Definition
An input tax credit is the VAT or GST a registered business paid on its own purchases, which it can deduct from the VAT or GST it collected on its sales. The business pays the tax authority only the difference. Claiming the credit usually requires a valid tax invoice from the supplier.
Also called: Input VAT, Input tax, ITC
Input tax credit in practice
VAT and GST are designed so that tax is ultimately borne by the final consumer. Each business in the chain charges output tax on its sales, reclaims input tax on its purchases, and remits the net amount. If input tax exceeds output tax, the business can usually claim a refund.
To claim input tax credit, the purchase must be for business use and the business must hold a valid tax invoice showing the supplier's tax number and the tax charged. Missing or incorrect details on a supplier invoice can mean the credit is denied.
Some purchases are blocked from credit, such as certain entertainment or private-use costs, and businesses making exempt sales may only recover part of their input tax.
Example
In one quarter a Canadian contractor charges $13,000 of GST/HST on sales and pays $4,200 of GST/HST on materials and tools. It remits $8,800 to the Canada Revenue Agency after claiming $4,200 in input tax credits.
Frequently Asked Questions
Can I claim input tax credit without a tax invoice?
Generally no. Most VAT and GST systems require a valid tax invoice, or an equivalent document, to support the claim. Ask suppliers to correct any invoice missing required details.
What is output tax?
Output tax is the VAT or GST you charge on your sales. Input tax is what you pay on purchases. Your return reports both and the difference is payable or refundable.
Related terms
- VAT VAT (value added tax) is a consumption tax charged at each stage of the supply chain on the value added, used in the EU, UK, and more than 160 other countries.
- GST GST (goods and services tax) is a broad consumption tax applied to most goods and services, functioning like VAT.
- Tax invoice A tax invoice is an invoice that meets the legal requirements for the buyer to claim a tax credit, typically under a VAT or GST system.
- Reverse charge Reverse charge is a VAT rule under which the buyer, rather than the seller, accounts for the VAT on a transaction.
- GSTIN A GSTIN, or Goods and Services Tax Identification Number, is the 15-character number assigned to each business registered for GST in India.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.