• Jul
  • 21
  • 2013

A brief on Input Tax Credit of VAT

Posted In GST | | 26 Comments »

Manufacturer will be entitled to credit of tax paid on inputs used by him in manufacture. A trader (dealer) will be entitled to get credit of tax on goods which he has purchased for re-sale

No credit is available in case of inter-state purchases.

Credit will be available of tax paid on capital goods purchased within the State. Credit will be available only in respect of capital goods used in manufacture or processing. The credit will be spread over three financial years and not in first year itself. There will be a negative list of capital goods . Some States allow credit at one go while some allow over a period of 12 months and so on.

Credit will be available as soon as inputs are purchased. It is not necessary to wait till these are utilised or sold [para 2.3 of White Paper on State-Level VAT).

No credit of CST paid : Credit of Central Sales Tax (CST) paid on inputs and capital goods purchased from other States will not be available

Non-availability of input credit in certain cases :

Credit of tax paid on inputs will be denied in following situations – No credit if final product is exempt – Credit of tax paid on inputs is available only if tax is paid on final products. Thus, when final product is exempt from tax, credit will not be availed. If availed, it will have to be reversed on pro-rata basis.

If the final products are transferred to another State as stock transfer or branch transfer, input credit availed will have to be reversed on pro-rata basis, which is in excess of 4%. In other words, in case of goods sent on stock transfer/branch transfer out of State, 4% tax on inputs will become payable e.g. if tax paid on inputs is 12.5%, credit of 8.5% is available. If tax paid on inputs is 4%, no credit is available. Thus, the VAT as introduced is State VAT and not a national VAT.

In following cases, the dealer is not entitled to input credit –

(a) Inputs used in exempted final products

(b) Final product not sold but given as free sample

(c) Inputs lost/damaged/stolen before use. If credit was availed, it will have to be reversed.

Generally, in following cases, credit is not available –

(a) Purchase of automobiles (except in case of purchase of automobiles by automobile dealers for re-sale)

(b) fuel.

There are variations between provisions of various States.

Certain sales are ‘zero rated’ i.e. tax is not payable on final product in certain specified circumstances. In such cases, credit will be available on the inputs i.e. credit will not have to be reversed. Distinction between ‘zero rated sale’ and ‘exempt sale’ is that in case of ‘zero rated sale’, credit is available on tax paid on inputs, while in case of exempt goods, credit of tax paid on inputs is not available.

Export sales are zero rated, i.e. though sales tax is not payable on export sales, credit will be available of tax paid on inputs. In respect of sale to EOU/SEZ, there will be either exemption of input tax or tax paid will be refunded to them within three months.

SOME MORE CLARIFICATION

Where Inputs Are Partly Used For Making Taxable Goods (Or Inter-State Sales) And Partly For Making Exempt Goods, The Tax Credit Shall Be Reduced Proportionately. To Illustrate, X Purchased Machinery For Rs. 10 Lakh And Paid A Tax Of Rs. 1,25,000 On It And Used It In The Manufacture Of Taxable As Well As Exempted Goods. At That Time, He Estimated That The Share Of Taxable Goods Made By The Machinery Would Be 80 Per Cent. In This Case, His Input Tax Credit Will Be Restricted Only To 80 Per Cent Of Rs. 125,000 Or Rs. 1,00,000.

There Is No Need For A `One To One Correlation Between Input Tax Credit And Output Tax. Quite A Number Of Small Businesses Are Under The Misconception That Input Tax Has To Be Adjusted Against Output Tax On A Bill To Bill Basis.

The Operation Of The Input Tax Mechanism Is Simple. The Dealer Will Be Eligible To Take Credit For The Eligible Input Tax In A Tax Period As Specified On The Entire Purchases. He Will Charge VAT At The Prescribed Rate As Is Done In The Present System For Levy Of Sales Tax. The VAT Or Output Tax Payable Is Compiled On A Monthly Basis As Is Done Now. The Dealer Can Adjust The Input Tax Eligible On The Entire Purchase In The Tax Period Against The Output Tax Payable Irrespective Of Whether The Entire Goods Purchased Are Sold Or Not. For Example, If The Input Tax Credit In A Particular Month Is Rs. 1,000 And The Output Tax Payable Is Rs. 500, The Excess Input Tax Of Rs. 500 Can Be Carried Forward To The Next Tax Period.

Assuming No Further Input Tax Credit In The Following Month And That The Output Tax Payable Is Rs. 700 The Dealer Will Pay Rs. 200 Along With The Monthly Return.

——————

SHUBHI GOEL

Shubhigoel1989@gmail.com

Sandeep Kanoi

26 Responses to “A brief on Input Tax Credit of VAT”

  1. NJ says:

    I need simple clarification. My company is in Delhi. I buy goods from Punjab by paying 2% CST. I then sell this goods to Agra UP by charging 2% CST. Is my tax adjustable.
    Suppose i bought Rs 100 mtrl + 2% CST = 102/-
    I sell this to customer in agra @ 110 + 2% CST = 112.20.
    My profit is Rs 110-100= 10/- or 110-102= 8/-?

