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All you wanted to know about...input tax credit

Parvatha Vardhini C | Updated on January 27, 2018

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The GST (Goods and Services Tax) and its army of terminology are briskly marching through media space these days. One such much-bandied about term is ‘input tax credit’.

What is it?

You can’t punish a man twice for the same crime, says the law. Shouldn’t the same principle apply to taxation of goods and services? Enter ‘input tax credit’. The basic premise is that taxing the same thing twice is not fair.

So, to avoid double taxation on items used as inputs to make other items, credit of taxes paid on the inputs can be taken by the maker of the next item while paying tax on the output. If the tax paid on inputs is higher than the tax on the output, the excess can be claimed as a refund.

Input tax credit is also available to traders on goods bought for sale/resale, besides a few other cases such as goods bought for use in works contract.

Currently, input tax credit is available for taxes such as excise duty, VAT (Value Added Tax), CST (Central Sales Tax) and service tax. But there are several ifs and buts as to which of the taxes can be set off against each other.

Why is it important?

The integration of several indirect taxes under GST will make life easier for companies and businesses when it comes to claiming input tax credit, as it is expected to be seamless. Currently, they cannot take credit for some of the taxes they pay, against the final produce. For example, consumer companies which spend quite a bit on advertising will be able to offset the tax paid on this under GST. This is not allowed under the existing law.

Secondly, the GST rules for claiming input tax credit has been tightened to avoid frauds or revenue leakage for the government. Among other rules, the buyer cannot get input tax credit unless the supplier has actually paid the relevant tax or claimed input credit. Input tax credit provisions also become important during the transition to GST.

For traders/retailers who may not have proper documentation of the payment of tax on inputs, only 40 per cent credit will be given for stocks in transition. The credit will be higher at 60 per cent if the item falls in the 18 per cent or 28 per cent GST rate bracket, as per the decision taken at the recent June 3 meeting of the GST council.

Why should I care?

Primarily because the goods and services you buy could get cheaper. Without input tax credit, there is a ‘cascading’ effect of taxes. That is, tax is levied on the entire value of intermediate goods and services. Under GST, credit of tax already paid should reduce the tax outgo and the final price of the product or service.

Seamless availability of input tax credit for goods and services will also help shareholders. It will ease up cash flows and result in better efficiencies for businesses. This will aid savings and more effective deployment of resources.

The Government benefits too, as strict rules to prevent fraudulent input tax credit mean that it can get more in its revenue kitty. In short, if it works to plan, the input tax credit can be a win-win-win.

The bottomline

It’s always a good idea to give credit where it is due.

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Published on June 05, 2017

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