What is input tax credit?

The tax you paid on purchases, set against the tax you collected on sales.

Last checked 20 September 2026

Input tax credit is the GST you paid on business purchases, set against the GST you collected on sales, so you only pay the government the difference. It is the mechanism that stops tax compounding at each stage — and the part of GST that costs businesses the most money when it goes wrong.

How it works

You buy stock for ₹ 1,00,000 plus ₹ 18,000 GST. You sell it for ₹ 1,40,000 plus ₹ 25,200 GST. You do not pay ₹ 25,200 to the government — you pay ₹ 25,200 minus the ₹ 18,000 you already paid on the purchase, so ₹ 7,200.

The ₹ 18,000 is your input tax credit. It is real money: without it your cost of goods rises by 18% and either your margin or your price has to absorb it.

The conditions you have to meet

Credit is not automatic. Broadly, all of the following must hold:

You hold a valid tax invoice or debit note from a registered supplier.
You have actually received the goods or services.
The supplier has reported and paid the tax — which is the condition you do not control.
You have filed your own return for the period.
You claim within the time limit — broadly, by 30 November following the end of that financial year, or the date you file the annual return, whichever is earlier.

The third condition is the dangerous one

Your credit depends on your supplier doing their job. If they never file, your credit can be denied even though you paid them in full and hold a perfectly good invoice. This is why reconciliation is not an accounting nicety — see GSTR-2B reconciliation.

The 180-day payment rule

If you claim credit and then do not pay your supplier within 180 days of the invoice date, the credit has to be reversed with interest. You can reclaim it when you eventually pay. Stretching a supplier past six months therefore has a tax cost on top of the relationship cost.

Credit you cannot claim

Some credits are blocked outright, whatever the invoice says. The list includes, with exceptions in each case:

Motor vehicles for personal transport, and related insurance and servicing.
Food and beverages, outdoor catering, club and health-club memberships.
Goods and services used for personal consumption.
Goods lost, stolen, destroyed, written off or given away as free samples.
Works contract services for constructing immovable property, other than plant and machinery.

And structurally: if you sell exempt goods, or you are under the composition scheme, you cannot claim credit on the inputs behind those supplies.

What good practice looks like

1
Record every purchase bill as it arrives, with the supplier’s GSTIN, the taxable value and the tax split.
Not at month end from a pile. The details you need are on the paper in your hand today.
2
Reconcile your purchase register against GSTR-2B every month, before filing.
3
Chase the suppliers whose invoices are missing, while the period is still recent enough to fix.
4
Only claim what is actually reflected and eligible.

In TracEasy the Purchase Register report is that purchase-side sheet, built from the bills you entered.

Can I claim credit on an invoice I have not paid yet?

Yes, subject to the other conditions — but you must pay within 180 days or reverse it with interest.

What if I have more credit than output tax?

It carries forward in your electronic credit ledger. Refunds of accumulated credit are available in specific situations, such as exports and an inverted duty structure.

Does credit expire?

The right to claim it for a given financial year does. Miss the deadline and the credit is lost, which is the single most expensive routine mistake under GST.

Sources

CGST Act 2017, sections 16, 17 and 18; Rule 37
CBIC — GST Acts, Rules and notifications (cbic-gst.gov.in)

How TracEasy handles this

Record a purchase bill

Enter a supplier invoice and let it bring the stock in for you.