What Is Input Tax Credit in GST?

The meaning of input tax credit is fixed by what it lets you do: it is the amount of GST charged to you on a business purchase that you may set against the GST you charge your own customers. Section 16(1) of the CGST Act, 2017 gives every registered person 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 what it buys, collects output tax on what it sells, and pays the government the difference. The three steps are a payment, a collection and an offset:

• 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.

Law stated as on 10 September 2026, verified against the Central Goods and Services Tax Act and Rules and against the notification and circular register as it stood on 7 May 2026 for notifications and 25 July 2026 for circulars. Reviewed by KSMG Knowledge Desk.

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 you on a purchase, and it appears on the supplier's invoice as a rupee amount. Input tax credit is your right to set that amount against the tax you owe on your own sales. Section 16 states the conditions on which input tax becomes input tax credit, and until they are met you have paid tax and hold a document.

GST is levied as more than one tax, and each one produces its own credit. Central tax and State or Union territory tax are charged together on a supply inside one State, so an intra-State purchase produces two credits rather than one. Integrated tax is charged on a supply that crosses a State border and on an import of goods, and it produces one credit. Compensation cess is charged on a short list of goods in addition to those three, and it produces a fourth credit that can be set only against cess. Each credit can be spent only in the order the utilisation rules allow.

Five definitions in Section 2 of the CGST Act, 2017 establish that mechanism. Section 2(62) defines input tax as the central tax, State tax, integrated tax or Union territory tax charged on any supply made to you. It expressly brings in the integrated tax charged on an import of goods, and the tax you pay yourself under reverse charge. Compensation cess is absent from that list, so cess credit arises under a separate enactment rather than under Section 2(62). The definition closes with an exclusion that is decisive in a whole class of cases: input tax "does not include the tax paid under the composition levy". Section 2(63) then defines input tax credit in five words, as "the credit of input tax".

What you bought is classified by three of those definitions, and the classification changes how the credit is treated over time. Section 2(59) defines an input as any 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 the same way for services. Section 2(19) defines capital goods as goods whose value is capitalised in your own books of account and which are used or intended to be used for business. The test is what your accounts did with the cost, and not what the item is. 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) ends by providing that the amount "shall be credited to the electronic credit ledger of such person", and Section 49(2) repeats that the credit as self-assessed in the return goes into that ledger. Section 41(1) is what makes the claim yours to make, because a registered person is entitled to avail the credit of eligible input tax "as self-assessed, in his return". Nobody approves the claim in advance. Section 41(2) then requires that credit to be reversed with interest where the supplier has not paid the tax, and its proviso lets you re-avail it when the supplier does pay.

Section 54(3) of the CGST Act, 2017 allows a refund of unutilised credit in two cases only. The first is zero rated supplies made without payment of tax. The second is accumulation because the rate on inputs is higher than the rate on output supplies, other than nil rated or fully exempt supplies, and even then not on supplies the Government has notified as excluded. Outside those two cases unused credit stays in the ledger until there is output tax to absorb it. Section 16(3) makes a business choose between the credit and depreciation on the same tax, so a claim under the Income-tax Act, 1961 on the tax component forfeits the claim under Section 16. Section 10(4) denies any credit of input tax 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 legs 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 settles the remaining ₹8,100 out of the credit already paid to the supplier. Tax is therefore borne only on the value the trader added, not on the full ₹72,000 sale. A second purchase invoice in the same period would raise the ₹8,100 in this example and leave the ₹12,960 where it is.

A real month has many invoices at several rates, and the totals are added pool by pool rather than invoice by invoice, which is what the order of set-off requires.

The ₹8,100 also has to be recorded, and it is posted to an input tax account rather than into the cost of the purchase. Credit entries in your books therefore show the amount as a receivable from the government, and not 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" and on nobody else, so registration is settled before any invoice is looked at.

• 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 at all, however much GST they have been charged.

A head office that receives one invoice for a service the whole group consumes cannot keep the credit for itself. It registers separately as an Input Service Distributor (ISD), issues an ISD invoice to each branch and passes the credit on in the proportion the rules prescribe. Rule 36(1)(e) of the CGST Rules, 2017 makes that ISD invoice a document on which the branch may claim, which is why the branch's eligible credit can include tax on an invoice it never received.

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. Section 20(3) then fixes the conversion: central tax is distributed as central tax or integrated tax, and integrated tax as integrated tax or central tax. State tax is absent from that sub-section because a Central Act cannot distribute it, and the State enactment contains the corresponding provision.

