GST credit, also known as Input Tax Credit (ITC), is a credit that a registered taxpayer can claim for the GST (Goods and Services Tax) paid on the purchases of goods and services used for their business. This credit can be used to offset the output GST liability of the taxpayer and helps to avoid the cascading effect of taxes.
Here’s an example of What is Goods and Service Tax (GST) Credit:
Let’s say a registered taxpayer, ABC Company, purchases raw materials worth Rs. 1,00,000 from a supplier. The GST rate applicable on these raw materials is 18%, so ABC Company pays Rs. 18,000 as GST to the supplier.
Later, ABC Company manufactures finished goods using these raw materials and sells them to its customers for Rs. 1,50,000. The GST rate applicable on the finished goods is also 18%, so ABC Company charges Rs. 27,000 (18% of Rs. 1,50,000) as output GST to its customers.
Now, to calculate the GST credit or Input Tax Credit, ABC Company can subtract the GST paid on purchases (Rs. 18,000) from the GST charged on sales (Rs. 27,000). So, the net GST liability of ABC Company will be Rs. 9,000 (Rs. 27,000 – Rs. 18,000).
Therefore, ABC Company will deposit Rs. 9,000 with the government as GST liability instead of the full Rs. 27,000, as they have claimed the credit for the GST paid on their purchases.
In summary,
GST credit or Input Tax Credit is a credit that a registered taxpayer can claim for the GST paid on the purchases of goods and services used for their business. The taxpayer can use this credit to offset their output GST liability and avoid the cascading effect of taxes.
