Input Tax Credit (ITC) — Eliminating Cascading Effect

4.1 Cascading Effect — The Old Problem

Old system: A manufacturer pays 10% Excise Duty on goods → sells to distributor who pays 13% VAT on the price including excise duty → tax is levied on tax (cascading). This inflated prices and made Indian goods uncompetitive.

With GST and ITC:

• Manufacturer pays CGST+SGST = ₹180 on ₹1,000 goods → claims ITC from their supplier's GST
• Net GST = only the value added at each stage
• Final consumer pays tax only on the final value, not cumulative tax at every stage

4.2 ITC Mechanism

Eligibility for ITC:

1. Registered taxpayer under GST
2. Possesses valid tax invoice/debit note
3. Goods or services received
4. Supplier has filed GSTR-1 and paid taxes (reflected in buyer's GSTR-2B)
5. Goods/services used for business purposes (not for personal use)

ITC not allowed on: Personal consumption, motor vehicles (except for business of transport, driving school), food and beverages, outdoor catering, club memberships, health insurance (except for statutory obligation).

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