• Jul
  • 21
  • 2013

A brief on Input Tax Credit of VAT

Article ID 57673 | Posted In GST | | 68 Comments » Print Friendly and PDF

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.


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)