Section 10(4) stops a composition dealer collecting any tax from a customer, as well as denying that dealer credit. The customer of a composition dealer therefore has no input tax to claim, and the bar applies a second time one step down the chain. Whether a business should use the composition scheme depends on its turnover and on who its customers are, because a dealer selling to registered businesses gives up the credit at both ends of every sale.

The earliest date from which credit is available is fixed by registration. Section 18(1)(a) of the CGST Act, 2017 entitles a person who applies for registration within thirty days of becoming liable to credit on stock held on the day immediately preceding the date from which he becomes liable. Inputs held as such, and inputs contained in semi-finished and finished goods, both count. ITC on stock held before registration therefore turns on two dates and a thirty-day application. A business below the threshold can register voluntarily for a related reason: without registration the GST on its purchases is a cost it can never recover.

Input tax credit works the same way for a manufacturer, a trader and a service provider, because the same Section 16 conditions and the same Section 17(5) bars apply to all three. A manufacturer's blocked spend is canteen and staff welfare, a trader's is goods lost, stolen or given away, and a service provider's is employee travel and club membership.

• 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) defines its bars by categories of purchase, so a manufacturer and a service provider buying the same canteen service meet the identical clause. What differs between them is how often they buy it, and therefore how much of their spend falls inside the clause.

Business type does not change entitlement. Which Section 17(5) clause applies first depends on what the business buys.

An input tax credit problem is one of four kinds, and a different set of provisions governs each. How much credit is available, and in what order it is spent, is governed by Sections 49(5), 49A and 49B with Rule 88A. Whether a particular purchase carries credit at all depends on the seven Section 16 conditions and on Section 17(5). Whether a claim is still in time depends on Section 16(4), and whether an invoice has reached you is shown by your GSTR-2B.

• 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 still inside the Section 16(4) window for the financial year the invoice falls in.
• Supplier questions: Whether the invoice has reached your GSTR-2B, and what to do when a supplier has not filed.

Seven conditions must all be met before input tax credit can be claimed under Section 16 of the CGST Act, 2017. The eligibility criteria begin with registration and end with payment of the supplier.

• GST Registration: Only a person registered under GST can claim input tax credit; composition dealers cannot.
• Valid Documents: You must hold a valid tax invoice, debit note or bill of entry issued by the supplier.
• Receipt of Goods/Services: The goods or services must actually have been received, or the last instalment received.
• Tax Paid to Government: The supplier must have reported the invoice and paid the tax charged to the government.
• Time Limits: Claim by 30 November following the financial year or the annual return date, whichever is earlier.
• Return Filed: You must have furnished your own GSTR-3B return for the tax period concerned.
• Payment Within 180 Days: Pay the supplier the invoice value plus tax within 180 days, or reverse the credit.

Four of the seven conditions are the clauses of Section 16(2): valid documents, receipt, tax paid to the government, and your own return filed. Section 16(2)(a) requires possession of a tax invoice, a debit note, or such other tax paying document as the rules prescribe. Section 16(2)(aa) requires the supplier to have furnished the details of that invoice or debit note in the statement of outward supplies, and requires those details to have been communicated to you. Section 16(2)(b) requires that you have received the goods or services. Section 16(2)(c) requires that the tax charged on the supply has been paid to the government, in cash or out of admissible credit. Section 16(2)(d) requires that you have furnished your return under Section 39. The fifth condition is Section 16(4), and the seventh is the second and third provisos to Section 16(2) read with Rule 37. Three of the seven therefore turn on the supplier: the document he issues and reports, the supply he delivers, and the tax he pays to the government.

One clause of Section 16(2) appears on almost no checklist, and it forms part of the GSTR-2B condition counted above rather than a separate one. Section 16(2)(ba) requires that the details of the credit communicated to you under Section 38 "has not been restricted". Section 38 is what generates GSTR-2B, and its sub-section (2)(b) lists six cases in which credit is communicated as restricted. They are supplies from a person within a prescribed period of taking registration, and from a person who has defaulted in paying tax for a prescribed period. They also include supplies from a person whose declared output tax exceeds what he paid by a prescribed limit, and from a person who has himself availed credit beyond his entitlement. Sub-clause (v) adds a person who has defaulted in discharging liability under Section 49(12). Sub-clause (vi) then leaves the list open, naming "such other class of persons as may be prescribed". Credit can therefore be refused on the strength of your supplier's compliance record on other invoices, and not on anything wrong with yours.

