📢 Too many exams? Don’t know which one suits you best? Book Your Free Expert 👉 call Now!

    Question

    In the context of GST, which of the following statements

    best describes the "Input Tax Credit" (ITC) mechanism?
    A It is a cash refund provided by the government to manufacturers for every purchase of raw material made during a financial year. Correct Answer Incorrect Answer
    B It allows a registered taxpayer to reduce the tax already paid on inputs (purchases) from the tax to be paid on output (sales). Correct Answer Incorrect Answer
    C It is a special discount given to consumers at the time of purchasing essential goods to reduce the final invoice value. Correct Answer Incorrect Answer
    D It is the total amount of GST collected by a business from its customers which must be deposited with the government without any deductions. Correct Answer Incorrect Answer

    Solution

    The Core Concept Input Tax Credit (ITC) means that at the time of paying tax on output (your sales), you can deduct the tax you have already paid on your inputs (your purchases). This ensures that tax is levied only on the Value Addition at each stage of the supply chain.   Illustrative Example Let’s look at a manufacturer named "Company A":

    • Purchases: Company A buys raw materials for ₹10,000 and pays 18% GST , which is ₹1,800 (this is the Input Tax).
    • Sales: Company A processes the material and sells the finished product for ₹15,000 . They charge the customer 18% GST , which is ₹2,700 (this is the Output Tax).
    • Net Tax Payable: Instead of paying the full ₹2,700 to the government, Company A uses the ITC of ₹1,800.
    Calculation: $2,700 (Output Tax) - 1,800 (Input Tax) = 900$
    • Final Result: Company A only pays ₹900 to the government.
      Why other options are incorrect:
    • Option A is incorrect because ITC is not a "cash refund" for every purchase; it is a credit used to offset liability. You only get a refund in specific cases (like exports or inverted duty structures).
    • Option C is incorrect because ITC is a business-to-business (B2B) mechanism. End consumers do not "claim" ITC; they bear the final tax burden.
    • Option D is incorrect because it describes the gross tax liability without the benefit of credit, which would lead to double taxation (cascading effect).
      Eligibility Conditions for ITC To claim this credit under Section 16 of the CGST Act, a person must:
    • Be a registered taxable person.
    • Possess a valid Tax Invoice or Debit Note.
    • Have actually received the goods or services.
    • Ensure the supplier has paid the tax to the government and filed their returns.

    Practice Next
    More Research Questions
    ask-question