Published 5 October 2026
Input tax credit is what makes GST a tax on value added rather than on every transaction. A business pays tax on what it buys, collects tax on what it sells, and pays the government only the difference. Without credit, GST would cascade exactly as the taxes it replaced did.
That makes credit the most valuable thing a registration provides, and the most closely policed. Most GST disputes about money, as opposed to classification, are about credit taken that the department says was not available. Usually the reason is not that the purchase was outside the business. It is that one of the conditions in section 16(2) was not met, sometimes through no act of the person claiming.
This guide covers section 16 of the CGST Act. The next covers what credit is blocked even when every condition is met.
The entitlement, and the word that qualifies it
Section 16(1) states the entitlement. Every registered person is entitled to credit of input tax on supplies “used or intended to be used in the course or furtherance of his business”. The credit goes to the electronic credit ledger.
The entitlement is “subject to such conditions and restrictions as may be prescribed”. Section 16(2) then opens with a phrase that overrides everything before it:
Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,—
What follows is a list of conditions. They are cumulative. Meeting five of six is not enough.
Condition (a): the document
The recipient must be “in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed”.
Rule 36(1) of the CGST Rules lists the documents that qualify. They are a tax invoice under section 31, a self-invoice for reverse charge supplies, a debit note, a bill of entry for imports, and an Input Service Distributor’s document. Rule 36(2) requires the document to carry the prescribed particulars. A proviso relaxes this: credit is still available if the document shows the tax charged, a description, the total value, the GSTINs of both supplier and recipient, and, for inter-State supplies, the place of supply.
Condition (aa): the supplier has reported it
Clause (aa), in force from 1 January 2022, requires that the invoice details “has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient”.
This is the condition that changed GST credit from a matter of the recipient’s own records to a matter of the supplier’s filings. The supplier reports the invoice in GSTR-1. The common portal compiles what suppliers have reported into a statement for each recipient, under section 38. Rule 36(4) names that statement as FORM GSTR-2B. An invoice the supplier never reported does not appear in GSTR-2B, and on the words of clause (aa), the recipient is not entitled to the credit, whatever invoice it holds.
Condition (b): receipt
The recipient must have “received the goods or services or both”. An Explanation deems receipt in the two common indirect cases:
- goods delivered by the supplier to another person “on the direction of such registered person”, including by transfer of documents of title, which is the bill-to-ship-to case from the place of supply guide
- services provided “to any person on the direction of and on account of such registered person”
A proviso deals with goods under one invoice that arrive in instalments. Credit is available only “upon receipt of the last lot or instalment”.
Condition (ba): credit not restricted
Clause (ba), in force from 1 October 2022, requires that the credit communicated under section 38 “has not been restricted”.
Section 38(2)(b) lists the suppliers whose invoices may appear in GSTR-2B as ineligible, wholly or partly. They include recently registered suppliers; suppliers in continuing default of tax payment; and suppliers whose output tax as reported exceeds what they paid by a prescribed limit. They also include suppliers who took more credit than their own GSTR-2B allowed, by a prescribed limit, and others as prescribed. Where the statement shows a supply as restricted, clause (ba) denies the credit.
Condition ©: the tax has been paid to the Government
Clause © is the condition that most troubles recipients:
subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply;
The recipient cannot see whether its supplier has paid. Yet the condition is the recipient’s to satisfy. A recipient that paid the full price, including tax, to a supplier who then did not pay the tax over meets every other condition and still fails this one.
Rule 37A gives the condition a deadline. Take an invoice the supplier reported in GSTR-1, but for whose period the supplier had not filed GSTR-3B by 30 September after the end of the financial year. The recipient must reverse the credit in a GSTR-3B filed on or before 30 November. If it does not, the amount is payable with interest. If the supplier later files, the recipient may take the credit again.
Condition (d): the recipient’s own return
The recipient must have “furnished the return under section 39”. Credit cannot be held in suspense against a return not yet filed.
Paying the supplier: the 180-day proviso
The second proviso to section 16(2) adds a further condition, which operates after the credit is taken. If the recipient does not pay the supplier “the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice”, an amount equal to the credit is to be “paid by him along with interest payable under section 50”. The proviso does not apply to supplies on which tax is payable under reverse charge.
Rule 37 fills in the detail. The reversal is proportionate to the amount unpaid, and is made in the GSTR-3B for the period immediately after the 180 days. Supplies without consideration under Schedule I are deemed paid. So are amounts added to value under section 15(2)(b), costs the recipient bore on the supplier’s behalf.
The third proviso restores the credit when the supplier is paid. Rule 37(4) provides that the time limit in section 16(4) “shall not apply to a claim for re-availing” credit reversed earlier.
Depreciation or credit, not both
Section 16(3) prevents a double benefit on capital goods. Where depreciation has been claimed under the Income-tax Act “on the tax component of the cost of capital goods and plant and machinery”, credit on that tax component “shall not be allowed”. A business must choose between capitalising the tax and depreciating it, or taking credit and depreciating only the net cost.
The time limit in section 16(4)
Credit on an invoice or debit note cannot be taken after “the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier”.
Two points about the limit catch people. The year is the year of the invoice, not of the recipient’s books or of receipt. And the annual return, if filed before 30 November, closes the window early.
Before 1 October 2022, the limit was the due date of the return for September following the year. The change to 30 November was made by the Finance Act, 2022.
Two reliefs from the time limit
The Finance (No. 2) Act, 2024 inserted two sub-sections into section 16, each “with effect from the 1st day of July, 2017”.
Section 16(5) deals with the first four years of GST. For invoices and debit notes of 2017-18, 2018-19, 2019-20 and 2020-21, credit may be taken in any return under section 39 “filed up to the thirtieth day of November, 2021”. Credit those years’ invoices that section 16(4) would have denied is saved, provided it was taken in a return filed by that date.
Section 16(6) deals with registrations that were cancelled and then restored. Where cancellation is revoked under section 30, or by an appellate authority, tribunal or court, credit on invoices not already time-barred at the date of cancellation may be taken in a return filed within the later of two windows. The first is the ordinary deadline under section 16(4). The second is, for the period from cancellation to revocation, a return filed within thirty days of the revocation order.
Checking a claim
The order of analysis for any invoice is:
- Is the supply used or intended for business? If not, section 16(1) gives no entitlement. The next guide covers the further question of whether section 17(5) blocks it anyway.
- Is there a qualifying document under rule 36, with the essential particulars?
- Has the supplier reported it in GSTR-1, so that it appears in GSTR-2B, and does GSTR-2B show it as available rather than restricted?
- Have the goods or services been received, or is receipt deemed? For goods in instalments, has the last lot arrived?
- Has the supplier paid the tax? GSTR-2B does not show this directly. Rule 37A converts it into a deadline tied to the supplier’s GSTR-3B.
- Has the recipient filed its own return?
- Is the claim within section 16(4), or saved by section 16(5) or (6)?
- After the claim, has the supplier been paid within 180 days? If not, the credit is reversed until it is.
The next guide covers blocked credits under section 17(5): purchases on which credit is denied even when every condition in this guide is satisfied.