Receipt under clause (b) depends on your direction to the supplier. Where goods are delivered to a third person on your direction, whether that person acts as your agent or not, the Explanation to Section 16(2)(b) treats you as having received them. The Explanation reaches the same result for goods handed over before or during their movement, by transfer of documents of title or otherwise, and for services provided to another person on your direction and on your account. Goods you direct a supplier to deliver elsewhere are therefore deemed received by you, and the credit survives the fact that they never arrived at your premises. A drop-shipped consignment is the ordinary case the Explanation covers.

Goods received in pieces carry no credit until the last piece arrives. Where the goods against a single invoice are received in lots or instalments, the first proviso to Section 16(2) entitles you to the credit only on receipt of the last lot or instalment. A part-received consignment carries no credit at all in the meantime, and taking the credit against the first delivery produces a reversal with interest if the department picks it up. On plant bought against one invoice and shipped over several months, the invoice may fall in one financial year and the last lot in the next. Section 16(4) is measured from the financial year of the invoice, so the credit becomes available late in a window that started early.

Condition four is the one the department relies on when a supplier has not paid. Section 16(2)(c) makes your credit depend on tax that somebody else was supposed to remit, and Section 16(2)(aa) makes it depend on that supplier furnishing the invoice details in GSTR-1. Rule 36(4) makes credit available only where those details have been furnished by the supplier and communicated to you in GSTR-2B. Rule 37A deals separately with the supplier who reports the invoice but never files the return that pays the tax. Where the supplier has not furnished that GSTR-3B by the 30 September following the year in which you availed the credit, you must reverse it in a GSTR-3B filed on or before the following 30 November. Miss that date and the amount becomes payable with interest under Section 50. If the supplier files later, you may re-avail the credit in a return for a tax period thereafter. A supplier can therefore put an invoice into your GSTR-2B and still leave you without a claim, which is what makes a supplier's filing status worth checking before payment.

Depreciation and credit are alternatives on the same amount of tax. Section 16(3) denies input tax credit on the tax component of the cost of capital goods and plant and machinery where depreciation has been claimed on that tax component under the Income-tax Act, 1961. A business that capitalises the GST along with the asset and then depreciates the whole figure has chosen the depreciation and given up the credit. The choice is made at the point of posting, by whoever determines what is included in the asset's cost. Keeping the tax out of the capitalised cost is what preserves the claim, and the treatment of input tax credit on capital goods turns on that single entry.

The 180-day rule is counted from the date the supplier issued the invoice. The second proviso to Section 16(2) requires you to pay the supplier the value of the supply along with the tax within 180 days of the date of issue of the invoice. Where you do not, Rule 37 requires an amount equal to the credit availed to be paid or reversed, proportionate to the amount left unpaid, with interest under Section 50. The reversal goes in the GSTR-3B for the tax period immediately following the 180 days. Three carve-outs are written into the rule itself. Supplies on which tax is payable under reverse charge are outside the second proviso altogether, because there the money owed to the supplier and the tax owed to the government are different obligations. Supplies made without consideration under Schedule I are deemed by Rule 37 to have been paid for, which is what stops a stock transfer between two registrations of the same person triggering a reversal that no payment could ever cure. And the second proviso to Rule 37(1) deems paid any amount added to value under Section 15(2)(b), meaning an amount the recipient is liable to pay which the supplier has incurred. That amount is never paid to the supplier, so without the deeming every such supply would trigger a reversal.

The third proviso lets you take the credit again when you do pay.

GST registration is what gives the entitlement, because Section 16(1) confers it on a registered person, and the composition bar in Section 10(4) removes it again for anyone paying tax under that scheme. Section 16(1) fixes no moment at which registration must subsist, and Section 18(1) supplies credit on stock held before registration in defined cases. Section 18(1)(a) is the clause that reaches stock held on the day before liability begins. Clause (b) applies to a person who registers voluntarily under Section 25(3). Clauses (c) and (d) apply to a move out of the composition scheme and to an exempt supply becoming taxable. Section 18(2) then caps all of it: no credit under Section 18(1) may be taken after one year from the date of the tax invoice for the supply.

