Bigsun Udaan › Finance reference guides › GST lesson 4
TDS & Tax · GST lesson 4 of 5
Input tax credit and reverse charge
How a business avoids paying tax on tax, and the special case where the buyer pays the GST.
Input tax credit (ITC)
When a business buys goods or services for its work, the supplier charges GST. This is the business's input tax. When it later sells, it collects GST from its customers: the output tax. The business may subtract the input tax from the output tax and pay only the difference. That subtraction is input tax credit.
A worked example
Priya runs a small bakery company (fictional). In one month, at 18% GST:
| Amount before GST | GST | |
|---|---|---|
| Purchases (flour, packaging, a service) | ₹10,000 | ₹1,800 (input tax) |
| Sales | ₹15,000 | ₹2,700 (output tax) |
GST payable = ₹2,700 − ₹1,800 = ₹900. Without credit she would pay ₹2,700, and tax would pile up at every step.
Try the set-off
When can you claim ITC?
- You hold a valid tax invoice from a registered supplier.
- You have actually received the goods or services.
- The supplier has filed their return and the invoice shows in your auto-generated GSTR-2B statement.
- The supplier has paid the tax to the government.
- You have filed your own return.
Good habit: every month, match your purchase records with GSTR-2B. If a supplier's invoice is missing, ask them to correct it before you claim the credit.
Credits you cannot claim (“blocked credits”)
Some purchases do not give ITC even with a valid invoice. Examples commonly listed under section 17(5) of the CGST Act:
- Goods or services used for personal purposes
- Most motor vehicles for carrying a small number of people (with some exceptions)
- Goods lost, stolen or destroyed
- Free samples
The full list has conditions. Always read the current provision or ask a professional.
Reverse charge mechanism (RCM)
Normally the seller collects GST. Under reverse charge the buyer pays it directly to the government. It applies to specified supplies. Examples often mentioned include certain legal services, goods transport agency services and imported services.
- The buyer must work out the GST and pay it in cash through the return.
- The buyer can usually claim that GST as ITC afterwards, if the conditions are met.
- Businesses often forget RCM. It is a frequent source of notices.
Practice
- A business collected ₹5,400 GST on sales and paid ₹3,600 GST on eligible purchases. How much must it pay in cash?
- A business bought a gift for a relative using company money and has a GST invoice. Can it claim ITC? Why or why not?
- Make a monthly checklist for ITC: three things to check before filing the return.
Show answers
1) ₹5,400 − ₹3,600 = ₹1,800. 2) No: personal use is a blocked credit. 3) For example: invoices in GSTR-2B, purchases used for the business, and reverse-charge items worked out.
Check yourself
1. Output tax ₹2,700, input tax ₹1,800. GST payable?
₹2,700 − ₹1,800 = ₹900.
2. Which statement lists the invoices you can safely claim ITC on?
ITC needs a valid invoice, receipt of goods or services and the invoice reflected in GSTR-2B.
3. Under reverse charge, who pays the GST to the government?
Under RCM the buyer pays.
4. Which is a typical blocked credit?
Free samples are listed among blocked credits.
Learning material for beginners, checked in October 2026. It is not tax or legal advice. GST rates, limits and due dates change, and websites sometimes disagree on details. Always confirm on the GST portal (gst.gov.in) or with a Chartered Accountant or GST practitioner before applying anything in real work. All names and amounts in the examples are made up.