  2. Anees Kader says:

    If purchased item is sold in other state then items purchased from within state and outside state are allowd for input credit or not . And item are Capital goods ??? And what is the process for taking the Credit.plz explai the process

  3. Anees says:

    If purchased item is sold in other state then items purchased from within state and outside state are allowd for input credit or not . And item are Capital goods ??? And what is the process for taking the Credit

  4. Hemant says:

    Akbar Khan/K P Krisshnan,
    In the said case 2 scenarios can be visualised. Let there be 3 parties A (say in state of Gujarat), B (say a state in Rajasthan) and C (also in state in Rajasthan).
    Scenario 1: if A despatches goods to B and B in turn sells the goods to C directly without B taking physical delivery, then CST would be applicable u/s 6(2) of CST Act. In this case B has to endorse LR in favour of C and C has to take physical possession of the goods. C will issue C form to B though in the same state, B will issue C form to A and A will issue E1 form to B. This would be treated as continuous interstate sale. In this case, say A raises an invoice for Rs. 100 + 2% CST which makes total invoice value as Rs. 102. B will raise invoice on C for Rs. 105. Difference of Rs. 3 9105-102) would constitute profit margin of B as he cannot once again charge CST on such sales.

    Scenario 2: Taking the same example as above, if B takes physical possession of the goods then CST sale would be complete at that (B) stage. In this case sale between B & C would be treated as local sale and VAT would be charged by B to C on which C would get credit. In this case the invoice would be for Rs. 102+applicable VAT. B will have to issue C form to A.

    Hope I have clarified your doubts.

    Hemant

  5. K P KRISSHNAN says:

    If a purchaser had purchased goods from other state and instead of CST the supplier had charged VAT in the Invoice. WILL THE Buyer get the Input Vat Credit of the same.

    No Input vat Credit is available, because of the VAT charged in the Invoice with other State.

  6. Akbar Khan says:

    If a purchaser had purchased goods from other state and instead of CST the supplier had charged VAT in the Invoice. WILL THE Buyer get the Input Vat Credit of the same.

  7. Vinod Aggarwal says:

    Whether the input tax paid on local purchases can be adjusted against tax liability on CST sales with or without C form?

  8. Hemant says:

    Mahesh Poddarji,
    Input credit is available only if goods are procured locally in the sate and sale is effected from the state either local or OMS. In your case since purchases are on OMS basis, no input tax credit (ITC) would be available even if OMS sale has taken place. The logic of giving credit is the revenue from purchase and sale should accrue to the same state where the transaction takes place.
    Regards,

    hemant

  9. K P KRISSHNAN says:

    What if I buy raw material from within the state(paying 5% input tax) and sale all the finished outside state(getting 1% cst as output tax). Are these adjustable?

    If the sales are covered by C form declaration you can adjust the ITC and C/F the excess ITC for next year

  10. K P KRISSHNAN says:

    one of our manufacturer has purchased the goods and taking the input vat. after a period the goods was damaged to much and he sold as a scrap. whether the a.o. can reverse the input tax credit.

    In this case taking of ITC is in order as a manufacturer. Disposal of goods may be different from purchased goods as a manufacturer. The question of reversal of ITC doesnot arise.

  11. K P KRISSHNAN says:

    ITS IS AVAILABLE FOR LOCAL PURCHASE OF PACKING MATERIAL FOR MANUFACTURING DEALER ONLY NOT FOR RETAILER, STATIONERY. FOR STATIONERY THE DEALER SHOULD BE A RETAILER.

  12. Hemant says:

    To which state do these provision pertain?

  13. shivayogi says:

    dear all

    one of our manufacturer has purchased the goods and taking the input vat. after a period the goods was damaged to much and he sold as a scrap. whether the a.o. can reverse the input tax credit.

    thanking you,

    warm regards

  14. K P KRISSHNAN says:

    This type of transaction is may be treated as E1 sales, there is no input for CST purchases.

  15. K K SARAWAGI says:

    Where goods have been purchased from out of a State after paying CST @ 2% and inter-State sale of same goods have been made at CST of 2%, no ITC shall be available. As mentioned in the article herein above, no ITC against CST purchase is available. ITC is available on payment of local VAT only. Where local purchased goods are used by a manufacturing company and some finished product is sold within the State and some stock transferred to other State, ITC shall be available in the ratio of local sale : inter-State sale.

  16. P.N.V.GIRI says:

    Sir,

    What about input tax credits on purchase of Packing material and Stationery items?

  17. CMA Krishna Gupta says:

    Nice article Sir,

    Please write more article on VAT

  18. Renjith R Pillai says:

    Under Kerala Value Added Act, There can take input tax credit of Capital goods. ITC of Capital Goods which value is under Rs 5 lakhs can take on same month. and Above of Rs 25 lakhs, ITC can take as several Instalment fixed by the assessing authority.

  19. Ravindra patil says:

    thanks. nice post

  20. shubhi goel says:

    KP Krisshnan ji
    ITC credit is not available if goods given as free sample , as gift and personally
    consumed

  21. saurav says:

    What if I buy raw material from within the state(paying 5% input tax) and sale all the finished outside state(getting 1% cst as output tax). Are these adjustable?

  22. soniya rajendra patil says:

    Dear sir,kindly Provide the details regarding CST paid by EOU and its refund claim

  23. MAHESH PODDAR says:

    what about if one purchase goode from outsied the state i.e paying cst@2% and sell the same goods outside the state @cst2% than weather set off of input cst@% is available or not???

    pls any one can reply

  24. K P KRISSHNAN says:

    In TNVAT 50% of the ITC will be adjusted in first year and the remaining of ITC will be adjusted in subsequent years. The provisions of Act are different from State to State there is no uniformity.

  25. harish says:

    Under the Pb. VAT Act, 2005 ITC on capital goods is available @ 6.05% against 13.75% paid by the taxable person. What is the logic? Have u any idea?

  26. K P KRISSHNAN says:

    Non-availability of input credit in certain cases reversal of credit in excess of 3% under TNVAT Act.under Sec.19(4), whether free samples are allowed in VAT Act.

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