Input Tax Credit under GST is the most common word associated with the present day taxation regime. Input Tax Credit incorporated in the GST mechanism in order to minimize the cascading effect (tax on tax). In an ideal tax mechanism, taxes never become a part of the cost of a product, until it reaches the ultimate final consumer.
Input Tax Credit commonly known as ITC is the tax that a registered taxpayer pays on procuring goods or services or both and the same can be utilized to reduce the output tax liability. In simple words, a registered person can reduce his future tax liability by claiming input tax credit to the extent of tax paid on goods/service procured.
Input Tax Credit cannot be claimed in certain cases under the Input Tax Credit Rules, some of them are as below:
How to Calculate Input Tax Credit under GST with Example
The recipient of the goods or services or both can claim the credit for the input tax paid at each stage of the supply chain and can use it to reduce the output GST liability by offsetting it. In order to understand this concept better, let’s take an example:
Let’s take ABC Limited (a tyre manufacturer) which sells custom-made tyres.
ABC Limited purchased rubber from a registered supplier for Rs 40,000 exclusive of GST at a rate of 12.5%. Thus, the GST paid on inward supply is Rs 5000.
ABC Limited now sells the tyres manufactured by it for Rs 80,000, exclusive of GST at a rate of 12.5%, making the total selling price Rs 90,000 (Rs 80,000 + Rs 10,000).
Thus, the GST that ABC Limited owes to the government = Output tax – Input tax credit = Rs 10,000 – Rs 5,000 = Rs 5,000
Documents Required to Claim Input Tax Credit under GST
A registered person must have the following documentary evidence to claim input tax credit: