Input Tax Credit (ITC) under GST

Understanding Input Tax Credit

Input Tax Credit (ITC) is a key feature of the GST system that allows businesses to reduce their tax liability. It essentially means that you can claim credit for the GST you have paid on your inputs (purchases) when you sell your outputs (goods or services). This mechanism helps avoid double taxation and ensures that GST is only levied on the value added at each stage of the supply chain.

How ITC Works

Imagine you are a furniture manufacturer. You purchase wood (input) and pay GST on it. You then use the wood to manufacture a table (output) and sell it, collecting GST from your customer. With ITC, you can reduce the GST you owe on the sale of the table by the amount of GST you already paid on the wood.

• Example:
  • You purchase wood for ₹100 + ₹18 (GST) = ₹118
  • You sell the table for ₹500 + ₹90 (GST) = ₹590
  • You can claim ₹18 as ITC.
  • Your net GST liability would be ₹90 (output GST) - ₹18 (ITC) = ₹72

Eligibility for ITC

To claim ITC, certain conditions must be met:

• Registered Person: You must be a registered person under GST.
• Tax Invoice: You must possess a valid tax invoice from your supplier.
• Goods/Services Received: You must have received the goods or services.
• GST Paid: You must have actually paid the GST to your supplier.
• Return Filing: You must file your GST returns on time.

Avoiding Double Taxation

ITC plays a crucial role in avoiding double taxation in the GST system. Without ITC, businesses would end up paying GST on the entire value of their output, including the value of inputs on which GST has already been paid. This would lead to a cascading effect of taxes, increasing the cost of goods and services.

By allowing businesses to claim credit for the GST paid on inputs, ITC ensures that GST is only levied on the value added at each stage of the supply chain. This reduces the overall tax burden on businesses and consumers, promotes efficiency, and encourages compliance.

Blocked Credits

It's important to note that ITC is blocked on certain goods and services, such as:

• Motor vehicles (except those used for transportation of goods or passengers)
• Goods and services used for personal consumption
• Goods and services used to construct immovable property (except for plant and machinery)