If you’ve tried to understand Input Tax Credit under GST, you’ve probably felt that the real challenge doesn’t start with the ITC rules themselves—but with the huge set of definitions the law expects you to know before even touching Section 16. That’s because GST is a definition-driven law. Every small term—input, supply, business, recipient, capital goods—carries a special meaning under Section 2 of the CGST Act.
In this blog, let’s simplify the core definitions connected to ITC, explain why each one matters, and connect everything back to real business situations. Everything you read below is based directly on official GST definitions.
1. Understanding “Input”, “Input Service” and “Capital Goods”
These three definitions form the base of ITC. If something does not qualify as input, input service, or capital goods, then ITC cannot be claimed on it.
1.1 Input (Section 2)
“Input” means any goods (other than capital goods) used or intended to be used in the course or furtherance of business.
Key takeaway:
Anything you purchase that is not capitalized in your books automatically becomes an input.
Examples:
- Raw materials
- Packing materials
- Office stationery
- Spare parts
- Consumables used in machinery
- If you buy A4 paper for printing invoices → Input
- If you buy 200 kg of steel rods for manufacturing → Input
1.2 Input Services (Section 2)
Any service used or intended to be used for business purposes is an input service.
Examples:
- Security service for office
- Rent of factory premises
- Audit fees
- Courier service
- Legal consultancy
Every service from transport to advertising becomes an input service if it supports business operations.
1.3 Capital Goods (Section 2)
Capital goods are goods whose value is capitalized in books of accounts and are used for business.
Examples:
- Machinery
- Computers
- Office furniture
- Tools and equipment
- Vehicles used for eligible business activities
Important ITC rule:
If you claim depreciation on the GST portion of a capital asset, then ITC cannot be claimed on that GST part.
This rule prevents double benefit.
2. Input Tax & Input Tax Credit
Two of the most important definitions for ITC.
2.1 Input Tax (Section 2)
Input tax includes:
- IGST
- CGST
- SGST
- UTGST
- RCM tax
- Tax paid on imports
✔ Excludes:
- Composition tax
- Interest/penalty/fines
✔ Example:
- If you bought raw materials worth ₹1,00,000 + GST ₹18,000,
- then ₹18,000 is your input tax.
If you pay RCM on legal services, that RCM amount also becomes input tax (subject to ITC rules).
2.2 Input Tax Credit (Section 2)
Input Tax Credit means the credit of input tax that you can claim on purchases of goods, services, or capital goods.
✔ Example:
Input tax from various purchases:
- Raw materials: ₹18,000
- Factory rent: ₹5,400
- Machinery purchased: ₹36,000
Total ITC = ₹59,400
This ITC can be used to pay tax on your outward supply.
3. Inward Supply & Outward Supply
These two definitions decide when ITC becomes available and when tax becomes payable.
3.1 Inward Supply (Section 2)
Covers all receipts of goods or services—whether by purchase, acquisition, or any other means—with or without consideration.
✔ Examples:
- Buying raw materials
- Receiving a taxable service
- Getting goods from job worker
- Free samples (inward without consideration, but ITC rules apply separately)
ITC starts only with an inward supply.
3.2 Outward Supply (Section 2)
Outward supply means supplies made by a registered person in business.
✔ Includes:
- Sale
- Transfer
- Exchange
- Barter
- Lease
- Rental
- Disposal
- Even supplies made without consideration (like branch transfers)
Once you make an outward supply, GST is payable. Your ITC gets used at this stage.
4. Business (Section 2)
The definition of business is extremely wide.
✔ Includes:
- Any trade, manufacture, commerce
- Any service
- Any adventure or concern
- Activities regardless of profit motive
- Admission entry, club activities, professional services
- Even activities of government bodies (in certain cases)
✔ Why this matters?
ITC is allowed only when the inward supply is used for business.
So understanding “business” is crucial.
5. Consideration (Section 2)
Consideration includes:
- Payment in money
- Payment in kind
- Payments by any person on behalf of the recipient
- Subsidies linked to price (except Government subsidies)
✔ ITC relevance:
If there is no consideration, supply might fall under Schedule I but ITC rules differ.
6. Continuous Supply of Goods / Services
6.1 Continuous Supply of Goods
Supply provided continuously under a contract (like monthly delivery).
