Library / Goods and Services Tax: The Professional's Master Guide

15. Input Tax Credit: Concept and Conditions (Section 16)

Input tax credit (ITC) is the tax a registered person has paid on his purchases which he may set off against the tax payable on his sales. Without it, tax would be charged at every stage on a value that already includes earlier tax. With it, each person pays tax only on the value he adds, and the full tax is borne by the final consumer. This chapter covers the entitlement under section 16 of the CGST Act, the conditions in section 16(2), the 180-day payment rule, the time limit, and the question of whether an honest buyer should lose credit when his supplier does not pay.

15.1 What qualifies for credit

Section 16(1) allows every registered person to take credit of input tax charged on supplies to him which are used or intended to be used in the course or furtherance of his business. Three categories qualify: inputs (goods other than capital goods, section 2(59)), input services (section 2(60)) and capital goods (goods capitalised in the books, section 2(19)). "Input tax" under section 2(62) covers CGST, SGST, IGST and UTGST charged on supplies, IGST on imports and tax paid under reverse charge, but not composition tax. The words "intended to be used" mean that credit is not postponed until the goods are consumed. Raw material bought in March for use in May is credited in March.

Illustration 89: Basic credit and set-off for a textile unit

Sharma Textiles Pvt. Ltd., Surat, makes man-made fibre fabric (5%). Its intra-State purchases for October 2026:

Step 1: Yarn Rs. 10,00,000 at 5% = Rs. 50,000. Packing material Rs. 1,00,000 at 18% = Rs. 18,000. Factory rent Rs. 3,00,000 at 18% = Rs. 54,000. Air compressor (capitalised) Rs. 5,00,000 at 18% = Rs. 90,000.

Step 2: Total ITC = Rs. 2,12,000 (CGST Rs. 1,06,000 and SGST Rs. 1,06,000).

Step 3: Output tax on fabric sales of Rs. 25,00,000 at 5% = Rs. 1,25,000 (CGST Rs. 62,500 + SGST Rs. 62,500).

Result: Output tax is paid wholly from the credit ledger and Rs. 87,000 is carried forward. Because the output rate is lower than the input rates, credit keeps building up. Refund under the inverted duty structure covers only credit on inputs, not on input services or capital goods (Part F).

15.2 The conditions in section 16(2)

Section 16(2) opens with "Notwithstanding anything contained in this section, no registered person shall be entitled to the credit ... unless". Every condition must be met. Failing one defeats the claim even if the purchase is genuine.

Clause	Condition	Usual proof
16(2)(a)	Tax invoice, debit note or other prescribed document	Invoice with rule 36(2) particulars; bill of entry; ISD invoice; self-invoice for reverse charge
16(2)(aa)	Invoice or debit note reported by supplier and communicated to recipient	Appears in GSTR-2B
16(2)(b)	Goods or services received	Goods receipt note, e-way bill, transport and service records
16(2)(ba)	Credit not restricted in the statement under section 38	Shown as available in GSTR-2B
16(2)(c)	Tax actually paid to the Government by the supplier	Supplier's GSTR-3B filing status
16(2)(d)	Recipient has filed his return under section 39	GSTR-3B filed

Under rule 36(2), a document missing some particulars still supports credit if it shows the tax, the description, the total value, the GSTINs of supplier and recipient, and the place of supply for inter-State supplies.

Invoice in GSTR-2B: section 16(2)(aa)

From 1 January 2022, credit can be taken only for invoices and debit notes that the supplier has reported in GSTR-1 or IFF and that appear in the recipient's GSTR-2B. Rule 36(4) was aligned with this, and the earlier provisional credit (history in chapter 5 of this Part) ended. If the supplier has not uploaded an invoice, the buyer must wait.

Receipt of goods or services: section 16(2)(b)

The Explanation to section 16(2)(b) treats goods or services as received where (i) the supplier delivers goods to another person on the direction of the registered person (bill-to-ship-to), (ii) an agent receives goods for the principal, or (iii) services are provided to another person on the direction and on account of the registered person. Where goods under one invoice arrive in lots or instalments, the first proviso to section 16(2) allows credit only on receipt of the last lot.

Illustration 90: Machinery received in lots

Patel Engineering Works, Rajkot, is billed on 12 August 2026 for a packing line of Rs. 40,00,000 plus IGST Rs. 7,20,000. The line arrives in three lots on 20 August, 18 September and 6 October 2026.

