Input Tax Credit

Input tax credit lets a business deduct eligible GST paid on its purchases from GST payable on its sales. Under GST, input tax credit (ITC) prevents cascading, or tax on tax, by ensuring that eligible input taxes do not become part of the business's costs on which tax is charged again.

How the credit mechanism works

A registered business charges GST on its taxable sales, creating an output tax liability. It offsets this liability with eligible GST paid on goods and services purchased for business use.

• The net tax payable is the output tax liability minus admissible input tax credit, subject to statutory utilisation rules.
• This credit chain makes the tax borne at successive stages correspond to value added, rather than repeatedly taxing value already taxed.
• The final consumer normally cannot claim credit and therefore bears the tax.

A numerical illustration

Assume that purchases and sales attract 18% GST, all input tax is creditable, and prices exclude GST.

• A trader purchases goods for ₹100 and pays ₹18 as input GST.
• The trader sells these goods for ₹150 and charges ₹27 as output GST.
• After claiming ₹18 as credit, the trader remits ₹9, which equals 18% of the ₹50 value added.
• Together, the supplier's ₹18 and the trader's ₹9 equal ₹27, or 18% of the final sale value; the input tax is not taxed again.

Conditions and limits

Credit is not automatic: Section 16 of the CGST Act, 2017 prescribes eligibility and conditions. Section 17 provides for apportionment and blocked credits.

• Where credit is unavailable, input tax can remain embedded in costs, limiting the removal of cascading.