Are you starting a business for the first time and considering GST registration? Feeling confused about bookkeeping and claiming input tax credit on purchases? This guide will clear your doubts.
Let’s take an example:
Mr. Umang establishes a business called Umang Trading Co. and registers for GST. Let’s say, his business involves buying and selling goods, specifically electronics.
One day, Mr. Umang purchases a phone from a wholesaler for ₹1,00,000 + 18% GST (₹18,000), totaling ₹1,18,000. He pays this amount from his bank account.
Since he is GST-registered, he provides his GSTIN at the time of purchase. The wholesaler will mention Mr. Umang’s GSTIN in his GST return, allowing Mr. Umang to claim an input tax credit (ITC) of ₹18,000.
Later, Mr. Umang sells the same phone to a customer, Mr. Santosh, for ₹1,20,000 + 18% GST (₹21,600), totaling ₹1,41,600.
Now, let’s break down Mr. Umang’s financials so far:
Now that the sale is complete, Mr. Umang has a Gross GST liability of ₹21,600. However, since he had already claimed an input tax credit (ITC) of ₹18,000 at the time of purchase (by providing his GST number), he only needs to pay the remaining ₹3,600 from his bank account.
This is how input tax credit works under GST, ensuring that tax is applied only to the value added at each stage.
If Mr. Umang had not claimed GST input on his purchase, his profit and loss summary would look different, as shown below:
Do you see how significantly profit decreases when input tax credit isn’t claimed on purchases? This highlights the importance of understanding and utilizing input credits effectively.
Note: Input tax credit can only be claimed on purchases directly related to the business.
For detailed accounting and GST solutions, it’s always best to consult a Chartered Accountant.
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- Theodore Roosevelt
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