What Expenses Can Be Claimed as Input Tax Credit ITC?
Quick Summary
- Input Tax Credit (ITC) allows businesses to reduce their tax by claiming the GST paid on purchases used for business purposes.
- Only goods and services used for commercial activities are eligible for ITC, excluding personal use and exempt goods.
- To claim ITC, businesses must have a valid tax invoice, receive the goods or services, and ensure the supplier has paid the GST.
- ITC is not available for goods lost, stolen, or damaged, and cannot be claimed on exempted goods.
- GST software can help businesses manage and maximize their ITC claims efficiently.
For small business owners, understanding the ins and outs of ITC can save significant money. Thus, using GST software can help you claim in accordance with GST requirements by simplifying the process and ensuring you maximise your ITC. This article explains which expenses businesses can claim as Input Tax Credits and how to calculate and claim them.
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What is the Input Tax Credit under GST?
An input tax credit (ITC) is the tax you already paid when buying goods or services. Deduct this amount from the total tax owed. ITC is a system that prevents cascading assumptions. Cascading taxes mean levying tax on tax. To learn more about it, read our complete guide to Input Tax Credit .
Who Can Claim GST Input Tax Credit?
Section 16 of the CGST Act outlines a few conditions for claiming ITC. These conditions are as follows:
- Only those with a GST registration and who have submitted their GSTR-2 returns may claim the input tax credit.
- The dealer must possess a tax invoice or debit note from the input service provider.
- You must receive the products, services, or both.
- The supplier has made the GST payment to the government for this supply.
- You can only use the input tax credit when you receive the final batch of goods after purchasing them in parts.
- You cannot claim an input tax credit if you have claimed depreciation on the tax of a capital good.
- The registered taxpayer should pay the supplier within 180 days of the invoice.
Eligibility & Conditions for Claiming ITC Under GST
Eligibility for Taking Input Tax Credit
Businesses must ensure the following to claim ITC:
- GST-Registered users.
- They have received goods or services.
- They possess a tax invoice or debit note from a supplier.
- The supplier has paid the tax.
- They have filed the required GST returns .
Compliance Conditions: Invoice Rules, Time Limits & 180-Day Payment Rule
A. Basic Conditions to Claim ITC
A registered person can claim ITC only if:
- A proper tax invoice, debit note, or prescribed document is available.
- Goods or services have been received (including receipt in instalments, where applicable).
- The supplier has paid the tax through their GST returns.
- The recipient has filed GSTR-3B for the relevant period.
If any of these pillars is missing, ITC may be blocked or challenged later.
B. Invoice Rules and Timing
- ITC is allowed only against a valid tax invoice that includes the GSTIN, invoice number, date, HSN or SAC, taxable value, and tax breakup (CGST, SGST, IGST).
- If goods are received in multiple lots, ITC can be claimed only after receipt of the last lot.
- For debit notes, the ITC time limit is linked to the debit note's financial year, not the original invoice's.
C. Time Limit for Availing ITC
There is an outer time limit for claiming ITC for a financial year.
ITC must be availed on or before the earlier of:
- 30 November of the following financial year, or
- The date of filing the annual return for that year.
Any ITC not claimed within this limit generally lapses, even if all other conditions were fulfilled.
D. 180-Day Payment Rule
GST law also links ITC to payments made to the supplier.
If ITC has been claimed but the recipient fails to pay the value plus tax to the supplier within 180 days from the invoice date:
- ITC proportionate to the unpaid amount must be reversed, and
- Interest must be paid from the date of the original ITC claim until the reversal.
Once payment to the supplier is made later, the ITC can be re-availed, without paying interest again.
What Are the Benefits of Claiming Input Tax Credit for Your Business?
Input Tax Credit helps reduce your overall tax burden. When you purchase goods or services for business use, you pay GST to your supplier. By claiming ITC, you can adjust this amount against the GST you collect from customers.
Here are the key benefits:
Reduces total GST payable
Improves cash flow
Prevents double taxation
Encourages proper invoice compliance
Lowers overall business cost
For growing businesses and MSMEs, proper ITC management can directly increase profitability.
Documentation Checklist for Claiming ITC
A clean ITC claim is always supported by strong documentation. This not only helps during department enquiries but also when CAs review books or prepare reconciliations.
A practical checklist looks like this.
1. Registration and master data
- Valid GST registration of your business.
- Updated the customer and vendor master records with the correct GSTIN, address, and state.
2. Supplier documents
Tax invoices with:
- Supplier and recipient GSTIN
- Invoice number and date
- Description of goods/services
- HSN/SAC, quantity, taxable value
- GST rate and amount (CGST/SGST/IGST/cess)
- Debit notes / credit notes , where applicable.
