What is Input Tax Credit Under GST?

Written by : Knowledge Centre Team

2024-08-02

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Assume you are a manufacturer of a product. You buy input material and pay tax on the purchase. There are three input materials required for manufacturing your final product. To produce a single unit, the tax you pay while purchasing input products X, Y, and Z is Rs 500, Rs 250, Rs 150, respectively. When you sell your final product after manufacturing is complete, you again have to pay a tax of Rs 1200. There is a way to reduce your tax liability when paying output tax. You can remove the taxes you have paid on inputs from your output tax liability.

We will look at how you can do it. Before that, let us understand GST.

What is GST?

GST is known as Goods and Service Tax. Earlier, in India, a consumer used to pay many different taxes like VAT, service tax, excise, etc. GST is an indirect tax that has replaced almost all the earlier indirect taxes. It is levied on the supply of goods and services and came into effect on 1st July 2017.

GST has removed the cascading effect on the sale of goods and services. It eliminates the tax on tax. Hence the cost of goods decreases.

Types of Taxes in GST

There are three types of taxes in GST - Integrated Goods and Services Tax (IGST), State Goods and Services Tax (SGST), Central Goods and Services Tax (CGST). The central government has fixed different taxation rates under each of the above three categories. It applies to the payment of tax for goods and services rendered. The below table will help you understand the difference between them better.

Type	Who benefits?	Collected By?	Applicable transactions
CGST	Central government	Central government	within a single state (intrastate)
SGST	State government	State government	within a single state (intrastate)
IGST	Central Government and State Government	State government	Between two different states or a state and a Union Territory, (interstate)

What is Input Tax Credit (ITC) in GST?

Input tax credit (ITC) is the credit manufacturers receive for paying input taxes towards inputs used in the manufacturing of products. In the example we discussed earlier, the credit you will receive as a manufacturer is Rs 900 (500 + 250 + 150). Using this input tax credit, you can offset the output tax against the input tax already paid. Hence, you will only pay Rs 300 (1200 - 900) tax on the product sale. Below are other important points related to Input Tax Credit:

As a dealer, you are also entitled to ITC if you have purchased goods for resale.
ITC does not apply to all types of inputs.
Every state in India has a different condition in this regard, and hence you should check the terms and conditions for your respective state.

There are certain circumstances when you are not eligible for claiming input tax credits . Some of the conditions are:

Goods purchased from unregistered dealers.
Goods bought from registered dealers who have chosen the Composition Scheme.
Goods bought without Invoice.
Goods purchased for personal consumption or received for free as gifts or goods purchased from abroad.
Goods are notified in the negative list by respective state governments.

How to Claim ITC in GST?

Let us assume you buy goods from Mr Seller. In this case, you will be eligible to claim the credit on purchases based on the invoices. The credit can be claimed by following the below steps:

Mr Seller will upload the details of all tax invoices issued in GSTR1.
Once the details are uploaded successfully, the details concerning sales to you will get reflected in GSTR 2A or GSTR-2B.
The same data will be reflected in the system when you file your tax.
You will accept the detail. It confirms that the deal was done between two parties and that the information shared by Mr Seller is correct.
Once accepted, the tax on purchases gets credited to your 'Electronic Credit Ledger'.
You can adjust it against future output tax liability. If there is no future output tax liability, you can claim the refund.

How to Avoid Paying Extra Taxes?

Maintaining a record of all eligible GST purchases and sales allows you to claim ITC. Thus, reducing your GST liability. However, in your personal finance as well you can reduce your annual tax liabilities using investments and relevant expenses.

1. Tax Saving Investments as Individuals

There are many tax-saving plans available to reduce tax liability. Some of these plans you must have as an individual investor, while others help you meet your long-term financial goals:

a) Term Insurance Plan

Individuals can buy these to protect their families, while corporates can buy them as a group plan for their employees. It provides life cover to the insured, and you can avail of tax benefits on the premium paid.

b) Unit Linked Insurance Plan

ULIPs act as a saving plan with an equity investment option and the safety of an insurance plan. You can use this plan to safeguard your child’s goals or save to build a big corpus for your retirement. ULIP Plans like Invest 4G from Canara HSBC life let you invest for up to a 99-year term.

c) Guaranteed Saving Plan

If you feel that you cannot afford to take any chances with your money this is the plan for you. These long-term tax-saving investment plans give tax benefits, protection from early death, and guaranteed maturity value.

d) Health Insurance

The premium you pay towards your (or your employees) health insurance is eligible for tax benefit. You should consider Mediclaim and critical health plans to build a comprehensive cove umbrella.

e) Guaranteed Income4Life Plan

Along with tax benefits, you can create a reliable income stream for yourself. The plan from Canara HSBC Life Insurance offers guaranteed income payment till the age of 99.

2. Tax Saving Investments for Corporates

Investing in your employees’ welfare always pays you back in terms of performance. The following investment plans help take the burden off your shoulders to fund some of these benefits. Additionally, these plans will also offer tax rebates for your business:

a) Group Gratuity Scheme/Plan

A life insurance plan which helps you to provide your employees with gratuity and leave salary. This plan also has an investment value and you can invest in traditional or unit-linked plans.

b) Group Mediclaim Insurance

A group health policy that can take care of the emergency medical bills of your employees and their covered family members.

c) Group Term Life Insurance

The best employers not only take care of the employees while they are working with them but also ensure the financial safety of their employees from the unforeseen.

Good financial management helps you save money whether from your monthly expenses or taxes, both in business and life. You can avoid last moment rush, errors and penalties by simply filing your returns before due dates. For additional savings, invest in tax-saving options and build for your long-term goals.

Most tax-saving investments are those you anyway need in your financial life to either secure your dependents or your future. For example, term life and health insurance plans are necessary for long-term financial safety against contingencies. Similarly ULIP, PPF and NPS investments help you build a good corpus for retirement.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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