under Rule 86A, the Commissioner or an authorised officer not below Assistant Commissioner may restrict use of credit believed to be fraudulently availed or ineligible, with reasons recorded in writing. The restriction ceases after one year and may be lifted earlier when its conditions no longer exist.

Section 49(5) prescribes the utilisation sequence for each tax type and prohibits central tax credit from being used towards State or Union territory tax, or State or Union territory tax credit towards central tax. Section 49A requires integrated tax credit to be fully utilised before central, State or Union territory tax credit is used. Rule 88A permits remaining integrated tax credit to be utilised against central and State tax "in any order", rather than the sequence in Section 49(5)(a). Section 49B authorises the Government to prescribe the order and manner of utilisation; Rule 88A prescribes that order.

A business may need to pay cash while holding credit it cannot utilise. Integrated tax credit must first be exhausted in the permitted order. If State tax liability remains after that utilisation and available State tax credit has been used, central tax credit cannot pay the remaining State tax liability, so cash is required despite the central tax balance. The GST set-off rules apply in each tax period using that period's opening balances.

Input tax credit prevents tax from accumulating on tax already charged at earlier stages of a supply chain; the net GST burden at each stage corresponds to the value added.

• Lower net tax payment: After eligible credit is set off, net GST payable corresponds to the value added.
• Reduced cash requirement: Credit reduces the cash needed each month to discharge output tax liability.
• Lower input cost: A registered business can recover GST on its eligible purchases through input tax credit.
• Supplier compliance: Credit depends on the supplier's reporting and tax payment, providing a reason to buy from suppliers who file.
• Purchase documentation: Claiming credit requires invoices, evidence of receipt and reconciliation, so businesses must maintain the corresponding records.

Tax is charged at each supply-chain stage, with credit available to the intermediate businesses. The final consumer bears the tax without claiming credit, avoiding cumulative taxation of the businesses' purchases.

Input tax credit is recorded separately for CGST, SGST or UTGST, IGST and compensation cess, with prescribed utilisation restrictions.

• CGST credit: Arises on intra-state purchases and can be set against CGST liability, then IGST, and never against SGST.
• SGST or UTGST credit: Arises on intra-state purchases and can be set against SGST or UTGST liability, then IGST.
• IGST credit: Arises on inter-state purchases and imports and can be set against IGST, then CGST or SGST.
• Compensation cess credit: Arises on cess-bearing supplies and can be set against compensation cess liability only.

Cess credit can be utilised only against cess. A business purchasing cess-bearing inputs without making cess-bearing outward supplies therefore accumulates credit that cannot be used against ordinary GST. Central and State tax credit can each be used against integrated tax, and integrated tax credit against integrated, central and State tax. Central and State tax credit cannot be used against each other's liabilities. Section 49(5)(e) and (f) prescribe that prohibition, and the power under Section 49B to prescribe an order is expressly subject to those clauses.

Under the proviso to Section 49(5)(c), State tax credit may be used against integrated tax only where central tax credit is unavailable for that payment. The proviso to clause (d) imposes the same condition on Union territory tax credit. Central tax credit must therefore be used first against integrated tax; using State tax credit while central tax credit is available breaches that order.

Each tax type is recorded as a separate balance in the electronic credit ledger. Credit may be carried forward for permitted utilisation, subject to reversal, restriction and lapse requirements, including Section 18(4).

A taxpayer must reverse credit claimed without entitlement. Section 50(3), read with Rule 88B, requires interest on wrongly availed credit that has been utilised; unused credit does not attract that interest. For a portal-detected mismatch, Rule 88D requires an intimation in Part A of DRC-01C. Within seven days, the taxpayer must pay through DRC-03 with interest or explain in Part B. Failure to respond results in a demand under Section 73, 74 or 74A. Penalty is determined separately and is higher for fraud or wilful misstatement. Sections 73 and 74 apply to periods "upto Financial Year 2023-24": Section 73 applies without an allegation of fraud, and Section 74 applies where fraud, wilful misstatement or suppression is alleged. From FY 2024-25, Section 74A applies to tax not paid, short paid or erroneously refunded and credit wrongly availed or utilised, "for any reason". Section 74A(5)(i) prescribes ten per cent of the tax due or ₹10,000, whichever is higher, without an allegation of fraud. Section 74A(5)(ii) prescribes a penalty equal to the tax due where fraud is alleged.

Under Rule 88B(3), interest is calculated from the date wrongly availed credit is utilised until reversal or payment of the corresponding tax. Its Explanation deems credit utilised when the electronic credit ledger balance is less than the amount wrongly availed. If the balance has never been less than that amount, the credit has not been utilised within the rule's meaning; reversal before that threshold is met attracts no interest under Section 50(3).

Under Rule 88D the department compares the credit availed in GSTR-3B against the credit available in GSTR-2B, and intimates the difference in Part A of FORM GST DRC-01C where it crosses the notified threshold. Interest and penalty on wrongly availed credit are computed separately, and both can apply to a single wrong claim.