Explain input tax credit under GST with a simple example.

What the interviewer wants to hear

• ITC is GST paid on purchases used for business
• It is set off against GST payable on sales
• Avoids tax on tax across the supply chain
• Conditions: valid invoice, goods or services received, supplier has reported and paid
• Some credits are blocked

Model answer

Input tax credit is the GST a business pays on its purchases, which it can set off against the GST it collects on its sales. For example, a trader buys goods for ₹1,00,000 plus ₹18,000 GST and sells them for ₹1,50,000 plus ₹27,000 GST. Instead of paying the full ₹27,000 to the government, it uses the ₹18,000 credit and pays only ₹9,000. This means tax is paid only on the value added at each stage, so there is no tax on tax. To claim the credit, the business needs a valid tax invoice, must have received the goods or services, and the supplier must have reported the invoice so it appears in GSTR-2B and paid the tax. The purchase must be used for business, and some items, like most food and beverages or personal-use items, are blocked even if paid by the business.

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