Input Tax Credit (ITC)

Input Tax Credit (ITC)

Part of: Prelims and GS-III – Economy

Context GST Network has said it has blocked Rs 14,000 crore worth of input tax credit (ITC) of 66,000 businesses registered under the Goods and Service Tax.

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.