NOTE ON

“INPUT TAX CREDIT”

UNDER THE PUNJAB VALUE ADDED TAX ACT, 2005

“The evergreen contest between the Revenue and the Assessees under the Punjab Value Added Tax Act, 2005 has lent an aura of complexity to the issues involved therein. But this aura soon fades away if we approach the problem in the background of historical development of this branch of law”.

1. Recently the Hon’ble Judges of the Hon’ble Punjab & Haryana High Court has clinched the issue by passing a landmark judgment reported in 40 PHT, page 145 regarding denial of input tax credit by the Assessing Authority on the ground that the dealer from whom the assessee has purchased goods have not deposited full tax in the Government Treasury. No liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the Government Treasury unless fraudulent or collusion or connivance with the registered selling dealer or its predecessors is established.

2. If the purchasing registered dealer produces the bill issued by the registered dealer, then his burden is discharged and he cannot be held responsible or forced to go around from pillar to post to collect the material in order to get the record. Rather it is the duty of the Assessing Authority to obtain the necessary particulars if any suspicion arises in the mind of the Assessing Authority. Selling registered dealer who collect tax from the purchasing registered dealer acts as an agent for the Government and is duty bound to deposit the same in the Government Treasury.

3. In order to clear the above position regarding input tax credit, kindly see the below mentioned provisions of law:-

(a)               INPUT TAX – As per Section 2 sub-clause (o) of the Punjab Value Added Tax Act, 2005, “input tax” in relation to a taxable person means value added tax (VAT), paid or payable under this Act by a person on the purchase of taxable goods for resale or for use by him in the manufacture or processing or packing of taxable goods in the State.

(b)               INPUT TAX CREDIT – As per Section 2 sub-clause (p) of the Punjab Value Added Tax Act, 2005, “input tax credit” means credit of input tax (in short referred to as ITC) available to a taxable person under the provisions of this Act.

  • Input tax includes tax paid on:

(i)                    Purchases of raw material;

(ii)                  Goods purchased for resale;

(iii)                Purchase of capital goods such as machinery or equipment for use in business;

(iv)                Tools and accessories used in business; and

(v)                  Packing material for resale and use in manufacture

  • Input tax credit or set-off is the allowance of input tax against the tax payable on the sale and purchase of goods.
  • Net VAT payable by a taxable person is equal to the output tax payable less available input tax credit.
  • for use in the manufacture, processing or packing of taxable goods for sale within the State or in the course of inter-State trade or commerce or in the course of export.

4. When Partial Input Tax Credit is admissible:- Section 13(2) of the Punjab Value Added Tax Act, 2005 read with Rule 22 of the Punjab Value Added Tax Rules, 2005, input tax credit is allowed to the extent by which the amount of tax paid in the State exceeds 4% for goods:-

(i)                 Section 13(2)(a) of the Punjab Value Added Tax Act, 2005 read with Rule 22 of the Punjab Value Added Tax Rules, 2005 sent outside the State other than by way of sale in the course of inter-State trade or commerce or export;

(ii)               Section 13(2)(b) of the Punjab Value Added Tax Act, 2005 read with Rule 22 of the Punjab Value Added Tax Rules, 2005 used in manufacture, processing or in packing of taxable goods sent outside the State other than by way of sale in the course of inter-State trade or commerce or export;

(iii)             Section 13(3) of the Punjab Value Added Tax Act, 2005 read with Rule 20 of the Punjab Value Added Tax Rules, 2005 sent for job wok for further processing and not received back within ninety days;

(iv)             Section 13(4) of the Punjab Value Added Tax Act, 2005 namely, furnace oil, transformer oil, mineral turpentine oil, water methanol mixture, naptha and lubricants, used in production of taxable goods or captive generation of power.

4.1             Section 19(5) of the Punjab Value Added Tax Act, 2005: Under the Central Sales Tax Act, 1956, input tax credit on the Schedule ‘H’ goods or the products manufactured there-from, when sold in the course of inter-State trade or commerce, is available only to the extent of Central Sales Tax chargeable under the Central Sales Tax Act, 1956.

4.2             Section 13(1) of the Punjab Value Added Tax Act, 2005 read with Rule 19, 22, 23 & 24 of the Punjab Values Added Tax Rules, 2005: When the goods purchased are also used for purposes other than taxable sales.

