How to Calculate Input Tax Credit (ITC) under GST?

Team Masters India
Team Masters India at May 11, 2022
How to Calculate Input Tax Credit (ITC) under GST?

Calculation of Input Tax Credit

In simple words, “Credit on tax can be claimed by a supplier on the output of goods and set off against tax paid earlier on the input of the goods”. The idea is to reduce the cascading effect and lessen the tax burden, ultimately eliminating dual tax payments.

Let us, deep dive, further into input tax credit calculation by taking a simple example to further understand how to calculate Input tax credit.

How to calculate ITC in GST with example

A manufacturer’s final tax output comes out to be INR 1000 which he needs to pay on the final goods or but during the whole process he already has paid taxes of INR 250 and INR 300 on the initial purchase of the goods. Now the scenario is the tax already paid by the manufacturer is INR 550 (250+300), which is eligible for the tax credit and the manufacturer can claim this amount at the time of the tax to be paid on the final goods i.e.; 1000. So the tax actually needs to be paid by him is reduced to INR 450 (1000-550). Hence, we can conclude that

Tax credit availed: INR 550 (250+300)

Tax on output : INR 1000

Tax to be paid: INR 1000-INR 550 = INR 450

Let’s further understand ITC calculation in GST with respect of GST and value of Goods: -

Assume you have a business and the GST you have to pay is 18% on the raw material purchased. The cost of the raw is INR100, so the tax paid will be 18 which needs to be paid by the manufacturer.

Now the final goods are ready, the manufacturer sells the final goods worth INR 300 with the GST of 18% on it making the tax component to be 54 and the total cost of the final goods to be 354 (300+54). But at the time of filing the return, the manufacturer can claim 18 as input credit already paid. And deposit 36 as the final tax liability with the government.

Remember ITC is a tax imposed on value addition on the goods and services and not on final goods.

Although the utilization is through a waterfall mechanism through various stages of IGST/CGST/SGST

The ITC is set off under the following manner: -

  1. Set off first with IGST, and the balance with CGST/SGST with the respective proportion.
  2. Set off second with CGST and the balance with SGST. However, the credit available with CGST can’t be set off against SGST or UGST
  3. Lastly the residual tax credit from IGST is set off against SGST. However, the credit available with SGST/UGST can’t be set off against IGST

How to calculate ITC in GST?

  1.       Calculate the tax credit available with you for eligible goods or services
  2.       Determine the utilization at each level
  3.       Calculate the final GST of the finished goods or services
  4.       Claim the available ITC

So to summarize till now what we have learned of the input tax credit formula under GST would be as below: -

                       GST payable = Output GST- Input GST

 How to calculate Output GST: GST on sale of the final goods

 How to calculate Input GST: GST on purchase of the raw material

 We clearly understand the benefits of the ITC: -

  1.  Reducing the tax burden
  2. Eliminating dual Tax
  3. Tax levied only on addition of value on goods or services and not only on final goods
  4. Simplicity
  5. Transparency
  6. Easy to the taxpayer

Blocked Credits under ITC

There are few exemptions of ITC on goods or services which can’t be claimed. Good exclusively used for: -

  1.     Personal use
  2.     Exempt supplies
  3.     Supplies for which ITC is not available

Relevant return filled with GST to claim ITC: -

GSTR-1 is a monthly return related to details on outward supplies:

Turnover

Due Date

Above INR 5 crore

11th of every month

Below INR 5 crore

13th  of the following Quarter

 GSTR-2A/2B is a monthly return related to details on all inward supplies.

GSTR-3B is a monthly self-declaration return to be filled and furnished in a summarized manner involving all the details of outwards supplies made, input tax credit claimed, tax liability ascertained and taxes paid.

The input and output tax credit must be filled in GSTR-1 and GSTR-2 before filing GSTR-3B

Due Date:

Turnover

Due Date

Above INR 5 crore

20th of every month

Below INR 5 crore

22nd of the following Quarter

 Time Limit to claim ITC in GST: -

A buyer should pay the supplier within 180 days from the date of issuing the invoice. There are also dedicated slabs according to turnover for filing of the return. The due date for GST-3B for September 2021 is 20th October 2021 for all monthly files.

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