byShine legal India                        Published On 2025-06-05

The Goods and Services Tax (GST) brought major reforms to how taxes are collected in India. One of the key features of GST is the Input Tax Credit (ITC), which allows businesses to reclaim the tax paid on the materials or services (inputs) used to produce their goods or services. This system provides several benefits, such as reducing the overall tax burden, preventing taxes from being paid multiple times, also known as tax cascading and helping businesses to save money. 

What is ITC (Input Tax Credit)?

The Input Tax Credit (ITC) is a system that helps businesses to avoid paying tax on tax, also known as tax cascading. The ITC is a refund or credit issued to a business for GST paid on business purchases or expenses. This credit can be used to reduce the GST that the business needs to pay on its sales. GST registration enables businesses to receive credit for tax already paid on purchases, avoiding the need to pay tax on the same amount again. 

How GST simplified India’s tax system- From multiple taxes to one nation, one tax. 

Before the implementation of Goods and Services Tax, the central government and the state government imposed separate taxes on goods and services. These included value-added tax or a tax on the sale of goods and excise duty or a tax on manufacturing. These taxes were treated separately, which meant that businesses could not use taxes paid to one government to reduce taxes owed to another. As a result, businesses ended up paying tax multiple times on the same amount. This issue has been resolved since the implementation of GST. Now, both the central and state governments apply GST together on goods and services. Since they are part of the same unified tax system businesses can use the tax paid at one stage to reduce the tax they owe at the next stage. This process helps lower costs and eliminates double taxation. 

What is GST Registration?

GST registration is the process by which a business or individual is officially registered with India's Goods and Services Tax (GST) system. GST registration makes a business part of the formal GST system meaning it must follow GST rules, collect GST on its sales and file regular returns. GST registration is required for businesses with a turnover that exceeds a certain threshold limit and it enables them to claim benefits such as the Input Tax Credit (ITC), which allows them to claim back the tax paid on purchases, lowering their overall tax burden.

Eligibility to claim Input Tax Credit (ITC) under the GST

1. GST registration is required for businesses to claim ITC on any goods or services it purchases.
2. In order to claim ITC, a valid tax invoice from a registered supplier is required.
3. ITC can be claimed only when the goods or services have actually been received by the buye
4. The supplier must pay the GST they collected from the buyer to the government. If the supplier does not pay GST to the government, the GST authority will not recognise the payment as legitimate and the buyer will be unable to claim ITC.
5. To claim ITC the business must have filed all the applicable GST returns as required by the law.

 

Impact of GST registration on Input Tax Credit (ITC) 

• It reduces the overall tax burden for businesses.
• It eliminates the practice of paying tax on tax by allowing businesses to deduct the tax they paid on goods from the tax they owe on sales.
• It encourages accountability by requiring businesses to keep accurate records and file returns. 
• It improves cash flow by allowing businesses to recover GST on inputs which reduces upfront tax costs. 

Impact of GST registration on cost savings with Input Tax Credit (ITC)

• Access to Input Tax Credit (ITC)- GST registration allows businesses to claim ITC meaning they can recover the tax paid on goods and services used for business which reduces overall costs. 

For example-  XYZ Ltd is a company that buys raw materials worth ?100,000 and pays ?18,000 as GST. Later, the company sells finished goods for ?1,50,000, charging ?27,000 as GST. XYZ Ltd can use the ?18,000 already paid as an input tax credit, so it only needs to pay ?9,000 more to the government. This helps the company lower its tax burden and save costs.

• No double taxation- Under GST, companies like XYZ Ltd do not have to pay tax twice. They can apply the GST paid on purchases to reduce the tax they must pay on sales, avoiding paying tax twice on the same amount.
• Lower compliance costs for larger businesses- With GST registration, businesses only need to register once under GST for all indirect taxes, file consolidated monthly or quarterly GST returns and maintain standard formats for invoices and records.
• ITC on Capital Goods- Businesses that register for GST can claim ITC on capital goods like machinery, equipment and tools used in their operations. These purchases frequently involve large GST amounts and claiming the ITC on them results in significant long-term cost savings.
• ITC on Services- GST registration allows businesses to claim ITC on services such as rent, legal services, professional fees and more. These benefits extend to both service-based businesses and those involved in the sale of goods.