Input Tax Credit refers to the credit a business can claim for the Goods and Services Tax (GST) paid on inputs (goods or services) used to produce taxable supplies. Essentially, it helps avoid the cascading effect of taxes, allowing businesses to pass on the benefit to consumers through reduced costs.

For instance, if a manufacturer pays GST on raw materials and later collects GST from customers for finished goods, the ITC mechanism allows the manufacturer to offset the GST paid on raw materials against the GST collected on sales.

Key Conditions for Claiming Input Tax Credit

To claim Input Tax Credit, certain conditions must be met:

1. The taxpayer must be registered under GST.

2. A valid tax invoice or debit note must be in possession.

3. The goods or services must be used for business purposes.

4. The supplier must have deposited the GST with the government.

Benefits of Input Tax Credit

1. Reduction in Tax Liability: ITC directly reduces the amount of GST payable, improving cash flow for businesses.

2. Improved Profit Margins: By reducing the overall cost of goods or services, ITC enhances competitiveness and profitability.

3. Compliance Incentive: The ITC system motivates businesses to ensure proper invoicing and tax payment to claim credit seamlessly.