What is input tax credit?

Considered to be one of the most impactful tax reforms of India, Goods & Services Tax (GST) has changed the course of Indian businesses. While a lot has already been written about the significance of GST, one of the aspects that is not understood generally is – the mechanism of input credit within this new tax reform.

In this post, we will explain the basics of what input tax credit in GST means and how it impacts your business. Unless you are new to online selling or altogether new to the idea of business, you probably already know about the VAT input credit. However, under the GST regime the input tax credit works slightly different.

So, what is input tax credit?
Under the GST taxation regime / system, the GST input tax credit means that at the time of paying tax on output, you can reduce the tax you have already paid on inputs.

For example, if you are the manufacturer of your own product, the calculation works in the following manner:
Tax payable on output (the final product) is Rs. 500.
Tax paid on input (purchases) is Rs. 450.
You can claim INPUT TAX CREDIT of Rs. 450 on each of the final product and you only need to deposit Rs. 50 as GST.

Simply explained, while making a purchase from a GST registered dealer, manufacturer or a raw materials provider, you pay appropriate taxes as part of the purchase cost paid to procure the relevant materials / products. While selling the final products you will collect tax from the buyer. You basically adjust the taxes you paid with the amount of tax on output (i.e. tax on sales). While selling your product you can claim the input tax amount you have paid.

Please visit our A to Z GST guide for input tax credit related information and to learn more about the GST tax reform. If you have not set up your online store yet on amazon.in, please click here to register with Amazon.