What is GST Input Tax credit -ITC with example and rules

Goods and Service Tax- Since July 2017 Goods and Service Tax are applicable in India, it is considered as the biggest reforms under which GST Input Tax Credit (ITC) is one of the talking points, which needs to be considered carefully.

In this post, we will discuss what is GST Input Tax Credit, its example for simple utilization of ITC under GST and what is GST Input Tax Credit rules.

What is GST Input Tax Credit- ITC?

Input Tax Credit under GST- In simple words, ITC means that at the time of paying GST on sales you can reduce the GST already paid on purchase made by you.

The concept of ITC under GST is not a new one, although it was also followed in earlier taxes e.g. Service Tax and VAT. Now in new concepts of GST, it becomes easy to claim ITC. In an old regime it is not possible to claim ITC for central sales tax, entry tax, luxury tax, and some other taxes, in addition to this, manufactures of products and service provided is not eligible to take credit of central excise duly.

How to calculate Input Tax Credit

Let us understand Input Tax Credit under GST with example

Example of ITC under GST

input tax credit under gst with example
Input Tax Credit under GST with example

Simple mechanism of the utilization of ITC under GST- When you buy any product or take any service from a registered dealer you pay GST on that purchase or service and on the selling of products or providing services you collect tax from your customer or client. During reconciliation of GST, you adjust the tax paid on purchase/service with the tax collected on your sales/services and balance liability of GST has to be paid to the Government account.

Also Read:- The concept of New GST Return and Difference between Forms GST RET-1, Sahaj & Sugam

Example

You are manufacture, for manufacturing you buy a product and after complete manufacturing, you sell that product to your customer.

Purchase of product- The price of this product is Rs. 100 and the rate of GST is 18% so the final Invoice Value will be Rs. 118 (Cost Rs. 100 + GST Rs. 18)

Sale of Product- Now you sale that product for Rs. 150 and rate of GST is 18%, final invoice value will be Rs. 177 ( Cost Rs. 150 + GST Rs. 27).

GST/ITC Calculation- After-sale you have to file your GST Return and required to pay your liability, In the current example the liability of GST is Rs. 9 (Output tax of Rs. 27- Input tax of Rs. 18) The same need to be paid on or before the due date of GST Return.

Who can claim GST Input Tax Credit?

ITC can be claimed only for business purposes. It can not be claimed on personal goods or services, exempt supply under GST, etc.

How to claim ITC under GST

For claiming Input Tax Credit, there are certain rules which need to be followed. Out of those rules, some common rules are as under:-

What is GST Input Tax Credit Rules ?

GST Input Tax Credit Rules
Know about GST Input Tax Credit Rules

In the last para, we learn that it can be claimed only for business purposes. For claiming of ITC under GST there are some rules related to the utilization of ITC, which are as under:-

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1. One must be the registered taxable person under GST.

2. For Claiming Input Tax Credit (ITC) the goods and services must be used for business purposes only.

3. Input Tax Credit (ITC) can be claimed on export/Zero-rated supplies but not on the exempt supply of goods.

4. In case the business of a registered taxable person changes its constitutions due to merger, sale, or transfer of business, then the unused Input Tax Credit shall be transferred to the new constitution of business.

5. One can credit its (ITC) in an electronic credit ledger in a provisional manner on the common portal as prescribed in GST law.

6. Some documents like tax invoice, debit/credit note, supplementary invoice need to be kept for claiming Input Tax Credit (ITC).

7. For claiming of Input Tax Credit (ITC) actual receipts of goods/services are necessary.

8. The Input Tax Credit (ITC) should be paid through electronic credit/cash ledger.

9. For claiming of Input Tax Credit (ITC) all required GST returns need to be filed.

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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.

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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)

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