INPUT TAX, Input Tax Credit

 

INPUT TAX:

Under GST regime, Input tax is tax charged on supply of goods and/or services to the manufacturer which are used in the course of his business .

Input Tax Credit (ITC):

• Input Tax Credit is the reducing of Tax liability by claiming the tax (Input Tax) which has been paid by the businessman at the purchase of the items used for manufacturing.
• This adjustment takes place in the GST wallet of businessman automatically when these transactions take place.

In the example, Let the manufacturer uses inputs A,B and C to produce an output:

Taxes paid by manufacturer are:

        Tax paid on A:100

        Tax paid on B:120

        Tax paid on C:80

This Total tax ie Rs 300 paid by the manufacturer is INPUT TAX.

Now, if manufacturer produces item such that total tax implication on output: Rs 450

Tax to be paid by Manufacturer: Rs 450

Tax already paid ie Tax Input by manufacturer on the inputs: Rs 300

Tax to be paid by manufacturer after Input tax credit = Rs 450-Rs 300 

                                                                                                 =Rs 150

This process of refund of  Tax Rs 300 by the Income Tax Department is said to be Input Tax credit .

• Input Tax credit (ITC) lowers the total tax liability as Input Tax is returned back.
• Input Tax credit (ITC) increases the cash flow with business man as it refunds the tax amount to the businessman.