Input Tax Credit; Composition Levy; Works Contract; Tax Invoice; GSTN — Law of Taxation Notes

Input Tax Credit; Composition Levy; Works Contract; Tax Invoice; GSTN

Input tax credit is the heart of GST — the mechanism that kills cascading. Take it away and GST becomes just another tax-on-tax. So the law guards it with four strict conditions, and gives small dealers a simpler flat-rate escape (composition) if they are willing to give it up.

The GST mechanics cluster

A. Input Tax Credit (ITC) — ss.16–18 CGST. ITC is the credit of GST paid on purchases (inputs), which a registered person sets off against the GST payable on his sales (output). It ensures tax is paid only on value added. Four conditions (s.16(2)) must all be met:

1. the buyer holds a valid tax invoice/debit note;
2. he has received the goods or services;
3. the supplier has actually paid the tax to the government (and filed his return);
4. the buyer has filed his return.

(Further: he must pay the supplier within 180 days, and cannot claim ITC on blocked credits under s.17(5) — motor cars, personal consumption, goods for personal use, etc.)

B. Composition levy — s.10 CGST. A simplified scheme for small taxpayers whose turnover is within a cap (broadly ₹1.5 crore): they pay GST at a low flat rate on turnover (e.g. 1% for traders, 5% for restaurants) instead of the normal rate, file quarterly, and enjoy less compliance. But a composition dealer cannot collect GST from customers, cannot claim ITC, and cannot make inter-State supplies — the trade-off for simplicity.

C. Works contract — s.2(119). A works contract is a contract for building, construction, fabrication, repair, etc. of immovable property where transfer of property in goods is involved. Under GST it is treated as a supply of service (Schedule II), taxed as a whole — resolving the old goods/services split that plagued VAT and service tax.

D. Tax invoice — s.31. Every registered supplier must issue a tax invoice showing the description, value, and the CGST/SGST/IGST charged. It is the document that carries the ITC — no valid invoice, no credit.

E. GSTN (GST Network). The IT backbone of GST — a company managing the common portal for registration, returns, payment and matching of credit. It makes GST a largely online, self-policing system.

The Format (pro-forma)

Learn this skeleton first, then see it applied below. XXXX stands for a figure; amounts in brackets (XXXX) are subtracted.

Format — Computation of Net GST Payable (output tax − ITC, s.49 set-off order)

🧩 WORKED EXAMPLE — GST payable after input tax credit

Facts. A manufacturer buys inputs for ₹1,00,000 + 18% GST (input tax ₹18,000) and sells the finished goods for ₹1,50,000 + 18% GST (output tax ₹27,000).

Rule. Net GST payable in cash = output tax − input tax credit (s.16), provided the four ITC conditions are met.

Apply.

• Output tax on sale = ₹27,000
• Less ITC on inputs = ₹18,000
• Net GST payable = ₹9,000

Conclusion. The manufacturer pays only ₹9,000 in cash — tax on the ₹50,000 value he added — not the full ₹27,000. That is ITC removing cascading. A composition dealer, by contrast, would pay a flat 1% on turnover but get no ITC.

In Simple Terms: Input tax credit lets you subtract the GST you paid on purchases from the GST you owe on sales, so you pay tax only on the value you added (four conditions in s.16 must be met). Small dealers can instead pick the composition scheme — a low flat rate, but no ITC and no inter-State sales. The tax invoice carries the credit; the GSTN portal runs it all online.

flowchart TD
    ROOT["GST mechanics"]:::root
    ROOT --> ITC["Input Tax Credit ss.16-18<br/>output tax - input tax; 4 conditions"]:::leaf
    ROOT --> COMP["Composition s.10<br/>flat rate, no ITC, no inter-State"]:::leaf
    ROOT --> WC["Works contract s.2(119)<br/>treated as SERVICE"]:::leaf
    ROOT --> INV["Tax invoice s.31<br/>carries the ITC"]:::leaf
    ROOT --> GSTN["GSTN portal<br/>online, self-policing"]:::sub
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef sub fill:#F2F2F2,stroke:#555,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

• ALD Automotive (P) Ltd. v CTO (2019) — input tax credit is a statutory concession/benefit, available only on fulfilling the conditions the Act prescribes; it is not an absolute right.

Back to Top

📄 Full notes + Question Bank (₹199) — every topic in depth, model answers to all past KSLU questions, in one printable PDF. Get the bundle · 10 Solved Problems · All Law of Taxation topics