Input Tax Credit- Analysis of section 9 of Delhi Value Added Tax Act, 2004

CA Vinay Singh Negi

Ever since the concept of Tax Credit has been incorporated in the Indian Taxation system, assessees becoming liable to take benefit from this concept under any nature of tax be it Service Tax, VAT or excise, face ambiguities with regard to its claim and the resultant set off, in case available.

In this article, efforts have been made to clarify the types of ambiguities which are commonly faced by the dealers while applying section 9 of DVAT Act, 2004 (“the Act”) which contains provisions for claiming Input Tax Credit under the act.

This article explains the above concept in the following manner:

A. Main provisions of Tax Credit

B. Prohibitions & Restrictions thereof

C. Reduction in Tax Credit

D. Relevance of Tax Invoice

E. Specific case of Tax Credit in case of Capital Good

(A) Main provision of claiming tax credit under DVAT Act, 2004:

Sub-section (1) of section 9 reads out the provisions as follows:

“Subject to sub-section (2) of this section and such conditions, restrictions and limitations as may be prescribed, a dealer who is registered or required to be registered under this Act shall be entitled to tax credit in respect of the turnover of purchases occurring during the tax period, where the purchase arises in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making-

(a) Sales which are liable to tax under section 3 of this Act; or

(b) Sales which are not liable to tax under section 7 of this Act.

From the above mentioned provisions following points can be interpreted:

(a) Tax credit shall be available to the registered dealer which is quite practical as un-registered dealer not liable to pay net tax liability under DVAT Act.

(b) Tax credit will be available in respect of that turnover of purchases which arise in the course of his activities as dealer. Section 2 (1)(j) of the Act inter-alia defines a ‘dealer’ as any person who in the course of his business buys or sells goods in Delhi. It means that tax credit will not be available on the purchases made from outside Delhi into Delhi. That is the reason credit on tax on CST purchases is not available as CST Act even does not put any provision for credit of tax on CST purchases.

(c) Tax credit will be available on a condition that goods are to be used for sales which are liable to tax u/s 3 and u/s 7 which covers following sales:

i. Sales within Delhi

ii. From Delhi to other states (CST sales)

iii. From one state to another state (Stock transfer from Delhi then CST sales)

iv. From India to outside India (Export sales)

v. Sales in the course of import from outside India into India.

Note: Exempted sales under first schedule is not covered u/s 9(1)

(B) Prohibition and restrictions on claiming tax credit:

As per Section 9 (2) of Act no tax credit available:

(a) On purchases made from un-registered dealer

(b) On purchases of non- creditable goods mentioned in VII^th schedule of the Act.

(c) On purchases from Casual dealers

(d) On purchases from dealers elected to pay tax under composition scheme u/s 16.

(e) Unless selling dealer has actually deposited tax or adjusted lawfully against output liability and reflected it in the return filed for the respective tax period.

The provisions contained in clause (e) above lead to a practical difficulty for the purchasing dealer who also needs to file return for same tax period and due to which most of the time it gives rise to mismatch in Annexure 2A which have to be rectified by requesting seller to revise his return to add the sales value on the basis of which buyer has taken tax credit or buyer needs to revise his return to remove the purchase value on which mismatch is coming.

(C) Reduction in Tax credit:

Section 9 (3) of the Act states that amount of input tax credit shall be reduced in the manner described in sub-sections (4), (6) & (10) of this section.

(D) Reduction in tax credit in case of sale of exempted goods or transfer without consideration:

As per section 9 (4) of the Act, if purchased goods have been used partly for making sales as referred to in sub-section (1) and partly for other purposes the amount of tax credit shall be reduced proportionately.

“Other purposes” may involve following cases:

(a) Sale of exempted goods mentioned in 1^st schedule of this act.

(b) Goods transferred without sales consideration not amounting to sales.

Proportionate amount by which reduction shall be made is prescribed in section 10 of this act and rule 6 of the DVAT rules 2005 and according to which:

(a) In case commodity-wise accounts are maintained then tax credit shall be reduced by the amount of input tax paid on purchases used for such other purposes.

(b) In case commodity-wise accounts are not maintained, then reduction shall be calculated on the basis of purchase price of such goods immediately preceding their use for other purposes or their fair market value, whichever is higher.

(2) Reduction in tax credit in case of branch transfer outside Delhi:

As per section 9 (6) of the Act, if purchased goods(other than capital goods) for which tax credit has arisen u/s 9(1) or manufactured goods out of such goods have been exported from Delhi by way of transfer to

(a) Non-resident consignment agent; or

(b) Non-resident branch of the dealer

And such transfer is not by way of sale made in Delhi

Then notwithstanding anything contained in section 9(1), the amount of tax credit shall be reduced by prescribed percentage.

Note: As per section 2(1)(v), Non-resident means who has no fixed place of business in Delhi. It means above mentioned goods are to be transferred to consignment agent or branch of the dealer outside Delhi and if stock is transferred within Delhi to other branch of the dealer having same TIN then no reduction will be made.

Prescribed percentage by which amount shall be reduced is defined under rule 7 of DVAT Rules, 2005 and according to which 2% of total amount available as input credit for stock transfer shall be reduced.

(3) Reduction in tax credit in case of CST sale against form “C”:

As per section 9 (10) of the Act, if purchased goods(other than capital goods) for which tax credit has arisen u/s 9(1) or manufactured goods out of such goods have been exported from Delhi by way of sale made under section 8(1) of CST Act, 1956 (which is Inter-state sales against form “C”) then notwithstanding anything contained in section 9(1), the amount of tax credit shall be reduced by prescribed percentage.

It means no reduction shall be made in case inter-state sale is made without form “C”

Prescribed percentage has not yet been notified by the Govt till now but to avoid the legal implication of this section, dealers have a tendency to reduce input tax at rate which is applicable in case of stock transfer which is 2%.

(D) Tax credit on the basis of Tax invoices only:

As per section 9(8), input tax credit can be claimed only when dealer holds a tax invoice which means tax credit cannot be claimed on the basis of Retail Invoice.

(E) Input tax credit in respect of capital goods:

Tax credit on taxable goods shall be as follows:

(a) 1/3^rd of input tax on such capital goods in same tax period and

(b) Balance 2/3^rd of such input tax, in equal proportions, in corresponding tax periods, in two immediately successive financial years.

It means if Rs 12,000/- is input tax credit available on purchase made on 3^rd Jan’ 2016, then Rs 4,000/- per tax period can be claimed in tax period ending 31^st Mar 2016, 31^st Mar 2017 and 31^st Mar 2018.