GST Input Tax Credit: Understanding Section 16 of the GST Act

GST Input Tax Credit Understanding Section 16 of the GST Act

ITC or Input Tax Credit is a tax levied on a business when it pays on a purchase and at the time of making a sale it can use to reduce the tax liabilities of that business. In simpler terms, businesses can claim a credit up to the extent of GST paid on purchases. Goods and Services Tax (GST) is a system, which facilitates credit across a whole supply chain, in a seamless manner it is an integrated or merged tax system, in which each and every purchase by a business must be equated with another business’s sale.

In our country, indirect taxes generate a major portion of revenue for the government and indirect taxes are undoubtedly the backbone of the Indian Economy. The continuous chain of Input Tax Credit is of the keynote of Goods and Services Tax in India. Cascading effect in the earlier taxation system was because of the non-availability of the ITC at different stages.

This article will explain the eligibility criteria and time limit for claiming ITC, the relevance of invoice in ITC claim, and the Reversal of ITC.

Eligibility criteria for claiming ITC

One can not claim ITC on Goods and Services entirely for personal use, exempt supplies and supplies for which ITC is not available specifically. GST tax credit can be claimed only for the purpose of business.

Section 16 of the GST Act lays down some conditions to be fulfilled to claim GST Input Tax Credit under GST Act, the conditions are explained below: –

  • It will be qualified to be claimed if the goods or services bought are further used for the purpose of business.
  • Tax invoice, debit note, or document which is evidencing the payment towards the purchase are essential for claiming ITC.
  • In Form GSTR-1, the supplier should fill the tax invoice or debit note and it should appear in the form GSTR-2B of the buyer.
  • As per section 16(2)(a), the perks of provisional ITC claims are no longer provided from 1st Jan 2022.
  • The buyer must have received such goods or services to claim ITC.
  • In form GSTR-3B, the buyer must mention the GST returns.
  • If the Goods and Services are received in installments then the Input Tax Credit can only be claimed when the last instalment is received.
  • Within 180 days from the invoice date, the buyer must pay for the supply of goods and services, a buyer can claim Input Tax Credit again when the payment is made to the supplier.
  • A buyer can not claim ITC when the depreciation has been claimed on the tax compound of the purchased capital goods.
  • A buyer should claim ITC for a debit note or invoice of a particular financial year within the time limit prescribed by the GST provisions.
  • As the seller is selling both exempt and taxable supplies, the common credit of ITC should be spilled proportionately to the extent of taxable supplies.
  • Blocked credit are certain items that are not eligible for ITC claims and these are listed in Section 17(5) of the CGST Act.

Relevance of Invoice in ITC claim

As an invoice provides us with a single source of information on all the transactions, it simplifies the process of tracking and managing the taxes on every sale. Tax invoices help in streamlining the filing procedure and reducing the probability of errors. Invoice eliminates the need for paperwork and manual data entry, which in turn is beneficial and profitable for businesses. Even tax invoices can save a company’s reputation as it ensures compliance with the GST tax laws, Overall, tax invoices are beneficial for the business in many term as it simplifies the filing process and reduces the cost of doing business in some terms. It increases the long-term productivity of the company.

The time limit to issue a GST invoice varies depending on the type of supply, here we have a brief guide.

  • In case of goods of normal supply, the GST invoice must be issued on or before the removal of the purchased item, and In case of continuous supply, the issue date of the invoice under the GST should be on or before receiving payment or the generation of the account statement.
  • And in the case of services, generally tax invoice under the GST should be completed within 30 days of rendering that service, and for financial services, which are provided by Banks, NBFCs, and other financial institutions, the GST tax invoice should be issued within the 45 days of the date of service supply.

The time limit for claiming Input Tax Credit (ITC)

The time limit to the taxpayer for claiming the Input Tax Credit under GST in respect of the invoice or debit note or any other document which shows the details of transactions for the supply of goods and services or both during that Financial Year is given under section 16(4) of CGST Act,2017.

In Union Budget 2022, section 16(4) which describes the time limit for claiming GST Input Tax Credit was amended and included as clause (b) of section 100 of the Finance Act, 2022.

As per section 16(4) of the CGST Act of 2017, the time limit for claiming GST Input Tax Credit should be before the following:

  • 30 November succeeding the end of the Financial Year.
  • Filing the Annual Return in form GSTR 9 whichever is earlier

The buyer of goods and services must keep in mind the 180 days rule, which says that the buyer must complete the whole payment to the supplier within the time span of 180 days from the date of supply to claim ITC.

And if the buyer fails to complete the payment to the supplier of the goods and services within 180 days, then their GST Input Tax Credit claimed will be added to their outward tax liability including interest on such reversal of ITC claimed.

Reversal of Input Tax Credit under GST

The reversal of ITC is a condition in which a business or a company is required to reverse the credit of the GST Input Tax Credit claimed earlier. This can happen because of many causes such as services and goods used for non-business purposes or many other reasons as well. Reversal of ITC nullifies the credit which was claimed earlier, and reversal of the Input Tax Credit under GST also requires the payment of interest which will depend upon when such reversal is done. Input Tax Credit under GST  can be reversed under various scenarios which are deeply defined in the rules of CGST.


Input Tax Credit is one of the most integral and constitutes part of the Goods and Services Tax (GST) System taxes. In this mechanism, businesses can claim Input Tax Credits on the already paid goods and services which are specifically used for business purposes. This system of ITC in some terms ensures that the taxes are paid only on the value which is added at every stage of the supply chain. Most importantly, ITC can only be claimed on Goods and services specifically used for business purposes. Any sort of discrepancies and mismatches in the tax invoice or debit note can be a reason for the rejection of the ITC claim. We hope that this article had helped you to some extent.

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