Understanding Input Tax Credit Under GST

Input tax credit is the mechanism that stops GST becoming a tax on a tax. You pay tax on what you buy, you charge tax on what you sell, and you pay the difference. Without it, tax would compound at every stage of a supply chain.

In principle it is simple. In practice, credit is conditional, and the conditions are where disputes begin.

Broadly, you need a valid tax invoice or prescribed document, you need to have actually received the goods or services, the tax must have reached the government, and the supply must have been reported by your supplier so that it is visible to you.

That last condition is the one businesses underestimate. Your entitlement is affected by someone else's compliance. Which is why supplier selection is a compliance decision, not only a commercial one, and why periodic reconciliation with the credit available to you is essential.

Certain categories are restricted or blocked outright, and credit relating to exempt supplies or personal use has to be apportioned rather than claimed in full.

The discipline that protects credit is unglamorous: keep documents, reconcile regularly, and raise a discrepancy with the supplier while it is still small.