# Input Tax Credit (ITC) — Introduction
## Why ITC Exists
GST is a value-added tax. At every stage of the supply chain, tax is collected on the full sale price, but the supplier is allowed to set off the tax already paid on inputs. This prevents tax cascading ("tax on tax") and ensures GST is paid only on the value added at each stage.
## The Credit Chain — How It Works
```
Inputs (revenue + capital)
│ buy with input tax
▼
Business operations
│ add value, then sell
▼
Output (charge output tax)
```
## Worked Mechanism
Assume tax rate = 18%.
| Step | Particulars | Amount (₹) |
|---|---|---|
| 1 | Inputs purchased (cost basis) | 6,00,000 |
| (+) GST on inputs @ 18% | 1,08,000 | |
| Total paid to supplier | 7,08,000 | |
| 2 | Output sale value | 10,00,000 |
| (+) GST on output @ 18% | 1,80,000 | |
| Collected from customer | 11,80,000 | |
| 3 | Output GST liability | 1,80,000 |
| (–) ITC already paid on inputs | (1,08,000) | |
| Net cash to be paid to Government | 72,000 |
So of the ₹1,80,000 output tax, ₹1,08,000 is settled via ITC, and only ₹72,000 leaves the business in cash.
## Critical Definitions
### ITC Availment vs ITC Utilisation
- Availment: The taxpayer claims ITC in the GST return and credits it to their Electronic Credit Ledger on the GST portal. This is the booking of credit.
- Utilisation: Using the availed ITC to pay output GST liability. This is the consumption of credit.
A taxpayer can avail credit today and utilise it later, but cannot utilise more than what has been availed.
### Basic Eligibility Criteria for ITC
1. Only a registered person can avail ITC. Unregistered persons pay GST as cost.
2. Goods/services on which ITC is to be availed must be intended to be used, or used, for business. Personal use → no ITC.
## How GST Returns Plumb the Credit
- Supplier files GSTR-1 with details of outward supplies by the 11th/13th of the following month.
- These auto-populate into the recipient's GSTR-2B (auto-drafted ITC statement).
- Only ITC reflected in GSTR-2B can be availed by the recipient (subject to other conditions).
This automated matching prevents fraudulent ITC claims unsupported by supplier-side reporting.