Input Tax Credit (ITC): Definition, Properties, Examples

You will learn about Input Tax Credit (ITC) in this article. Input credit means that when you pay tax on output, you can deduct the tax you’ve already paid on inputs and pay the difference. When you buy a product/service from a registered dealer, you pay taxes on the purchase. On selling, you collect the tax.

You adjust the taxes paid at the time of purchase with the quantity of output tax (tax on sales), and balance liability of tax (tax on sales minus tax on purchase) has got to be paid to the government. This mechanism is named utilisation of input decrease. Continue reading to know more.

Calculation of Tax

Taxes are calculated on the value of purchasing products or services or both, at a specific percentage pronounced by the government. The percentage of taxes is subject to vary as per government decisions from time to time.
Once the rate is given, the computation of tax is straightforward. It involves only simple concepts of percentage.

To calculate taxes, we need to know the following terms:

Dealer: A person who buys goods/services for resale.

Cost Price: The price at which a trader buys goods.

List Price: The price at which the article is marked. It is also known as marked price.

Discount: To sell out the old stock or for some other reason, shopkeepers offer a certain percentage of the list price as a discount. The discount is always calculated on the list price.

Selling Price: The price at which a trader sells his goods at a discount. It is also known as the sale price.

Selling Price \(=\) Marked Price \(-\) Discount

Goods and Service Tax (GST)

Before \({1^{{\rm{st}}}}\) July \(2017\), we had several indirect taxes such as VAT, excise, service tax, etc. From \({1^{{\rm{st}}}}\) July \(2017\), the government of India has eradicated all such indirect taxes and introduced a new tax called goods and service tax (GST).

GST is a consumption (for using goods/services) based tax that is levied when one buys/transfers goods or services or both. GST is to be levied at every point of sale/transfer of goods or services or both. It has replaced all former indirect taxes levied by central and state governments. Also, GST is applicable throughout India except in the state of Jammu and Kashmir.

Now, GST is the only (indirect) tax to be paid by individuals or organizations as all other indirect taxes that existed before GST are merged into it.

Below are some of the reasons to introduce GST:

1. To remove the disparity of taxes in different states and bring about uniformity in taxation rates on goods and services.
2. One nation, one tax was the aim of the government in implementing GST.
3. To remove the complexity of state taxes and central taxes.
4. To reduce tax evasion. GST is expected to bring buoyancy to the government revenue by extending the tax base.
5. To minimize the physical connection between the taxpayer and the tax authorities, reducing the taxpayer’s difficulties.
6. To remove the multiplicity of taxes on some products, sales tax, service tax, etc., were charged simultaneously.
7. To avoid surging effect (double taxation), i.e., tax on tax. GST is levied only on value addition.

Every business person pays GST on his purchases and collects GST on the sale of his goods. The difference between the GST collected (on sale) and paid (on purchase) is deposited with the government.

Thus tax deposited with the government is:

\(=\) GST collected \(-\) GST paid

\(=\) GST on sale price \(-\) GST on the purchase price

\(=\) GST on (sale price \(-\) purchase price)

\(=\) GST on value addition

This ensures that only the value addition is taxed.

Types of GST

GST is a destination-based consumption tax. Hence, the consumption place decides who will collect the tax, i.e., state, central, or both governments. GST applies to every type of movement of goods/services.

Below are the types of GST.

Central-GST (CGST): The central government collects it for the intra-state transaction of goods and services. In the case of CGST, the beneficiary is the central government.

State-GST (SGST)/Union Territory GST (UGST): It is collected by the state government/union territory for the intra-state/union territory transaction of goods and services. In the case of SGST, the beneficiary is the state government.

Integrated GST (IGST): The tax levied by the central government for inter-state transactions, including imports of goods and services.

Input Tax Credit (ITC)

An uninterrupted and seamless chain of input tax credit (ITC) is one of the products and services tax’s key features. ITC may be a mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is the tax on tax. Under this taxation system, credit of taxes being levied by the central government isn’t available as a set-off for payment of taxes levied by state governments and the other way around. 

One among the foremost essential features of the GST system is that the whole supply chain would be subject to GST to be levied by Central and government concurrently. Because the tax charged by the Central or the State Governments would be a part of an equivalent tax regime, tax credit paid at every stage would be available as a set-off for tax payment at every subsequent stage.

An input tax credit means that while paying tax on the sale (output) of goods and services, you can avail yourself of the tax you have already paid on the purchase (input) of the above goods/services and pay only the balance amount as tax.

