What is Input Tax Credit (ITC) under GST?
The Indian Economy has been witnessing major changes in its system over the last decade. The most prominent changes can be seen in India’s taxation system. Various taxes have been added to the list quite recently. One of those includes Input Tax Credit or ITC, a significant component of Goods and Services Tax (GST). This article highlights what input tax credit under GST is and who can claim the benefits.
What is ITC?
Input Tax Credit or ITC stands for the tax paid on purchases for the business which can later on be redeemed through deduction at the time of paying tax on the business collected from their customers on final goods or products. Input Tax Credit reduces the registered person’s GST liability for the sale of goods or services.
It can be better explained through a hypothetical example.
For example there is a man called Ram, who is a factory owner. He manufactures cotton clothes. Let’s assume that at the time of purchasing the raw material or cotton for his company, he got to know that the cost of the cotton is Rs. 100 but he is also supposed to pay 18% GST on it which makes it cost Rs. 118 to purchase cotton. After a while, he manufactured cotton T-shirts out of the raw material and converted it into a finished product. He sold his products at the cost of Rs. 600 with 18% GST on the product i.e. Rs. 108 in this case. So, the total amount will become Rs. 708. So, as a registered GST business owner Ram will get the benefit of paying the GST on his output Tax. Ram doesn’t have to pay Rs. 108, which is the 18% GST on his output tax. He can deduct the Rs. 18 he paid to purchase the raw material from the Rs. 108 he’s supposed to pay to redeem his Input Tax Credit. The net amount he’ll pay to the government will be Rs. 108 – Rs. 18 = 90.
In this way Ram will get the benefit of Rs. 18 while paying the net amount to the government authorities. Therefore, the businesses such as manufacturers, traders and so on mentioned in the GST Act can enjoy these benefits from the Input Tax Credit.
Who is Eligible to Claim ITC under GST?
The first and foremost criteria for being eligible for ITC is that the business should be legally GST registered. As ITC is a component under GST only. It includes a large number of taxpayers under it such as Regular Taxpayers, Casual Taxpayers, and Nonresident taxpayers. However, there are some restrictions under the respective taxpayers.
ITC cannot be redeemed for personal benefit. It is purely available to be claimed by businesses. It can include manufacturing, e-commerce and so on. This also means that the output sale based on which the tax is going to be claimed should be related to business operations and not personal usage.
All the essential documents should be there as evidence. The business must have authentic GST-compliant invoices from the supplier. The business must have also filed the GST returns, and the supplier from which the business house has purchased the products should also have filed their returns.
The additional eligibility also includes a specific time period under which ITC or Input Tax Credit can be claimed by the business houses.
How To Maximize ITC Benefits?
In order to increase the benefits of Input Credit Tax or ITC there are several steps which are supposed to be followed by the businesses.
The most crucial thing is to ensure that the documents are accurate. Ensure that all invoices for goods and services purchased are well maintained and timely updated. Proper documentation reduces the time in getting the ITC.
As mentioned above a businesswoman/businessman can only get ITC if the supplier from whom they’re buying products is correctly reporting GST. Also, make sure that the GST on purchases matches with those mentioned in the GSTR-2A/2B report.
To maximize the benefits of ITC one should utilise ITC as early as possible. It can be utilised only in the period it is claimed. Missing a claim can lead to the possibility of losing benefits.
Seeking professional advice is another preferred step to maximize the benefits of ITC. Consultation with a professional and experienced tax consultant or GST consultant can help identify areas of improvement and various other benefits as well.
Get Started with TaxDunia
Hence, it can be concluded that Input Tax Credit is a really beneficial component proposed under Goods and Services Tax. It’s proven as an asset offered by the government or the business owners in order to reduce their liabilities. Reach out to TaxDunia if you have unclaimed ITC. Our team of experts will help you avail of the eligible ITC and meet your legal compliance.
