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What is Input Tax Credit?

Input tax credit is that credit which manufacturers get to pay taxes of input for inputs deployed in the manufacturing of the product. A dealer is eligible for input tax credit if the dealer has bought products for resale purpose.


Input tax credit signifies that during tax payment for output, you can decrease that tax which you paid earlier for the inputs. For example, if you manufacture goods, and tax which you pay for the final product is Rs. 480 and the tax which you pay during buying the product (input) is Rs. 310. Then you have Rs. 310 as input credit and you are required to pay Rs. 170 in taxes.

All dealers are responsible for tax output on sales taxable performed in the business processes. By using the input tax credit, a dealer can balance the tax output against the already paid input tax by the dealer. It is not necessary that on all the kinds of inputs, input tax credit is applicable. Every state has certain conditions and rules relating to this and they are accordingly applicable.

On Capital Goods Input Tax Credit:

On capital goods, for the traders and the manufacturers, input tax credit is available. The entire credit of tax can expand across 36 EMIS maximum. The monthly instalments limit will be decreased if the state concerned wants.

Take the example of Maharashtra, the complete input tax credit is provided in the month of buying. If within three years, the capital assets are sold, an amount equivalent to input tax credit can be withdrawn. The capital goods negative list is also there which signifies that those items which are listed are not entitled for input tax credit.

Under VAT Input Tax Credit:

On the goods value addition, the VAT (value added tax) is imposed, and the liability of the VAT is determined by decreasing the input tax credit from the sales tax output during the duration of the payment. By using an example of input tax credit, it is easily explained.

  • Input acquired during the period: Rs. 1 Lakh.
  • Total sales during the month: Rs. 3 Lakhs.
  • Paid input tax: Rs. 5,000.
  • Payable output tax: Rs. 26,000.
  • Total paid VAT: (Rs. 26,000-Rs. 5,000) = Rs. 21,000.
  • The payable tax can be determined by subtracting the input tax credit from the total tax liability.

On Service Tax Input Tax Credit:

It is known as CENVAT credit where other service provider pays service taxes and it is declared as tax credit. Every provider of a service is also a consumer using a service. A service provider also uses a telephone in his office, on the bills of the telephone, the service provider also pays the service taxes. The tax paid by the service provider is an important component of the complete cost of input of the provider of service. This will finally increase the overall cost of the services given by the service provider.

Finally, this will result in a cascading effect which will be borne by the customers by paying the price of the services they use. To ignore this scenario, the Indian government provided the CENVAT credit to the provider of the service. It is a kind of input tax credit.

Under GST, how input tax credit is claimed?

Under the GST, if you want to claim the input tax credit, you need to have a debit note, that is issued by the dealer registered or tax invoice (of buying).

You must get the services or goods.

Under the GST, there are three kinds of taxes.

  1. IGST = Integrated GST
  2. CGST = Centre GST
  3. SGST = State GST

Eligible and Ineligible Purchases for Input Tax Credit:

To get the benefits of the input tax credit, you can buy goods for the following purposes:

  • For the purpose of 0 rate sales.
  • Deployed as capital goods and reselling or manufacturing the good taxable.
  • Used in the contract work execution.
  • Used as packing materials, containers, consumable stores or raw materials to be sold abroad or inside the country.
  • Interstate commerce or trade sales
  • Resale or sale in the state.

The following circumstances are ineligible for claiming input tax credits:

To claim the input tax credits, the circumstances given below are not eligible:

  • If without invoice, goods are purchased.
  • From those dealers who are not registered, you bought goods.
  • Goods bought with invoice but not distinct mention of tax amount.
  • If you buy goods from outside India.
  • If goods are bought from a different state.
  • The goods include toilet articles, furniture, motor vehicles, which is not related to goods stocked or produced for resale or sale purpose.
  • Goods received as a free gift or bought for personal consumption.
  • Goods purchased from registered dealers who select the scheme of composition.