Input Tax Credit - ITC



Introduction - 

Input Tax Credit (ITC) is a crucial concept in the field of taxation that enables businesses to reduce their tax liability by claiming credit for the taxes paid on their inputs or purchases. Under the Goods and Services Tax (GST) regime, ITC is a key feature that allows registered businesses to claim credit for the taxes paid on the goods or services used in their business. Let's take a look at some numerical examples related to ITC.

In the first example, a business registered under GST purchases raw materials worth ₹10,000 and pays a tax of ₹1,800 on it. The business uses these raw materials to manufacture goods that are then sold for ₹20,000 with a tax rate of 18%. The ITC available to the business will be ₹1,800.

In the second example, Mr. A made a purchase of goods valued at Rs. 36,000, and an 18% GST was levied on it, resulting in a GST amount of Rs. 6,480. He later sold goods valued at Rs. 44,000 and incurred a GST of Rs. 7,920.
To calculate the net GST payable and input GST credit, we can subtract the GST paid on purchases (Rs. 6,480) from the GST payable on sales (Rs. 7,920). This results in a net GST payable of Rs. 1,440 through cash.

It's worth noting that the input tax credit availed by Mr. A is equivalent to the GST paid on purchases (Rs. 6,480).

It is essential to note that ITC cannot be claimed on inputs used for personal consumption, exempt supplies, or goods that are not used in the course of business. The mechanism of ITC ensures that the tax burden is borne by the final consumer and not by the businesses in the supply chain. It also creates an incentive for businesses to purchase goods and services from registered suppliers who have paid taxes, thereby reducing the incidence of tax evasion.

Conclusion - 

In conclusion, ITC is a vital feature of the GST regime that allows businesses to reduce their tax liability, avoid the cascading effect of taxes, and promote compliance. Businesses must ensure that they are registered under GST, and the suppliers from whom they purchase inputs are also registered under GST to claim ITC. By doing so, businesses can reduce their tax liability and contribute to the growth of the economy. So, if you're running a business, it's crucial to understand the concept of ITC and how it can benefit your business.