What is Input tax credit under GST – Explained with examples

The main reason of bringing GST law into India is to reduce the cascading tax effect. As per the present law, at each stage of the entire supply chain, registered taxable persons are eligible to take input tax credit.

Input tax means the taxes that have been paid while buying raw material or services. Similarly, the tax collected on the sale of the product or services is known as output tax.

You can take credit for the taxes incurred on input goods and services while paying output tax, it’s known as input tax credit. This means you can reduce your taxes to be paid on output goods or services by taking credit for taxes paid on input.

input tax credit gst

For instance, if your tax liability on final goods is Rs 400 and you have already paid Rs 200 in the same state as the tax on your purchases of goods then you can take credit of Rs 200 to reduce your finance tax liability of Rs 400. Here, in this case, you need to pay Rs 200 (400-200) to the government.

You can take Input tax credit only if your business is registered under GST law.

Here are certain conditions you need to fulfil to avail input tax credit in addition to getting registered under GST law;

  • You must obtain tax invoice, debit note, Bill of Entry, ISD Invoice, or Invoice issued by service recipient under Reverse charge mechanism.
  • Goods or services must have been received by you
  • Tax charged on purchases has been paid or deposited to the government.
  • Supplier from whom you have purchased goods or services has filed GST return in Form GSTR-2.

If you have paid more tax on your input and after claiming input tax credit, you still left out with balance taxes to be settled then you are allowed to carry forward it or claim the refund.

We have three types of taxes in GST law;

  • SGST – State GST collected by State Government
  • CGST – Centre GST collected by Center Government
  • IGST – Integrated GST collected by Center Government

Table showing how input credit is taken under GST

To Pay IGST You can take input credit from IGST, CGST and SGST respectively paid on input goods and services. All three type of taxes can be considered for input tax credit (ICD).
To Pay CGST You can take input credit from CGST and IGST respectively paid on input goods and services. You cannot use input tax credit (ICD) of CGST to pay SGST.
To Pay SGST You can take input credit from SGST and IGST respectively paid on input goods and services. You cannot use input tax credit (ITC) of SGST to pay CGST.

Process of Input Tax Credit

Suppose Mr X sells goods to Mr Y on which tax invoice and all other things to claim input tax credit have complied. After selling goods, Mr X will upload the details of all tax invoices issued in GSTR1 including the details of the sale to Mr Y.

After selling goods, Mr X will upload the details of all tax invoices issued in GSTR1 including the details of the sale to Mr Y.

In Mr Y’s login, details related to input tax credit will get auto populated in GSTR 2A. Data as reflecting in GSTR 2A will automatically get pulled to GSTR 2 to be filed by Mr Y as details of inward supplies. If Mr Y didn’t agree to the details of GSTR 2 then he is allowed to make changes in it.

If Mr Y agreed and accepted the GSTR 2 then taxes on purchases will get reflected and Mr Y can adjust those against the output tax liability.

Input tax credit example in case of Interstate supply

Suppose Mr X has sold good from Karnataka to Mr Y of Karnataka worth Rs 10,000. After getting these goods from Mr X, Y resells it to Mr Z of Kerala for Rs 17500. The final sale takes place in Kerala to the end consumer for Rs 30000.

GST will be charged on almost all the goods and services consumed in India. As per the present law, we have five different GST rates i.e. 0%, 5%, 12%, 18% and 28% prescribed for various goods and services.

For our example let us assume for a moment that the tax rates for the goods sold in our case are as follows;

  • Central GST (CGST) – 9%
  • State GST (SGST) – 9%
  • Integrated GST (IGST) – 18%

As discussed above, when Mr X is selling goods to Mr Y within Karnataka, it’s treated as an intra-state sale. This means Mr X has to charge central GST @ 9% and State GST @9%.

When Mr Y is selling to Z of Kerala, it’s treated as inter-state supply and Integrated GST (IGST) is charged @ 18%.

At the end, when Mr Z of Kerala is selling to end consumer in Kerala, it will be considered as an intra-state sale and both CGST @ 9% and SGST@ 9% will be charged.

Particulars Sale Value CGST SGST IGST Total GST to be paid
Mr X sold to Mr Y (Intra-state) Rs. 10,000 Rs. 900

(10,000*9%))

Rs. 900

(10,000*9%)

NIL Rs. 900 to be paid to Central Government as CGST and Rs 900 to be paid to State government as SGST.
Mr X has to charge Rs. 900 as CGST and Rs 900 as SGST in addition to the sale value of Rs 10000. It’s assumed that Mr X has no input tax credit.

 

Particulars Sale Value CGST SGST IGST Total GST to be paid
Mr Y sold to Mr Z (Interstate supply) Rs. 17,500 NIL NIL Rs. 3,150

(Rs. 17,500*18%) – Rs. 900 (CGST) – Rs. 900 (SGST) = Rs. 1,350

Rs. 1,350 to be paid to central government as IGST
Mr Y has to charge Rs. 3150 as IGST in addition to the sale value of Rs 17500. While paying to government Mr Y will take input tax credit as discussed above.

 

Particulars Sale Value CGST SGST IGST Total GST to be paid
Mr Z sold to end consumer in Kerala (Intrastate Supply) Rs. 30,000 Rs. 2,700

(Rs. 30000*9%) – Rs. 2700 (IGST Credit as paid by Y)

Rs. 2,700 (Rs, 30000*9%) – Rs. 450 (IGST balance credit as paid by Y) = Rs. 2250 NIL Rs. 2250 to be paid to State government as SGST.
Mr Z is required to charge Rs. 2700 as CGST and Rs. 2700 as SGST in addition to Rs. 30000 to end consumer. While paying to the government, Mr Z will take input tax credit as mentioned above and required to pay only Rs 2250.

In our above example, you will find that Rs. 900 has been collected by Karnataka government on account of the first sale that has been taken place in Karnataka by Mr X. As per the GST law, the tax should be charged on the state where goods were consumed. In our example, Kerala is the state to collect the tax as goods are finally consumed there. For this reason, the adjustment will be taken place between states and centre. Due to this adjustment, Rs. 900 will be transferred to the central government by Karnataka Government which again will be distributed 50-50 between the centre and Kerala government. Finally, tax collected by Kerala government will be Rs 2700 (2250+450) and by the centre is Rs 2700 (2250+450).

However, here is a list of items on which input tax credit shall not be available;

  1. Motor vehicles and other conveyances except when they are used for;
  • providing the taxable supplies of further supply of vehicles/conveyances
  • transportation of passengers/goods
  • or imparting training on driving
  • flying
  • navigating such vehicles/conveyances
  1. goods/services provided in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except when used for providing similar taxable supplies
  2. membership of club, health and fitness centre;
  3. Rent-a-cab, life insurance, health insurance (except where mandated by Government), except when they are used for providing similar services;
  4. Travel benefits extended to employees on vacation
  5. Works contract services supplied for construction of immovable property, other than plant and machinery, except when used for similar service;
  6. goods/services received for construction of immovable property (excluding plant & machinery) on own account
  7. goods/services on which tax has been paid under Composition scheme;
  8. goods/services received by a non-resident taxable person except on goods imported by him
  9. goods/services used for personal consumption
  10. goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
  11. any tax not paid/credit wrongly availed by reasons of fraud/willful misstatement/suppression, etc.

When goods are partly used for business and partly for other purposes, input tax credit is available to the extent they are used for the business. Similarly, if input goods or services are used partly for taxable supplies and partly for exempted supplies then input credit is available only to the extent used in taxable supplies.