Input Tax Credit (ITC) under GST: Boon or Burden for Businesses?

When the Goods and Services Tax (GST) rolled out in 2017, it marked one of India’s most ambitious tax reforms, aimed at consolidating the nation into a “one tax, one market” framework. Businesses initially welcomed GST, hoping it would simplify compliance, eliminate the cascading effect of multiple indirect taxes, and improve the ease of doing business.

At the heart of this reform lies the mechanism of Input Tax Credit (ITC)—a system that allows businesses to offset the GST paid on purchases against the GST payable on sales. On paper, this mechanism looks like a clear win: it prevents double taxation, lowers costs, and boosts transparency.

Yet, the reality for many businesses, especially micro, small, and medium enterprises (MSMEs), has been far more complex. ITC has turned into one of the most debated and litigated components of GST, with compliance hurdles and cash flow blockages diluting its intended benefits. This article examines whether ITC really acts as a boon for Indian businesses, or whether it has, in practice, become more of a burden.

What is Input Tax Credit (ITC) under GST?

In simple terms, ITC allows a registered business to reduce its tax liability by claiming credit for GST already paid on inputs.

Example:

• A manufacturer buys raw materials worth ₹1,00,000 and pays 18% GST (₹18,000).
• Finished goods are sold for ₹1,50,000 with 18% GST (₹27,000).
• Instead of paying the full ₹27,000 as output tax, the manufacturer can claim credit of ₹18,000 and pay only the balance ₹9,000.

This ensures that GST is levied only on the value addition at each stage, not on the entire transaction value. While the system is straightforward in theory, complications arise due to strict compliance conditions.

Legal Framework of ITC under GST

The provisions relating to ITC fall under Chapter V of the CGST Act, 2017 (Sections 16–21) and corresponding GST Rules. Some key highlights are:

• Section 16(1): Right of a registered person to claim ITC on goods or services used for business.
• Section 16(2): Conditions include possession of a valid invoice, actual receipt of goods/services, tax payment by supplier to the government, and timely filing of returns.
• Section 17: Restrictions and apportionment of credit (e.g., ITC blocked on goods for personal consumption, motor vehicles for private use, etc.).
• Section 18: Special scenarios such as new registrations and shifting from composition to regular schemes.
• Sections 20–21: ITC distribution rules and recovery of wrongful credit.

Similarly, Rule 86A of the CGST Rules empowers tax officers to block ITC if fraudulent activity is suspected—though this often affects genuine taxpayers too.

ITC as a Boon for Businesses

Despite implementation challenges, ITC has provided several advantages:

1. Elimination of cascading tax effect – It ended the era of “tax on tax” prevalent under the earlier indirect tax regime.

2. Lower cost of doing business – Passing on credit reduces the overall tax burden, making products/services more competitively priced.

3. Formalization of the economy – Since ITC is available only when suppliers are GST compliant, it pushes businesses into the formal tax net, ensuring better transparency.

4. Improved working capital efficiency – When compliance is smooth, ITC ensures businesses don’t bear tax liability on the full turnover, leading to better cash flow management.

ITC as a Burden for Businesses

However, in practice, the mechanism has become a compliance-heavy burden, particularly for MSMEs:

1. Vendor dependency – Even if a buyer has paid the supplier, ITC can be denied if the supplier fails to deposit tax or file returns. This “guilty by association” approach is widely criticized.

2. Constant legal changes – Frequent amendments, notifications, and evolving return formats make it hard for smaller businesses to keep up.

3. Blocking of ITC – Tax authorities often block ITC under Rule 86A, even on suspicion, crippling working capital.

4. Heavy litigation – Numerous disputes arise around availability of ITC on construction, CSR expenditure, promotional schemes, etc., adding cost and uncertainty.

5. MSME disadvantage – While larger corporations can afford compliance teams, MSMEs struggle with reconciliations, audits, and penalties, turning ITC into a cash flow nightmare.

Landmark ITC Litigations

Litigation has become central to ITC’s journey under GST. A few significant judgments include:

• Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019, Orissa HC): Held that ITC on construction of malls should be allowed if used for renting, but this interpretation conflicted with Section 17(5).
• Bharti Airtel Ltd. v. Union of India (2021) 13 SCC 573: The Supreme Court disallowed rectification of returns to avail missed ITC, underscoring the rigidity of compliance rules.
• VKC Footsteps India Pvt. Ltd. v. Union of India (2021) 13 SCC 153: Court upheld restrictions on refund of unutilized ITC under inverted duty structure, affecting exporters and manufacturers.

These cases underline how ITC disputes have become a recurring feature of GST litigation.

ITC and MSMEs: A Hard Reality

MSMEs—around 30% of India’s GDP contributors—are disproportionately affected:

• They often lack leverage to ensure supplier compliance.
• Refund delays lock up funds, creating severe cash flow shortages.
• Compliance costs, including hiring tax professionals, eat into thin margins.
• Even minor ITC errors may lead to penalties or prosecution.

Thus, while ITC was meant to empower MSMEs, it has, in reality, added another layer of operational strain.

Critical Analysis: Boon or Burden?

The dual character of ITC means it is both a facilitator and an obstacle:

• For large, resourceful corporations, ITC is largely a boon—reducing costs and allowing them to compete globally.
• For MSMEs, it frequently becomes a burden due to complex compliance, working capital blockage, and excessive litigation.

Hence, ITC’s effectiveness depends not on its conceptual design but on its administration and implementation.

Suggested Reforms

To transform ITC from a litigation hotspot into a true business enabler, the following reforms can be considered:

• Shift liability principle – Buyers complying in good faith should not lose ITC due to vendor default.
• Stability in GST law – Fewer frequent amendments and clearer guidelines are necessary.
• Faster refunds – Especially for exporters and MSMEs, refund timelines should be streamlined.
• Technology-driven reconciliation – AI-led return-matching tools can reduce compliance burdens and disputes.
• Awareness initiatives – Government outreach and MSME-focused training programs will increase compliance capacity.

Conclusion

Input Tax Credit is undoubtedly the backbone of GST’s promise to remove cascading taxes and streamline indirect taxation. In theory, it is a formidable business-friendly tool. In practice, however, frequent disputes, delayed refunds, and compliance complexities have often turned it into a burden—particularly for MSMEs.

For larger businesses, ITC largely remains a boon. For smaller ones, it often means blocked capital and endless paperwork. The government’s challenge, therefore, lies in striking a balance between revenue protection and ease of doing business. If reforms toward simplification, faster refunds, and protection of genuine taxpayers are implemented, ITC can truly become the boon it was envisioned to be. Until then, the “boon or burden” debate will continue to echo in boardrooms, courtrooms, and Parliament alike.