Question

Mrs. Malhotra purchased solar panels for the taxable value of Rs 85,000. She sold them for Rs 90,000. The rate of GST is 5%. Find the ITC of Mrs. Malhotra.
(a) 4000
(b) 3500
(c) 4500
(d) 4250

Answer 1

Hint: In the above question, we have given the purchased amount of solar panels as Rs 85000 on which GST has incurred. And Mrs. Malhotra sold those solar panels at a price of Rs 90, 000. We are asked to calculate the ITC of Mrs. Malhotra. An ITC means (Input Tax Credit) which is calculated by finding the initial tax that Mrs. Malhotra had paid while purchasing the solar panels. That tax is calculated by taking $5$% of Rs 85, 000. We know that $x$% of y is calculated as $\dfrac{x}{100}\left( y \right)$.

Complete step-by-step answer:
Now, in the above question, it is given that Mrs. Malhotra purchased solar panels of value Rs 85,000 and those solar panels are taxable with the rate of GST as $5$% so we are going to find the tax that Mrs. Malhotra has paid on purchasing those solar panels.
To find that tax, we are going to find the $5$% of Rs. 85, 000.
We know the formula for $x$% of y is equal to:
$\dfrac{x}{100}\left( y \right)$
Using the above relation, we can find the $5$% of Rs. 85, 000 as follows:
$\dfrac{5}{100}\left( 85000 \right)$
In the above expression, two zeros will be cancelled from the numerator and the denominator and we get,
$\begin{align}
  & \dfrac{5}{1}\left( 850 \right) \\
 & =4250 \\
\end{align}$
 Hence, the tax paid on the purchase of solar panels is equal to Rs. 4250.
Now, what is ITC? ITC is an Input Tax Credit meaning that the tax paid initially like in this problem, Mrs Malhotra purchased solar panels at a price of Rs 85000 here, and she had paid Rs 4250 as a tax. Now, when she sold these solar panels at a price of Rs 90, 000, the tax incurred on this amount is $5$% of Rs 90,000 which is equal to:
$\begin{align}
  & \dfrac{5}{100}\left( 90000 \right) \\
 & =5\left( 900 \right) \\
 & =4500 \\
\end{align}$
So, the tax incurred on Rs 90,000 is Rs 4500 and as she had already paid the tax of Rs 4250 so she only has to pay the tax of the difference of Rs 4500 and Rs 4250.
Hence, the ITC is the initial tax amount of Rs. 4250 which Mrs. Malhotra doesn't want to pay while selling the solar panels at the price of Rs. 90, 000.
Hence, the correct option is (d).

Note: In the exam, you might got confused like is there any role that Rs. 90, 000 played in the final answer and by just over thinking you will find the tax on Rs. 90, 000 at the rate of $5%$ and then subtract the initial tax of Rs. 4520 from it. This is completely a wrong answer. So, don’t make such mistakes in the exam. The role of Rs. 90, 000 is only to test you whether you know what ITC means or not.