Vyavsay School
← GST without the fear · lesson 2 of 5

How GST moves, and input tax credit

Follow GST from supplier to customer and know what you can claim back.

6 min read

GST is a tax on what a customer pays. A business collects it, pays it to the government, and — this is the part that confuses people — gets back the GST it paid on its own purchases. The result is that each business in a chain pays tax only on the value it added. This is called input tax credit, or ITC.

The chain, with made-up numbers

Take a 18% rate, and three steps.

  1. A supplier sells you cloth for ₹1,000. They charge 18% GST: ₹180. You pay ₹1,180. The supplier pays that ₹180 to the government.
  2. You stitch it and sell the garment for ₹2,000. You charge 18%: ₹360. Your customer pays ₹2,360.
  3. You pay the government not ₹360, but ₹360 − ₹180 = ₹180. You have already paid ₹180 through your supplier; you claim it back as input tax credit.

Total GST paid to the government: ₹180 + ₹180 = ₹360, which is 18% of the final price of ₹2,000. Nobody was taxed twice. You paid tax only on the ₹1,000 of value you added.

The tax you collect on sales is output tax. The tax you paid on purchases is input tax. Each return period you pay the government the difference.

What you can claim

Broadly, GST paid on things bought for the business — stock, raw material, equipment, services like rent or a CA's fee — can be claimed, if you are a regular GST-registered business.

You need:

  • A proper tax invoice from the supplier, with your GSTIN on it. (The last lesson in this course shows what one looks like.)
  • The goods or services actually received.
  • The supplier to have reported the sale. Your credit is matched against what your supplier tells the government they sold you. If they do not report it, the credit does not show up for you to claim.

That last point is why reliable suppliers matter. A supplier who collects GST from you and does not file their returns can cost you the credit — you paid the tax, and cannot get it back until they put it right.

What you cannot claim

  • If you are not registered, GST on your purchases is simply a cost.
  • If you are on the composition scheme, you cannot claim input tax credit at all. That is a large part of the trade-off the next lesson covers.
  • Some purchases are blocked from credit by law even for regular businesses — personal consumption is the obvious one. Ask your CA about anything that is not clearly for the business.

Why it changes your pricing

If your customers are businesses, they can claim the GST you charge them, so for them your real price is the price before tax. If your customers are households, they cannot — for them, the GST is part of the price.

The GST calculator below adds GST to a price, or takes it out of a price that already includes it, at every rate — and shows the CGST/SGST or IGST split.