Step 1: The invoice appears in GSTR-2B for August 2026, but the receipt condition is met only on 6 October 2026.

Step 2: In the August 2026 GSTR-3B, the auto-populated Rs. 7,20,000 is shown in Table 4A and reversed in Table 4B(2).

Result: Rs. 7,20,000 is reclaimed in the October 2026 return (Table 4A(5), with disclosure in Table 4D(1)). Using it earlier would attract interest at 18% under section 50(3).

Illustration 91: Bill-to-ship-to supply

Mehta Pipes Pvt. Ltd., Ahmedabad, buys pipes of Rs. 5,00,000 from Kaveri Steel Tubes, Chennai, and asks Kaveri to deliver them to its customer Rao Constructions in Hyderabad.

Step 1: Kaveri bills Mehta: place of supply Gujarat (section 10(1)(b) of the IGST Act). IGST 18% = Rs. 90,000.

Step 2: Mehta bills Rao Rs. 5,75,000: place of supply Telangana. IGST 18% = Rs. 1,03,500.

Result: Mehta is deemed to have received the goods and takes credit of Rs. 90,000. Net IGST = Rs. 13,500, which is 18% of its margin of Rs. 75,000. Keep the proof of delivery at Hyderabad on file.

Tax actually paid by the supplier: section 16(2)(c)

Section 16(2)(c) requires that the tax charged has been actually paid to the Government by the supplier, in cash or through his own credit. The buyer has paid the tax to the supplier and has no control over whether it is passed on, which is why this condition has been litigated so much. Section 41 and rule 37A give the mechanics. Where the supplier has not filed GSTR-3B for a tax period by 30 September following the end of the financial year, the buyer must reverse the credit by 30 November of that year, and may re-avail it when the supplier files.

Illustration 92: Supplier fails to file GSTR-3B: rule 37A

Joshi Traders took credit of Rs. 54,000 (CGST Rs. 27,000 + SGST Rs. 27,000) in January 2026 on an invoice of Kavya Enterprises that appeared in GSTR-2B.

Step 1: Kavya has not filed GSTR-3B for January 2026 by 30 September 2026.

Step 2: Joshi reverses Rs. 54,000 in Table 4B(2) of the October 2026 GSTR-3B, filed by 20 November 2026. A reversal after 30 November 2026 would carry interest under section 50(3) from the date of use.

Result: Kavya files the return in February 2027 and Joshi re-avails Rs. 54,000 in its February 2027 return (Table 4A(5), with disclosure in Table 4D(1)).

Judicial view: Validity of section 16(2)(c)

Bhandari Scrap Traders v. Union of India (Supreme Court, 2026): On 24 July 2026 the Supreme Court dismissed the special leave petitions against a Division Bench judgment of the Gujarat High Court dated 1 May 2026 that had upheld section 16(2)(c). There is no ground to strike it down or read it down. The Delhi VAT law, on which the bona fide purchaser rulings rested, works on a different scheme, and sections 41, 73 and 74 of the CGST Act let a buyer re-claim credit once the supplier pays. A buyer can be denied credit while the supplier has not paid.

Suncraft Energy (P) Ltd. v. Assistant Commissioner, State Tax (Calcutta High Court, 2023; SLP dismissed 2023): Credit was not to be denied only because of a GSTR-3B and GSTR-2A mismatch, without first proceeding against the defaulting supplier. Such rulings must now be read subject to Bhandari Scrap Traders, though the officer must still examine the buyer's evidence before passing an order.

Diya Agencies v. State Tax Officer (Kerala High Court, 2023): Sections 16(2)(c) and 16(4) upheld; credit is a concession subject to conditions, but a buyer should be allowed to prove that he paid tax to a genuine supplier.

15.3 Payment to the supplier within 180 days

The second proviso to section 16(2) requires the recipient to pay the supplier the value and the tax within 180 days from the date of invoice. Otherwise, the credit proportionate to the unpaid amount is reversed with interest in GSTR-3B for the tax period after the one in which the 180 days expire (rule 37). The credit can be re-availed when payment is made, with no time limit. The rule does not apply to reverse charge supplies, deemed supplies without consideration under Schedule I, and amounts added to value under section 15(2)(b). Book adjustment and set-off against dues from the supplier count as payment.