(i)                 Apart from taxable sales, goods are used in production, tax free sales, consignment or branch transfers, zero rated sales, inter-State sales.

(ii)               Capital goods, used partially for manufacture of taxable goods and partially for manufacture of tax free goods.

(iii)             That entire input tax credit is allowable on capital goods as there is no provision which casts liability on the dealer to reverse the input tax credit exceeding 4%. The above issue has been decided in favour of dealer by the Hon’ble Appellate Authority in the case of Sharu Special Alloys (P) Limited.

4.3             Rule 21(2-A) of the Punjab Value Added Tax Rules, 2005: Input Tax Credit is available only to the extent of tax payable on the resale value of goods or sale value of manufactured / processed goods, when such goods are sold at a price:

(i)                 lower than purchase price in the case of resale, or

(ii)               lower than cost price in the case of manufactured/ processed goods.

Sub-Rule (2-A) was inserted with effect from 09.11.2010 vide Notification No.GSR.37 / P.A.8 / 2005 / S.70 / Amd. (31) / 2010 dated 08th November, 2010.

5. Section 13(1) and Section 13-A of the Punjab Value Added Tax Act, 2005: No input tax credit is admissible, for the taxable goods purchased by a person, when

(i)                 purchases made from outside the State of Punjab. However, any entry tax paid under the Punjab Tax on Entry of Goods into Local Areas Act, 2000, while importing such purchases would qualify for input tax credit.

(ii)               purchaser is not a taxable person (VAT person).

(iii)             purchases not made against ‘VAT Invoice’. However ‘Vat Invoice’ would not be required when input tax credit is claimed against purchase tax paid under Section 19 the Punjab Value Added Tax Act, 2005 or Entry Tax paid  under Section 13-A of the Punjab Tax on Entry of Goods into Local Areas Act, 2000.

6. Section 13 of the Punjab Value Added Tax Act, 2005 read with Rule 19(1) of the Punjab Value Added Tax Rules, 2005: A taxable person is entitled to input tax credit on capital goods purchased by him from a taxable person within the State of Punjab provided that the capital goods so purchased are used for manufacture of taxable goods. Where capital goods are used for manufacturing taxable as well as tax free goods, input tax credit will be admissible on prorata basis.

7. Export of goods: Sales in the course of export out of the territory of India are Zero-rated Sales. On such sales no output tax is payable though the input tax paid on the purchases related to such sales is available as input tax credit. An exporter is eligible to claim refund of input tax in respect of VAT paid within Punjab on its purchases. Or else, an exporter can purchase goods for purpose of exports without paying any tax subject to furnishing a declaration in form ‘H’ as specified in the Central Sales Tax Act, 1956.

8. Rule 21(1) of the Punjab Value Added Tax Rules, 2005: Input Tax Credit is not available corresponding to the goods lost, destroyed or damaged beyond repair.

In the case of Bharat Petroleum Corporation Ltd vs. State of Punjab 19 VST at page 118, the Hon’ble Punjab & Haryana High Court denied input tax credit on petrol / diesel to the petitioner who was engaged in the business of refining of crude and marketing of various petroleum products. Thereafter matter was disposed of by Hon’ble Supreme Court of India in favour of Bharat Petroleum Corporation Ltd with the observation that if appeal is filed than the appellate authority will decide the matter in accordance with law.

Thereafter matter was finally decided by Hon’ble Punjab VAT Tribunal in favour of assessees.

9. Rule 20 of the Punjab Value Added Tax Rules, 2005: Goods sent for job works – ITC admissibility – Input tax credit is available on goods sent for job work for further processing, if the goods are received back within a period of ninety days.

10. Rule 21(2) of the Punjab Value Added Tax Rules, 2005: When goods are sold at price –

(i)                 lower than purchase price in the case of resale, or

(ii)               lower than cost price in the case of manufactured / processed goods,

Input Tax Credit is available only to extent of tax payable on the resale value of goods or sale value of manufactured / processed goods.

11. Promotional sales: Input Tax Credit is available as long as the goods purchased are for the purpose of taxable sales. Question is whether goods sold free in some sale promotional scheme, such as buy one – get one free, entitles for ITC claim.

