Home Business A Simple Illustration Of Input Tax Credit

A Simple Illustration Of Input Tax Credit

The Goods and Services Tax has changed the tax landscape of the country in a comprehensive way. India’s indirect taxation system before the GST was implemented was characterized by a complex web of regulations administered by different bodies.

Businesses had to keep track of many different taxes, like VAT, Octroi, various Cesses, local taxes, entry taxes, etc.

This created a drag on the economy and was very problematic, especially for small businesses.

Simple Illustration Of Input Tax Credit

All of that changed with the implementation of the GST Act. The GST subsumed many of the taxes under the older regime into one single unified tax. The GST was broken down into various components, the central component, which is codified into the CGST Act, as well as the SGST Act for the State component.

Under the previous tax regime, there was pretty much no way of tracking the production of goods throughout the manufacturing process. therefore, the value-added during the manufacturing process step by step was not being accurately captured.

This caused some problems with respect to the Value Added Tax which was prevailing before the introduction of the GST. There was a case of double taxation because there were taxes added on top of taxes already charged to dealers and manufacturers.

With the introduction of the GST, the Government decided to create a mechanism where manufacturers and dealers can claim some of the taxes back and eliminate double taxation. This system is known as the Input Tax Credit. The basic highlights of the Input Tax Credit are outlined below.

1. Basic Idea Of Input Tax Credit

The basic idea of Input Tax Credit is the elimination of double taxation. How that is done is by allowing dealers to pay taxes less whatever taxes have already been paid. This makes sure the taxes paid in each step of the way accurately reflects the amount of work that had been done with respect to the product.

ITC allows dealers to pay the exact amount of tax to the manufacturer less taxes already paid for the number of inputs used for making the product. The CGST Act and SGST Acts have tax treatments for Input Tax Credit.

2. Who Can Claim Input Tax Credit And How?

The Input Tax Credit can be claimed only by those taxable persons who have registered under the GST Act. Those who have not registered under the GST Act are not allowed to claim ITC. for you to be able to claim Input Tax Credit, you must have a Debit Note or a Tax Invoice of purchase issued by a registered dealer.

In case of products received in installments or lots, the Input Tax Credit is only available against the tax invoice of the last installment of a shipment of goods. One important condition for claiming the Input Tax Credit is that the dealer must have received the Goods and or Services.

To aim for transparency, the Government has designed the GST in such a way that every transaction filed in the returns on the GST form can be validated in at least two ways.

The Input Tax Credit is also no different. The Input Tax Credit can only be claimed by a dealer if the supplier has deposited the tax with the Government and filed the appropriate returns.

This makes sure that the Input Tax Credit being claimed is valid and already paid in advance. This also makes sure that all the suppliers are GST compliant.

3. Some Important Aspects

A few important things must be kept in mind with respect to the Input Tax Credit. The ITC cannot be claimed on invoices that are over one year old.

The time period is calculated with respect to the invoice date. The Input Tax Credit can be claimed for both Goods as well as Services as GST is charged on both.

One important distinction to keep in mind when calculating Input Tax Credit is what goods and services have been used over the course of business. As Input Tax Credit is not allowed on goods and services which are for personal use, the dealer must make sure that there is a separation of such items when accounting for the claims.


The GST Act was implemented to make ease of doing business in India easier. That is why the Government has designed certain aspects of the tax keeping in mind small and medium enterprises.

A major issue with the previous tax regime was that it was not flexible as well as didnt have the kind of tracking mechanism that is required for a fair and transparent tax system.

The Input Tax Credit is one such mechanism whereby both the Government as well as businesses benefit from it. The CGST Act and SGST Act both have various elements inside it which try to make doing business as easy as possible.


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