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What Is Input Tax Credit Under GST? Research Team | Posted On Wednesday, February 13,2019, 01:15 PM

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What Is Input Tax Credit Under GST?



What Is Input Tax Credit Under GST?

Input Tax Credit Meaning

What is input Tax Credit? Input tax credit on GST means at the time of paying tax on output, you can reduce the tax already paid on inputs. So how does this work?

Let’s say you are a manufacturer. Tax payable on final product called output is Rs 400. Tax paid on purchases called input is Rs 350. You can claim input credit of Rs 350 and deposit Rs 50 in taxes.

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Input tax credit under GST:

Input tax credit makes sure tax is levied only on value addition at each stage of the supply chain. You get credit for the taxes paid at the previous stage.

A garment manufacturer gets credit on taxes paid on raw materials purchased (say cotton) while computing final indirect tax liability. A telecom Company gets input tax credit on goods and services used in business. In the past you couldn’t claim input tax credit for CST (Central Sales Tax), Entry Tax, Luxury Tax and other taxes. With GST, you can claim Input Tax Credit.

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How to calculate input tax credit?

Let’s say you are in a business where the service/product attracts 18% tax. You can adjust the 18% tax (This is the tax due), against taxes already paid on inputs. Taxes are only on the value addition and not on total product value.

Let’s say you manufacture steel rods and plates. You have bought raw steel worth Rs 500 to manufacture a steel rod. You have also bought Rs 100 worth of other raw materials.

The GST for steel is 18% and other raw material is 28%. This means you have paid taxes of Rs 500 * 18% = Rs 90. You have also paid Rs 100 * 28% = Rs 28 taxes on other raw materials.

The total tax paid as a manufacturer = 90 + 28 = Rs 118.

You have decided to sell the steel rod to a distributor at Rs 700 + GST. Let’s say the steel rod has GST at 18%. The tax on the product is Rs 126. The steel rod is invoiced for Rs 826. (This is Rs 700 + Rs 126).

The manufacturer is collecting Rs 126 as GST from the distributor. The manufacturer had paid Rs 118 towards GST for inputs. He would have to claim a credit of Rs 126 – Rs 118 = Rs 8, which he had paid as GST from the Government.  

GST Input tax credit rules:

  • You must be a registered taxable person.
  • You can claim Input Tax Credit (ITC) only if goods and services are used for a business.
  • ITC can be claimed on exports, but are taxable.
  • In case of registered taxable person, if constitution changes due to mergers, sale or transfer of business, ITC which is unused gets transferred to merged, sold or transferred business.
  • You need supporting documents like debit note, tax invoice, or even a supplementary invoice to claim ITC.
  • Input tax credit can be claimed only on the actual receipt of goods and services.
  • ITC is paid through electronic credit.
  • GST returns like GST 1,2,3,6 and 7 must be filed.

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How to claim input tax credit under GST?

  • To claim input tax credit you must have the tax invoice of purchase or debit note. This would be issued by a registered dealer.
  • You should receive the goods and services.
  • The tax charged on purchases must be deposited by the supplier with the Government in cast or through input tax credit.
  • Supplier should have filed GST returns.

What’s great about input tax credit?

You get input tax credit on GST only if supplier has deposited tax collected from you with the Government. This enables matching and validation of ITC. Make sure suppliers are GST compliant to get input tax credit.

What are the documents required to claim input tax credit?

  • You need supplier issued invoices for supplying services/goods according to laws of GST.
  • You need a bill of entry.
  • A debit note issued to the supplier in case of tax payable as specified in the invoice.
  • A supplier issued bill of supply for goods and services.
  • A credit note issued by Input Service Distributor according to GST invoice rules.

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Input tax credit on capital goods

Capital goods are used extensively in the business and enjoy input tax credit under GST. To get input tax credit on capital goods, the transaction must be reflected in GST return filing.

Input Tax Credit Formula:

The formula is as follows:

GST paid on monthly basis – Input tax credit on capital goods – Mixed Use.

 GST paid on quarterly basis – Input tax credit on capital goods – Mixed Use.

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