GST rollout: What is Input Credit? Heres what you need to know about it

Goods and Service Tax (GST) will soon be a reality from July 1, 2017. As the rollout date nears, the concept and the tax structure is important to understand.

The new tax regime, or GST apart from the companies, it is expected to benefit consumers and manufacturers too. Here's how.

To understand how it will reduce burden, it is important to understand the term "Input credit".

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What is Input credit?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs.

Input Credit Mechanism is available to you when you are covered under the GST Act.

Which means if you are a manufacturer, supplier, agent, e-commerce operator, registered under GST, you are eligible to claim input credit for tax paid by you on your purchases.

According to ClearTax, when you buy a product/service from a registered dealer you pay taxes on purchase, while making sales, tax is collected and periodically the same is adjusted with the tax you already paid at time of purchase and balance liability of tax (tax on sales (minus) tax on purchase) is to be paid to the government. 

This mechanism is called utilisation of input tax credit(tax on purchase adjustment against tax liability on output i.e. sales).

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Explaining the term with an example, Archit Gupta, Founder & ClearTax.com, said, "Say, you are a manufacturer. The final tax payable on your output (FINAL PRODUCT) is Rs 450, while you have already spent Rs 300 buying the raw materials needed to make your product. Under GST, you can claim the input credit of Rs 300 and you will only need to deposit Rs 150 more in taxes."

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Therefore, to allow you to claim input credit on purchases all your suppliers must be GST compliant as well.