Previous Year Question

Input Tax Credit (ITC) is one of the major features of the GST system. According to the official GST Council material, an uninterrupted and seamless chain of input tax credit is a key feature of GST, and ITC is designed to prevent the cascading effect of taxes, i.e. “tax on tax.” Therefore, the technically correct term for option (A) is Input Tax Credit.

Under the ITC mechanism, a registered taxpayer who fulfils the prescribed conditions can claim credit for GST paid on eligible inward supplies and use it towards payment of output tax liability. This prevents repeated taxation of the entire value at successive stages of production and distribution and makes the effective tax burden relate mainly to the value added at each stage. CBIC rules also provide for availing input tax credit by a registered person on the basis of prescribed documents and conditions.

For this reason, ITC reduces tax cascading and allows tax credit to move through the supply chain. The GST Council also explains that businesses can claim credit for tax paid on inputs used in production. Online compliance digitises GST administration and destination-based taxation is another important feature of GST, but the “seamless flow of credit” asked in the question directly refers to Input Tax Credit.