Input Tax Credit (GST Setoff)

by | 27 Jun 2022 | Finance

Congratulations! You certainly are a smart person because you just took a step to save money by clicking on this blog! Let’s be honest, every single one of us wants to get back the money that we have spent! How about we tell you that this is very possible to achieve in the world of Tax if you simply understand the concept of Input Tax Credit, popularly known as GST Setoff. It is a concept that has not been properly understood by business owners around India, but don’t worry; We are here to save you the time that you would spend researching on this subject by giving everything to you in one place!  So, let’s dive in!

Input tax credit means that at the time of paying tax on output, you can reduce it, by deducting from the amount, the tax you have already paid on your input(s). If the tax payable on your output is more than the tax payable on your input, then you’re eligible to get the balance back as well. Let us break this down with an example!

Let’s say you manufacture paper and to manufacture it, you need raw materials like wood, bleach, rosin and titanium oxide. All of these raw materials are called your Inputs. While purchasing these products, you, of course, pay tax on them. Say, the total tax paid on these raw materials is Rs.500. Now once you have manufactured top quality paper, you will want to sell your paper, which is your output and the tax you have to pay on selling your paper is Rs.1500. But you’re thinking, “Wait, haven’t I already paid tax on this product before the manufacturing process?” The answer is yes! So why should you have to pay it once again? The solution to this is ITC, which allows you to deduct the tax paid on your inputs from the tax paid on your output and in the end the sum total of tax you have to pay is Rs.1500 – Rs.500 = Rs.1000. And you just saved Rs.500.

Can I as a business owner avail the benefits of ITC?

Yes, but only if you are registered under the GST Act. In short, if you are a manufacturer, e-commerce operator, supplier, or an agent registered under GST, you can claim input credit for the tax paid by you on your purchases.

What are the Conditions to claim Input Credit?

  • You must have the tax invoices of purchase or debit note from the registered dealer and if in case you receive the goods in installments, a credit will be available against the tax invoice upon receipt of the last installment. Note: Do not misplace the invoices! Instead, you could keep it safe by using a cloud-based data storage system just like we do.
  • You should be a registered taxable person.
  • You can claim input credit only for goods and services used for business purposes.
  • In the case of a merger, sale or transfer of business, the unused input tax credit can be transferred to the merged, sold or transferred business.
  • One can credit the Input Tax Credit in his/her Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
  • If there is a receipt of goods and services, you can claim an input tax credit.
  • Electronic Credit/cash ledger should be used to pay the input tax.

Is it applicable to everything?

No, of course not. Here is what ITC is not applicable to. 

  1.     Travel benefits extended to employees
  2.     Membership of club, health or fitness center
  3.     Life Insurance / Health Insurance (unless the government has made it mandatory for the employer)
  4.     Goods or services used for personal consumption
  5.     The ITC on goods or services on which tax has been paid by a composition dealer; the ITC shall not be available.
  6.     ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
  7.     ITC in case of a non-resident taxable person
  8.     ITC in case of food and beverages, outdoor catering, health services, etc
  9.     Beauty treatment services/cosmetic and plastic surgery
  10. Rent-a-cab services (unless such service is mandatory to provide by norms of the government)
  11. Construction services for the construction of an immovable property

How do I claim it? 

Suppose there is a particular business transaction between the Seller and the Buyer. In this case, the Buyer can claim the credit on his purchases, based on the invoices. Seems Interesting? Let’s understand how:

Step 1: The Seller will upload the details of all tax invoices issued in GSTR 1.

Step 2: The details with respect to sales to the Buyer will auto-populate/ get reflected in GSTR 2A.

Step 3: The Buyer will then accept the details that the purchase has been made and reported by the seller correctly. Subsequently, the tax on purchases will be credited to the ‘Electronic Credit Ledger’ of the Buyer and he can adjust it against future output tax liability and get a refund.

Though GST may seem like a curse in the beginning, there are many provisions such as this, that can help you save a lot of money in the short and long term. We hope we have made it slightly easier for you to get an understanding of this Tax structure, which looks complicated on the exterior, but is rather easy on the interior once you break it down into simple concepts.

If you have any other queries regarding this topic or just want someone to handle it for you, feel free to reach out to us on and we would be happy to help you out!

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