Input Tax Credit is the credit that is availed on the GST amount paid on the purchases from a GST registered taxpayer.
When a GST registered buyer pays GST on the purchase of goods or services, this GST amount is reduced from the outward liability payable on the outward supplies.
In simpler words, Input Tax Credit under GST will be a tax reduced from your outward liabilities payable on account of sales.
Hari (the Supplier) collects GST amount of Rs. 36,000 from Anjali (the Retailer). Hari pays this GST amount to the government through his monthly GSTR-1 return.
Now, Anjali (the Retailer) collects a GST amount of Rs. 40, 000 from the end consumer. But, Anjali need not pay this complete amount to the government as a GST liability. As she has already paid Rs. 36,000 on his Purchase or Input.
Anjali can now claim an Input Tax Credit of Rs. 36,000 while paying his outward GST liabilities.
Thus, the net GST payable by Anjali (the retailer) to the government will be Rs. 4,000, which will be paid by cash. The rest 36,000 shall be adjusted from the Input Tax Credit availed for this transaction.