Illustration 93: Proportionate reversal under rule 37

Kavya Components Pvt. Ltd. receives an invoice dated 10 April 2026 for Rs. 5,00,000 plus GST Rs. 90,000. It takes and uses the credit in the April 2026 return filed on 20 May 2026, and pays the supplier Rs. 3,54,000 within 180 days.

Step 1: The 180 days end on 7 October 2026. Unpaid = Rs. 5,90,000 minus Rs. 3,54,000 = Rs. 2,36,000.

Step 2: Reversal = Rs. 90,000 x 2,36,000 / 5,90,000 = Rs. 36,000, in the November 2026 GSTR-3B filed on 20 December 2026.

Step 3: Interest at 18% from 20 May to 20 December 2026 (214 days) = Rs. 36,000 x 18% x 214 / 365 = Rs. 3,799.

Result: On paying the balance on 5 January 2027, Rs. 36,000 is re-availed in the January 2027 return. The interest is not refunded.

Key point

The 180 days run from the invoice date, not from receipt of goods or the credit period in the purchase order. Where long credit terms are normal in the trade, build the reversal and re-availment into the monthly closing checklist.

15.4 Depreciation on the tax component: section 16(3)

If depreciation under the Income-tax Act is claimed on the tax component of capital goods, no credit is allowed on it. The companion guide on the Income-tax Act, 2025 deals with the income tax side.

Illustration 94: Choosing between ITC and depreciation

Singh Packaging buys a printing machine for Rs. 10,00,000 plus GST Rs. 1,80,000. Depreciation is taken at 15% and the income tax rate at 25%.

Step 1: Option A: capitalise Rs. 10,00,000 and take ITC of Rs. 1,80,000. Depreciation Rs. 1,50,000.

Step 2: Option B: capitalise Rs. 11,80,000, no ITC. Depreciation Rs. 1,77,000, which is Rs. 27,000 more, saving tax of Rs. 6,750 in year one.

Result: Option A is better unless the credit cannot be used, for example where all outputs are exempt.

15.5 Time limit: sections 16(4), 16(5) and 16(6)

Under section 16(4), credit on an invoice or debit note cannot be taken after 30 November following the end of the financial year to which it relates, or the date of filing the annual return, whichever is earlier. For a debit note, the relevant year is the year of the debit note, not of the original invoice (from 1 January 2021). The claim must be made in a return actually filed by that date.

Sections 16(5) and 16(6), inserted by the Finance (No. 2) Act, 2024 from 1 July 2017, give relief. Section 16(5) allows credit for FY 2017-18 to FY 2020-21 taken in any return filed up to 30 November 2021. Section 16(6) helps a person whose registration was cancelled and later revoked: credit not already time-barred on the date of cancellation can be taken in a return filed within 30 days of the revocation order, for the period between cancellation and revocation, or up to 30 November of the following year, whichever is later.

Illustration 95: Time limit for FY 2025-26 invoices

Gupta Electricals files monthly returns.

(a) Invoice dated 15 March 2026, claimed in the October 2026 GSTR-3B filed on 18 November 2026, with GSTR-9 not yet filed: allowed.

(b) Same invoice, but GSTR-9 for FY 2025-26 was filed on 25 October 2026: time-barred, as the earlier date applies.

(c) Invoice dated 28 March 2026, goods received on 6 April 2026: credit arises in April 2026, but must be claimed by 30 November 2026.

(d) Debit note dated 10 May 2026 on a January 2026 invoice: belongs to FY 2026-27, so the limit is 30 November 2027 or the FY 2026-27 GSTR-9 date, if earlier.

(e) A quarterly filer's October to December 2026 return is due in January 2027, after 30 November 2026. It must claim FY 2025-26 credit in the July to September 2026 return.

Judicial view: Time limit under section 16(4)

Thirumalakonda Plywoods v. Assistant Commissioner (Andhra Pradesh High Court, 2023): The Court upheld the time limit in section 16(4) as a valid condition attached to a concession. Credit claimed after the time limit is lost even if all other conditions are met. The Kerala High Court in Diya Agencies took the same view. Relief for early years now comes only from sections 16(5) and 16(6).