1. Input tax includes CGST/SGST/IGST paid on input goods, input services, etc.
2. Only a registered person is entitled to take credit of the input tax charged on the supply of goods/services.
3. The credit of tax paid on every input used to supply taxable goods or services, or both, are allowed under CIST.
4. The input tax credit is not available for purchasing petroleum products, liquor, petrol, diesel, motor spirit, etc.
5. In exports of goods/services, GST is not payable, but the input tax credit is still available. Such transactions are called zero-rated transactions in GST.

Solved Examples- Input Tax Credit (ITC)

Q.1. Let \(A, B\) and \(C\) be three traders belonging to different states. Trader \(A\) sells some goods/services to trader \(B\) for \(₹ 500\), and trader \(B\) sells the same goods/services to trader \(C\) at a profit of \(₹ 200\). Calculate the tax liability of \(B\) if the rate of GST is \({\rm{12 \% }}\).
Ans: It is a case of an inter-state transaction.
For trader \(A\):
SP \(=₹ 500\)
IGST \(={\rm{12 \% }}\) of \({\rm{ }}₹ 500 = \frac{{12}}{{100}} \times ₹ 500 = ₹ 60\)

For trader \(B\):
CP \(= ₹ 500\)
SP \( = ₹ 500 + ₹ 200 = ₹ 700\)

For trader \(C\):
CP \(= ₹ 500\) and profit of \(= ₹ 200\)
Input-tax credit (ITC) \(=\) Tax on purchase of goods/services (input-tax) \(= ₹ 60\)
Output tax \({\rm{12 \% }}\) of \(₹ 700 = \frac{{12}}{{100}} \times ₹ 700 = {\rm{ ₹ 84 }}\)
Therefore, the tax liability on trader \(B=\) output tax \(-\) ITC \( = ₹ 84 – ₹ 60 = ₹ 24\)

Q.2. A product is sold from Kanpur (UP) to Banaras (UP) for \(₹ 12, 000\) and then from Banaras to Ranchi (Jharkhand) at a profit of \(₹ 4, 000\). If the rate of GST is \({\rm{18 \% }}\), find the net GST payable at Banaras.
Ans: When the product is sold from Kanpur to Banaras. It is an intra-state transaction.
For the dealer in Kanpur:
SP \(= ₹ 12, 000\)
CGST \(={\rm{9 \% }}\) of \(₹ 12,000 = \frac{9}{{100}} \times ₹ 12000 = ₹ 1080\)
SGST \(={\rm{9 \% }}\) of \(₹ 12,000 = \frac{9}{{100}} \times ₹ 12000 = ₹ 1080\)
When the product is sold from Banaras to Ranchi, it is an inter-state transaction.

ITC \( = ₹ 1080 + ₹ 1080 = ₹ 2160\)
CP \( = ₹ 12000\)
Profit \( = ₹ 4000\)
SP \( = ₹ 12000 + ₹ 4000 = ₹ 16000\)
IGST \(={\rm{18 \% }}\) of \(₹ 16000 = \frac{{18}}{{100}} \times ₹ 16000 = ₹ 2880\)
Therefore, net GST payable at Banaras \(=\) Output GST \(-\) ITC
\( = ₹ 2880 – ₹ 2160 = ₹ 720\)

Q.3. An article is sold from Jaipur (Rajasthan) to Indore (MP) for \(₹ 5,000\) and then from Indore to Bhopal (MP). If the tax rate under the GST system is \({\rm{18 \% }}\) and the profit made by the dealer in Indore is \(₹ 2,000\), find.
(i) Net GST payable by the dealer in Indore.
(ii) CP for the dealer in Bhopal. (Assume that the dealer in Bhopal is the end-user).
Ans: SP in Jaipur \(= ₹ 5000\)
IGST \(={\rm{18 \% }}\) of \(₹ 5000 = \frac{{18}}{{100}} \times ₹ 5000 = ₹ 900\)
CP in Indore \(= ₹ 5000\) and profit \(= ₹ 2000\)
SP in Indore \( = ₹ 5000 + ₹ 2000 = ₹ 7000\)
CGST \(={\rm{9 \% }}\) of \(₹ 7000 = \frac{9}{{100}} \times ₹ 7000 = ₹ 630\)
SGST \(={\rm{9 \% }}\) of \(₹ 7000 = \frac{9}{{100}} \times ₹ 7000 = ₹ 630\)

Therefore, net GST payable by the dealer in Indore \(=\) output GST \(-\) Input GST
\( = (₹ 630 + ₹ 630) – ₹ 900 = ₹ 360\)
CP for the dealer in Bhopal \(=\) SP for the dealer in Indore \(+\) GST
\( = {\rm{₹ 7000 }} + (₹ 630 + ₹ 630) = ₹ 8260\)

