Input Tax Credit (ITC): Meaning, Conditions, Blocked Credits and Reversal (Basics) Questions

Question 1

Define Input Tax Credit (ITC).

Accepted Answer

**ITC** is the credit of **GST paid on inputs/input services/capital goods** that can be used to reduce **output GST liability** (subject to conditions) (concept).

Question 2

Net GST payable equals Output GST minus ITC. (True/False)

Accepted Answer

True. **Net GST payable = Output GST − Eligible ITC** (concept).

Question 3

State one benefit of ITC.

Accepted Answer

ITC reduces the **cascading effect (tax-on-tax)** and makes GST a **value-added** tax (concept).

Question 4

ITC can be claimed for personal consumption. (True/False)

Accepted Answer

False. ITC is linked to **business use** and eligibility conditions; personal use ITC is not allowed (concept).

Question 5

What is meant by blocked credit (one line)?

Accepted Answer

**Blocked ITC** is input tax credit that is **specifically not allowed** under GST law (concept/overview).

Question 6

ITC reversal means taking back ITC claimed earlier. (True/False)

Accepted Answer

True. **ITC reversal** is required when ITC is wrongly claimed or conditions change/not met (concept).

Question 7

List any three basic conditions to claim ITC (exam checklist).

Accepted Answer

Any three conditions (concept/overview):

- claimant is a **registered person**
- valid **tax invoice/debit note** is available
- goods/services are **received**
- supplier has paid tax and returns are filed (system-based) (overview)
- ITC used for **business purposes**

Write any three in exam points.

Question 8

Differentiate eligible ITC and blocked ITC (any three points) using a table.

Accepted Answer

Difference (concept):

| Basis | **Eligible ITC** | **Blocked ITC** |
|---|---|---|
| Meaning | credit allowed if conditions met | credit not allowed by law |
| Use | reduces output GST payable | cannot be claimed (concept) |
| Example | inputs for taxable supply | personal use / specified blocked items |

Any three points are sufficient.

Question 9

Explain why ITC is called the ‘heart of GST’ (any three points) with a small table.

Accepted Answer

ITC is central to GST because it supports value-added taxation (concept).

| Point | Explanation |
|---|---|
| **Removes cascading** | avoids tax-on-tax through credit chain |
| Promotes **invoice compliance** | buyers demand proper invoices to claim ITC |
| Tax on **value addition** | net tax effectively on value added (concept) |

Write any three clear points.

Question 10

Compute net GST payable: Output GST = 18,000; eligible ITC = 12,000 (show a table).

Accepted Answer

Working (concept):

| Particulars | Amount |
|---|---:|
| Output GST | 18,000 |
| Less: eligible **ITC** | (12,000) |
| **Net GST payable** | **6,000** |

Net payable is output tax minus eligible ITC (concept).

Question 11

List any three examples of blocked ITC (blocked credits) and write one-line reason for each (use a table).

Accepted Answer

Examples of **blocked ITC** (any three) (concept/overview):

| Example | Why blocked (basic idea) |
|---|---|
| Personal consumption | not for **business** use (concept) |
| Inputs used for exempt supplies | credit chain should apply only to taxable supplies (concept) |
| Certain employee benefits / specified items | specifically restricted by law (overview) |

Write any three with one-line reasons (exam style).

Question 12

Explain ITC reversal for exempt/personal use (basic) with a small proportionate example table.

Accepted Answer

If inputs are used partly for **taxable** and partly for **exempt/personal** use, ITC is allowed only to the taxable business portion; the rest is **reversed** (concept).

Example (simple): Suppose total ITC = 10,000 and 20% relates to exempt/personal use.

| Particulars | Amount |
|---|---:|
| Total ITC claimed | 10,000 |
| Portion for exempt/personal use (20%) | 2,000 |
| **ITC to be reversed** | **2,000** |
| Eligible ITC (balance) | 8,000 |

(Exam tip: write “proportionate reversal as per rules”.)

Question 13

Write an exam-style answer on ITC: meaning, conditions and blocked credits (use headings and a table).

Accepted Answer

### Meaning
**Input Tax Credit (ITC)** is the credit of **input GST** paid on inward supplies that can be set off against **output GST liability** (subject to conditions) (concept).

### Basic conditions (any four)
- claimant is **registered**
- valid **tax invoice/debit note**
- goods/services **received**
- used for **business** purposes
- returns filed and tax paid in the system (overview)

### Blocked credits (examples)
Some credits are **blocked** by law (concept). Examples (any three):
- personal consumption
- inputs used for exempt supplies
- specified items like motor vehicles/food & beverages in certain cases (overview)

| Category | Key idea |
|---|---|
| Eligible ITC | allowed when conditions met |
| **Blocked ITC** | not allowed under law |

Conclusion: ITC removes cascading and supports value-added GST (concept).

Question 14

Explain ITC reversal: meaning, when it applies, and why it is required (exam-style) with a table and flowchart.

Accepted Answer

### Meaning
**ITC reversal** means reducing/adding back ITC that was claimed earlier when eligibility conditions are not met or usage changes (concept).

### When reversal may apply (examples)
- inputs used for **exempt supplies** or **personal use** → proportionate reversal (concept)
- non-payment to supplier within prescribed time (overview)
- ITC wrongly/excessly claimed → reversal + interest (overview)

| Situation | Why reversal is needed (concept) |
|---|---|
| Exempt/personal use | ITC should relate only to taxable business use |
| Wrong claim | prevents undue benefit |
| Non-compliance | enforces conditions and discipline |

Flow (overview):

```text
Claim ITC -> Check usage/conditions -> If not met -> Reverse ITC (and interest if applicable)
```

Conclusion: Reversal ensures ITC is limited to eligible taxable business activity (concept).

Question 15

Explain with an example how ITC removes cascading and ensures tax on value addition (exam-style) using a simple table/flow.

Accepted Answer

### Core idea
GST becomes a **value-added tax** because eligible **ITC** allows set-off of input tax against output tax, reducing **cascading** (concept).

### Simple illustration (concept)
Assume:
- Purchase value 1,00,000 + GST 18% (input GST = 18,000)
- Sale value 1,20,000 + GST 18% (output GST = 21,600)

| Particulars | Amount |
|---|---:|
| Output GST on sale | 21,600 |
| Less: eligible **ITC** (input GST) | (18,000) |
| **Net GST payable** | **3,600** |

### Conclusion
Only the tax on **value added** (20,000 × 18% = 3,600) is effectively paid, so tax-on-tax is avoided (concept).

Input Tax Credit (ITC): Meaning, Conditions, Blocked Credits and Reversal (Basics)

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