Sub-section (5) states that no input tax credit would be admissible for goods used for gifts. In this situation, what needs to be seen is, whether the ‘get one free’ is a ‘zero price sale’ or a ‘free gift’.

Going by the definition of ‘sale’ as given in Section 2(zf) of the Punjab Value Added Tax Act, 2005, sale includes transfer of property by other valuable consideration as well. Can the linking of one goods with sale to other goods, be treated as valuable consideration. Also, another point to note is that the seller has the liberty (to change) to bill the freebies at a price say 1 rupee. Full ITC will be available as long as price of such goods is more than the purchase price.

12. Section 8A(2)(a) of the Punjab Value Added Tax Act, 2005: Input Tax Credit is not admissible to a taxable person in respect of goods purchased by him from a ‘lump-sum person’ registered under the lump-sum tax payment option scheme under the Punjab Value Added Tax Act, 2005. A ‘lump-sum person’ cannot issue ‘VAT Invoice’ for sale made by him.

13. Section 13A of the Punjab Value Added Tax Act, 2005: Entry Tax so paid by a taxable person, registered under the Punjab Value Added Tax Act, 2005 is adjustable as set off against the subsequent tax liability under the Punjab Value Added Tax Act, 2005 and the Central Sales Tax Act, 1956. A taxable person is entitled to input tax credit in respect of the Entry Tax paid by him, provided the goods imported are for the purpose of:

(i)                 sale in the State or

(ii)               in the course of inter-State trade or commerce or

(iii)             in the course of export or

(iv)             for use in the manufacture, processing or packing of taxable goods for sale within the State or in the course of inter-State trade or commerce or export.                    

14. Diesel used in generation of electric power for captive use: Input Tax Credit is not available on diesel used in generation of electric power for captive use. The decision of the Hon’ble Tribunal was set aside be the Hon’ble Punjab & Haryana High Court in the case of State of Punjab vs. Malwa Cotton & Spinning Mills, Ludhiana (2011) 39 VST 65. The Hon’ble High Court held that a perusal of Section 13(5) of the Punjab Value Added Tax Act, 2005 clearly shows that diesel in an item on which input tax credit is not available unless as provided under clause (b). In view of such express provision, resort could not be had to clause (i). It is settled principle of law that an express and special provision excludes a general provision. It is pertinent to point out that an SLP against the above judgment of the Hon’ble P&H has been filed before the Hon’ble Supreme Court of India.

In another case the Hon’ble Supreme Court of India in the case of Commercial Taxation Officer, Udaipur vs. Rajasthan Taxchem Ltd. has observed as under:-

“In view of the fact that the diesel is being used for the purpose of running the generator sets for the production of the ultimate product which is also required for the purpose of manufacturing the end product the diesel can only be termed as raw material and not otherwise.”

15. Change from TOT to VAT: A person, who was earlier registered as TOT and subsequently gets himself registered for VAT, won’t be entitled for input tax credit on the stock held by him on the date of change of registration and would be liable to pay TOT on such stock, if sold within thirty days from such date. In case he is unable to sell such stock within thirty days of change of registration, he would have to pay applicable VAT on sale of the remaining stock and he would not get any input tax credit with respect to such stock.

16. CIRCUMSTANCES UNDER WHICH INPUT TAX CREDIT NEEDS TO BE REVERSED:-

(a)               Change of registration from VAT to TOT – A person, who was earlier registered for VAT and has subsequently got himself registered for TOT, shall reverse input tax credit availed with him before such change, on the stock of goods held by him on the day, when he is registered as TOT person.

(b)               Closure of business – A person shall reverse input tax credit availed by him on goods which remained in stock at the time of closure of his business.

(c)                Credit note from the seller – Where the selling taxable persons has made any modification (e.g. reduction in sale price) in respect of a sale by issuance of credit note, the purchasing person needs to make necessary adjustment of input tax credit availed subject to the condition that selling dealer has deposited the tax after the deduction, if the seller has deposited the tax on entire amount although any incentive was given then the input tax credit should not be reversed.

(d)               Goods lost, destroyed or damaged beyond repair – Input tax credit availed on goods lost, destroyed or damaged beyond repair to be reversed on occurrence of such events.

