What is Input Tax Credit Under GST- Conditions, Eligibility and Example

GST (Goods and service tax) is a no new term for anyone familiar with taxes. Ever since the introduction of GST in 2017, the nation is aware of the tax imposed on the purchase of goods and services. Under GST there are different slabs according to the percentage of tax imposed (5%, 12%, 18%, 28%) on the purchase of various goods and services. GST has various clauses to specify the basis and limitations of the rule to prevent the citizens from any fraudulent activities and give a clarity on tax implication.

Input tax credit (ITC) is another clause under GST that refers to the credit on tax imposed on any person who purchases goods and services that are being used or will be used for their business.

What is Input Tax Credit Under GST?

To understand the input tax credit (ITC) meaning, let’s first understand the meaning of ‘Input’ in GST terms. Input refers to the purchase of goods or services and output refers to the sale of goods or services.

Whenever you reduce the GST paid on the purchase (Input) from liability payable on any outward supplies (Output), the balance you get is Input Tax Credit. Businesses can reduce their tax liability by claiming a credit to the extent of GST already paid at the time of purchase and the extra a business collects through output supplies is paid to the government.

The Income Tax Department introduced ITC to remove the cascading effect on GST and end the multiple tax paying cycle

Input Tax Credit with an Example

Let us take a hypothetical example to understand what is Input Tax Credit.

Mr. A is a trader who purchases goods from a raw material supplier worth Rs.1,000 at 10% GST i.e, Rs. 100., which should be submitted to the government by the supplier.

Later, Mr. A sells the same goods at Rs. 1500 at 10% GST i.e, Rs. 150 and collects GST from the retailer. Here, Mr. A should pay Rs. 150 (GST) to the government.

But, the trader already paid Rs.100 to the supplier on the same goods as GST and the supplier paid the same GST to the government. Do you think Mr. A should pay GST again to the government on the same goods?

Here comes the role of Input Credit Tax: The rule says that if you reduce the amount of GST on outward supplies from the GST amount on inward supplies, you will only pay the balance amount.

Input Credit Tax Under GST= Outward GST payable – Input tax (GST on purchase)

Input Credit Tax Under GST= 150 – 100

Input Credit Tax Under GST= Rs. 50

So, Mr. A only needs to pay Rs. 50 as a GST on the goods.

Who is Eligible to Claim ITC?

Following are a few points that indicates if a business is eligible for Input Tax Credit or not:

• ITC is only available for a registered person. To claim credit for Input tax, you first need to register yourself with the GST act.
• The goods and services purchased should only be used for the furtherance of your business.
• The input tax credit amount you want to claim should be credited in your electronic ledger.

Conditions to Claim ITC

In section 16(2), the Income Tax Department has stated some conditions one registered person shall satisfy to claim credit under Input tax.

• Must have a Tax Invoice or Debit Note.
• The goods and services should be received.
• The tax paid by the recipient should be paid to the government.
• Furnished (Filing) the valid GST return.