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How does input tax credit system help reduce tax evasion in GST?

By Finserv MARKETS - Nov 21,2019
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Earlier this year, the government detected tax evasion to the tune of ₹20,000 crore (between April-February 2018-19)half of which it did recover. This can partly be attributed to the Goods and Services Tax that was introduced two years ago. Today, income tax and GST returns are being matched to find tax offenders, thanks to data analytics.

There are several ways in which businesses try to evade tax. They refrain from issuing invoices, under-report sales, claim false credits, show false exports to avail refunds, collect taxes that are not deposited to the exchequer and avail wrong exemptions among others. This was further complicated with sales returns being filed at the state level and service tax returns at the national level in the pre-GST period.

How does input tax credit system help reduce tax evasion in GST?

Source: CAG, Ministry of Finance

It was with the purpose of keeping such malpractices in check that the input tax credit(ITC) system was made an essential part of GST. It allows you to reduce your tax outgo by taking into account the tax paid on input(purchase), at the time of paying tax on the output(sale) of your business. Once you are registered under the GST act, you can easily claim ITC.

Not only should you have received goods from a registered dealer along with a tax invoice, but he/she should have also filed a GST return in this aspect. The input credit that you claim is matched with the corresponding supplier invoice and verified. This is perhaps the biggest advantage of input tax credit. It encourages businesses to be tax compliant.

However there is a flip side as well. As per GST law, invoices have to be uploaded on the GST IT network for each and every transaction. Only then can it be eligible for tax credits. This not only increases the woes of the government with hundreds of crores stuck in input tax credit claims, but also adds to the problems of businesses, struggling to get a business loan.

It is difficult for SMEs to finance their companies and the complexities of input tax credit system can only make them disappointed. However, if you are a business owner looking for easy financing options, a business loan available on Finserv MARKETS can help kickstart your business with upto Rs 30 lakh capital at your disposal. However, even then you will need to comply with GST, so you better make friends with the input tax credit system and understand it better.

Without Input tax credit (ITC), GST would become a burden than a boon, since it would result in a tax upon tax. ITC helps to recover the tax that you pay on expenses towards producing goods or giving out services as a part of your business. These may include expenditure on marketing or advertising, telephone charges, office rent, electricity charges etc. Taking advantage of input tax credit, you can set off the GST paid on expenditure for running your business against the GST charged to the customers.

How does input tax credit system help reduce tax evasion in GST?

Source: thehindu.com

This could be a huge relief especially for small business owners or those just starting out their entrepreneurship journey. At every stage of the supply chain, the buyer of the goods or service gets credit for the input tax paid, and he can use it to offset the GST payable on the output which is required to be paid to the Centre and State governments. Let us understand this by taking an example.

Karthika ran a boutique in a small rented space near her house. She had managed to channel her creativity into her business. Today she has a team of 6 designers and was taking orders not only for daily wear clothes but also premium wedding and party wear. In the last 2 months she charged her clients Rs. 1,00,000 + GST@ 18 percent i.e. Rs. 18,000 for the finished clothes. She bought fabric worth Rs 30,000 and also paid office rent of Rs. 30,000, so her input costs was Rs 60,000 + GST @ 18 percent that is Rs. 10,800.

Due to the input tax credit system, since Karthika will claim Rs 10,800 despite having charged a GST of Rs. 18,000, she will only deposit(Rs18,000-Rs 10,800) Rs. 7,200 with the government. This will prompt her to pay her taxes thus increasing tax compliance as well, which is the main advantage of input tax credit introduction in GST to the government. It reduces tax evasion in GST as well as the burden on government revenues.

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However, there are certain conditions that need to be fulfilled in order to take advantage of input tax credit if you are a business owner paying GST:

  1. You should have a tax invoice or debit note that has been issued by a registered supplier
  2. You have either received any goods or utilised services for the purpose of your business or both
  3.  You have paid your GST return
  4. The person supplying you the goods or services has already paid the tax charged in this respect.

So get familiar with ITC and avoid tax evasion in GST by streamlining your business operations. You can always avail a business loan available on Finserv MARKETS if you are looking to scale up your existing business or need capital to start a new one. There is no collateral or security required and the approval process is also quick. Attractive interest rates and flexible payment options further make it more convenient. So be a smart businessman and take your company to new heights!
Also read all about GST, components of GST & different between SGST, CGST & IGST

Finserv MARKETS, a subsidiary of Bajaj Finserv, is a one-stop digital marketplace that has been created for consumers on the go. It offers 500+ financial and lifestyle products, all at one place. At Finserv MARKETS, we understand that every individual is different. And that’s why we have invested in creating a proposition – Offers You Value. A value proposition that ensures you get offers which are tailor made for you. We also offer an amazing product range and unique set of online offers across Loans, Insurance, Investment, Payments and an exclusive EMI store. Be it in helping you achieve your financial life goals or offering you the latest gadgets, we strive to offer what you are looking for. From simple and fast loan application processes to seamless and hassle-free claim-settlements, from no cost EMIs to 4 hours product delivery, we work towards fulfilling all your personal and financial needs. What’s more! Now enjoy the same benefits in just one click with our Finserv MARKETS App


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Bajaj Finserv Direct Limited ("BFDL") is primarily engaged in distribution of financial products and services through its digital platform (“Bajaj Finserv MARKETS”) and inter alia renders services of customer acquisition, providing preliminary credit support activities, fulfilment services and post-acquisition customer services to Banks, NBFCs, HFCs. BFDL is also a registered Corporate Agent (Composite) under valid IRDAI registration number: CA0551 valid till 10-Apr-2024 for solicitation and servicing of Insurance Products. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522