What is Input Tax Credit? Explain with examples

What is Input Tax Credit? Explain with examples

What is input tax credit?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Here’s how:

When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.

For example- you are a manufacturer: a. Tax payable on output (FINAL PRODUCT) is Rs 450 b. Tax paid on input (PURCHASES) is Rs 300 c. You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes.

What is mean by input tax?

Input tax means the central tax (CGST), State tax (SGST), integrated tax (IGST) or Union territory tax (UTGST) charged on supply of goods or services or both made to a registered person. It also includes tax paid on reverse charge basis and integrated tax goods and services tax charged on import of goods.

What is Input Tax Credit with example?

“Input Tax Credit” means the credit of GST Taxes such as Central tax – CGST, State tax- SGST, Integrated tax- IGST, or Union Territory tax – UTGST available to the registered person on the inward supply of goods or services or both in the course or furtherance of his business excluding the tax paid under composition levy. It further includes the tax paid on supply of goods or services or both on which the recipient is liable to pay on reverse charge basis.
Example: Mr. A sells goods worth Rs 1,00,000 to Mr. B. on 01.08.2021 on credit. GST, @ 5 % has been assumed which comes to Rs 5,000. The invoice value, thus, is Rs. 1,05,000. Mr. B decides to pay the invoice amount to Mr. A. Now, while filing the GST returns for August 2021, Mr. B can claim the input tax credit of Rs 5000.00.

Importance of Tax Credit

Input credit means that the taxpayer can reduce the output tax liability by the amount of tax already paid on inputs. So, every registered person while paying the tax on output can claim the credit of tax already paid on input(purchases)

Objectives of input tax credit

One of the objectives of GST was to eradicate cascading effect of taxes which existed under excise, VAT and service tax. Under GST Input Tax Credit can be claimed irrespective of place of supplier, thus making accessibility for sales and purchase of goods easier


Created & Posted by Kiran

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