How to calculate Input Tax Credit under GST with example

Input Tax Credit under GST India means that it is method to avoid tax on tax. As you know Government of India introduced GST tax on July 1st 2017. And since then many people have confusion. However this GST guide for Input Tax Credit in India will clear your doubts. You can keep reading to know what is Input Tax Credit definition and how to calculate Input Tax Credit under new GST.

What is Input Tax Credit under GST in India?

Input Tax Credit short form is ITC. Moreover it is one of the important feature of Goods and Services Tax or GST. It is so because GST Council introduced one feature which helps you to cascade taxes. In simple words cascading of taxes means tax on tax.

How does ITC or Input Tax Credit work?

On other hand it means that you do not pay tax double time. Therefore there will not be double taxation. But it is only on goods that you use as inputs to make some other product. As a result maker of next product takes credit of taxes that you pay on inputs.

While this is only when paying tax on output. Besides if tax paid on input is more than tax on output then in this case you claim excess amount as refund. Indian Government allows traders to use ITC. However it is only on goods bought for either sale or resale. Or even when you buy goods to use in contract work.

How to calculate Input Tax Credit on goods under GST

You can know here how to work out Input Tax Credit as there are some Input Tax Credit rules that you follow. Below we gave on example which tells you how to calculate reduced input tax credit. You can also know how to file GST returns online.

Calculate Input Tax Credit under GST with example

  • Let us say A is steel utensil manufacturer and he bought raw steel
  • This raw steel is of Rs. 500
  • A also bought other raw materials which came for Rs. 100
  • Whereas GST on steel is 18%
  • In total A paid 28% GST on raw materials
  • Total GST in rupees is Rs. 90 on raw steel
  • 28 on other materials
  • All these are inputs only
  • Therefore total input tax that manufacturer pays is Rs. 118
  • A then adds making charges also and sells product for Rs. 800 plus GST
  • Let us now say that total invoice is Rs. 944 (Rs. 800 plus Rs. 144 as GST charges)
  • Thus manufacturer takes Rs. 144 as GST charges from distributor

How to adjust Input Tax Credit

It is simple method to adjust input tax credit on goods. Even you can know how to claim input tax credit on capital goods. However for this you must know what is reduced input tax credit.

Now you know that manufacturer paid Rs. 118 as GST already when he bought raw materials. And after selling to distributor for Rs. 944 where Rs. 144 was GST tax only. Thus manufacturer claims credit of Rs. 118 that he paid for inputs.

Finally manufacturer should deposit difference of Rs. 26 with government. It is so because this difference comes under Output Tax Less Input Tax. While before you could not claim credit on various taxes.

Importance and benefits of Input Tax Credit

There are many benefits of Input Tax Credit under new GST taxes. First is that because of GST multiple taxes came together. Second this tax rule will be simple to use for businesses and different companies. Third it will be easy process to claim input tax credit.

Fourth you must follow GST rules. It is so because only then you get complete credit. Otherwise you may get 40% credit only if documents are not correct or proper. In addition it is better that you know about documents and forms to claim Income Tax Credit under GST.


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