3. Proof of receipt of goods/services
- Goods receipt note (GRN) or delivery challan acknowledgement.
- Lorry receipt, e-way bill details, or transport documents where relevant.
- For services, work completion reports, emails, contracts or usage logs.
4. Payment and accounting records
- Bank statements or payment vouchers showing the value plus tax paid to the supplier.
- Proper ledger posting of purchases, expenses and ITC in books.
- Where 180-day rule applies, clear tracking of due dates and reversals.
5. Reconciliation documents
- GSTR-2B / 2A vs purchase register reconciliation working.
- Notes explaining mismatches and their resolution (pending invoices, supplier errors, timing differences).
- Any internal approvals for blocking or releasing specific ITC items.
6. Special cases
- Documentation for capital goods, including asset register and intended use.
- Separate records for exempt, non business and mixed-use inputs (for Rule 42/43 type apportionment).
- If these documents are maintained and organised, most ITC disputes can be explained and resolved quickly.
Which Expenses Are Eligible for GST Input Tax Credit in India?
Companies claim ITC solely for commercial endeavours. This rule excludes expenses for personal use, exempt goods, or goods not eligible for ITC claims. Companies can use ITC to purchase raw materials, packing materials, spare parts, consumables, printing, and stationery items.
Claim ITC on capital goods such as:
- Plant and machinery
- Support structures used for plant and machinery
- Motor vehicles used for the transportation of goods
- Repairs required for such transporting trucks
- Electronics, furniture, appliances, etc.
Taxpayers can get tax credits for various expenses. It includes cleaning, rent, internet, cell phones, bank fees, repairs, advertising, legal fees, and conferences.
What expenses are blocked / Ineligible for ITC (Section 17(5))?
The following commodities or services are not eligible for the input tax credit under GST:
- Businesses use motor vehicles for functional purposes or to offer taxable services. These services include passenger transportation, product transport, vehicle operation instruction, or similar transportation services.
- Registered taxpayers cannot use the goods or services they receive to provide the same type of service. This rule does not apply to outdoor catering, cosmetic and plastic surgery, and health services
Can We Claim ITC on Printing and Stationery Expenses Under GST?
Yes, ITC can be claimed on printing and stationery expenses when used strictly for business purposes. Items such as invoice books, letterheads, packaging materials, and office stationery qualify as eligible inputs.
However, if the items are used for personal purposes or not related to business activities, ITC cannot be claimed.
Can We Claim ITC on Internet and Telephone Charges for Business?
ITC is allowed on internet and telephone bills when these services are used for business operations.
If the connection is used partly for personal use, then only the proportionate business portion of ITC can be claimed. The bill must contain the supplier GSTIN and proper tax details.
Can We Claim ITC on Grocery Items and Staff Welfare Expenses?
Generally, ITC on grocery items and staff welfare expenses is not allowed. Food, beverages, and personal consumption items are subject to blocked credits.
However, if providing such items is mandatory under any law or part of a taxable outward supply, ITC may be permitted.
What Items Are 100 Per cent Deductible for GST Input Tax Credit?
ITC can be fully claimed on:
- Raw materials used for taxable supplies
- Office rent and professional services
- Business electricity bills
- Machinery used exclusively for taxable goods
- Business-related software subscriptions
The condition is that goods or services must be used wholly for taxable business activities.
Which ITC Cannot Be Claimed Common Blocked Credits Under GST?
The following are common blocked credits:
- Motor vehicles for personal use
- Food and beverages
- Membership of clubs or health centres
- Personal travel benefits for employees
- Goods lost, stolen, or given as free samples
These are subject to GST even when used in business.
What is the Common Credit in ITC?
A company may acquire capital goods, input commodities, and services from outside sources. Additionally, it may use the items and services acquired for private or commercial purposes. Under GST, businesses know the aggregate input tax credit on all such purchases as the Proportionate Credit or Common Credit. The taxpayer cannot claim credit for inputs utilised for private purposes. Therefore, you should apply the standard credit when paying the production tax liability.
Utilise the standard credit under the following criteria:
- You can use ITC only for commercial purposes, not for personal use of goods and services.
- ITC is eligible only for selling taxable goods and services.
- ITC does not apply to exempted supplies.
Practical Examples: Eligible, Ineligible & Mixed-Use Scenarios
Examples make the ITC rules easier to understand. Here are three simple scenarios you can relate to.
1. Fully eligible ITC – clean case
- A manufacturing company buys raw material for ₹10,00,000 + 18% GST (₹1,80,000) from a registered supplier.
- Goods are received at the factory.
- Supplier files GSTR-1 and GSTR-3B correctly, and tax appears in the buyer’s GSTR-2B.
- The buyer pays the supplier within 60 days through a bank.
