Input tax credit (ITC) is set off against the output tax liability of a registered taxpayer. This means that the ITC claimed on inputs used for making taxable supplies can be deducted from the GST payable on the output supplies.
Here's how ITC is set off:
- Step 1: Calculate ITC: The taxpayer calculates the ITC on eligible inputs based on the GST paid on those inputs.
- Step 2: Determine Output Tax Liability: The taxpayer calculates the GST payable on their output supplies.
- Step 3: Set Off ITC: The ITC calculated in step 1 is deducted from the output tax liability calculated in step 2.
- Step 4: Pay Net GST: The taxpayer pays the remaining amount, if any, as net GST liability.
Example:
A business sells goods for Rs. 100,000 (inclusive of 18% GST) and purchases raw materials for Rs. 50,000 (inclusive of 18% GST).
- ITC: The ITC on raw materials is Rs. 9,000 (18% of Rs. 50,000).
- Output Tax Liability: The GST payable on goods sold is Rs. 18,000 (18% of Rs. 100,000).
- Net GST Liability: The net GST liability is Rs. 9,000 (Rs. 18,000 - Rs. 9,000).
Practical Insights:
- ITC can be claimed on various inputs, including raw materials, machinery, and services used in making taxable supplies.
- Taxpayers must maintain proper records to support their ITC claims.
- There are certain conditions and restrictions on claiming ITC, which vary depending on the jurisdiction.
Solutions:
- GST Software: Using GST software can simplify the process of calculating and setting off ITC.
- Consult a Tax Professional: If you have any questions or uncertainties about ITC, consult a qualified tax professional.