A debit note issued under section 34(3) for an upward revision is a valid document for credit if it appears in GSTR-2B. For imports, IGST paid at customs flows into GSTR-2B from ICEGATE on the basis of the bill of entry.

15.6 Supplier's registration cancelled with retrospective effect

Officers often cancel a supplier's registration from an earlier date and then propose to deny credit to all its buyers. If the invoice was issued while the registration was active, appeared in GSTR-2B, the goods were received, payment went through the bank, and the supplier paid tax at that time, the buyer has a strong case. Retrospective cancellation alone does not prove that the buyer's purchase was fake.

Judicial view: Retrospective cancellation of the supplier

Additional Commissioner v. Safecon Lifesciences (P) Ltd. (Supreme Court, 2026): On 17 July 2026 the Supreme Court dismissed the Revenue's special leave petition against a judgment of the Allahabad High Court dated 9 September 2025, which had held that the extended period for fraud cannot be invoked against a buyer without proof of fraud or suppression by that buyer. Retrospective cancellation of the supplier or defects in the supplier's own purchases are not such proof. The supplier there had deposited the tax.

Read with Bhandari Scrap Traders: if the supplier did not pay, the buyer loses credit until it pays; if the supplier did pay, the department must prove the buyer's own wrongdoing.

15.7 The bona fide purchaser debate

Under VAT, several High Courts protected honest buyers whose sellers failed to deposit tax. The GST law was drafted partly to close that gap, and the courts have returned to the older principle that credit is a concession which the claimant must prove.

Judicial view: Bona fide purchaser under the VAT laws

On Quest Merchandising India (P) Ltd. v. Government of NCT of Delhi (Delhi High Court, 2017): Section 9(2)(g) of the Delhi VAT Act was read down so as not to apply to a buyer who bought in good faith from a registered dealer and paid the tax.

Arise India Ltd. v. Commissioner of Trade and Taxes (Delhi High Court, 2017; SLP dismissed 2018): Decided on the same lines; the Supreme Court dismissed the department's petition. In Bhandari Scrap Traders, the Supreme Court accepted that these VAT rulings do not carry over to GST.

Judicial view: Credit is a concession and the burden is on the claimant

Jayam and Co. v. Assistant Commissioner (Supreme Court, 2016): Under the Tamil Nadu VAT Act, input tax credit is a concession available only on the conditions laid down by the legislature.

State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. (Supreme Court, 2023): Under the Karnataka VAT Act, the dealer claiming credit must prove the purchase was genuine; invoices and cheque payments alone are not enough, and details of the seller, vehicle, freight and receipt should be shown. Section 155 of the CGST Act likewise puts the burden on the person claiming credit.

15.8 Due diligence on vendors

After Bhandari Scrap Traders, a buyer cannot rely on the invoice alone. The cost of a missed check is the credit plus interest at 18%.

Stage	Check	Evidence
Onboarding	GSTIN active; name matches PAN; filing history for 12 months	Portal screenshots; visit report for large vendors
Monthly	Invoice in GSTR-2B; supplier's GSTR-3B status; cancellations	GSTR-2B, IMS log, filing status
Payment	Paid within 180 days; hold GST portion if supplier defaults	Bank statement, contract clause
Year-end	Rule 37A check by 30 September; reversal by 30 November	Vendor-wise reconciliation

Practice note

Purchase contracts should require the supplier to upload invoices on time, pay the tax and indemnify the buyer for lost credit with interest. For new or large vendors, keep e-way bills, lorry receipts, weighbridge slips and gate entries with the invoice. In a fake supplier notice, these documents decide the case.

Chapter summary

• ITC is available on inputs, input services and capital goods used or intended to be used in the course or furtherance of business (section 16(1)).

• All conditions in section 16(2) must be met; for goods received in lots, credit is taken on the last lot.

• Bhandari Scrap Traders (Supreme Court, 2026) settles that section 16(2)(c) is valid; rule 37A requires reversal where the supplier has not filed GSTR-3B by 30 September, with re-availment when it does.

• Unpaid invoices beyond 180 days require proportionate reversal with interest and re-availment on payment (rule 37).

• No credit on the tax component if depreciation is claimed on it (section 16(3)).

• Credit must be claimed by 30 November of the following year or the date of the annual return, whichever is earlier; for debit notes the year of the debit note counts.

• Vendor due diligence and proof of movement are the buyer's main protection.