GST i.e. Goods and Services Tax is one of the biggest economic reforms in the history of India. We all know one basic thing that the GST is a replacement of all the Indirect taxes with a single tax with many tax brackets. There are even some goods and services which are not a part of the GST scheme, like petroleum products, electricity etc. But we will not discuss all that stuff here, but concentrate on the term which is called as “Input Tax Credit”.

We will understand the term with simple example. Have a seen a serial named as “Tarak Mehta ka ulta Chasma”? Most probably you will say YES. So, lets take him and him electronic shop to under the concept of Input Tax Credit.

Tarak Mehta owns an electronic shop in which he used to sell electronic gadgets like TV, Refrigerator, Washing machine, etc, etc. So, when he purchase these goods, he pays some taxes. Let he purchase goods of worth 2,00,000 rupees. If we assume 18 per cent GST, then total money paid by him is 2,36,000. Here the tax paid by him at the input is 36,000 rupees. This is called Input tax.

Of course, he will make some profit while selling these goods. Let he mark up goods by 10 per cent. So, he will sell goods of 2,00,000 rupees in 2,20,000 rupees. Now, while selling tax will be applicable on 2,20,000 not on 2,00,000.

So, as per 18 per cent tax rate, total tax will be 18 per cent of 2,20,000 i.e. 39,600 rupees. But if you can recall, Tarak Mehta had already paid 36,000 rupees as tax while buying goods. Now, while selling total tax applicable is 39,600 rupees. But now he just need to pay 39,600 – 36,000 = 3,600 rupees.

Input tax credit = Output tax – Input tax

Input Tax Credit may be unclaimed if output tax is less than input tax.
Tarak Mehta understands the value of taking invoices while paying taxes.

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