Seamless flow of input tax credit from the manufacturer of goods and services to the consumers i.e. across the chain and also across the country is the most fundamental characteristic of GST. In the process of sale and purchase of goods and services by the dealer, when goods/ services are bought, tax is paid while in the sale, tax is collected. Now, the settlement of tax is done periodically where the dealer needs to pay the difference amount of tax to the government. Here, the difference amount is the liability of tax i.e. excess of tax collected on sales over tax paid on purchases. This is how the process of utilization of input tax credit is explained.
Conditions and process to avail input tax credit on the sale of goods and services have been laid down by the law as described below:
There are three types of taxes which are charged under GST:
Now, let’s suppose Mr. X sells goods to Mr. Y. Hence, Mr. Y will get eligible for claiming credit on purchases based on invoice.
As soon as the sale is done by Mr. X, GSTR 1 will be uploaded by him with the details of invoice, the details of which will be in respect of Mr. Y which will auto populate in GSTR 2A. After this, Mr. Y will upload GSTR 2 with details of inward supply and it will pull out the same data from GSTR 2A.
Now, Mr. Y will accept the details of the purchase made by him, and have been reported correctly by the seller. After this, the “electronic ledger account” will be credited with the amount of tax on purchases of Mr Y which can be adjusted in any future tax output liability of tax.
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