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

• Office and factory rent: GST charged by the landlord on commercial rent is recoverable where the premises are used for business.
• Professional fees: Legal, audit, consultancy and other professional services taken for the business carry credit.
• Advertising and marketing: Agency fees, media buying and printing carry credit where the spend is for the business.
• Repairs and maintenance: GST on maintaining premises, plant and equipment is recoverable, subject to the construction bar.
• Telecom and internet: Business connections, leased lines and cloud subscriptions carry credit on the tax charged.
• Freight and logistics: Inward transport, warehousing and courier charges carry credit where they relate to business supplies.

Run these seven against a single invoice before you claim it.

• Registered on the date of supply? You must have held a GST registration in force on the date of the supply, and not be paying tax under the composition scheme.
• Invoice in your GSTIN? The invoice must carry your GSTIN and appear in your GSTR-2B for the period.
• 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 filed and paid? The invoice must have been reported by the supplier, which is what puts it in your GSTR-2B.
• Still inside the window? Work out the financial year the invoice falls in, then check it against 30 November following that year.
• 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? Diarise the 180th day from the invoice date; miss it and the credit is added back with interest.

Five documents support a claim to input tax credit, and Rule 36 of the CGST Rules, 2017 names them. They are a tax invoice, a debit note, a bill of entry, an Input Service Distributor invoice, and the self-invoice you raise on a reverse-charge supply.

• 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 you raise on yourself for supplies received under reverse charge from an unregistered supplier.

The document must contain the particulars Chapter VI specifies, which is what Rule 36(2) requires, and the supply must separately appear in your GSTR-2B under Rule 36(4). Six of those particulars are the ones the proviso to Rule 36(2) requires. They are the amount of tax charged, the description of the goods or services, the total value of the supply, the supplier's GSTIN, your own GSTIN, and the place of supply on an inter-State supply. A document missing anything else still supports a claim if it carries those six, so an invoice is not lost on a formatting defect alone.

GST on an import of goods is charged as integrated tax and collected by Customs, so there is no supplier invoice to hold and no GSTR-2B entry generated by a supplier. The bill of entry filed on the consignment is the document the credit is claimed on. Rule 36 is exhaustive on its own terms, so tax evidenced by a delivery note, a purchase order or a bank advice supports no claim at all.

A valid-looking document does not overcome two further restrictions in Rule 36. Rule 36(3) bars credit on any tax paid in pursuance of an order confirming a demand on account of fraud, wilful misstatement or suppression of facts under Section 74. Tax paid to close a dispute does not qualify as input tax credit. Rule 36(4) makes the claim depend on the supplier's filing rather than on your invoice. Credit is available only where the supplier has furnished the details in GSTR-1, as amended in GSTR-1A if any, or through the invoice furnishing facility. Those details must also have reached you in GSTR-2B under Rule 60(7). A perfect invoice that never appears in GSTR-2B supports nothing.

A reverse-charge claim cannot start before the self-invoice does. Section 31(3)(f) is what requires that invoice to exist. A registered person liable to pay tax under Section 9(3) or 9(4) issues an invoice, within the prescribed period, for goods or services received from a supplier who is not registered on the date of receipt. The Explanation to that clause widens "supplier who is not registered" to include a supplier registered solely to deduct tax under Section 51, so seeing a GSTIN on the supplier's papers does not excuse the self-invoice. Where you receive a supply on which you owe the tax under reverse charge, Rule 36(1) makes the invoice you raise on your own account a claiming document, and makes it so "subject to the payment of tax". No credit on that supply can be claimed before the self-invoice exists. Raising it late therefore delays the claim, because there is no claiming document until it is raised.

Input tax credit is claimed by reporting it in Table 4 of your GSTR-3B return for the tax period. Five steps run from checking the supply to paying the balance in cash.

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. Strip out blocked credits and the proportion attributable to exempt supplies or personal use under Rules 42 and 43.
4. Report the figures in GSTR-3B Table 4. Total credit from GSTR-2B goes at 4(A), eligible and ineligible alike; reversals go at 4(B); 4(C) is the net.
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.

Nothing in the Act or the Rules makes an action in the Invoice Management System (IMS) a condition of eligible credit. Rule 60(7), the sub-rule that creates GSTR-2B, is unamended: the statement is built from what your suppliers furnished in GSTR-1, GSTR-1A, the Invoice Furnishing Facility, GSTR-5 and GSTR-6, plus import IGST on a bill of entry. The 55th GST Council recommended amending both section 38 and rule 60 to give IMS a legal framework. Section 38 was amended by section 127 of the Finance Act, 2025, and commenced on 1 October 2025. Rule 60 was not amended, and the Central Board of Indirect Taxes and Customs (CBIC) has made no rule under the new clause 38(2)(c).