(e)               Capital goods used for manufacture of tax free goods – Input tax credit to be reversed to the extent, capital goods has been used in respect of manufacture of tax free goods or for processing of such goods.

17. The input tax credit to a purchaser cannot be denied merely on filing of an affidavit by the seller is like the cutting of blood supply artery and the formula no sale – no purchase. Matter ends hitting the case at rock bottom, the ultimate aim and object of sly boots doing things with artful dexterity. The Hon’ble Supreme Court of India in the case of State of Kerela vs. K.T. Shaduli Yusuff – 39 STC 478 (SC), the Hon’ble Punjab and Haryana High Court in the case of Pahar Chand & Sons vs. The State of Punjab – 30 STC 211 (P&H) and recently the Hon’ble VAT Tribunal in the case of Malkeet Trading Company vs. State of Punjab – 39 PHT 150 (PVT) clinches the issue.

18. The Hon’ble Punjab & Haryana High Court in CWP No.4087 of 1977 decided on 21.01.1978 held as under:-

“The main grouse of the petitioner in this case is, that the Assessing Authority has not summoned the commission agents, rather has refused to summon those persons and is going to finalize the assessment on the basis of evidence collected behind his back. Under S. 11 of the Punjab General Sales Tax Act, 1948 (hereinafter referred to as the Act), the dealer has a right to produce evidence of cause to be produced, any evidence in support of the return filed by him. The contention of the respondents is that the petitioner has not adduced any evidence to show that the transfer of goods to him by the commission agents was as a result of contract of agency and not of a sale. Since the dealer has a statutory right to produce evidence, so it is directed that the Assessing Authority shall give an opportunity to the dealer to produce his evidence or cause to be produced any evidence in support of his return and incase the Assessing Authority also feels to produce some evidence, it may do so under S.11 (3) of the Act it shall then decide the case in accordance with law. The assessing authority shall fix a date giving a reasonable time to the dealer to produce his evidence and thereafter it shall decide the case. With the aforesaid direction this petition is disposed of. If the dealer wants to summon the witnesses, the department will summon the witnesses in accordance with Rule 65 of the Punjab General Sales Tax Rules. The petitioner will appear before the Assessing Authority on January 17, 1978, on which date the petitioner will submit an application for the summoning of witnesses, if so desired.”

Author

N.S. Bedi, Advocate

5/13, Central Town,

Jalandhar City

Cell: +91 9814066336

E-mail: [email protected]

More Under Goods and Services Tax

13 Comments

  1. keshav kataria says:

    vat dealer has closing stock of taxable goods as on 01.07.2017, no input tax credit is available. under GST, dealer has opted for composition scheme. Moot point: is dealer liable to deposit VAT on the taxable goods held as on 01.07.2017

  2. sameer says:

    sir we have deposit advance tax (entry tax ) punjab icc against purchase of steel structure for new plants. is this refundable or not

  3. sameer says:

    sir we are manufacturing of pesticides in punjab. pesticides is tax free in punjab. we can take vat input credit on packing material in sales tax return.

  4. Bali Accountant says:

    Sir in the case of sella unit main problem that not define correct tax free reversal ration, when husk used for boiler

  5. V.K.SHARMA says:

    WHILE ASSESSMENT IT WAS SHOWN IN MISMATCH DATA THAT THE RC OF DEALER WAS CANCELLED PRIOR TO DATE WHEN INVOICES WERE ISSUED BY HIM AND ITC REVERSED ALONGWITH PENALTY, BUT THE E RETURN WAS FILED BY SUCH CANCELLED DEALER FOR THAT PERIOD AND ORIGINAL VAT INVOICES ALSO AVAILABLE WITH PURCHASING DEALER. IS THERE ANY REMEDY FOR SUCH PURCHASING DEALER ?

  6. Kamal says:

    Sir, if some purchases bills of different parties not entered in one financial year, may it entered in next financial year.

    Thanks & Regards
    Kamal
    Jalandhar

  7. Vinay Garg (Sangrur), Advocate says:

    Sir, if excess CST deposited in one Financial Year, may it be claimed in the next Financial Year. Kindly clarify my quary. Thanks. Vinay Garg (Sangrur), Advocate-Taxation, Flat No. 288/2, Sector 44-A, Chandigarh. Mobile : 9814238821; 9256391300

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