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 Credit under GST

Input Tax Credit cannot be claimed in certain cases  under the Input Tax Credit Rules, some of them are as below:

  • motor vehicles and other conveyances (except under specified situations)
  • Outdoor catering, food and beverages, health services, beauty treatment, cosmetic and plastic surgery (except under specified circumstances);
  • Health and fitness centre or Membership of a club,
  • Life insurance, health insurance, Rent-a-cab facility except where it is obligatory by the government for an employer under any law;
  • Travel benefits provided to employees (leave or home travel concession);
  • Services of Works contract in relation to the supply of goods and service for construction of immovable property (other than plant & machinery) except in certain circumstances,
  • Where Goods or services procured by a registered person own his own account for construction of immovable property (other than plant & machinery,
  • Goods or services or both on which composition levy is applicable;
  • Goods or services or both used for personal consumption
  • Goods stolen or lost, gifted, written off, destroyed, supplied as  free samples;
  • Any tax short paid not paid on account of fraud, suppression of fact, mis-declaration, seizure, detention.

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:

  • Invoice issued by the supplier
  • Document issued by ISD
  • In a case where the reverse charge mechanism is applicable or the total amount of the invoice is less than Rs 200, the invoice issued by the supplier which is similar to Bill of Supply
  • Bill of Entry issued by the Customs Department
  • A debit note issued by the supplier (if any)

Author Bio

Qualification: CA in Job / Business
Company: Taxguru Consultancy / Taxguru Edu
Location: Mumbai, Maharashtra, India
Member Since: 27 Feb 2017 | Total Posts: 896
A Blogger by Passion and a Chartered Accountant by Profession. View Full Profile

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June 2021