Input tax credit under GST

Input tax credit under GST

The Input Tax Credit refers to the tax amount paid on purchases, which can be claimed when paying taxes on sales. While this provides a basic understanding, there are several important provisions under the GST law that should be considered. This article will explain these provisions in detail.



What is an input tax credit?

Under GST, the Input Tax Credit is subject to various sections and rules. This benefit is accessible to the supplier and helps to decrease their tax liability for sales. The fundamental requirements for Input Tax Credit are outlined in Section 16 of the CGST Act, while Section 17 imposes some restrictions on its availability. Additionally, Section 18 deals with how Input Tax Credit is handled during the transfer or shifting in a business entity.

How does the Input tax credit mechanism work?

GST is a value-added tax, which means that each individual in the chain is responsible for paying tax only on their value addition. To better understand this concept, consider the following example:

Mr. A is a manufacturer who spends Rs. 80, plus tax, to manufacture a glass bottle. He then sells the bottle for Rs. 100, plus tax. In this scenario, Mr. A is only required to pay tax on his value addition, which is Rs. 20. However, he must still report and pay tax on the full sale amount. To ensure that he is only paying tax on his value addition, he can use the tax amount paid on his cost of Rs. 80 at the time of paying taxes on his sales. Therefore, when he sells the bottle for Rs. 100, he will only pay the tax on his value addition of Rs. 20 via cash ledger.

Tax on Rs. 100 less Tax on rupees 80= Tax on Rs. 20.

It will be declared in his return. In his return, he will show sales of Rs. 100 and input a tax credit of a tax amount of Rs. 80. He will adjust the tax on Rs. 100 with the tax of Rs. 80 first and then will pay the balance via cash ledger.

Read more to know about Input tax credits in GST

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