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.
The 3 GST credits can be used to offset one another.
Credit of CGST
Credit of SGST
Credit of UTGST
Credit of IGST
Note: SGST credit cannot be used to set off CGST and vice versa.
Input Tax Credit can be claimed by a person who is registered under GST and fulfils the prescribed conditions:
No Input Tax Credit will be available if depreciation has been claimed on capital goods.
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