Input Tax Credit

Input Tax Credit

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 purchase.

A business under composition scheme can not avail of input tax credit. ITC can not 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 mechanisms of Input Tax Credit (ITC) which helps to eliminate the cost cascading effect of the pre-GST tax regime.