Input Tax Credit under GST (Sections 16 & 17)

ITC is GST's flagship feature — the mechanism that prevents tax-on-tax and

makes GST a value-added tax in practice. It's also IDT's most-tested area:

every attempt under the new scheme has tested either eligibility, the

blocked-credit list, or the reversal mechanics. Expect 10-14 marks of ITC

content in any IDT paper.

1. The four conditions for claiming ITC (Section 16)

A registered person can take credit of input tax charged on a supply of

goods or services used in the course or furtherance of business, provided

all four conditions are met:

1. Possession of a tax invoice / debit note (or other prescribed

document, e.g., bill of entry for imports)

1. Receipt of the goods or services — including the "bill-to-ship-to"

deemed-receipt rule for principal-to-job-worker cases

1. Tax actually paid by the supplier to the government — this is the

critical practical hurdle, often tested via GSTR-2B reconciliation

1. Filing of GSTR-3B by the recipient for the relevant period

Time limit: ITC must be availed by **30 November following the end of the

financial year**, or the date of filing the relevant annual return,

whichever is earlier (Section 16(4)). Miss this date and the credit lapses

permanently.

A fifth practical condition introduced via Rule 36(4) and now codified in

Section 16(2)(aa): the invoice must be reflected in the recipient's

GSTR-2B. Mismatches mean no credit even if everything else is in order.

2. Blocked credits (Section 17(5))

Section 17(5) lists 14 categories where ITC is blocked regardless of

business use. Memorise the list — examiners test specific clauses:

Two of these (h, i) generate the most exam questions — the "construction

of immovable property" block. Plant & machinery (P&M) is not immovable

property for ITC purposes, so credit on P&M installation is allowed.

3. Apportionment when supplies are partly for taxable and partly for

exempt/non-business purposes (Section 17(1)-(4) + Rule 42/43)

If a registered person makes both taxable and exempt supplies (e.g., a

bank making interest-earning loans alongside fee-based services), ITC must

be apportioned. Two regimes:

3.1 Inputs and input services (Rule 42)

Step-by-step computation:

1. T = Total ITC on inputs/input services in the tax period
2. T1 = ITC attributable exclusively to non-business
3. T2 = ITC attributable exclusively to exempt supplies
4. T3 = ITC on blocked credits (Section 17(5))
5. C1 = T − (T1 + T2 + T3) → common credit
6. T4 = ITC attributable exclusively to taxable supplies (including

zero-rated)

1. C2 = C1 − T4
2. D1 = C2 × (Exempt turnover / Total turnover) → reversal for exempt
3. D2 = 5% × C2 → reversal for non-business (deemed)
4. C3 = C2 − (D1 + D2) → eligible common credit

3.2 Capital goods (Rule 43)

For capital goods used for mixed purposes, the ITC is averaged over 60

months (5 years) and the exempt portion reversed monthly.

4. ITC reversal (Section 16(2) second proviso + Rule 37)

If the recipient fails to pay the supplier within 180 days from the

invoice date, the ITC claimed must be reversed with interest. When payment

is eventually made, the recipient can re-avail the credit — there's no

time limit for the re-claim once the conditions are met.

5. ITC on capital goods

ITC on capital goods is fully available in the period of receipt

(subject to the four conditions), unless they're used for mixed purposes

(Rule 43 apportionment). However:

• •Depreciation under Income Tax Act cannot be claimed on the ITC portion

(the recipient must choose: credit OR depreciation, not both)

• •On sale of capital goods, the recipient pays GST on the higher of

(a) ITC reduced by 5% per quarter of use, or (b) transaction value × rate

6. ICAI exam patterns

ITC appears in every IDT attempt — typically 14 marks across one full

question + sub-parts in other questions.

7. The 60+ marks topper convention

• •State the section first: "Per Section 16(2) read with Section 17(5)

of the CGST Act, 2017..." — earns the authority mark

• •List the four conditions explicitly when checking eligibility
• •Use short forms inside working notes only: ITC, CGST, SGST, IGST.

Spell out "Input Tax Credit (ITC)" at first use in theory answers

• •Box the final eligible credit / reversal figure
• •Cite the rule for apportionment: "Per Rule 42 of the CGST Rules, the

common credit reversal is computed as follows..."

• •State the consequence if credit lapses: "The credit lapsed on 30

November 2026 per Section 16(4) and cannot be claimed thereafter"