What IMS does is portal practice, described by GSTN in its advisories, and it still matters. GSTN calls IMS "an optional facility introduced from October 2024 on GST Portal". It states that credit on a rejected record will not be available to you in GSTR-2B, and that a record left untouched is treated as deemed accepted. Because rule 36(4)(b) makes credit depend on details communicated to you in GSTR-2B, a rejection makes the credit unavailable for the month even though the rejection is not itself a statutory condition. GSTN's advisory of 8 October 2025 adds that IMS did not change auto-population, and that GSTR-2B is still generated automatically on the 14th. Run a monthly GSTR-2B reconciliation against your purchase register before the return is filed, whether or not you work in IMS.

Rule 42 strips out the identifiable amounts first and then apportions what is left. Total input tax for the period is denoted T. The credit attributable to inputs used exclusively for non-business purposes is T1, the part attributable exclusively to exempt supplies is T2, and the part blocked by Section 17(5) is T3. What reaches your electronic credit ledger is C1, calculated as C1 = T − (T1 + T2 + T3). The common credit remaining is then apportioned on the ratio of exempt turnover to total turnover, and that share is added back to output tax. Rule 42 apportions credit on inputs and input services between business and other purposes, and between taxable supplies and exempt supplies, on a formula run every month and trued up under rule 42(2) at the end of the financial year. Rule 43 does the same for capital goods, and it fixes the period in the rule itself. There is no annual true-up in rule 43 for an ordinary business, so its monthly instalments are final as computed. Input tax on capital goods not covered by the exclusive-use clauses is credited directly to the electronic credit ledger. The rule then provides that "the validity of the useful life of such goods shall extend up to five years from the date of the invoice". Sixty monthly instalments follow from that, and the exempt proportion of each instalment is reversed. A business making only taxable supplies applies neither rule. A business with any exempt turnover applies both every month, and the annual true-up is what converts a monthly estimate into a final figure.

Row 4(A) shows total credit from GSTR-2B, eligible and ineligible alike, broken between integrated tax, central tax, State or Union territory tax and cess. Paragraph 4.3(A) of Circular No. 170/02/2022-GST says so in terms. Two categories are excluded from that auto-population and reported at 4(D)(2) instead: credit time-barred under Section 16(4), and credit denied because the recipient of an intra-State supply is located in a different State or Union territory from the place of supply.

Row 4(B) then takes every reversal, split by whether it can be reclaimed. Permanent reversals go at 4(B)(1): Rules 38, 42 and 43, and blocked credit under Section 17(5). Reclaimable reversals go at 4(B)(2): Rule 37's non-payment within 180 days, and Sections 16(2)(b) and 16(2)(c). Credit reversed at 4(B)(2) is re-availed at 4(A)(5) when the condition is met and disclosed at 4(D)(1). Row 4(C) is 4(A) less the total of 4(B)(1) and 4(B)(2), and it is the figure that reaches your electronic credit ledger.

Row 4(B) is the return's own record of what did not qualify, and a reversal made by reporting a smaller number at 4(A) leaves no such record. A reversal is therefore declared at 4(B) of Table 4 of GSTR-3B, and never netted off inside 4(A).

Reverse-charge tax has to be paid before its credit exists. Rule 36(1) makes your self-invoice a claiming document "subject to the payment of tax", so the tax is discharged in cash from the electronic cash ledger before the credit on it becomes available. You cannot pay reverse-charge tax out of credit and then claim credit on the same amount. No provision defers the claim beyond that payment, so input tax credit on reverse charge is claimed once the tax has been discharged.

The outer limit for claiming input tax credit on an invoice or a debit note is fixed by Section 16(4) of the CGST Act, 2017. 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. Miss both and the credit lapses.

Credit is taken in a return, so for a monthly filer the last return that can carry credit for FY 2025-26 is the October 2026 GSTR-3B. 30 November is the statutory outer date, and the claim has to be made in the October return or an earlier one. A return for any month after October cannot carry credit for that financial year, whatever date the reader has in a diary. A quarterly filer under the proviso to Section 39(1) files for the July-to-September quarter instead, so the last carrying return is that quarter's GSTR-3B. Filing GSTR-9 early ends the period on the day of filing, so a business that files its annual return in August has until August and no longer.

