Input Tax Credit (ITC)
Part of: Prelims and GS-III – Economy
What is Input Tax Credit (ITC)?
- ITC is a mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is ‘tax on tax’.
- Input Tax Credit refers to the tax already paid by a person at time of purchase of goods or services and which is available as deduction from tax payable .
- In simple terms, input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.
- Exceptions: A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.
Concerns over its misuse
- Currently there is a time gap between ITC claim and matching them with the taxes paid by suppliers. There could be a possibility of misuse of the provision by businesses by generating fake invoices just to claim tax credit.
- As much as 80% of the total GST liability is being settled by ITC and only 20% is deposited as cash.
- Under the present dispensation, there is no provision for real time matching of ITC claims with the taxes already paid by suppliers of inputs.