• Jul
  • 21
  • 2013

A brief on Input Tax Credit of VAT

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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)


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

  1. BRS VASAN says:

    Dear Sir

    We are suppliers of Petrol Dispensing units to Oil companies like Indian oil corporation. IF we supply the petrol dispensing unit locally is the oil company is entitled to take input credit of the tax paid by them against our supply. Please explain with the relevant notifications.

    Thanks in advance.

    Regards

    BRS VASAN

  2. CA Jayakumar.M.G says:

    Sir
    Whether there is any restriction for availing CENVAT Credit on purchase under VAT.
    In our case , CTO issued notice demanding Tax on CENVAT Credit as in his opinion not included in Purchase in the Profit & Loss Account. to be more specific Toal Purchase as per Audited Profit & Loss A/c is Rs 225 Lakhs where as in Annual Return of VAT it Is Rs 250 Lakhs. the difference is Excise duty paid on purchase it accounted under CENVAT Credit and a detailed reconciliation statement was provided but not considered. According to CTO we are eligible for Input Tax credit under VAt only on Rs Rs 225 Laks, ie,excluding Excise duty.Kindly advice and suggest the accounting procedure commonly followed
    Thank you

  3. jshri says:

    Newly started EOU unit. But material purchased locally. Can I avail input credit on purchase. If so how.

    thanking in anticipation

  4. jai says:

    hi…all

    i want know the sales tax “we are doing third party export in this regard goods transported to exporter facteri …the person whom send the goods to us have to put invoice? …i asking we have prove to govt regarding goods send the exporter house for that what are formalites need

  5. k p krisshnan Advocate says:

    Question : I have purchase precious metal in FY 2012-13 and shown as investment now i want to sell the same after showing as stock. And we have no turnover till date, I have not registered my company with Gujarat VAT, Now how can i get the tax credit

    Answer: You are not eligible to avail ITC because of you are not a registered dealer at the time of purchase.

  6. Deepali lakdawala says:

    I have purchase precious metal in FY 2012-13 and shown as investment now i want to sell the same after showing as stock. And we have no turnover till date, I have not registered my company with Gujarat VAT, Now how can i get the tax credit

  7. K P KRISSHNAN says:

    We are a trading company in Karnataka. We purchased glass from a factory in Tamil Nadu for resale to our client in Karnataka. Unfortunately the glasses broke after receipt at our end during our custody. We had not lodged any complaint with any authorities at the time of breakage. We lost the order since we could not supply the material on time.

    In this case, since we had purchased the material against C-Form and we could not bill to our client; can we claim C-Form from KVAT to issue to our supplier?

    Please clarify, since we feel we are being misguided.
    answer: Yes you can claim your C form and you have to pay local tax also.

  8. Nawaz says:

    Dear Sir,

    We are a trading company in Karnataka. We purchased glass from a factory in Tamil Nadu for resale to our client in Karnataka. Unfortunately the glasses broke after receipt at our end during our custody. We had not lodged any complaint with any authorities at the time of breakage. We lost the order since we could not supply the material on time.

    In this case, since we had purchased the material against C-Form and we could not bill to our client; can we claim C-Form from KVAT to issue to our supplier?

    Please clarify, since we feel we are being misguided.

    Thank you in advance.

  9. s.ragavendran says:

    Sir,

    we are manufacturing rubber gasket and we sent a paper manufacturing company.

    they are insisting us vat charge only 5 %. but rubber gasket commodity only 5 % in tnvat commodity shedule. they are taking capital goods input in our product.

    Now we are charging 5 % 14.5 %

    kindly clarify the above matter

    Regards

    S.Ragavendran

  10. bhawana Latwal says:

    dear all.

    Please confirm, can i bill Item 12.5%, item 5% in same invoice against C form billing or i should bill separately of item 12.5% and item 5% against c form billing.

  11. K P KRISSHNAN says:

    Question:Our factory is located in TN. We are manufacturing and selling our product to the customer who are functioning in SEZ which is located out of TN. We are collecting form I also. In this cases whether we have to reverse the ITC. Please give us a reply.

    Answer: Are you collected any tax as CST for the (SEZ)buyer? If not there is no question of reverse of ITC under Sec.19(5)( c) or 19(2)(v)of the TNVAT Act or you have reverse the ITC for the same.

  12. Murugan says:

    Dear Sir

    Our factory is located in TN. We are manufacturing and selling our product to the customer who are functioning in SEZ which is located out of TN. We are collecting form I also. In this cases whether we have to reverse the ITC. Please give us a reply.

  13. K P KRISSHNAN says:

    Sir, I was setup a manufacturing unit in uttarakhand but due to some unavoidable circumstance we had closed our unit and sale out before commencement of commercial production. we had take VAT In put on purchase of Capital Goods within Uttarakhand state, now we have going to made sales tax assessment (2007-2008), but dept. not allowed ITC benefit during the year du to the reason you have not made commercial production. hence you will not entitle to take ITC benefit under sec 6(b)

    In this case, The A.O stand is hold good due to commercial production not yet commence by the dealer.

