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Input Tax Credit

Updated on July 18, 2023

Input Tax Credit (ITC) in India refers to the mechanism where a taxpayer can claim a credit for the tax paid on inputs (purchases of goods or services) that are used for the furtherance of their business. It allows businesses to offset the tax they have paid on inputs against the tax liability on their output supplies.

Tax implication of input tax credit in India

Reduces tax liability – Input tax credit allows businesses to reduce their tax liability by offsetting the tax paid on inputs against the tax payable on output supplies.

Eliminates cascading effect – By claiming input tax credit, businesses avoid the cascading effect of taxes, where tax is levied on tax, leading to a higher overall tax burden.

Encourages compliance – Availing input tax credit promotes tax compliance as businesses are incentivized to maintain proper records and documentation of input tax paid.

Lower costs – Input tax credit lowers the cost of goods or services for businesses as they can claim credit for the tax paid on inputs, reducing their overall expenditure.

Boosts competitiveness – Businesses that can avail input tax credit become more competitive as they can offer their products or services at a lower price due to reduced tax costs.

Encourages formalization – Input tax credit incentivizes businesses to operate within the formal economy, as it requires proper invoicing, registration, and compliance with GST regulations.

Proper utilization of tax paid – Input tax credit ensures that the tax paid on inputs is utilized effectively by businesses, benefiting the economy as a whole.

Streamlines supply chain – Claiming input tax credit streamlines the supply chain as businesses are motivated to work with GST-compliant suppliers and maintain proper documentation of transactions.

Transparency and accountability – Input tax credit promotes transparency and accountability in tax transactions as businesses need to ensure proper reconciliation of input tax credit claims.

Reduces tax evasion – By linking input tax credit to proper documentation and compliance, it helps in curbing tax evasion and promotes a more transparent tax system.