Input tax is the tax paid on purchases by a registered dealer in course of its business. The goods purchased could be for, resale; use in the execution of works contract; use in processing or manufacturing; where such goods directly goes into the composition of the finished products, are used as packing materials for packing of goods for sale, or are consumables directly used in the process of manufacturing.
When a dealer that is registered for value added tax (VAT) buys goods or services from another supplier, VAT is charged and is a particular percentage of the purchase cost. This is known as input tax. Similarly, when the dealer sells its own goods or services it charges its customers VAT at the same rate. This is output tax. Once a quarter, the dealer has to complete a VAT return, giving details of its input tax and output tax. The difference between output tax and input tax is payable to relevant authority. If input tax is greater than output tax the company can claim back such difference amount.