INPUT TAX CREDIT (SECTION 13,14, RULE 18 TO 26, FORM 7,8)

Only taxable person can claim ITC
Note: Registered person or casual trader can not claim ITC

ITC is available only against Input tax on taxable goods
Issue: What if goods no longer remain taxable ?
Note: As per Rule 21(4), if some goods are lying as input or output in the stock of a taxable, and such goods become tax free from a particular date, no ITC shall be admissible to taxable person on sale of goods lying in the stock or on using the the goods as input for making such tax free goods
Further as per Rule 21(6), where ITC has already been availed of by a taxable person against the purchase of goods which are used in mfg. tax free goods or are disposed off otherwise than by way of sale, ITC already availed shall be reversed. If as a result of reversal there is –ve ITC, it shall become payable forthwith.
There is no restriction in VAT law that ITC shall be available only against goods mentioned in registraiton certificate only.


As per section 13(1) proviso, goods should be :
-  For Sale in the state or
-  For Sale in course of Interstate trade or commerce
-  For Sale in course of export or
-  For use in mfg, processing or packing of taxable goods for
sale in the state or for sale in course of ISTC or for sale in course of export out of territory of India.
Cases not covered above:
- Branch Transfer (Covered by 13(2))
- Sale for direct export Out of territory of India (Covered by S.17)
- Goods sent for job work (Covered by 13(3))
- Goods Lost or destroyed (Covered by Rule 21(1))
- Goods disposed off otherwise than by way of sale (Covered by 21(6))
e.g. goods scrapped, job work

Input Tax Credit in case of Branch Transfer/ Consignment 13(2)
In case of transfer of goods outside the state, as such or used in manufacture or packing of taxable goods and such manufactured goods are transferred outside the state, otherwise than by sale, ITC=4% on purchase of goods is reversed.
a) If goods transferred are identifiable(R.23 proviso),
ITC to be reversed = Purchase Price X 4/100 (Rule 23)
 b) If goods transferred not identifiable (R. 24(2),
ITC to be reversed= Purchase Price X 4/100 X(BT/(GT+BT)
What if part of goods transferred are identifiable and part is unidentifiable. ? Logical calculation to be made e.g. a case of multiproduct concern

Input tax Credit on goods sent for Job Work 13(3)
 In case goods are sent for job work, 4% of value of such goods is reversed at the time of sending the goods. If goods are received back with in 90 days from the date of dispatch to the job worker (Rule 20), input tax credit reversed earlier is restored back. However, the evidence of receipt of goods shall be preserved, in the form of record, challan or memo, for being produced as and when called for.
 As per clarification dtd. 31-03-05, point no. 32, provisions of vat law not to apply if goods are sent for job work with in the state of Punjab. However as per ETC order dtd 13.08.07 in case of Gaurav Jagdish Arora, the context in which clarification at point no. 32 is issued is not clear , hence no reliance can be placed on this this clarification.
 As per Rule 20, goods sent for Job Work shall include:
Goods sent as such or after partial processing for further processing, testing, repair, reconditioning, or any other purpose.
 If goods sent for job work are not identifiable, how to determine value of goods sent for job work ? Also No pro rate calculation available.

Goods sent for Job Work Received back after 90 days
 Further as per ETC order dtd. 25.10.10 in case of SGS International, even if goods are received after 90 days, ITC reversed under Rule 20 can be can be restored .
 ETC referred to decision of Punjab and Haryana High Court in the case of M/s Stelco Strips Ltd. v/s State of Punjab reported as 2009-33 PHT page 31 (Punjab & Haryana High Court) wherein it was held that the time period of 14 days prescribed under section 51 (7) of the PVAT Act, 2005 is directory in nature; therefore following this decision; rule 20 is also directory in nature .
 However penalty u/s 60 for contravening Rule 20 i.e. Min Rs. 1000 and Max. Rs. 10000 can be imposed