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 relief outside that scheme, each on its own terms and each with its own closing date. Section 16(5) applies to specified earlier financial years. Section 16(6) applies to a registration that was cancelled and later restored on revocation of the cancellation. One limit on that relief is worth knowing before anyone spends money pursuing it. Section 150 of the Finance (No. 2) Act, 2024 bars any refund of tax already paid or credit already reversed on account of Section 16(4), even where the credit is now allowed by Section 16(5) or 16(6). Circular No. 237/31/2024-GST says so at paragraph 4. The rectification procedure under Section 148, opened by Notification No. 22/2024-Central Tax of 8 October 2024, ran for six months from that date and has closed.

Some purchases carry no credit even where every Section 16 condition is met, and Section 17(5) of the CGST Act, 2017 lists them. The six categories are passenger vehicles, food and beverages, club and fitness memberships, employee vacation travel, construction of immovable property, and goods lost, stolen or given away.

• Motor vehicles: Credit is blocked on passenger vehicles seating 13 or fewer including the driver, with three exceptions.
• Food, beverages and outdoor catering: Blocked, unless you supply the same category of goods or services onward.
• 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: Blocked on travel benefits extended to employees on vacation, such as leave or home travel concession.
• Works contract and own-account construction: Blocked where the supply is for construction of immovable property.
• 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 did not exist until that date, and it then reached back to 1 July 2017.

Section 17(5)(d) is the clause the substitution changed, and it applies to goods and services taken for construction of immovable property on your own account, including where the construction is in the course or furtherance of business. Clause (c) does the same work for works contract services supplied for such construction, except where the service is an input service for a further supply of works contract service. Explanation 1 to the two clauses treats reconstruction, renovation, additions, alterations and repairs as construction, to the extent they are capitalised. Clause (c) excepts an input service taken for a further supply of works contract service, and 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.

Twelve clauses make up Section 17(5), running from (a) to (i) with (aa), (ab) and (fa) inserted among them, and the six categories compress them. Clause (aa) blocks vessels and aircraft on the same pattern as motor vehicles, with exceptions for further supply, transportation of passengers, training, and transportation of goods. Clause (e) blocks credit on goods or services on which tax has been paid under the composition levy in Section 10. 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 goods or services used for personal consumption. Clause (i) blocks any tax paid under Section 74 in respect of any period up to FY 2023-24. Rule 36(3) states a related bar from the documents side, and it is wider: it has no financial-year confinement. Neither provision names Section 74A, which governs periods from FY 2024-25 onwards, so the tax-paid-on-a-fraud-demand bar has no stated counterpart for those years.

The expression affected by the substitution has its own statutory definition. The Explanation at the end of 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. A building is therefore outside the definition by name, which is what Section 124's substitution made conclusive.

The three exceptions to the Section 17(5)(a) bar are further supply of such motor vehicles, transportation of passengers, and imparting training on driving such motor vehicles. A vehicle bought for any other purpose carries no credit, whatever its business use. The bar is measured by approved seating capacity of not more than thirteen persons including the driver, and not by the seats a particular vehicle has fitted. Section 17(5)(ab) blocks general insurance, servicing, repair and maintenance on the same cars and motor vehicles, and its proviso restores that credit where the vehicles are used for the three permitted purposes or where the recipient manufactures or insures them.

The bar on food and beverages turns on what the buyer sells, not on what the buyer spends. Credit is available where an inward supply of the same category is used to make an outward taxable supply of that category, or as an element of a taxable composite or mixed supply. A caterer therefore claims on the food it buys and an office does not. A separate proviso to the same clause restores credit on any of these goods or services where a law in force obliges an employer to provide them to employees.

A reported GST Council Law Committee recommendation would allow input tax credit on vehicles bought in a company's name for employee use and on group insurance. No official record of that recommendation has been published, the GST Council has not adopted it, and no notification, circular or Act gives it legal effect. Until Section 17(5) is amended and the amendment is brought into force, the credit remains blocked. Pending amendments have no legal effect until they are enacted and commenced.

GST rates are fixed by notification on the GST Council's recommendation, and Section 16 is what confers the entitlement to credit. A change in the rate on a supply, including the GST 2.0 rate reform, alters what a business collects and pays and leaves Section 16 as it stands.

