Goods & Services Tax (GST) in IndiaInput Tax Credit Mechanism

April 12, 20220


Goods and Services Tax (“GST”), a form of Indirect Tax, is a prominent aspect of the new taxational regime of India. Within the GST structure, Input Tax Credit (“ITC”) is a mechanism provided under the Central Goods and Services Tax Act, 2017 (“CGST Act”) and similar state enactments, for the purpose of avoidance of double taxation.

The term “input tax” refers to the GST charged on any supply of goods and/or services used or intended to be used during the course of or in furtherance of business. Similarly, ITC signifies the credit or reduction of input tax from a taxable person’s output tax liability.

In simpler terms, ITC could be defined as the set-off of the amount of GST paid on purchases from the amount of GST to be paid on the sales. Thus, at the time of paying tax on output, the output tax liability may be reduced by the ITC, which is the amount of tax already paid on inputs.

Various provisions governing ITC are given under Chapter V (Sections 16 to 21) of the CGST Act and Chapter V (Rules 36 to 45) of the Central Goods and Service Rules, 2017 (“CGST Rules”). Similar provisions of ITC are also applicable under the Integrated Goods and Services Tax Act, 2017 (“IGST Act”).

Section 16 of the CGST Act stipulates the eligibility and conditions for availing ITC, and Section 17 of the CGST Act provides for the apportionment of credit and blocked credit. The rationale for introduction of ITC mechanism under the Indirect Tax structure of GST was to mitigate the cascading effect of tax, i.e., charging tax on tax rather than on goods or services.

This Blog shall elaborate upon the mechanism, eligibility and procedure to avail ITC as stipulated by the CGST Act.


Section 16(1) of the CGST Act states that “every registered person shall, subject to such conditions and restrictions as may be prescribed and, in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of business and the said amount shall be credited to the electronic credit ledger of such person.”

As per Section 16(1) of the CGST Act, the person claiming ITC must be registered under the CGST Act, as only a registered person is eligible to avail ITC. However, even a registered person who pays GST under Section 10 of the CGST Act i.e. the compound levy scheme, is not eligible to take the benefit of ITC.

Additionally, the registered person shall use the goods/services in the course of or in furtherance of his business. Therefore, if the goods or services are used or intended to be used for purposes other than business, ITC cannot be availed on such supply.

To determine whether the expenditure was used in the course or furtherance of business, such expenditure has to be judged from the point of businessman and not of the Revenue. The Hon’ble Supreme Court in S.A Builders Ltd v. CIT (Appeals), Chandigarh & ors [MANU/SC/8798/2006] observed that:

“We agree that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case.”

Further, no ITC shall be available in respect of inputs used for outward supply of exempted or ineligible goods or services.


According to Section 16(2) of the CGST Act, a registered person shall fulfil the following four conditions to avail ITC:

1. Possession of Tax Invoice or Debit Note

A registered person must have a Tax Invoice or Debit Note issued by a supplier registered under the CGST Act to avail ITC, as stipulated under Section 16(2)(a) of the CGST Act.

Further, as per the newly inserted provision of Section 16(2)(aa) of the CGST Act, the details of the Tax Invoice or Debit Note have to be furnished by the supplier in their Statement of Outward Supplies and such details have to be communicated to the recipient of such Tax Invoice or Debit Note, in the manner specified under Section 37 of the CGST Act.

Rule 36(2) of the CGST Rules also requires that the Tax Invoice should specify details such as the amount of tax charged, description of goods or services, total value of supply of goods and/or services, GSTIN of the supplier and recipient, place of supply in case of inter-State supply, etc.

2. Receipt of Goods and Services

According to Section16(2)(b) of the CGST Act, the registered person should have received the goods or service or both pursuant to such supply against which ITC is claimed. ITC can be claimed on the input supply only after the goods/services are received by the registered person claiming ITC.

It is to be noted here that where the goods against a Tax Invoice are received in lots or installments, the registered person shall be entitled to avail ITC on such supply only after the receipt of the last lot or installment.

3. Payment of tax to the Government

An important condition under Section 16(2)(c) of the CGST Act, which must be fulfilled to avail ITC is that the supplier of the input goods/services must actually pay the GST on such goods/services to the Government. In case the supplier fails to make such payment of GST to the Government, no ITC can be availed by the recipient of such input supplies.

4. Filing of Valid Return

As per Section 16(2)(d) of the CGST Act, the registered person should have furnished the Return under Section 39 of the CGST Act. Such Return has to be filed before the 20th of the month succeeding the month in which the supplies were received. This Return must be furnished in Form GSTR-3 and must contain all the details of inward supplies.


The second proviso to Section 16(2) of the CGST Act provides for the reversal of ITC availed and states that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.”

According to the aforementioned proviso to Section 16(2) of the CGST Act, in case of non-payment of consideration within 180 days of issuance of the Tax Invoice by the recipient to the supplier of goods or services, over which ITC has been availed by the recipient, an amount equal to the ITC availed shall be added to the output tax liability of the recipient along with interest thereon.

In this regard, Rule 37 of the CGST Rules states that the recipient shall furnish the details of such supply, the amount of value not paid and the amount of ITC availed of proportionate to such amount not paid to the supplier in FORM GSTR-2. Such information shall be furnished immediately following the period of 180 days from the date of the issue of the Tax Invoice.

