What is Input Tax Credit (ITC)?

• IAS NEXT, Lucknow
• 14, Oct 2021

GST Network has said it has blocked Rs 14,000 crore worth of input tax credit (ITC) of 66,000 businesses registered under the Goods and Service Tax.

Background:

The government had introduced Rule 86A in GST rules in December 2019 giving powers to taxmen to block the ITC available in the electronic credit ledger of a taxpayer if the officer has “reasons to believe” that the ITC was availed fraudulently.

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.