✔ Example:
A monthly supply of petroleum products under a written agreement.
6.2 Continuous Supply of Services
Services provided continuously or recurrently for a period exceeding 3 months.
✔ Example:
- Annual maintenance contracts
- Long-term consulting
- Infrastructure management services
✔ Why important?
Time-of-supply rules differ → ITC eligibility timing changes.
7. Composite Supply & Mixed Supply
These two definitions are necessary for determining tax rate, which affects ITC utilisation.
7.1 Composite Supply
Two or more supplies naturally bundled together, supplied in the ordinary course of business.
✔ Example:
- Goods + installation
- Hotel stay with breakfast
- Laptop with operating system pre-installed
Tax rate = Rate of principal supply.
7.2 Mixed Supply
Two or more supplies offered together for a single price that are not naturally bundled.
✔ Example:
A Diwali gift box containing:
- Sweets
- Chocolate
- Soft drinks
- Dry fruits
Tax rate = Highest tax rate among the items.
8. Distinct Person (Section 25)
Branches of the same company located in different states are treated as distinct persons.
✔ ITC relevance:
Stock transfer between branches = taxable supply, so ITC must be availed by receiving branch.
9. Exempt Supply
Supply of goods/services that attract nil rate, are wholly exempt, or are non-taxable.
✔ Examples:
- Unbranded flour
- Fresh fruits
- Services by way of education in schools
✔ ITC impact:
- No ITC is available for exempt supplies.
- If a business deals in both exempt and taxable goods → proportionate ITC formula applies (Rules 42 & 43).
10. Person (Section 2)
Person includes:
- Individual
- HUF
- Company
- Firm
- LLP
- AOP/BOI
- Corporation
- Government
- Trust
ITC can be claimed only by a registered person.
11. Principal & Agent
Important in cases where agents receive goods.
✔ Example:
- A commission agent receives goods for sale.
- Under Schedule I, supply between principal and agent is taxable → ITC implications apply.
12. Recipient & Supplier (Section 2)
Recipient
- Person liable to pay consideration.
- If no consideration → person receiving the supply.
Supplier
Person supplying the goods or services.
✔ Why important?
Invoice details must contain correct supplier and recipient to claim ITC.
13. Taxable Person & Taxable Supply
Taxable Person
One who is registered or required to be registered under GST.
Taxable Supply
Any supply chargeable to GST.
✔ ITC connection:
Only taxable persons on taxable supplies can avail ITC.
14. Voucher (Section 2)
An instrument where value of goods/services is identifiable.
✔ Example:
A gift voucher that allows purchase of a ₹1,000 shirt.
Vouchers affect time of supply and thus ITC timing.
15. Works Contract
A contract for:
- Construction
- Fabrication
- Creation of immovable property
- Repairs
- Renovation
- Fitting out of a building
✔ ITC restriction:
No ITC on works contract for construction of immovable property (except plant/machinery).
16. Zero-Rated Supply
Covers:
- Export of goods
- Export of services
- Supply to SEZ units/developers
Zero-rated supplies allow full ITC and refund.
17. Non-Taxable Supply
Goods/services not leviable to GST.
✔ Example:
Alcohol for human consumption
No ITC available on inputs used for non-taxable supplies.
18. Related Persons / Family
GST law says people connected by:
- Employer–employee
- Family relations
- Director/company relationship
- Business control
are related persons.
This matters because transactions between related persons may be taxable even without consideration, affecting ITC flow.
19. Non-Resident Taxable Person
A person occasionally doing business in India but not having a fixed place of business in India.
Example: A foreign exhibitor temporarily selling goods in India.
They must pay GST in advance → ITC rules are stricter.
20. Job Work (Section 2)
Processing on goods belonging to another registered person.
✔ ITC relevance:
Principal can take ITC even if goods are sent directly to job worker.
21. Market Value
Price that the same goods/services would fetch under normal circumstances.
Used for valuation between related persons → impacts ITC value.
Final Summary
Section 2 of the CGST Act may look like a long list of legal definitions, but every term has a direct connection with Input Tax Credit. Understanding these definitions helps you:
- Know which purchases qualify for ITC
- Avoid disallowed credits
- Handle complex situations like job work, branch transfers, composite supplies, or exempt supplies
- Correctly classify transactions in GST returns
- Prevent ITC mismatches
