How Is The Goods & Services Tax Charged And The Input Tax Credit Mechanism
The biggest tax reform in India thus far, the Goods and Services Tax has plenty of salient features. Once an entity has registered for GST, they must charge it on their supplies at the prevailing rate specified by the Government (relevant supplies that are subject to customer accounting bring an exception). This part of GST is known as output tax which must be paid to IRAS.
The GST that is incurred on business purchases, including import of goods, is referred to as input tax. If the business satisfies the conditions laid down for claiming input tax, the entity would be able to claim the Input Tax Credit benefit.
The primary goal of introducing this regime was to simplify the taxation system in vogue in the country and therefore to present to you in simple terms, the meaning of Input Tax Credit, it can be understood as the part of tax that one has already paid on their purchases. Let’s head on to the details of this system:
What is Input Tax Credit? Input Tax can simply be understood as the GST charged when goods or services are provided/sold to a taxable entity. Accordingly, Input Tax Credit refers to a reduction in taxes paid on the sales of the goods or services, as a result of the fact that a part of the tax due has already been paid on purchases. It is important to point out, however, that this is not an entirely new concept. It did exist in the pre-GST era as well, nevertheless, its application under GST has widened its scope.
A salient feature of this Input Tax Credit mechanism is that it can only be claimed on select types of ‘inputs’, which vary from country to country and form state to state. A simple example of how this mechanism functions would be:- The tax due from a manufacturer is Rupees 450, but he has already paid Rupees 300 on purchases, therefore, his Input Tax Credit would only be Rupees 150.
Now, a frequent that comes up while discussing Input Tax Credit, is whether there’s a time limitation to avail it? To answer this question, firstly, it is important to note that it is true that Input Tax Credit can only be availed within a specified time frame.
Secondly, the following table depicts the numerous situations wherein inputs can be claimed for semi-finished and finished goods:
Input tax credit for the above-mentioned situations can be claimed only if it does not exceed one year from the tax invoice date of issue related to supply.
For any other cases, ITC must be claimed earlier of the following-
a) Furnishing of annual return or
b) Due date of filing the monthly return (GSTR-3) for the next financial year’s September month.
How is Input Tax Credit calculated?
It is best to understand the working of Input Tax Credit through an example:
Let’s assume there’s a manufacturer selling a product at 18% rate of taxation. He uses various services or goods as ‘input’ in order to manufacture his final product. Essentially, through this mechanism, the tax due form him is set off in accordance with the taxes already paid by him on the purchase of the product. Therefore, the taxes are only paid by him for the value addition that he does and not on the total value of the product.
This credit can be availed on all stages of the distribution and selling channels, by retailers, distributors, and so on.
How is GST charged?
Finally, now that we know about the Input Tax Credit mechanism, we move on to how the Goods and Services Tax is actually charged. The GST Council has assigned various rates to different goods and services thereby creating tax slabs. There are still some products that can be purchased without any GST on them, however, a majority of goods and services come at the various tax rates, i.e, 5% GST, 12% GST, 18% GST, and 28% GST. These GST rates have been changed a few times since the law was first introduced and implemented in July 2017.
Calculating the amount of GST when filing one’s tax returns is a tedious tax. There are a number of factors that ought to be given due consideration, for instance, ITC, exempted supplies, reverse charge, and the like. One’s failure to pay the entire amount of GST would lead to a them being slapped with an 18% interest rate on the shortfall.
Here is an example showing how you can calculate your GST liability:
This calculation varies situationally and has to be calculated keeping in mind in the tax slab that the particular good or service falls in.