Understanding GST and Input Tax Credit with Practical Examples

The Goods and Services Tax (GST) is a comprehensive, value-added tax (VAT) that applies to the supply of goods and services in India. This tax is designed to replace the multi-layered and fragmented indirect tax system. One of the key features of GST is the mechanism of Input Tax Credit (ITC), which plays a crucial role in reducing the overall tax burden on businesses. This article explains the concept of GST, ITC, and its practical application with examples.

Introduction to GST

Before delving into GST Input Tax Credit, it's important to understand the concept of GST. GST is an indirect tax imposed on the supply of goods and services in India. It is levied at each stage of the supply chain, but the tax paid at each stage is creditable against the tax payable at the next stage (upstream). This helps in reducing the tax burden on the end consumer.

What is Input Tax Credit?

Input Tax Credit (ITC) is the mechanism that allows businesses to claim the tax paid on inputs used for furthering their business. This includes taxes paid on the purchase of goods and services. It is a fundamental concept in the GST regime, as it ensures a seamless flow of tax credits across the supply chain, promoting economic efficiency and reducing the overall tax burden.

Practical Example of GST and ITC

A Trader's Example

To understand how GST and ITC work, consider a simple example of a trader. Assume the trader purchases goods worth INR 1,00,000 with an 18% GST, which brings the total cost to INR 1,18,000. The trader then sells the goods for INR 1,50,000 with an 18% GST, making the total sale value INR 1,74,000 (INR 1,50,000 INR 24,000).

When filing the GST returns, the trader will report the sales as 1,74,000 and the purchases as 1,18,000. Therefore, the net GST payment to the government will be INR 24,000 (sales GST) minus INR 18,000 (purchase GST) INR 6,000.

Explanation of Input Tax Credit Mechanism

The mechanism of ITC involves the following steps:

The trader pays INR 18,000 on the purchase (input tax). The trader generates revenue from the sale, and the GST on the sale is INR 24,000. When filing the GST returns, the trader can reduce the GST on the sale by the input tax paid on the purchase, resulting in a net payment of INR 6,000 to the government.

A key point to note is that there is no concept of an "Output Tax Credit" in GST. The concept of ITC is more relevant and it allows businesses to claim the GST paid on inputs.

Manual for Income Tax Credit under GST

The concept of ITC under GST as defined in Section 2.57 of the Model GST Law and Section 2.1d of the IGST Act is that if the tax is due to a taxable entity for delivering goods or services, the IGST and CGST (under the CGST Act) or IGST and SGST (under the SGST Act) are levied on these transactions. The tax credit mechanism allows an entity to reduce the taxes paid on inputs against the taxes to be paid on outputs.

Calculation Example

Consider a scenario where the GST on the output is INR 45,000 and the tax paid on the purchases is INR 30,000. The entity can claim an ITC of INR 30,000, and the remaining tax of INR 15,000 is to be deposited with the government.

Claiming Input Tax Credit

To claim ITC, it is necessary to follow these steps:

Acquire a tax invoice or debit note from a registered dealer. Ensure that goods and services have been received and that the payments to the supplier have been deposited with the government. Verify that the supplier has submitted the GST declarations.

Using ITC for Different Purposes

PTC can be used for various purposes, such as:

Contributing to SGST

To make payments to SGST, an entity can claim the SGST and IGST paid on the purchases.

VAT Credit Example

In a simple example, assume Mr. A is a seller who sells goods to Mr. B. Mr. B can claim ITC on the purchases based on the invoices.

Mr. A uploads the tax invoice details in GSTR 1. The details of the sales to Mr. B are automatically entered into GSTR 2A, and Mr. B will provide the same details when filing GSTR 2. Mr. B confirms the details and credits the ITC on purchases to his Electronic Credit Ledger (ECL). He can then use this credit to offset future tax liabilities or claim a refund.

Functionality of GSTR Forms

Two types of GSTR forms must be completed monthly:

Form GSTR 1

This form covers all sales details and should be submitted on the 10th of the following month. Form GSTR 1A is useful for reconciliation, providing details of outbound supplies added, corrected, or removed by the recipient in Form GSTR-2.

Form GSTR 2

This form covers details of incoming deliveries and the application for ITC. Supplement claims or changes to Form GSTR-2A must be submitted in Form GSTR-2. Form GSTR 2A is auto-populated with details from Form GSTR-1 and should be submitted by the 11th of the following month.

The transition to GST required businesses to file their first two monthly returns on a self-assessment basis. GSTR 3B is used for declaring tax liabilities and details of credit claimed. Form TRANS 1 for claiming ITC is available at the GSTN portal and will be filed by most taxpayers by the 25th of August for the month of July.

Note: As of the latest updates, specific details and timelines may vary. Always refer to the official GSTN portal or consult with an expert for the most accurate information.