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Input Credit under GST:

Topics Covered:

  1. Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  2. Inclusive growth and issues arising from it.
  3. Government Budgeting.


Input Credit under GST:


What to study?

For Prelims and Mains: What is ITC- meaning, need, significance and concerns over its misuse.


Why in News? Concerned over a decline in GST revenues, tax officials are likely to examine the high usage of input tax credit (ITC) to set off tax liability by businesses.


What is Input Tax Credit (ITC)?

It is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.

A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.


Significance of ITC:

One of the positive features of GST is that it helps to avoid the undesirable cost cascading effect (or tax on tax) that existed previously. Now, in the case of GST, there is the mechanism of Input Tax Credit (ITC) which helps to eliminate the cost cascading effect of the pre-GST tax regime. Under GST, there is not cost cascading effect because of two facts. First, most of the taxes are merged under a single tax, and second, the input tax credit.


Concerns over its misuse:

  • There could be possibility of misuse of the provision by unscrupulous 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.
  • The matching is done on the basis of system generated GSTR-2A, after the credit has been claimed. Based on the mismatch highlighted by GSTR-2A and ITC claims, the revenue department sends notices to businesses.
  • Currently there is a time gap between ITC claim and matching them with the taxes paid by suppliers. Hence there is a possibility of ITC being claimed on the basis of fake invoices.


Need of the hour- real time updates:

To fill the gap, a new return filing system has been proposed. Once it becomes operational, it would become possible for the department to match the ITC claims and taxes paid on a real time basis. The revenue department would then analyse the large number of ITC claims to find out if they are genuine or based on fake invoices and take corrective action.


Source: the hindu.

Mains Question: Assess the performance of GST regime so far and discuss challenges going forward?