Q.4. Let \(A, B\) and \(C\) be three dealers in a GST chain. \(A\) buys some goods/services for \(₹ 2000\) and sells it to \(B\) at a profit of \(₹ 500\). \(B\), in turn, sells the same goods/services to \(C\) at a profit of \(₹ 1000\). Taking the rate of GST as \(={\rm{18 \% }}\), find: 
(i) Input-tax payable by dealer \(A\).
(ii) Input-tax payable by dealer \(B\).
Ans:
For dealer \(A\): CP \(= ₹ 2000\) i.e., purchase price \(= ₹ 2000\)
Input tax payable by dealer \(A=\) Tax on purchase
\(={\rm{18 \% }}\) of \(₹ 2000 = \frac{{18}}{{100}} \times ₹ 2000 = ₹ 360\)
As profit \(= ₹ 500\), SP \( = ₹ 2000 + ₹ 500 = ₹ 2500\)
For dealer \(B\):
CP \(= ₹ 2500\)
Therefore, Input tax payable by dealer \(B=\) Tax on purchase
\(={\rm{18 \% }}\) of \(₹ 2500 = \frac{{18}}{{100}} \times ₹ 2500 = ₹ 450\)

Q.5. A dealer in Agra (UP) supplies goods/services (worth \(₹ 1,000\)) to a dealer in Jhansi (JP). The dealer in Jhansi supply the same goods/services to a dealer in Mumbai at a profit of \(₹ 600\). Assuming that the dealer in Mumbai is the end-user of the product and the rate of GST is \({\rm{12 \% }}\), find:
(i) Input-tax for the dealer in Jhansi.
(ii) Output tax for the dealer in Jhansi.
Ans:
(i) As the goods/services are supplied from Agra to Jhansi, so it is a case of intra-state transaction
Given, SP for dealer in Agra \(= ₹ 1000\)
CGST \(={\rm{6 \% }}\) of \(₹ 1000\)
\( = \frac{6}{{100}} \times ₹ 1000 = ₹ 60\) and,
SGST \(={\rm{6 \% }}\) of
\( = \frac{6}{{100}} \times ₹ 1000 = ₹ 60\)

Therefore, output tax (GST) for the dealer in Agra \( = ₹ 60 + ₹ 60 = ₹ 120\)
\( \Rightarrow \) Input tax for the dealer in Jhansi \(= ₹ 120\)
(ii) CP for the dealer in Jhansi \(= ₹ 1000\) and, profit \(= ₹ 600\)
Therefore, SP for the dealer in Jhansi \( = ₹ 1000 + ₹ 600 = ₹ 1600\)
Now, the goods/services are supplied from Jhansi to Mumbai, so it is a case of inter-state transaction
So, IGST \(={\rm{12 \% }}\) of \(₹ 1600 = ₹ 192\)
Therefore, output tax for the dealer in Jhansi \(= ₹ 192\)

Summary

In this article, we learnt the tax calculation, the meaning of GST, types of GST, their definition, and the definition of input tax credit and solved some example problems.

Frequently Asked Questions

Q.1. Who is eligible to take the input tax credit (ITC) under the SGST & CGST Act?
Ans: A registered taxable person under GST Act who is paying the tax due within the course or further business can claim and avail of ITC credited in the electronic ledger.

Q.2. Can ITC be claimed on all the inputs and capital goods in one instalment?
Ans: Yes. ITC is often claimed on all the inputs and capital goods in one instalment subject to the conditions under Sec \(16(2)\) of the GST.

Q.3. What is an input tax credit?
Ans: An input tax credit means that while paying tax on the sale (output) of goods and services, you can avail yourself of the tax you have already paid on the purchase (input) of the above goods/services and pay only the balance amount as tax.

Q.4. What is ITC credit in GST?
Ans: Input tax credit means claiming the credit of the GST paid on the purchase of products and services used for the furtherance of business. The mechanism of the Input tax credit is that the backbone of GST and is one of the foremost important reasons for the introduction of GST.

Q.5. Can ITC be refunded?
Ans: As per Section \(54(3)\) of the CGST Act, \(2017\), a registered person may claim a refund of the unutilised input tax credit at the end of any tax period. A tax period is that the period that a return is required to be furnished. Thus, a taxpayer can claim a refund of unutilised ITC every month.

We hope this article on Input Tax Credit helps you in your preparation. Do drop in your queries in the comments section if you get stuck and we will get back to you at the earliest.