INPUT TAX CREDIT (ITC) under GST
Directorate of Commercial Taxes, West Bengal
Note: Reference to WBGST Act, 2017 includes reference to CGST Act, 2017 also.
Disclaimer: Answer is only for educational and guidance purposes and do not hold any legal validity. For complete details
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Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, “ITC”)
is one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading
of taxes. Cascading of taxes, in simple language, is ‘tax on tax’. Under the present system of
taxation, credit of taxes being levied by Central Government is not available as set-off for
payment of taxes levied by State Governments, and vice versa. One of the most important
features of the GST system is that the entire supply chain would be subject to GST to be levied
by Central and State Government concurrently. As the tax charged by the Central or the
State Governments would be part of the same tax regime, the credit of tax paid at every
stage would be available as set-off for payment of tax at every subsequent stage.
An example:-
Let us understand how ‘cascading’ of taxes takes place in the present regime. Central
excise duty charged on inputs used for manufacturing of final product can be availed as
credit for payment of central excise duty on the final product. For example, to manufacture a
pen, the manufacturer requires, plastic granules, refill tube, metal clip, etc. All these ‘inputs’
are chargeable to central excise duty. Once a ‘pen’ is manufactured by using these inputs,
the pen is also chargeable to central excise duty. Let us assume that the cost of all the above-
mentioned inputs is say, Rs.10/- on which central excise duty @10% is paid, means Re.1. The
cost of the manufactured pen is say Rs.20/-, the central excise duty payable on the pen @10%
will be Rs.2/-. Now the manufacturer of the pen can use the duty paid on inputs, i.e. Re.1/- for
payment of duty on the pen. So, he will use Re.1 paid on inputs and he will pay Re.1/- through
cash (1+1=2), the price of the pen becomes Rs. 22/-. In effect, he actually pays duty on the
‘value added’ over and above the cost of the inputs. This mechanism eliminates cascading of
taxes. However, when the pen is sold by the manufacturer to a trader, he is required to levy
VAT on such sale. But under the present system, the manufacturer cannot use the credit of
central excise duty paid on the pen for payment of VAT, as the two levies are being levied by
Central and State government respectively with no statutory linkage between the two.
Hence, he is required to pay VAT on the entire value of the pen, i.e. Rs.22/-, which actually
includes the central excise duty to the tune of Rs.2/-. This is cascading of taxes or tax on tax, as
now VAT is not only paid on the value of pen i.e. Rs.20/- but also on tax i.e. Rs.2/-.
Goods and Services Tax (GST) would mitigate such cascading of taxes. Under this new
system, most of the indirect taxes levied by Central and the State Governments on supply of
goods or services or both, would be combined together under a single levy. The major
taxes/levies which are going to be clubbed together or subsumed in the GST regime are as
under:
CENTRAL TAXES
STATE TAXES
• Central Excise duty
• Additional duties of excise
• Excise duty levied under Medicinal &
Toilets Preparation Act
• Additional duties of customs (CVD & SAD)
• Service Tax
• Surcharges & Cesses
• State VAT/Sales Tax
• Central Sales Tax
• Purchase Tax
• Entertainment Tax (other than those levied
by local bodies)
• Luxury Tax
Entry Tax (All forms)
• Taxes on lottery, betting & gambling
• Surcharges & Cesses
