Input Tax Credit (ITC)

3. Input Tax Credit (ITC)

Input Tax Credit (ITC) is the credit a registered dealer is entitled to claim for the GST already paid on purchases of goods, services, or capital goods used in the course or furtherance of the dealer's own business — this credit can then be set off against the GST the dealer collects on its own sales (output tax), so that only the NET amount is actually paid to the government. ITC is the single mechanism that makes GST work as a true value-added tax rather than a tax charged afresh, in full, at every stage — it is the direct fix for the cascading ("tax on tax") problem described in Section 1.

Key terms:

• Input Tax — the GST paid by a dealer on its own purchases of goods and services (inputs).
• Output Tax — the GST a dealer collects from its own customers on the goods and services it sells (outputs).
• Net GST Payable = Output Tax − Input Tax Credit.

Conditions to claim Input Tax Credit. A registered dealer can claim ITC only where all of the following are satisfied:

1. The dealer possesses a valid tax invoice (or a valid debit note) issued by a registered supplier.
2. The dealer has actually received the goods or services (or, for a supply in instalments, the last instalment).
3. The tax charged on that supply has actually been paid to the government by the supplier (directly, or through the credit available to the supplier).
4. The dealer has furnished the GST return required under the law.
5. The goods or services are used, or intended to be used, in the course or furtherance of the dealer's own business — not for purely personal consumption.

Worked illustration. A trader registered in Andhra Pradesh buys raw material for ₹50,000, paying GST at 18% — an input tax of ₹9,000. The trader processes this material and sells the finished goods for ₹80,000, charging GST at 18% on the sale — an output tax of ₹14,400.

• Output tax collected from the trader's own customer = ₹80,000 × 18% = ₹14,400.
• Input tax already paid on the raw material purchase = ₹50,000 × 18% = ₹9,000.
• Net GST actually payable to the government = ₹14,400 − ₹9,000 = ₹5,400.

Without Input Tax Credit, the trader would have had to pay the full ₹14,400 again on the sale, on top of the ₹9,000 already paid on the purchase — genuine double taxation on the same ₹50,000 worth of value. With ITC, GST is effectively borne only on the ₹30,000 of value the trader actually added (₹80,000 − ₹50,000), since 18% of ₹30,000 is exactly ₹5,400. …