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Input Tax Credit (ITC)

Input Tax Credit (ITC) is a tax mechanism that helps avoid the cascading effect of taxes on businesses by allowing them to claim credit for taxes already paid on inputs. ITC is an integral part of major taxation systems like Goods and Services Tax (GST) and Value Added Tax (VAT) implemented across various countries.

The concept of Input Tax Credits allows businesses to claim back the tax already paid on purchases that are inputs for furtherance of business. For instance, when a car manufacturer purchases raw materials worth $1000 plus $190 VAT, the ITC mechanism enables them to claim a credit for the $190 VAT paid on such purchases. Thereby removing the instance of double taxation and tax on tax, making the system transparent.

In India, the GST regime contains provisions for Input Tax Credit that can be claimed on inputs, input services and capital goods acquired by any business. For example, an Indian cloth manufacturer purchasing cotton worth $100 plus $5 GST can claim the ITC to recover the $5 GST paid. Thereby allowing the taxes paid on inputs to only be a temporary liability until the final product is sold. This encourages voluntary GST compliance across industry sectors.

Similarly, the Canadian GST/HST system grants Input Tax Credits to businesses to recover GST/HST paid on inputs relates to their commercial activities. Canadian businesses can claim back GST/HST paid at various stages such as production, distribution, wholesaling or retailing. Thereby reducing the tax burden on businesses and exempting taxation on business inputs.

The EU VAT taxation mechanism also provides input credit deduction to remove cascading of taxes and double taxation on business transactions. For example, When a Germany based car manufacturer imports machinery worth $100000 plus $19000 VAT, they can deduct the VAT amount from the overall VAT collected on subsequent car sales.

Therefore, the concept of Input Tax Credits is fast emerging as a popular way to eliminate hidden taxes on businesses across major world economies. It is an integral part of major tax regimes like GST (goods and services tax), VAT (value added tax) and GST/HST. ITC enables seamless flow of credits and reduces tax burdens on businesses thus encouraging voluntary compliance.


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