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What is Input tax credit

FREQUENTLY ASKED QUESTIONS ON VALUE ADDED TAX (VAT)

What is Value Added Tax?

Value Added Tax is a tax on value addition made by the subsequent seller on the inputs he purchased. It works on a macro economic principle i.e. the sale invoice – the purchase invoice as per standard economic norms is the value addition on which the tax is payable after deducting the tax paid on inputs purchased.

What is Input Tax?

“Input” normally means goods purchased by a dealer in the course of his business. The purchases would include any goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture or processing or packing or storing of other goods or any other use in business including capital goods under specified circumstances.

What is Input Tax Credit?

Input tax credit is the credit for tax paid on inputs. Every dealer is liable for output tax on the taxable sale effected by him. The basic principle of VAT is that every dealer pays tax only on the value addition in his hands. Input tax credit is the mechanism by which the dealer is enabled to setoff against his output tax the input tax.

Dealers are not eligible for input tax credit on all inputs. There are certain restrictions and conditions on the eligibility of input tax credit as may be stipulated in the respective State Acts. The restrictions and conditions are answered separately.

How is input tax credit to be claimed? Is there any requirement of a “one to one” correlation between input tax and output tax?

There is no need for a “one to one” correlation between input tax credit and output tax. Quite a large number of small businesses are under the misconception that input tax has to be adjusted against output tax on a bill to bill basis and have been opposing the implementation of VAT stating that their profit margin would be known to the buyer and that account keeping would be impossible.

The operation of the input tax mechanism is very simple. The dealer will be eligible to take credit of eligible input tax in a month (or such tax period as may be specified) on the entire purchases. The dealer would charge VAT at the prescribed rate of tax as is being done in the present system of 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 whether the entire goods purchased is sold or not. For example, if the input tax credit in a particular month is Rs. 10,000/-, the output tax payable is Rs.5,000/-, the excess input tax of Rs.5,000/- 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.7,000/-, the dealer will pay Rs.2000/- along with the monthly return.

Will input tax credit be available on all purchases for the business?

Generally, input tax credit will be eligible on all goods purchased for resale, raw material and packing materials for use in the manufacture of goods or even capital goods as specified. However, eligibility of input tax credit on capital goods is different in the draft VAT legislations of various State Governments.

Only good purchased from VAT registered dealers in the State will be eligible for input tax credit. Input tax credit will not be available on Inter State purchases.

There are likely to be restrictions or denial of input tax credit on Petroleum products, Tobacco and certain other products. One should refer to their respective State VAT Acts. Goods ineligible for Input Tax credit are also referred to as “Input Tax Credit Blocked goods”.

“In my opinion, the purchases on which you cannot claim a credit for your input tax are:

Automobiles, including commercial vehicles, unless you are in the business of dealing in such automobiles;

Spare parts for repair and maintenance of automobiles unless your business is dealing in such automobiles;

Petroleum products unless the petroleum products are used in the production of goods or for industrial use;

Goods used for personal consumption or gifts;

Air-conditioning units unless you are in the business of dealing in such units”.

PACKING MATERIAL & TREATMENT OF THE SAME

Can input tax credit be availed on use of petroleum products?

No. Tax on petroleum products cannot be availed as input credit. The input tax credit on petroleum products is covered by Schedule E. It provides that in the following circumstances the input tax credit on Petroleum products and natural gas be taken as NIL.

when used as fuel

when exported out of state

The second condition is more appropriate for trade dealers. In case they decide to stock transfer petroleum products out of state without sale, input tax on these products, if already availed on these products will have to be considered NIL.

What is the applicable rate of tax on Packing materials as Outputs?

Packing material or containers are always sold with some goods packed or contained it. No separate rate of tax is applicable on sale of such packing material/container. The rate of tax applicable to the goods packed in such packing material will be the rate of tax applicable on this packing material. Where such goods are exempted from tax, the sale of packing material/container will also be exempt from tax.

Example : spark plugs packed in plastic bags are taxed @ 12%. Thus rate of tax applicable on sale of this plastic bag is 12%. In case of these spark plugs are purchased by some authorised dealer e.g. automaker company, the applicable rate is 4%, thus applicable rate of tax on plastic bags in which such plugs are packed will be only 4%.

Can input credit on packing material be availed on use of petroleum products?

The eligibility of input tax credit on packing material also depends on the item packed therein. In case items packed therein are dealt in the circumstances that input tax credit is not eligible therein, input tax credit will not be available on such packing material as well.

Is there any restriction of availing of input tax on depending on the manner of disposal of goods say as free gifts or on stock transfer?

Yes. Input tax credit will be available on output tax payable on sales within the State and on Inter State Sale.

Restricted input tax credit is likely to be available on stock transfers/consignment dispatches to outside the State as discussed separately.

Whether there would be any other indirect tax after VAT is introduced?