- The purchase is fully used for taxable supplies.
Here, the company can safely claim full ITC of ₹1,80,000, subject to the time limit and proper documentation.
2. Clearly ineligible ITC – blocked credit
A business buys a motor car primarily for use by its directors, not for further supply of vehicles, nor for an eligible specific business use covered by exceptions.
- The invoice shows GST of ₹2,40,000 on the car.
- The car is used for personal and general office travel, not as a taxi, not for training or resale.
Under the blocked credit rules, ITC on many such motor vehicles is not allowed except in specified cases. So, even though the invoice has GST, this ITC must not be claimed. The GST becomes a cost.
3. Mixed-use scenario – taxable + exempt supplies
A company runs both:
- A taxable trading business, and
- An exempt education service under the same GSTIN.
It purchases office rent and common software services used by both divisions. GST on these comes to ₹1,20,000 for the year, and these are treated as common input services.
- Annual taxable turnover = ₹3,00,00,000
- Annual exempt turnover = ₹1,00,00,000
- Total turnover = ₹4,00,00,000
Proportion of exempt turnover = 1,00,00,000 ÷ 4,00,00,000 = 25%
- ITC relating to exempt part (to be reversed) = 25% of ₹1,20,000 = ₹30,000
- Eligible ITC for taxable supplies = ₹90,000
In practice, this apportionment is typically done monthly or for each tax period, per the rules, but the logic remains the same.
Putting it all together, ITC is safest when:
- Invoice and receipt conditions are respected.
- Time limits and 180-day rule are tracked.
- Documentation is complete and reconciled with 2B.
- Mixed-use and blocked credits are identified early and treated carefully.
This discipline keeps the credit chain clean and reduces the risk of future GST demands, interest and disputes.
What Are Capital Goods in GST and How Are They Different From Other Inputs?
Capital goods are assets used in business that provide long-term benefits, such as machinery, equipment, and tools. Unlike regular inputs that are consumed in production, capital goods are used over several years. ITC on capital goods is claimed differently compared to normal input goods.
Eligibility Conditions for ITC on Capital Goods Under GST
To claim ITC on capital goods:
1. You must be
GST registered
2. You must have a valid tax invoice
3. Goods must be received
4. Supplier must have paid the tax
5. GST return must be filed
If depreciation is claimed on the GST portion under Income Tax, ITC cannot be claimed on that part
When Can ITC on Capital Goods Be Availed and How Is It Claimed?
ITC on capital goods can be claimed in the month when the goods are received.
It is reported in GSTR 3B under the ITC section. Unlike earlier tax systems, GST allows full ITC in one go if the goods are used for taxable supplies.
Input Tax Credit on Capital Goods and Fixed Assets Ledger – How It Is Created
When capital goods are purchased, the asset is recorded in the fixed assets ledger.
The GST portion is recorded separately under the input tax credit ledger. This ensures clear tracking of asset cost and tax credit benefit.
ITC on Capital Goods Under GST With Examples (Machinery, Vehicles and Equipment)
Example 1: A manufacturer purchases machinery worth Rs 5,00,000 plus GST. The GST paid can be fully claimed as ITC if used for taxable supplies.
Example 2: If a business buys a vehicle for personal use, ITC is not allowed.
Example 3: Equipment used in production is eligible for full ITC.
GST on Capital Goods and Rule 43 Apportionment and Reversal of ITC
If capital goods are used partly for taxable and partly for exempt supplies, ITC must be apportioned.
Under Rule 43, credit is distributed over the useful life of five years. The exempt portion must be reversed proportionately.
ITC on Capital Goods Sent on Job Work or Used by Job Workers
ITC can be claimed on capital goods sent to a job worker.
The goods must be returned within the prescribed time limit. If not returned within the allowed period, ITC may need to be reversed.
ITC on Capital Goods When Business Is Transferred, Merged or Registration Cancelled
When a business is transferred or merged, unutilised ITC can be transferred to the new entity through prescribed forms.
If registration is cancelled,the remaining ITC may need to be reversed or paid as per GST rules.
How to Calculate and Report Input Tax Credit in GSTR 3B
To calculate ITC:
1. Add eligible ITC from purchase invoices
2. Exclude blocked credits
3. Adjust reversals if applicable
4. Report net ITC in GSTR 3B
Ensure invoices match GSTR 3B before filing. Incorrect reporting may lead to notices or penalties.
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Conclusion
Input Tax Credit is a powerful tool for reducing tax liability. Businesses must track eligible expenses, understand blocked credits, and properly manage capital goods ITC.
Accurate reporting in GSTR 3B and proper documentation ensure compliance and improve cash flow. With correct planning, businesses can legally maximise their ITC benefits.
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