How does Input Tax Credit work

How does Input Tax Credit Work?

Input tax credit refer to materials or services that a manufacturer procures or avails in order to manufacture a product or services which is the output. The taxes paid by a manufacturer, while buying the raw material or services, are known as input tax and similarly the tax collected on the sale of the product or services is called the output tax.

GST is charged on both goods and services and input credit can be availed on both goods and services.

Input Tax Credit

Input Tax Credit (ITC) means that the taxpayer can reduce the taxes it has already paid on inputs from the taxes it has to deposit on output. In simple words, he can take the credit of the amount of tax which has been paid on procuring of inputs. By doing so, the taxpayer is avoided from paying the double taxes on a single input.

Benefit of ITC

The benefit of availing Input Tax Credit is that it ultimately reduces the final price to the manufacturer, wholesaler, retailer and consumer too. It also cause a paradigm shift from individuals paying more taxes to more individuals paying taxes.

Also Read: Rules relating to setting off of Input Tax Credit

How does Input Tax Credit work?

In order to have a clear understanding of the working of ITC mechanism, one needs to have a clear understanding of ITC. When a manufacturer buys raw materials as inputs and sell the product, he pays tax on the material/input. So, when he is required to pay tax on the finished good/output, he can claim the tax credit that he has already paid to the vendor/supplier and pay the balance tax liability.

Illustration
Input Tax Credit

Now, when ‘W’ supplied goods to ‘R’, he collected Rs 5,000 GST from ‘R’ and pays the same to the government. When ‘R’ further sold the goods to ‘C’, he collected Rs. 6,000 GST from ‘C’

Also Read: GST Registration On Basis Of State & Turnover

Since ‘R’ had paid GST on inputs, he can claim an Input Tax Credit of an amount equal to the GST paid on the inputs i.e. Rs 5,000. The balance Rs 1,000 is paid to the Government by ‘R’. Lastly, ‘C’, the final consumer pays GST of Rs 6,000 to ‘R’.

Conclusion

If the concept of ITC not been there, the consumer would have been burdened with the payment of double taxation at each stage. Taking the credit of input tax promotes people to pay their taxes and not evade it.

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