Which of the following statement is related to the benefit of the “Input Tax Credit Mechanism” of GST ?

Correct — option (1), This avoid double taxation.

Input Tax Credit (ITC) lets a registered business subtract the GST it has already paid on its purchases from the GST it collects on its sales. It deposits only the difference with the government.

Without that set-off, the tax paid at an earlier stage becomes part of the cost, and the next stage charges tax on a price that already contains tax. That is tax on tax — the cascading or double taxation that option (1) names.

A worked case shows it. A manufacturer buys inputs for ₹100 and pays ₹18 GST at 18%. It sells the product for ₹150 and charges ₹27 GST.

With ITC it pays ₹27 − ₹18 = ₹9, which is 18% of the ₹50 value it added. Total tax in the chain is ₹27, exactly 18% of the final value.

Without ITC the chain would carry ₹18 + ₹27 = ₹45 on a ₹150 product.

The idea to remember: ITC turns GST into a tax on value added at each stage, with the full burden reaching only the final consumer.

Why the others are wrong

• (2)
  This avoid tax on production. — ITC does not remove tax from any stage. The manufacturer in the chain still pays GST — only on the value it adds, after setting off what it already paid.

  GST is a destination-based tax on the supply of goods and services, and the burden passes to the final consumer. Avoiding double taxation is not the same as avoiding tax on production.

• (3)
  This provide tax relief to start-ups. — ITC is open to registered persons generally, under the conditions in Section 16 of the CGST Act, 2017. It is not a start-up concession and makes no distinction by a firm's age.

  Tax relief aimed at start-ups comes from other laws, such as the income-tax deduction under Section 80-IAC of the Income-tax Act for eligible start-ups.

• (4)
  There is no need to keep records for producers. — This is the reverse of how ITC works. A credit can be claimed only with documents: the recipient must hold the tax invoice or debit note, have received the goods or services, and the supplier must have actually paid the tax.

  The CGST Act also requires every registered person to keep accounts, including the input tax credit availed.

Goods and Services Tax is a tax on the supply of goods and services, collected at every stage of the chain from raw material to retail. India introduced it on 1 July 2017, after the Constitution (One Hundred and First Amendment) Act, 2016.

The Input Tax Credit mechanism is what keeps a multi-stage tax from piling up. Each registered business pays GST on its purchases, charges GST on its sales, and pays the government only the difference.

So each stage is taxed only on the value it adds, and the total tax equals the rate applied to the final price. Before GST, many taxes sat in separate silos, and a credit for one could not always be set off against another — the cascading that GST was designed to reduce.

Credit depends on paperwork. Its conditions include a valid invoice, receipt of the supply, tax actually paid by the supplier, and a return filed by the recipient.

Key facts

• GST was introduced in India on 1 July 2017, following the Constitution (One Hundred and First Amendment) Act, 2016.
• Input Tax Credit lets a registered person set off GST paid on purchases against GST payable on sales.
• Among the conditions in Section 16(2) of the CGST Act, 2017: holding a tax invoice or debit note, receiving the supply, the supplier paying the tax, and filing returns.
• With ITC, each stage pays tax only on the value it adds, so total tax equals the rate applied to the final price.
• Alcohol for human consumption is outside GST; petroleum crude, diesel, petrol, natural gas and aviation turbine fuel awaited a GST Council recommendation as of February 2025.

Common traps

• "Double taxation" here means tax on tax along one supply chain, not a person being taxed by two countries. Read the phrase in the context of ITC.
• ITC reduces the tax a business deposits; it does not make production tax-free. The final consumer still bears GST on the full value.
• ITC is document-driven. An option saying records are unnecessary contradicts the invoice and return conditions on which the credit rests.

UnlockIAS will link similar questions from RAS Pre 2018 and 2013 here once those papers are published on this site.

• practice — not a real PYQ

  A dealer buys goods for ₹200 and pays ₹24 GST at 12%. He sells them for ₹300 and charges GST at 12%. Using input tax credit, how much GST must he deposit with the government?

  • (a)₹36
  • (b)₹24
  • (c)₹12
  • (d)₹60
  Answer(3) — Output GST = 12% of ₹300 = ₹36. Input tax credit = ₹24. Tax payable = ₹36 − ₹24 = ₹12, which is 12% of the ₹100 value added.

  Option (1) ignores the credit. Option (2) is the tax already paid on purchases. Option (4) adds input and output tax, the cascading ITC prevents.

• practice — not a real PYQ

  Which of the following is outside the purview of GST under the Constitution's definition of goods and services tax?

  • (a)Ghee
  • (b)Alcoholic liquor for human consumption
  • (c)Branded packaged food
  • (d)Restaurant services
  Answer(2) — Article 366(12A) defines goods and services tax as a tax on supply except the supply of alcoholic liquor for human consumption. Options (1), (3) and (4) are supplies that fall within GST, whatever rate or exemption applies to them.