Recently Rule 21(8) of Punjab VAT Rules 2005 was introduced which provided that where some goods as input or output are lying in stock of a taxable person and where rate of tax is reduced from a particular date, then from that date, input tax credit shall be admissible to the taxable person on sale of goods lying in stock or on using the goods as input for manufacturing taxable goods, at the reduced rate.

Rule 21(8) runs as under: 
“Where some goods as input or output are lying in stock of a taxable person and where rate of tax on such goods is reduced from a particular date, then from that date, input tax credit shall be admissible to the taxable person on sale of goods lying in stock or on using the goods as input for manufacturing taxable goods, at the reduced rate.”
Implications of Rule 21(8):Certain queries have been frequently raised that what will be the implications of the above amendment especially in regard to the closing stock of iron and steel existing on 31.01.2014(the date of reduction of tax), as the rate of tax on the same has been reduced from 4.95% to 2.75%.
Implication where ITC and stock both available on the date of reduction of tax: The implication of above amendment would be that the ITC available as on the date of reduction of tax against the stock lying on such date with the dealer would be admissible at reduced rate, meaning thereby although tax is paid @ 4.95% but ITC willl be available only @ 2.75%.
For example if A has stock of iron and steel goods lying as on 31.01.2014 of Rs. 100000/- and corresponding ITC is available to the tune of Rs. 4950. Then ITC will be available only to the tune of Rs. 2750/- i.e his ITC will be reduced to the extent of Rs. 2200/- i.e. 2.20%.
Implications where stock is available but no ITC is available: However in certain cases, some dealers have closing stock of iron and steel goods lying as on 31.01.2014 on which tax @ 4.95% has been paid but the corresponding Input tax credit of the tax paid on such stock has already been utilised by such dealers, against their other output tax liabilities, which may be due to output tax on other goods sold, taxable at higher rate or due to output tax liability as arisen on the value addition.
In such case what ITC will be available to such dealer, whether such dealer is required to reverse any input tax credit @ 2.2% and pay the same in the Government treasury? The answer to the above question in my view is a clear cut “no”.
The reason for it is the words used by rule 21(8) is “admissible at reduced rate” and not “reversal of excess tax paid than the reduced rate”. “Admissiblity” and “reversibilty” are two separate terms. Admissible literally means allowing and reverse means turning backword. ITC at reduced rate will be available only if the ITC at higher rate was standing at all, on the date of reduction of tax.
ITC at reduced rate is admissible only after the date of reduction as per the wording of Rule 21(8) and not before such date. Before such date ITC is available to its full extent, therefore if Input Tax at higher rate was standing to the credit of a person before the date of reduction, the same could have been utilised against other output liabilities by such person.
Rule 21(8) does not bar any person to adjust input tax credit of tax paid at earlier more tax rate against his output liabilities before the date of reduction of tax. It only allows ITC at reduced rate after the date of tax reduction. Allowance at reduced rate can be made only if any ITC is available.
After the date of reduction if there is no ITC available no question of admissibility of the same at full rate or reduced rate arises.
Conclusion: Therefore in nut shell Rule 21(8) does not warrant any reversal of ITC in case when there is no ITC available as on the date of reduction of tax.
 
Note: The above are only my personal views as per my interpretation.

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(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

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