Input tax credit must be reversed when the supply it relates to stops qualifying for credit after the claim was made. Failure to pay the supplier within 180 days of the invoice date reverses the credit under Rule 37. Use of inputs for exempt supplies or personal purposes reverses it under Rules 42 and 43. Disposal or sale of capital goods before the end of their credit life reverses it under Rule 44. A credit note issued by the supplier reducing the original tax reverses it as well. Reversal is made in Table 4(B) of GSTR-3B, with interest where the credit was utilised.

Both rules run every month on the period's own figures. Rule 42(1)(i) defines E as exempt supplies "during the tax period" and F as total turnover "during the tax period", and rule 43(1)(g) is in the same terms. Estimating is a fallback, engaged only where there is no turnover in the period or the information is unavailable, when the last available E/F is carried forward.

The annual true-up is required by rule 42 alone. Rule 42(2) requires the sub-rule (1) figure to be calculated finally for the financial year, before the due date for the September return following the year end. A shortfall is reversed with interest under section 50(1) running from 1 April of the succeeding year. An excess is claimed back as credit. Both fall due in a return for a month not later than September following the year end, which is a six-month outer date and not an open one.

There is no equivalent in rule 43 for an ordinary business. Its sub-rule (2) finalisation is confined to real-estate projects under paragraph 5(b) of Schedule II and runs for the project's life rather than the year. For ordinary capital goods the mechanism is exhaustively monthly: Tm is Tc divided by 60 under rule 43(1)(e), Te is that slice times E over F under clause (g), and clause (h) adds Te with interest to output tax "during every tax period of the useful life".

Rule 44 is principally a rule about leaving, rather than about disposing of an asset. It fixes the amount to be reversed on inputs held in stock and on capital goods held in stock in two situations. The first is cancellation of a registration under Section 29(5). The second is a move to the composition scheme, or a supply becoming wholly exempt, under Section 18(4). What the proviso to Section 18(4) then does is easy to miss: after the amount is paid, "the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse". A business whose supplies become wholly exempt pays the computed amount and forfeits whatever is left. Inputs are reversed proportionately on the invoices the credit was taken on, and capital goods on the remaining useful life. The computed amount is declared in FORM GST ITC-03 where it arises under Section 18(4), and in FORM GSTR-10 where it arises on cancellation of registration. Rule 44(5) requires the details to be certified by a practising chartered accountant or cost accountant. A business winding up a registration therefore has a reversal to compute before it can file its final return.

Finance Act, 2025, section 126 substituted the proviso to Section 34(2) of the CGST Act, and it now bars the reduction in two situations rather than one. Where the recipient is registered, the supplier gets no reduction in output tax liability on a credit note unless that recipient has reversed the credit attributable to it. In other cases, meaning an unregistered recipient, the bar is that the incidence of tax on the supply has been passed on to any other person. A supplier's own filing therefore depends on something the customer does, and on a B2C credit note it depends on whether the tax was passed on at all.

A supply becoming exempt on a rate change is a reversal trigger like any other. The GST Council states the point directly in its FAQ of September 2025. Credit already in the ledger can be used against liability on supplies made up to 21 September 2025. For supplies made on or after 22 September 2025, when the rate change took effect, credit must be reversed under the CGST Act.

A reversal of input tax credit is computed on its own base for each trigger. The bases are the unpaid proportion under Rule 37, a turnover ratio under Rules 42 and 43, remaining useful life under Rule 44, and the tax shown on the credit note.

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. Whatever the credit cannot cover is paid in cash from the electronic cash ledger.

The cash ledger pays tax, interest, penalty and fees; the credit ledger pays output tax and nothing else. Section 49(3) allows the amount in the electronic cash ledger to be used for any payment of tax, interest, penalty, fees or any other amount under the Act. Section 49(4) allows the amount in the electronic credit ledger to be used for payment "towards output tax" and nothing else, and it makes even that use subject to such conditions and restrictions as may be prescribed. Interest, late fee and penalty therefore come out of cash however large the credit balance is, which is why a business holding unusable credit can still be short of money at filing.

Two rules are what is prescribed there, and both can stop you spending a balance you hold. Rule 86B bars a registered person whose monthly taxable supply, other than exempt and zero-rated supply, exceeds ₹50 lakh from discharging more than 99 per cent of output tax from the credit ledger. One per cent has to come from cash. Exemptions are set out in the proviso. One applies where the proprietor, karta, managing director or specified officers have each paid more than ₹1 lakh of income tax in each of the last two financial years. Another applies where the person received an unutilised-credit refund above ₹1 lakh in the preceding year. Rule 86A separately allows the Commissioner or an authorised officer not below Assistant Commissioner, on reasons recorded in writing and a belief that credit has been fraudulently availed or is ineligible, to block use of an amount in the ledger. A blocked balance is visible and unusable, and the block lapses after one year.