No. All indirect taxes levied by State Govts. In the form of Works Contract Tax, Luxury Tax, Tax on Transfer of Right to Use, Retail Sales Tax, Turnover Tax, Entry Tax etc. would be abolished and all these will converge into VAT.

This would mean tremendous relief for the tax payers in general as now they will have to deal with one tax and not on 6-7 taxes that required separate accounting and procedures etc.

Will input tax credit be available on Inter State Purchases”?

Input tax credit will not be available on Inter State purchases for the obvious reason that your State cannot be expected to give credit for the tax paid in the State of the selling dealer.

Will input tax credit be available for the entire tax paid on eligible purchases?

Input tax credit will be available on the entire VAT paid on purchases.

What proof is required to claim input tax credit?
Input tax credit can be claimed only on purchases from VAT Registered Dealers. The original Invoices is the proof required to claim Input Tax Credit. The Invoices must be preserved carefully to be produced in assessment proceedings.

There may be circumstances when the original invoice is lost or destroyed. The VAT Rules of the respective States will provide for the procedure to be followed in such contingencies.

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Transitional provisions

Can input tax credit be claimed on stock of goods on the date of implementation of VAT”?

Since stock of Goods as on 31.3.2005 will be liable to VAT on sale from 1.4.2005, the tax paid under the present Sales tax will be eligible for Input Tax credit subject to conditions and restrictions as may be stipulated in the respective State VAT Acts.

As per uniform policy approved by Empowered Committee, all State Govts. Will give input tax credit on the closing stock held by the dealers as on 31st March, 2005. The policy being followed by majority of the States is as follows:-

Input tax credit set off will be available for specified stocks i.e. trading stocks, packing material and raw material as per tax rates applicable in the to be repealed in the sales tax enactment. The stocks should have been taxable at first point and the stocks should have been purchased within a specified period, say, one year i.e. between 1.4.04 to 31.3.05. The stock should be available in the respective State and the purchase invoice should show the component of sales tax separately. If all these conditions are satisfied, the dealer has to file a statement to be audited by a chartered accountant in case the input tax credit is beyond a certain amount along with his first return or within a period of four months. After verification, he would be allowed to set off the amount of input tax credit given on the closing stock held by him which he can set off against output tax payable either immediately or in few States in certain instalments.

Will the input tax credit set off be available for Works Contractors, for Transferors of Right to Use etc.?

Yes. There is no provision in any draft act released by the State Govt. denying such set off.

Will the input tax credit be available on the capital goods held by the dealers as on 1.4.05?

No.

Whether the input tax credit set off be available for dealers who are registered under the Sales Tax Act but not registered under the VAT regime?

No.

On what purchases of stocks in the sales tax enactment, the input tax credit set off will be given?

Only purchases made by dealers from the dealers situated within the State. There will be no input tax credit set off available from any purchases made from outside the State or for any import duty or CVD etc. paid for import of goods. This is the essence of VAT as this is supposed to be a consumption based tax.


Are all dealers eligible to claim input tax credit?

All VAT registered dealers can claim Input Tax Credit on the eligible purchases. However, retail dealers paying Presumptive Tax will not be eligible for input tax. In other words, dealers opting for composition scheme will not be eligible for input tax credit set off.


What is the procedure for adjusting input tax paid against the output tax payable?

In the return filed for the Tax Period there will be a column for input tax credit, which will have to be filled in. Copies of the Invoices in support of the claim of input tax credit will have to be preserved.


What is the procedure, in the case of a dealer, to adjust the input tax against output tax when the dealer makes taxable and exempt supplies? Will the input tax credit relating to exempt supplies lapse?

Input Tax Credit shall normally be available on sale or resale in the State; or use as raw material or as capital goods in the manufacturing and processing of goods other than those exempt from tax under this Act intended for sale in the State; or sale in the course of export out of the territory of India; or for use as containers for packing of goods other than those exempt from tax under this Act for sale or resale in the State.

The sale so effected (except in the course of export) shall normally be subject to tax. There are certain exempt transaction as may be specified in the respective State VAT Acts on which VAT is not chargeable.

If the purchases are used partially for the purposes specified, input tax credit shall be allowed proportionate to the extent they are used for the purposes specified above.

The VAT Rules of the respective States will provide for the manner of apportionment. Input tax credit may be claimed proportionate to the extent the inputs have been used towards taxable sale.

What happens to the input tax credit on the portion of purchases relating to exempt transaction?

There shall be a “Reverse Credit” of the input tax credit reliable to the exempt transactions, i.e., the proportionate input tax credit shall be deducted from the Input Tax Credit taken.

There are provisions in all VAT Draft Legislation to this effect.

Provided that if part of the goods purchased are utilized otherwise, the amount of reverse tax credit shall be proportionately calculated in a manner that is just and reasonable.

Can a dealer whose input tax credit exceeds the output tax payable in tax period or in a year claim refund of the excess credit of input tax?

Since the rate of tax on input and sales is the same in the case of a dealer, there will only be value addition and there may not be a situation where the input tax credit exceeds the output tax payable.

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