Definition and Concept of Input Tax Credit

• Input Tax Credit under VAT refers to the credit a registered dealer can claim on VAT paid for purchases

• It is applicable only when the purchased goods are used for resale or manufacturing of taxable goods

• Input tax is the VAT paid by a business on its inputs such as raw materials or inventory purchases

• This credit can be deducted from the VAT collected on sales to compute the net tax payable

• The mechanism ensures that tax is paid only on the value added at each stage of the supply chain

Input Tax Credit Works Under VAT

• A dealer pays VAT on purchases and collects VAT on sales of goods to customers

• The dealer subtracts input tax from output tax and pays the balance to the government

• If input tax exceeds output tax the excess credit may be carried forward or refunded as per rules

• Input credit is claimed by maintaining proper invoices and purchase records

• Input credit is not allowed on goods purchased for personal use or exempt sales

Conditions for Claiming VAT Input Tax Credit

• The purchaser must be a VAT-registered dealer with a valid VAT registration number

• A proper tax invoice must be issued by the selling dealer mentioning VAT charged separately

• The purchased goods must be used for making further taxable sales and not for exempt supplies

• The input credit must be claimed within the time period prescribed by the state VAT laws

• Credit is not allowed on capital goods in some states unless specifically permitted

Benefits of VAT Input Tax Credit System

• It reduces the overall tax burden on businesses by eliminating double taxation

• The mechanism promotes transparency and encourages proper invoicing and billing practices

• It lowers the cost of production and supply by allowing credit for input tax paid

• Dealers are incentivized to deal with registered suppliers to avail credit benefits

• The credit chain enhances tax compliance and ensures better tax collection for the state

Transition of Input Tax Credit under GST

• The concept of input tax credit was retained and expanded under the GST regime

• GST allows credit across goods and services while VAT credit was limited to goods only

• Transitional provisions enabled businesses to carry forward eligible VAT credit into GST

• The seamless GST credit system improved efficiency compared to the earlier VAT framework

• The VAT credit system laid the foundation for a robust and transparent GST input credit mechanism