Four provisions between them fix that order. Section 49(5) sets the sequence for each pool and closes it with two prohibitions: central tax shall not be utilised towards State or Union territory tax, and State or Union territory tax shall not be utilised towards central tax. Section 49A adds the overriding condition that central, State and Union territory credit may be applied only after integrated tax credit has been utilised fully. Rule 88A is what permits the remaining integrated tax credit to go against central and State tax "in any order" rather than in the sequence Section 49(5)(a) names on its face. Section 49B lets the Government prescribe the order and manner of utilisation, and Rule 88A is what it prescribed.

A business can pay cash in one month while holding credit it is not allowed to apply. A business holding an integrated tax balance must spend it before applying either of the other two pools, so a central tax balance can accumulate beside it while State tax is being paid in cash. The GST set-off rules are applied afresh in every tax period, on that period's own opening balances.

Input tax credit removes the cascading of tax through a supply chain, so GST is borne only on value added at each stage.

• Lower tax outgo: You pay GST on the value you add, not on the full sale value of what you sell.
• Better cash flow: Credit reduces the cash you must find each month to discharge output tax liability.
• Lower input cost: GST on business purchases stops being a cost for a registered business and becomes recoverable.
• Cleaner supply chains: Credit depends on the supplier having reported and paid, which is a reason to buy from suppliers who file.
• Better records: Credit depends on invoices, receipt and reconciliation, which forces documentation discipline the business benefits from anyway.

Tax is charged at every stage of a supply chain and relieved at every stage except the last, so the burden reaches the final consumer once rather than accumulating on each business that handled the goods on the way.

Input tax credit exists in four separate pools, one for each tax charged under GST, and the pools cannot be freely mixed.

• 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.

Credit of cess can be set only against cess, so a business that pays cess on its inputs and makes no cess-bearing outward supply accumulates a balance it can never spend against ordinary GST. The other three pools are directional: central tax and State tax can each be applied to integrated tax, integrated tax can be applied to all three, and central and State tax can never be applied to each other. The prohibition is at Section 49(5)(e) and (f), and Section 49B's power to prescribe an order is expressly made subject to those two clauses.

Applying State tax to integrated tax is not free even where it is permitted. The proviso to Section 49(5)(c) allows State tax to be used against integrated tax only where the central tax balance is not available for that payment, and the proviso to clause (d) says the same of Union territory tax. Central tax therefore goes first against integrated tax, and a business that applies State tax while a central tax balance is available has utilised in the wrong order.

Each of those four types is a separate balance in your electronic credit ledger, and the credit stays there until you use it.

Credit claimed without entitlement must be reversed, and interest runs on it where the credit was actually utilised. Section 50(3) read with Rule 88B charges interest only on wrongly availed credit that has been utilised, and not on credit that merely sat unused in the ledger. Where the mismatch is detected on the portal, Rule 88D has an intimation issued in Part A of DRC-01C, and the taxpayer must either pay through DRC-03 with interest or explain in Part B, within seven days. Ignore it and the amount is demanded under Section 73, 74 or 74A. Penalty follows separately, and is heavier where the department alleges fraud or wilful misstatement. Which provision applies depends on the financial year. Sections 73 and 74 are now both confined to periods "upto Financial Year 2023-24". Between them they keep the old split: Section 73 for a demand raised without an allegation of fraud, and Section 74 where fraud, wilful misstatement or suppression is alleged. From Financial Year 2024-25 onwards a single provision applies. Section 74A covers tax not paid, short paid or erroneously refunded, and credit wrongly availed or utilised, "for any reason". It then grades the penalty inside itself. Section 74A(5)(i) sets ten per cent of the tax due or ₹10,000, whichever is higher, where there is no allegation of fraud. Section 74A(5)(ii) sets a penalty equal to the whole of the tax due where there is.

Utilisation is a deemed event under Rule 88B(3), and it happens without anyone spending anything. Rule 88B(3) runs interest from the date of utilisation of the wrongly availed credit until the date it is reversed or the tax on it is paid. Its Explanation deems the credit utilised when the balance in the electronic credit ledger falls below the amount wrongly availed. A business whose ledger balance never falls that far has therefore not utilised the credit within the meaning of the rule, and a reversal made before it falls 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.