Input Tax Credit or ITC in GST is a refund that GSTIN holders can claim for the tax they paid while purchasing capital goods for their company.
The pre-GST era has a lot of problems like cascading taxes which increase the product’s costs on the business and the consumers.
This was removed after the introduction of the GST which allowed the manufacturers, and businesses to claim any extra tax that they may have paid at any stage within the supply chain.
This allowed the businesses to operate business steadily and helped the businesses to grow as well. This reduced the cost of production and controlled inflation in the economy.
India also has a robust IT structure that allows the seamless delivery of GST benefits to the user and it also incentivizes them to participate in the taxation.
In this article, we will discuss what is Input Tax Credit in GST and Things to remember while claiming ITC, etc. but, before that let’s find out what an Input Tax Credit is with an Example.
What is Input Tax Credit? -Example
Input Tax Credit is a tax that is already paid by a business at the time of purchase of the raw materials and can claim back at the time of selling the item via Input Tax Credit.
During the production cycle of a product, at all the stages taxes are to be charged from the manufacturer or service provider hence, the cost of production goes up.
To decrease the cost of production, an Input Tax Credit is provided which allows the business to claim the ITC back and only pay the output tax at the time of selling.
Let’s say a Manufacturer purchases three raw material of Rs.100, Rs.200, and Rs.300 from a supplier and pay a tax of 10% on them, i.e., Rs.10, Rs.20, and Rs.30 respectively.
Now, at the time of selling he sells each item for Rs.150, Rs. 250, and Rs.350 respectively, so, the tax computed with a 10% rate would be Rs.15, Rs.25, Rs.35.
But the manufacturer had already paid Rs.10, 20, and 30 so, the net tax payable for the manufacturer would be Rs.5 for each product sold (15-10=5, 25-20=5, 35-30=5).
The tax paid at the time of purchasing the raw material can be claimed as ITC and the manufacturer’s cost of production of the product will come down.
This way, the end consumer also can get the benefit of the low-cost item without having to compromise the product quality.
Who is allowed to take Input Tax Credit?
The following are the users who are allowed to take Input Tax Credits on their GST-
- All the GSTIN holders are allowed to claim Input Tax Credits except those who are registered under the composition scheme.
Who is not allowed to take Input Tax Credit?
The following are the users who are not allowed to take Input Tax Credits on their GST-
- Users who are not registered under the GST
- Users who are registered under the composition Scheme
Conditions for Claiming ITC
The following are the conditions that the user must meet to claim the Input Tax Credit-
- The user who has possession of the tax invoice or debit note issued by the supplier registered under the GST
- The user has received the goods or services
- The user has furnished the return under section 39
- The tax charged has been paid to the Government
Things to remember while Claiming the ITC
The following are the things that you should remember while claiming the ITC-
- Keep all the invoices and debit notes with you for claiming the ITC
- For imports, a bill of entry is important without this you’ll not get the ITC on the items
- After uploading the invoices into your GSTR1 form and will be auto-populated in the GSTR2A or GSTR2B
- Your Input Tax Credit will be credited to the Electronic Credit Ledger and you can adjust the amount with the tax that you are liable for, finally, you’ll only have to pay the adjusted amount as tax.
- If you file the income tax returns for your loss, you can carry them forward to future years indefinitely