Input Tax Credit

Input tax credit is the credit that a manufacturer has received for having paid input taxes towards the inputs that have been used in the manufacture of goods and products. In a similar manner, a dealer will be entitled to input tax credit.

What is Input Tax Credit?

Input tax credit is the credit manufacturer's received for paying input taxes towards inputs used in the manufacture of products. Similarly, a dealer is entitled to input tax credit if he has purchased goods for resale.

All dealers are liable for output tax on taxable sales done in the process of his business. With the help of input tax credit, he can offset the output tax against the input tax already paid. Input tax credit is not applicable on all types of inputs. Each state has its own norms and conditions in this regard and are applicable accordingly.

Input Tax Credit on Capital Goods

Input tax credit is available for manufacturers and traders on capital goods. The overall tax credit can be spread over a maximum of 36 EMIs. This limit of monthly instalments may be reduced if the concerned state so desires. For instance, in Maharashtra the overall input tax credit is given only in the month of purchase. In case the capital asset has been sold within 36 months, a proportional amount of input tax credit will be withdrawn. A negative list of capital goods also exists that lists items not eligible for input tax credit.

Input Tax Credit under VAT

The value added tax (VAT) is charged on the value addition to goods, with the VAT liability being calculated on by reducing the input tax credit from the output sales tax during the payment duration. This can be explained with an input tax credit example:

  • Input purchased in the period: Rs.1 lakh
  • Total sales in the month: Rs.2 lakhs
  • Input tax paid: Rs.4,000
  • Output tax payable: Rs.25,000
  • Overall VAT to be paid: (output tax paid – input tax paid) = (Rs.25,000 – Rs.4,000) = Rs.21,000

Therefore, the overall tax payable can be directly calculated as the difference between the overall tax liability and the input tax credit.

Input Tax Credit on Service Tax

This is called as CENVAT credit, wherein the service taxes paid by a different service provider can be claimed as tax credit. To explain this simply, every service provider is in fact a service consumer himself. A typical service provider will have at least one telephone in his office, for which he is paying service taxes on bills. Now, this tax paid becomes a part of the overall input cost for the service provider, which will then increase the prices of the service they are offering. This will give rise to a cascading effect which will ultimately hit the final consumer with higher prices. To avoid such a scenario, the CENVAT credit is offered by the government to service provider, which is a type of input tax credit, broadly speaking.

Input Tax Credit Eligible & Ineligible Purchases

To avail input tax credit benefits, the goods purchased should be for one of the below mentioned purposes:

  • Sale or resale within the state.
  • Interstate trade or commerce sales.
  • Used as raw materials, consumable stores or containers or packing materials to be sold anywhere inside the country or abroad.
  • Used in the execution of works contract.
  • Used as capital goods while manufacturing or reselling the taxable good.
  • Used for making 0-rates sales.

The following circumstances are ineligible for claiming input tax credits:

  • Goods bought from unregistered dealers.
  • Goods bought from registered dealers who have chosen Composition Scheme.
  • Goods notified in the negative list by respective state governments.
  • Goods purchased without Invoice.
  • Goods purchased with Invoice but without a separate mention of amount of tax.
  • Goods purchased for manufacturing exempted goods other than exports.
  • Goods that are in stock which have been taxed previously in an Act though they are categorized as exempted goods under VAT Act.
  • Goods purchased for personal consumption or received for free as gift.
  • Goods purchased from abroad.
  • Interstate goods purchases.
  • Goods including motor vehicles, furniture, toilet articles etc. that aren’t related to production of goods or stocked for the purpose of sale/resale.

News on Input Tax credit

  • ITC can be used for the discharge of maximum tax liability according to the Finance Department

    In a statement, the Finance Department has said that there have been no orders given to GST officials to use unathorised means of communication to achieve GST revenue collection targets. With many unconfirmed reports of the practice, taxpayers were asked to discharge the maximum tax liability in cash.

    The Finance Ministry also stated that ITC or Input Tax Credit can be used to discharge the maximum tax liability by taxpayers.

    22 March 2021

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