GST 2.0 Rollout Today: What Is Input Tax Credit And How It Benefits Businesses

The tax system of India is undergoing major changes from September 22, with a new structure of Goods and Services Tax (GST) coming into effect. The four tax slabs existing have now been merged into two — 5 per cent and 18 per cent. Whereas, the ‘sin goods’ like tobacco and luxury items fall under the special 40 per cent slab.

The GST Council, led by Finance Minister Nirmala Sitharaman, announced these sweeping changes earlier this month with the aim of a simpler structure to boost consumption and improve compliance.

Cheaper Insurance, Lower GST on Services

Health and life insurance policies would not be subject to taxes under GST 2.0, which will lower their cost. The goal of the action is to boost financial inclusion nationwide and persuade more

people to choose coverage. Although this lowers the cost of services for customers, insurance companies may see an increase in expenditures as they will no longer receive the input tax credit for their operating expenses.

Additionally, the GST on services like salons, spas, gyms, fitness centres, and yoga institutions has been lowered under the new regime from 18 per cent with input tax credit (ITC) to 5 per cent without ITC.

What is Input Tax Credit?

The input tax credit system allows businesses to reduce the burden of tax, claiming credit for the GST already paid on purchases or expenses. It helps to monitor that taxes are paid only on the value added at each stage, evading multiple tax payments.

For example, if a manufacturer pays Rs 36,000 GST on raw materials worth Rs 2 lakh and charges Rs 72,000 GST on the selling product worth Rs 4 lakh, they can claim a credit of Rs 36,000. The effective tax liability then becomes Rs 36,000 instead of Rs 72,000.

To claim ITC:
– Businesses must be registered under GST
– Hold valid tax invoices
– Receive goods or services in full
– Ensure suppliers have paid GST and filed returns.

Claims must also be made within specified deadlines: Before the annual return filing date or by November 30 of the following financial year.

Conditions and Restrictions
On lost and stolen goods, a company cannot claim ITC. Items used for personal purposes, employee benefits, or certain services like catering are also not in this list.