How to Claim an Input Tax Credit?

GST, as we all know, is a destination-based, indirect tax. This tax acts as a value addition to goods as well as services, at each stage of the supply chain. This tax was introduced in order to create a single, unified tax for the entire country.

Now, there are many questions in the common citizen’s mind, asking for clarity on the topic. First let us recall the features of this tax, after which we shall study the Main Advantages of GST.

GST Features

  • It is dual-tax. It means that it has two components: one part is levied by the state and the other part by the center.
  • It has managed to abolish most of the predominant taxes of the previous regime – VAT, service tax, customs duty, central sales tax. All of these are now under one single umbrella, the Goods and Services Tax. Apart from these big taxes, several other low revenue-generating taxes have been brought under GST.
  • The GST has a four-tier structure. The tax slabs are fixed at 5%, 12%, 18% and 28%. There are several goods that are essential in nature and are exempt from any tax. The rate structure has been fixed by taking into consideration whether a certain product or service is a luxury or a necessity.
  • The threshold limit has been fixed at a certain value for different parts of the country.
  • The center and the state share the revenue in a 50:50 ratio.
  • The various components under GST are CGST, SGST, and IGST. The main objective of this tax is the sharing of revenue.
  • There is a certain relaxation for small, medium businesses and startups. It is known as the Composition Scheme. The scheme is availed by various startups, manufacturers and restaurant owners. It allows these businesses to pay tax at a flat rate, but without any input credits.
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Main Advantages of GST

The Main Advantages of GST are:

  • The main advantage of GST is the elimination of the cascading effect of the previous tax regime.
  • The higher threshold for registration is a cause for celebration. Many small and medium businesses have heaved a sigh of relief, owing to the higher threshold and other beneficial schemes.
  • The filing procedure is easy. No paperwork has brought in a lot of respite to business owners.
  • The rules are set for various sectors, including E-commerce. There is no ambiguity.
  • The logistics industry has really benefited from the GST law. Earlier, a company had to maintain several warehouses in various states, owing to the immense pressure of CST and state entry taxes. But, not anymore.
  • A large part of the unorganized sector has been brought under GST.

What is Input Tax Credit?

It is basically very simple. Even a layman can understand what it is all about. It means that at the time of paying taxes on output, you can reduce the tax part which you have already paid during input.

For example:

You are a manufacturer XYZ.

After computation, the tax payable on output i.e. finished product = Rs 450

You have already paid tax on input = Rs 250

Now, you will be able to claim the input tax amount of Rs 250 and thus deposit only Rs 200.

Input Credit Mechanism in GST

You can avail of the above benefit if you are registered under the GST Act. Thus, you may not come under the tax owing to the higher threshold limit, however, you must still register. This will enable you to claim the input tax credit.

How to claim input credit under GST?

There are a set of procedures, that you need to follow.

  • You should keep all your tax invoices, issued by any registered dealer. There is one point to note here. If you are taking goods in installments, the last tax invoice will count.
  • If you are claiming input, you should have already received the goods or services.
  • The tax that has been charged on your purchase, should have been deposited to the government by the supplier in cash or by way of claiming input credit.
  • The supplier should have filed GST returns.
  • So, there is one important point to note here. Every input credit that you claim has to be matched with your suppliers. Thus, your suppliers and vendors, with whom you deal should be GST compliant as well.

Here, I am going to explain in detail with the help of an example.

Say, Mr. XYZ is a seller. He sells goods to Mr. B. So, Mr. B, being the buyer will be eligible to claim the input credit on the purchases. The invoice has to be present, without fail.

  • Mr. XYZ sells certain goods to Mr. B and then files GSTR I.
  • The information from GSTR I gets reflected in GSTR 2A of Mr. B.
  • The data will migrate from GSTR 2A to GSTR 2, after Mr. B acknowledges.
  • The amount of tax that has been paid reflects in the Electronic Credit Register.
  • Now, Mr. B can choose to use the credit against output tax liability or he can ask for a refund.

I hope, this makes it easy to understand. The process is simple enough and can be performed by the business owner or his designated person. There are more areas around the input tax credit system. We can always study the exceptions, once we are through with the main process. Filing GST returns and claiming inputs is quite easy, it seems.

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