JOB WORKER
 If job work results transfer of property of goods along with labour the transaction shall fall under works contract and goods which are transferred shall be taxed and ITC shall be fully allowed on goods used in job work .
 However if certain goods get consumed in the process of execution of the contract and now form part of service, the ITC shall be allowed proportionately because as per proviso to section 13, ITC is allowable on goods for use in manufacturing, processing or packing of taxable goods for sale. Further as per Rule 21(6), if Goods on which ITC has been availed are disposed of otherwise than by sale, ITC shall be reversed. Since the goods have been used for service and not for sale, ITC shall not be allowed on goods used in service.
ITC on goods lost or destroyed
or damaged beyond repair Rule 21
 No ITC is admissible on goods which are lost or destroyed or damaged beyond repair w.e.f 6-11-08. Earlier ITC reversal was applicable only if goods are lost or destroyed due to theft, fire or natural calamity.
 Reversal of ITC on occurrence of above shall be made immediately.
 As per ETC order dtd. 19.7.10 in Jai Kissan Filling Station, ITC on oil evaporated stands covered by R.21(1)
 As per Notification dated 08-11-2010, where goods are resold at price lower than purchase price or sold at price lower than cost price in case of manufactured/ processed goods, ITC shall be allowed only up to tax payable on sale value of goods.
 Due to application of above provision, as and when capital goods are sold , at depreciated value , substantial amount of ITC shall have to be reversed.
 Whether ITC should be reversed for process loss ? Perhaps No


Input Tax Credit on Capital Goods 13(1)
 a) Input Tax credit is admissible on capital goods.
 As per section 2(d) Capital Goods means any plant, machinery or equipment including equipment for pollution control, laboratory and cold storage used in manufacturing, processing and packing of taxable goods for sale
 b) But if capital goods are used for manufacturing tax free goods or for job work, ITC available on pro rata basis only taking into account ratio between value of taxable goods manufactured And value of tax free goods and amount received or receivable for job work done (Rule 19(1))
Note: It means advance received for job work not to be taken into account.
 c) If ITC on capital goods already allowed then ITC will be reversed to the extent of tax free goods manufactured.(R.19(2))
Note: Here no mention of reversal of ITC on job work. Further, if lesser ITC taken due to higher proportion of tax free goods or job work in the first year or first return period, whether there shall be restoration of ITC in coming periods ?
 d) If reversal results negative ITC, it will be deemed payable. (Rule 19)
Issues on ITC on Capital Goods
 Whether ITC allowable on machinery lying idle ?
Ans: Regarding uninstalled machinery the department may argue that it is not for use in manufacturing in current period. But, ITC entitlement is on purchase provided it is for use in manufacturing., Further as per section 13(12), ITC can be claimed only in the year in original invoice is received. So ITC should be taken on machinery even if lying idle.

 What shall be effect on claim of ITC on capital goods, of changing proportions of job work & Tax free goods, in relation to gross receipts ?

 So, If in current year the major use of machinery is towards Job work, whether the substantial ITC shall stand reversed ?

 Further there is no provision for restoration of ITC reversed.

 Whether I can claim ITC in parts over useful life of machinery ?
Ans: No, because as per section 13(12), ITC can be claimed during the period in which original VAT Invoice is received.

Input tax Credit prohibited on certain goods 13(5)
 Automobiles, including commercial vehicles, two wheeler, three wheeler AND spare used in repair and maintenance, unless a case of dealer in automobiles or spare parts
 Note : Cycle Rickshaw is not automobile.? What if it is machine driven ?
- Petrol, diesel, ATF,LPG, CNG, unless a case of dealer in such goods
- Immovable property, Civil Structures
- Weigh Bridge, unless installed inside the manufacturing premises for use in manufacturing process.
- Office Equipment, Building Material, unless a case of dealer in such goods
- Furniture & Fixtures including electric fixtures and fittings, unless a case of dealer in such goods
 Note : In case of electric installations along machinery, VAT credit prohibited ?
- A.C., Refrigerator unless essential for storage or mfg. of taxable goods or unless a case of dealer in such goods
- Goods used in generation, distribution and transmission of electrical energy unless for captive consumption. (e.g. diesel – Malwa Cotton Spinning Mills)
 Note: It means VAT on generator set will not be allowed as credit, unless generator used for running machines.
- Goods used in manufacture, processing, packing of tax free goods
- Food, Beverages, Tobacco products, unless a case of dealer in such goods
- Goods used for personal consumption or gifts

