What is input tax credit in gst and how to calculate it ?

how to calculate input tax credit

What is input tax credit ?

In the process of sale of goods to end customer or end user the same goods will sold by more than one person in the sales chain. For example Hindustan unilever limited manufactures and sells as certain product(gst rate @ 5 % ) at Rs.105 (Rs.100 plus GST rs.5) to its  super distributor, super distributor sells the same product at Rs. 110.25  to area distributor (Rs. 105  + Rs.5.25 ), distributor sells the product at Rs.115.5 to supermarket ( Rs.110 + Rs.5.5 ), super market Sells it at Rs. 126 to end customer (Rs.120 + Rs.6).

Product GST rate is 5 % which means the government net gst collection from the product sold to end customer is 5 % on Rs.120 taxable value, its works out to Rs.6.

But this 6 rs will not be collected fully collected from final supplier at ever point of sale tax is collected at value addition, in our case let us assume inputs of hindustan unilever for production is 0%.

Hindustan unilever sell at Rs.105 including tax of Rs.5 gst from super distributor and pays 5 Rs GST to government as there is no input tax credit available and issues invoice mentioning GST as Rs.5. super distributor sells at Rs.110.25 including tax of Rs.5.25 and pays tax of Rs.0.25 to government after deducting tax already paid to hindustan unilever, similarly distributor pays Rs.0.25, super market pays Rs.0.50 so the total tax collected by the government from all the four person comes to Rs.6 which is 5 % of final taxable value.

In simple terms supplier pays GST at the rate calculated on value addition made by him in our case value addition made buy super distributor is Rs.5 (105-100) so net tax payable is 5 % on Rs.5 which works out to be Rs.0.25.

 Sl.NoSupplierCalculationTax paid by the Supplier to Government
 1 Hindustan unilever 100 * 5 % Rs.5
 2 Super Distributor (105-100)* 5 % Rs.0.25
 3 Distributor (110-105)* 5 % Rs.0.25
 4. Super market (120-110 ) * 5 % Rs.0.50
 Total amount paid to government by all suppliers Rs.6.00

Finally we  can conclude that GST department collects tax from all suppliers who had completed gst registration application with gst department at all level of sales at the value addition made by them in the sales cycle, total tax collected will be equal to sum of taxes collected from all persons in sale cycle which will exactly works out to be tax to be collected if final price.

Advantages of input tax credit system

  1. Government collects full tax with out any evasion as multiple parties are involved in the cycle
  2. Collection of tax at each level ensures early collection of taxes this eliminates waiting time untill final sale, gst is paid by the supplier during gst monthly return filing  tax revenue can be used for objects of the government.
  3. Supplier will have sense of paying less tax as the final liability is only on value addition made by them.
  4. Forces supplier to issue invoice to registered dealer as they need it to claim input tax credit so finally suppression of sales is eliminated in this kind of transactions.
  5. Suppression of purchases is eliminated in case of transactions between registered dealers as the GST portal efficient input tax credit system.

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