At the time of paying tax on the “final product” or “output product”, a registered taxpayer can deduct the tax amount that HE OR SHE has already paid while purchasing the raw material that went into that product. The tax amount so deducted is called the input tax credit, which is effective for the services sector too. Input tax credit is among the features of the upcoming GST regime. Consider, for example, the case of a company selling a smartphone, and that the tax payable comes to Rs 5,000. The company had bought a small camera as raw material for the smartphone, and paid a tax of Rs 500 on the purchase.
It is this Rs 500 that is called the input tax credit, which will be deducted from the tax of Rs 5,000 on the output product, so that the tax being paid while selling the smartphone is Rs 4,500.
Just like income tax refund, the input tax will be credited automatically into the company’s account.
Under the GST law, however, such a company would get the input tax credit only when four conditions are followed. One, the company must have either a “tax invoice” or a “debit note” that was given by the supplier who sold the raw material. Two, the company must have received the raw material. Three, the supplier of the raw material must have deposited with the government the Rs 500 tax paid by the purchaser. Four, the supplier must have filed its GST returns with the government.
Input Tax Credit prevents the cascading of taxes as it will be in effect across goods and services at every stage of supply.
Cross-utilisation of input credit of one component of tax against the other is allowed except for utilisation of credit of CGST for SGST, and vice versa. For example, input tax credit of CGST is allowed only for the payment of CGST and IGST.