When you purchase any raw materials as inputs to manufacture and sell your commodity, you end up paying tax on such input material. The tax you paid on the purchase of such input material is called Input Tax. At the time of supply of the finished goods, you are required to pay corresponding tax in respect of the finished good or output. However, to pay tax on such finished goods you can avail the deduction of the tax that you have already paid on input materials (used in the manufacturing of finished goods) and just pay the balance as the net tax liability. In this article we will discuss in detail about GST Input Tax Credit Example.

Reconciliation of Input Tax Credit

The 3 GST credits can be used to offset one another.

Credit of CGST

  • CGST Credit can be used to set off CGST liability
  • If there is any of CGST credit left over, it can be used to set off the next IGST liability

Credit of SGST

  • SGST Credit can be used to set off SGST liability
  • Any leftover credit of SGST can be utilised to set off the next IGST liability

Credit of UTGST

  • UGST Credit can be used to set off UTGST liability
  • Any leftover credit of UTGST can be utilised to set off the next IGST liability

Credit of IGST

  • IGST Credit can be used to set off IGST liability
  • Any leftover credit of IGST can be utilised to set off CGST liability first and then set off the SGST / UTGST liability.

Note: SGST credit cannot be used to set off CGST and vice versa.

Who can claim Input Tax Credit?

Input Tax Credit can be claimed by a person who is registered under GST and fulfils the prescribed conditions:

  • The input goods or services have been received by the registered person
  • The registered person should be in possession of a tax invoice
  • The registered person has filed the GST returns.
  • The GST charged has been deposited to the credit of government by the registered person.
  • In the case where goods are received in instalments/lots Input Tax Credit can be claimed only when the last instalment/lot is received by the registered person.

No Input Tax Credit will be available if depreciation has been claimed on capital goods.

Documents Required to Claim Input Tax Credit

  • In order to claim the input tax credit, a registered person will need the following documents:
  • Tax Invoice issued by the supplier of the goods or service
  • Where the total bill amount is less than Rupees 200 or it is a case of a reverse charge, the invoice issued by the supplier which is similar to the Bill of Supply
  • Debit note (if any)
  • Bill of Entry issued by the Customs Department
  • Bill of Supply issued by the supplier
  • Document issued by Input Service Distributor could be an invoice or credit note

How to Calculate GST Input Tax Credit GST Example

At every stage of the supply chain, the buyer of the goods or service gets credit for the input tax paid, and he can use it to offset the GST payable on the output which is required to be paid to the Centre and State governments. To understand this Input Tax Credit concept better, let’s take the help of an illustration of a company called XYZ  Ltd which sells custom-made tyres.

XYZ purchases rubber worth Rupees 40,000 from ABC Ltd. at a GST rate of 12.5%. Thus, the input tax paid by XYZ Ltd is Rupees 5.000.

XYZ sells the manufactured tyres for Rupees 80,000 at a GST rate of 12.5%, making the total selling price Rupees 90,000 (Rupees 80,000 + Rupees 10,000).

Thus, the tax that XYZ ltd owes to the government = Output tax – Input tax credit = Rupees 10,000 – Rupees 5000 = Rupees 5,000

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