Further, such person shall be liable to pay interest at the rate of 18% p.a. for the period starting from the date of availing ITC on such supplies till the date of payment of the additional output tax liability.

However, as per the third proviso to Section 16(2) of the CGST Act, the recipient shall be entitled again to claim ITC, upon payment of the amount towards the value of supply of goods or services or both along, with tax payable thereon.


As per Section 16 (4) of the CGST Act, a registered person shall not be entitled to avail ITC in respect of any Tax Invoice or Debit Note for the supply of goods or services or both after:

  • The due date of furnishing of the Return under Section 39 of the CGST Act for the month of September following the end of the financial year to which such Tax Invoice or Debit Note pertains; or
  • Furnishing of the relevant annual return, whichever is earlier.

Further, a conjoint reading of Section 39 (1) read and Section 44(1) of the CGST Act indicates that the Return for September is to be filled by 20th October, and the annual return is to be filled by 31st December of the succeeding financial year.

Therefore, the maximum time limit for availing ITC on a Tax Invoice of a particular year shall be the earlier of 20th October of the succeeding financial year or the date of filing the annual return.

In the case of ALD Automotive Pvt. Ltd. v. The Commercial Tax Officer and Ors. [MANU/SC/1168/2018], the Supreme Court held that the Legislature may provide for a time limit to avail ITC, which has to be mandatorily followed by the person claiming ITC. The Supreme Court held that:

“The statute having not given any indication for extension of time which is a condition for claiming Input Tax Credit, the submission that period could have been extended by assessing authority is unfounded and cannot be accepted.”


As per Section 17(5) of the CGST Act, ITC cannot be availed for certain goods and services prescribed by the CGST Act. Further, Section 17(5) is an overriding clause which states that notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following:”

The supply of following goods and services are ineligible for the purpose of availing ITC:

  • Motor vehicle for transportation of people, having approved seating capacity of not more than 13 persons (including the driver of the vehicle) except when used for the specified purpose;
  • Vessel and Aircraft except when used for the specified purpose;
  • Foods and beverages, outdoor catering, beauty treatment, health insurance, cosmetic & plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft except when used for the specified purpose, life insurance and health insurance;
  • Membership of a club, health and fitness centre;
  • Travel benefits extended to employees on vacation such as leave or home travel concession;
  • Works Contract service when supplied for construction of immovable property (not plant & machinery) except where it is an input service for further supply Of Works Contract service;
  • Goods and services received for construction of immovable property (not plant & machinery) on his own account including when such goods/services are used in business;
  • Person who made the payment of tax under Composition Levy Scheme pursuant to Section 10 of the CGST Act, 2017;
  • Goods or services or both received by a non-resident taxable person except on goods imported by him;
  • Goods lost, stolen, destroyed, written off, or given off as gift or free sample; and
  • Tax paid under Sections 74, 129, and 130 of the CGST Act.

The second proviso to Section 17(5)(b) of the CGST Act stipulates an exception to the effect that where it is mandated or obligatory under law for a taxpayer employer to provide the supplies listed under Section 17(5)(b) to its employees, then ITC shall be allowed for such supplies in a subjective manner.


The primary objective which led to the introduction of the entire GST framework within India was to avoid the burden of various erstwhile indirect taxes faced by the ultimate consumer, as various taxes were levied by the Centre and the State. Such taxes were not allowed to be adjusted against each other.

Therefore, GST was introduced and it incorporated the ITC mechanism to avoid double taxation and reduce the tax burden of the ultimate consumer. This could also be seen in the Statement of Objects and Reasons to the Constitution (122nd Amendment) Bill, 2014, which states that “the goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services.”

Over the years, some beneficial amendments have been made in the provisions concerning ITC. For example, an explanation to Section 16(2)(b) of the CGST Act was inserted pursuant to which it was deemed that the registered person has received the services where the goods or services are provided by the supplier to any person on the direction of and on account of such registered person.

However, onerous conditions such as denial of ITC on the failure of a supplier to pay the tax over which the recipient has no control, has in some way or the other led to defeating the very purpose of GST, which is to avoid double taxation.

Similarly, the Finance Act of 2021 has introduced another burdensome pre-condition for availing ITC under Section 16(2)(aa) of the CGST Act, which requires the supplier to furnish the details of Invoices or Debit Notes, over which ITC is to be claimed by the recipient, in their Form GSTR-1. Thus, it restricts a bona fide recipient from claiming ITC over such supplies until and unless the supplier furnishes the details in Form GSTR-1.

Additionally, Rule 86A of the CGST Rules empowers the Commissioner under the CGST Act to block ITC in the Electronic Credit Ledger of the recipient upon reasonable belief that it was availed fraudulently or was ineligible to avail. Though such powers are granted to the authorities to avoid tax evasion, in many cases, the ITC remained blocked due to the fraudulent acts of the supplier leaving the recipient harassed for no fault of his own.

Further, such blocked ITC is to be unblocked by the authorities upon the expiry of a year from the date of blocking. Unblocking of ITC has been discussed in detail in our previous Blog here.

Nonetheless, the implementation of GST has improved and simplified the fiscal system and the indirect tax structure. Similarly, ITC is an inalienable part of the overall framework of GST which has helped multiple taxpayers reduce their tax burden by setting off the GST already paid on input supplies.

-Team AMLEGALS, assisted by Mr. Aditya Baheti (Intern)

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