Input Tax Credit

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Input tax credit refers to the mechanism of claiming a reduction of tax paid on the inputs of a business or profession. In India, under the Goods and Service Tax law, a business enterprise can claim an input tax credit while calculating output tax on their goods sold or services provided. The net tax liability should be paid as prescribed under the GST law.

Understanding Input Tax Credit

  • Input tax credit provisions eliminate the cascading effect of taxes thus reducing the overall price of goods and services to the ultimate consumers. An input tax credit is available on the GST paid on all inputs, consumables, raw materials, semi-finished goods and other eligible goods or services.
  • The credit offsets the GST liability on the outputs which may be goods or services. For example, a business concern buys raw materials for Rs 1 lakh and pays a GST of Rs 12,000 and hires services of a mechanical engineer at a cost of Rs 2 lakh and pays GST of Rs 36,000, the cumulative eligible input GST credit is Rs 48,000. The concern manufactures and sells a custom made machine for Rs 5 lakh and is liable to pay an output GST payable of Rs 90,000.
  • In the example, while discharging the liability of output GST of Rs 90,000, the concern can claim input credit for GST of Rs 48,000 already paid on inputs. The output liability should be paid on or before the filing of the GST return. The liability should be discharged by way of an electronic challan. The net liability payable will be Rs 42,000.
  • However, in the above example, while billing the customer, the business concern must raise a bill of Rs 5 lakh and collect a GST of Rs 90,000. Thus, the total invoice value will be Rs 5,90,000. The input tax credit is not part of the invoice calculation or does not stand reduced at the time of raising an invoice.

Conclusion

The claim for input tax credit should be in accordance with the GST law and applicable rules. The different rules for the claim of GST credit on State GST, Central GST and IGST. The method of rebating and credit must be correctly applied to arrive at the correct output GST liability at the time of filing the GST return.