Save Money with Input Tax Credit

27 Jun 2022 | Finance

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Hooshang Bakht

Brego Business was started with a mission to make entrepreneurship easy. Our goal is to help business owners grow and scale without having to deal with the day-to-day stress of running a business. We specialize in providing services that help business owners grow their businesses, including Digital Marketing, search engine marketing (SEM), social media marketing (SMM), LinkedIn marketing, video production, accounts receivable (AR), accounts payable (AP), internal audit, VCFO, and recruitment. We have helped more than 500 brands grow their businesses. We work closely with clients to understand their unique needs and develop customized strategies that deliver measurable results.

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GST setoff

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.

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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, allowing them to claim input tax credit. This input tax credit can be adjusted against future output tax liability, reducing the overall tax burden. Furthermore, any excess input tax credit can be carried forward to subsequent tax periods or even claimed as a refund. This provision is just one of the ways in which GST can help businesses save money in both the short and long term. With a little effort to understand its concepts, the seemingly complex tax structure can be simplified into a manageable system that benefits businesses through input tax credit.

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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Frequently asked questions

1)What is tax set off in GST?

Tax set off in GST refers to the process of reducing the tax liability of a taxpayer by adjusting or offsetting the amount of tax paid on inputs (purchases) against the tax collected on outputs (sales).

2)What is input tax credit in GST?

Input tax credit (ITC) is a mechanism that allows a taxpayer to claim a credit for the tax paid on purchases of goods or services used for business purposes. This credit can be used to offset the tax liability on sales made by the taxpayer.

3)Who can claim input tax credit in GST?

Any registered taxpayer who has paid tax on purchases of goods or services used for business purposes can claim input tax credit in GST.

4)What are the conditions for claiming input tax credit in GST?

To claim input tax credit in GST, the taxpayer must have a valid tax invoice or other prescribed document, the supplier must have filed the GST returns, and the taxpayer must have received the goods or services.

5)Can input tax credit be claimed on all purchases?

No, input tax credit cannot be claimed on all purchases. Some goods and services are excluded from the input tax credit mechanism, such as motor vehicles and food and beverages.

6)What is the time limit for claiming input tax credit in GST?

Input tax credit can be claimed in the same tax period in which the invoice or other prescribed document is received. It can also be claimed in the subsequent tax period but not later than the due date for filing the GST return for the month of September following the end of the financial year or the actual date of filing the annual return, whichever is earlier.

7)Can input tax credit be carried forward to the next tax period?

Yes, if the input tax credit cannot be fully utilized in the current tax period, it can be carried forward to the next tax period and used to offset the tax liability on future sales.

8)What is the difference between input tax credit and tax credit in GST?

Input tax credit refers to the credit that a taxpayer can claim on the tax paid on purchases of goods or services used for business purposes, while tax credit in GST refers to any credit that a taxpayer can claim to offset their tax liability, including input tax credit, output tax credit, and any other credit allowed under the GST laws.

9)Can tax set off be claimed on goods and services purchased for personal use?

No, tax set off can only be claimed on goods and services purchased for business purposes. Personal purchases are not eligible for tax set off.

10)Is there any limit on the amount of input tax credit that can be claimed in GST?

No, there is no limit on the amount of input tax credit that can be claimed in GST, as long as the conditions for claiming the credit are met. However, the amount of input tax credit that can be utilized to offset the tax liability on output supplies is subject to certain restrictions."