Input Tax Credit (ITC) is at the heart of the GST framework — ensuring that taxes flow smoothly through the value chain without creating cascading effects. Yet, ITC remains one of the most misunderstood and heavily litigated areas for businesses. From eligibility rules to apportionment, reversals, ISD mechanism, and refund provisions, companies are often caught between procedural complexities and compliance obligations.

The reference infographic above offers a holistic overview. In this blog, we break it down into a practical, business-focused explanation so you can implement the rules with clarity and confidence.

A Complete Guide to GST Input Tax Credit (ITC) & Refund Provisions in India

I. Claiming ITC & Eligibility (Section 16)

For any business to claim ITC, two foundational conditions must be met:

1. The claimant must be a registered person under GST.
2. The goods or services must be used for business purposes.

However, Section 16(2) lays down additional mandatory conditions such as:

• Possession of a valid tax invoice or debit note
• Supplier must have furnished invoice details in GSTR-1
• Goods/services must have been actually received
• Tax must be actually paid to the Government via supplier
• Claimant must have filed the return (GSTR-3B)
• ITC must not be restricted under Section 38

The time limit for availing missed ITC is also strictly enforced — the earlier of:

• 30th November of the following financial year, or
• Date of filing annual return
  

Another important limitation: businesses cannot claim depreciation on the tax portion of capital goods if they wish to claim ITC on it.

Most importantly, the burden of proof lies entirely on the taxpayer. Maintaining proper documentation, supplier reconciliation, and consistent follow-ups is therefore essential.

II. Calculation & Reversal of ITC (Apportionment)

Not all ITC is eligible for full credit. When goods or services are used for both taxable and exempt (or business and non-business) activities, ITC must be apportioned.

GST laws classify:

• Business/Taxable Supplies → Eligible ITC
• Non-business/Exempt Supplies → Ineligible ITC
  

Apportionment Rules (Rule 42 & Rule 43)

The calculation involves:

1. Total Input Tax (T)
2. Less: Ineligible Non-business credits + Exempt-related credits
3. Apply complex formulas under Rule 42 for input/input services and Rule 43 for capital goods.
   

The end result is Final Eligible ITC, which can be claimed in the return.

Special Rules for Capital Goods

Capital goods have a useful life of 5 years (60 months) for ITC calculation purposes. Businesses must proportionately reverse ITC for exempt usage each month.

Reversal Due to Non-Payment

If the recipient does not pay the supplier within 180 days, the ITC claimed must be reversed with interest.
Once payment is made, ITC can be reclaimed.

III. Input Service Distributor (ISD) – Section 20

Large organizations often incur centralized expenses (advertising, SaaS tools, consulting, marketing, head office services). The ISD mechanism allows them to distribute ITC efficiently to different GST registrations (distinct persons).

Key points:

• ISD receives invoices for common input services
• ITC is distributed via ISD invoice/credit note
• Distribution must follow defined ratios and rules:
  • Specific credits → To respective unit
  • Common credits → Proportionate turnover-based distribution

Tax Head Conversion (Rule 39)

The ISD must distribute ITC maintaining tax-type consistency:

• IGST can be distributed as IGST
• CGST/SGST may convert depending on the state of the recipient
• For recipients in different States, tax heads change accordingly

This ensures correctness in credit flow and prevents mismatches in electronic ledgers.

IV. Refund Provisions (Section 54)

The refund mechanism under GST is critical for exporters, inverted duty industries, and businesses with accumulation of ITC. Section 54 governs all refund claims.

1. Claiming Refund

• Applications are filed via Form GST RFD-01
• Time limit: 2 years from the relevant date
• Refund types include IGST, CGST, SGST, unutilized ITC, and excess balance in cash ledger
  

2. Refund of Unutilized ITC

Unutilized ITC is allowed in two cases:

A. Zero-Rated Supplies (Exports/SEZ)

Businesses exporting goods or services can claim refund of accumulated ITC.
Refund amount is calculated based on:

• Zero-rated turnover
  
• Adjusted total turnover
  
• Net ITC available
  

B. Inverted Duty Structure

When input tax rate > output tax rate, accumulated ITC rises. Refund is allowed except for items notified as restricted.

3. Payment & Disbursement

The refund process includes:

• Provisional Refund: 90% within 7 days
  
• Final Order: Remaining amount after verification
  

4. Unjust Enrichment

Refund is not granted if tax burden has been passed on to another person. In such cases, the refund goes to the Consumer Welfare Fund.

Understanding the ITC framework — eligibility, calculation, reversals, ISD mechanism, and refunds — is essential for maintaining compliance and optimizing cash flow. Proper documentation, vendor reconciliation, and timely filing are the backbone of an effective GST strategy. Get in touch with Pitchers Global today!