Know all about Input Tax Credit (ITC)

Input tax credit is claimed by a registered dealer. A registered dealer is one who has TIN from his VAT Department. VAT registration is mandatory for claiming the tax credit. Each state has its own rules and regulations regarding tax collecting norms and is applicable accordingly. Input tax credit is an aggregate amount of tax payable on the total local purchases made by a registered dealer from other registered dealers within the State during a particular period. It is adjusted against aggregate amount of output tax (VAT) on total sales (local + central) made during a particular period. Input tax credit cannot be claimed against all purchases but only against purchases of taxable items. It excludes items specified in Schedule ‘C’. Both the parties in purchasing transaction must have a valid TIN.

Input tax credit on VAT:-

If a dealer has made purchases for Rs.200000/- and the input tax is Rs.10000/-

Sales for Rs.100000/-(local + central) and the output tax is Rs.5000/-

Now, this input tax will be adjusted against output tax i.e. (10000-5000=5000). This additional amount Rs.5000/- is input tax credit.

Input tax credit on Capital Goods:-

Manufacturers and traders dealing in capital goods are eligible for tax credit. A negative list of capital goods that are not eligible also exists.

Input tax credit on Service Tax:-

Service tax paid by service providers can be claimed as input tax credit and it is called as ‘CENVAT’ credit. Service tax provider increases the cost of the services that he is providing and it hits the consumers with the higher prices. So to avoid this stage, the government provides for ‘CENVAT’ credit and it is a type of input tax.

Ineligible for Input tax credit:-

• Purchases made from unregistered dealer.
• Purchases made from composition dealer.
• Purchases made without proof i.e. without Tax invoice.
• Purchases made for manufacturing of exempted goods other than exports.
• Purchases made from out of India.
• Purchases made from central dealers.
• Purchases of those goods that are notified in the negative list by respective governments.
• Goods including motor vehicles, furniture, toilet articles etc. that aren’t related to the production of goods or stocked for the purpose of sale/resale.

How input tax credit is claimed:-

It is claimed while filing returns for a particular tax period. When a return is filed, input tax is set off against output tax and the balance is paid to the dealer along with the return. During the year, the input tax credit is carried forward to the next tax periods and is used for adjusting against the output tax. At the end of the year, it is available for a refund if there is a remaining balance.

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