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Input Tax Credit (ITC): GST

Input Tax Credit (ITC):

The Supreme Court has confirmed a Madras High Court judgment which upheld a fiscal formula included in the Central Goods and Service Tax Rules to execute refund of unutilised Input Tax Credit (ITC) accumulated on account of input services.

  • 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.

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.
  • There could be possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim tax credit.
  • As much as 80% of the total GST liability is being settled by ITC and only 20% is deposited as cash.
  • Under the present dispensation, there is no provision for real time matching of ITC claims with the taxes already paid by suppliers of inputs.
  • 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.

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