Input tax credit

                                 

After the implementation of GST it is clear to us that it is a single tax system throughout the country, replace all type of indirect taxes of states, union territories and central. In GST system there are four types of collecting tax is introduced that is SGST-tax collected by states, CGST-tax collected by central ,UGST-tax collected by union territories and IGST-collected by central government for interstate sale. That is GST eliminates the cascading of taxes that is ‘tax on tax’ system. Now the main confusion arises when the term input tax credit comes. It is closely linked with the estimation of GST system.

Now, what is input tax credit?

It is the credit that an individual received for the tax on the inputs used in manufacturing the product .i.e if 10% tax he paid to buy an inputs then next step when the finished product he sale, he must be subtract the amount he has paid in taxes at the time of purchase of inputs and submit the balance amount to the government as a tax of finished product. Now elaborating the concept we can say that

A product is produced and crossed the multiple stages to come on the hand of the final consumer. i.e the stages are,

 Input seller   ---------- Manufacturer-------- Wholesaler------- Retailer---------- Final consumer

In every stages buyer have to pay tax .ie. Manufacturer pays tax to the government when he buys the inputs; again wholesaler pays tax to buy the finished product. Retailer also pay tax when he buy the product from the wholesaler and lastly final consumer pays tax when he buy the final product with packaged and labeled from the retailer. Before the implementation of GST wholesaler pay the tax twice of inputs which earlier once paid the manufacturer. For simplicity take an example, suppose the manufacturer buys inputs of Rs100, and suppose tax rate is 10%.Then for the inputs manufacturer pay Rs10 as a tax. In the next stage manufacturer produced goods with this inputs and added Rs50 as a cost of production. So, now wholesaler buys this finished product at

Rs{Input cost(100)+Tax(10)+production cost(50)}=Rs160+ 160*10%=Rs(160+16)=Rs176.[ For more details go to  How GST works ]

Here manufacturer once pays the tax  when he buys  inputs but wholesaler pays the tax twice of the same inputs when he buys the finished product. In this way the cost of the final product when it comes on the hand of final consumer increases. Government looks ‘tax on tax ‘matter through the implementation of GST. Now, wholesaler can demand input tax credit from the government as a return tax .i.e Wholesaler now pay Rs{Input cost(100)+Input tax(10)+production cost (50)+tax on production cost(50*10%)}=Rs(100+10+50+5)=Rs165 to the manufacturer instead of Rs176.

The return tax of Rs11 is called input tax credit.

In the case of the input tax credit in GST system it is compulsory that each and every step  we have to pay the tax .i.e Manufacturer  must pay tax to the government when he buy  inputs from the input seller .If manufacturer buy the inputs without paying tax to the government then how could wholesaler demand the return tax? In that case wholesaler must be paid the whole tax when he buys the product from the manufacturer.

So, it is mean to say that if you answered your question paper you have to verify that other also do the same and no one cheating in the exam.

For related topic-1) GST its advantages and disadvantages

                            2) Tax and its types

                            3) Tax and its principles