  14. Dayal Singh says:

    Sir, I was setup a manufacturing unit in uttarakhand but due to some unavoidable circumstance we had closed our unit and sale out before commencement of commercial production. we had take VAT In put on purchase of Capital Goods within Uttarakhand state, now we have going to made sales tax assessment (2007-2008), but dept. not allowed ITC benefit during the year du to the reason you have not made commercial production. hence you will not entitle to take ITC benefit under sec 6(b)

  15. rudresha says:

    thanks for the article

  16. jay says:

    If dealer is in lumpsum and made export good whether he is eligible to claim vat refund ???

  17. Saurav Kumar Banerjee says:

    THANKS! FOR THE ARTICLE ON VAT AND CST IN INDIA. This is owesome and is a assistance to my research for indirect tax studies.

  18. Suri says:

    Under TNVAT,can we carry forward ITC from Mar14 to this yr?What happens to ITC of Mar15?

  19. Suri says:

    Under TNVAT rules,are we allowed to carry forward ITC from Mar14 to April 14?If by Mar15, we have ITC,whats the effect?

  20. shankar says:

    Can we take input for last 6 months purchases in the current month ?

  21. K P KRISSHNAN says:

    Dear Mr RAKESH KUMR, issue bellowing with which STATE VAT ACT then only we can find an solution.

  22. RAKESH KUMR says:

    Sir, I am dealing with trade of paints. A machine is required to me for paint complexion , I claim input credit on its purchase,while sale tax department has been denied to credit of input ,i claimed. Department’s view is that dealer is not manufacturer how can it be given the benefit of input credit while traders ‘s opinion is that without using this machine he is not be able to make sale in large scale .please show me a light how am i get ridden of this complicated matter .

  23. manish says:

    can we take input credit on material handling equipment such as plastic pallet, plastic crates ?

  24. K P KRISSHNAN 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 software goods ??? And what is the process for taking the Credit.plz explai the process !

    ans: within the state purchases are eligible for input tax credit, for outside state are not allowed for all taxable items. as per the provisions of the concerned state act.

  25. Harish 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 software goods ??? And what is the process for taking the Credit.plz explai the process !

  26. K P KRISSHNAN says:

    If The Person is not registered in 2011-12 under VAT and he purchases goods on which vat @ 12.5% charged but in 2013-14 he registered under vat & he wants to take Input Credit on goods purchased in 2011-12 so it is possible or not????????

    In this case ITC not allowed due to previous assessment year.

  27. Sandip says:

    If The Person is not registered in 2011-12 under VAT and he purchases goods on which vat @ 12.5% charged but in 2013-14 he registered under vat & he wants to take Input Credit on goods purchased in 2011-12 so it is possible or not??????????

  28. prakash says:

    Manufacturing unit purchase of material on 5th March (it induced Excise and vat) this bill not accounted and realized the August 15th. This bill take the input vat and central excise?

  29. K P KRISSHNAN says:

    Question:

    A is a manufacturer. A purchase material Z inside a state. He has done value addition to the material Z and sold it outside the state.

    Can A avail ITC VAT on purchase of material Z.
    If yes then how and as per which act.
    If no then why.
    Yes according to Sec.19(2)(v) of the TNVAT Act.

  30. Satya says:

    Question:

    A is a manufacturer. A purchase material Z inside a state. He has done value addition to the material Z and sold it outside the state.

    Can A avail ITC VAT on purchase of material Z.
    If yes then how and as per which act.
    If no then why.

    Please help.

  31. K P KRISSHNAN says:

    Question: we manufacture the tax exempted material finished goods but on the raw material we pay VAT .So how we can claim the VAT ITC from the sale tax

    Answer: In this case you are not eligible to avail ITC, because of your end product is exempted.

  32. vishal says:

    we manufacture the tax exempted material finished goods but on the raw material we pay VAT .So how we can claim the VAT ITC from the sale tax

  33. B.Saravanan says:

    interestate sales made against Form “C” and the CST payable was adjusted against the available ITC… Subsequenty if the Purchaser is not producing the Form “C”, Will the ITC adjusted against the CST payable is valid or not….?? Whether we should pay the entire CST payable or the difference Tax alone to be paid….????

  34. 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/-?

  35. 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

  36. 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

  37. 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

  38. 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.

  39. 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.

  40. 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?

  41. 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

  42. 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

  43. 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.

  44. 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.

  45. Hemant says:

    To which state do these provision pertain?

  46. 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

  47. K P KRISSHNAN says:

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

  48. 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.

  49. P.N.V.GIRI says:

    Sir,

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

  50. CMA Krishna Gupta says:

    Nice article Sir,

    Please write more article on VAT

  51. 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.

  52. Ravindra patil says:

    thanks. nice post

  53. shubhi goel says:

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

  54. 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?

  55. soniya rajendra patil says:

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

  56. 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

  57. 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.

  58. 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?

  59. 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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