Posted on by Insights Editor
Print Friendly, PDF & Email

What is Input Tax Credit (ITC)?

GS Paper 3

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Context:

The Central Board of Indirect Taxes and Customs (CBIC) has come out with norms on blocking of tax credit by GST field officers, saying that such blocking should be on the basis of ‘material evidence’ and not just out of ‘suspicion.’

 

New Norms:

  • The norms laid down five specific circumstances in which such credit could be blocked by a senior tax officer. These include invoices on which GST has not been paid by sellers.
  • The commissioner or an officer authorised by him, not below the rank of assistant commissioner, must form an opinion for blocking of input tax credit (ITC) only after ‘proper application of mind’ considering all the facts of the case.

 

What is Input Tax Credit (ITC)?

  • 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 simple terms, input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Exceptions: A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.

 

Concerns over its misuse:

  1. There could be possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim tax credit.
  2. As much as 80% of the total GST liability is being settled by ITC and only 20% is deposited as cash.
  3. Under the present dispensation, there is no provision for real time matching of ITC claims with the taxes already paid by suppliers of inputs.
  4. Currently there is a time gap between ITC claim and matching them with the taxes paid by suppliers. Hence there is a possibility of ITC being claimed on the basis of fake invoices.

 

Insta Curious:

Did you know that the Madras HC had held last year that Section 54(3) of the Central Goods and Service Tax (CGST) Act – which allows for a refund of Input Tax Credit (ITC) where the accumulation is due to an inverted duty structure – does not infringe on Article 14 of the Constitution? It said that refund of tax paid on inputs and not input services was available under the inverted duty structure.

 

InstaLinks:

Prelims Link:

  1. What is GST?
  2. What is composition scheme?
  3. What is Input tax credit?

Mains Link:

Discuss the significance of Input tax credit.

current affairs

Sources: the Hindu.