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What is tax credit scheme? Explain.

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  • For any effective tax regime, it is very important to ensure that there is no duplication of tax. When tax is levied on the same transaction more than once, it is known as duplication of tax.
  • Input Tax Credit (ITC) is a mechanism to avoid duplication of tax on the same transaction. ITC ensures that whatever tax is paid on a given product at an earlier stage, it is set off against the tax payable at the present stage. Earlier, there was no provision under indirect tax system for input tax credit on indirect tax paid, but now GST allows for input tax credit.

Example:

Suppose a trader pays GST of ₹ 35000 at the time of purchase of goods. Suppose at the time of selling this product he is liable to pay GST of ₹ 40,000/-. Then the person needs to pay only the difference in the amount of GST i.e. GST during sale – GST during purchase = ₹ 40,000 – ₹ 35,000 = ₹ 5000/-

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