Partial Use of Goods for taxable sales
 Where identification of goods is possible (R.23)
i.e. the dealer has maintained commodity wise account of his purchase and its use in sale or production and can correlate purchase with sale of taxable goods, ITC allowable = Vat paid or payable on such purchases- Reversal in ITC, if any
 Where identification of goods is not possible(R.24(1))
ITC on taxable sales= (IT X T)/(GT+BT)
IT= Total ITC- Reverse Tax for tax/ return period
T= Turnover of taxable goods+ Turnover of Zero rated sale + Sale in ISTC + Value of branch/consignment transfer- Tax Amount
GT= GTO of sales including ISTC during return/tax period
BT= Value of branch/consignment transfer of taxable goods in ISTC in return/tax period

Input Tax Credit on certain consumables s.13(4)
Input tax credit on certain consumables, used in production of taxable goods or used in generation of power, is allowed only in excess of 4%. These consumables include: furnace oil, turpentine oil, naphtha and lubricants, water methanol mixture, transformer oil.

ITC already availed
a) ITC already availed on goods used in manufacturing , processing of tax free goods or disposed off otherwise than by sale , to be deducted from ITC for the relevant period.
b) If due to deduction , ITC goes negative, it is deemed to become payable.
ITC vs. purchase tax
Excess ITC can be used for payment of purchase tax.
(Vat commissioner Order dtd 13-08-07 in case of Jamna Traders, Sunam)
Input Tax Credit on Conversion
From VAT to Composition Scheme : (S.13(6)):Input Tax credit on stock to be reversed
From Composition scheme to VAT (S.13(7)) :
I) No input tax credit on stock
II) Tax under composition scheme on stock sold with in 30 days. This period is very short.
Input Tax Credit on Purchases from Exempted Unit
a) On purchases by VAT dealer from exempted unit used in mfg, processing , packing of taxable goods OR sales to VAT dealer with in state OR central sale, 4% notional ITC is allowed.
 b) Notional ITC shall be shown separately in the return and separate account of such notional ITC shall also be maintained
 c) However, in above case if goods are sold to non VAT dealer, entire purchase is allowed as deduction from turnover (Rule 5 of Deferment and Exemption Rules)
 d) If goods are used in manufacturing, processing or packing of tax free goods, no notional ITC
 e) If goods purchased from exempted unit are exported out of India, no notional ITC shall be allowed
 f) Notional ITC can be used for paying VAT and CST only.
 g) First actual ITC shall be adjusted against and only after actual ITC is exhausted, the notional ITC shall be used.
 h) No refund on account of notional ITC shall be granted.
 i) Separate accounts for Notional and Actual ITC to be maintained
 Vide Notification dated 06-01-2010, Notional ITC on goods sold in inter state trade or commerce shall be restricted to CST chargeable only retrospectively w.e.f. 01-04-2005
Whether Notional ITC can be claimed against unutilized goods
Vide Notification dated 06-01-2010, the conditions relating to Deferment and exemption changed retrospectively wef 01-04-2005, promulgating that Notional ITC shall be utilized only against sale of such goods only. However notional ITC can be carried forward till disposal of goods purchased from exempted unit. If the goods are disposed, Notional ITC shall stand utilized.
Notional ITC on freight charged in Invoice of Exempted Unit
As per ETC order dated 18.10.06 in case of M/s. Saurav Chemicals, notional ITC shall be allowed on the value on which exempted unit has calculated its notional liability. Hence if exempted unit takes into account freight for calculating notional liability, notional ITC shall be calculated taking into account the amount of freight also.
ITC on purchases from Exempted Electronic Unit
 No Notional ITC shall be allowed on such purchases
 Value of purchases shall be reduced from turnover and tax shall be payable on value additions only.
 Electronic Unit and subsequent taxable persons shall issue only retail invoice irrespective of the fact that goods are sold to taxable person or any other person.
 Exempted Electronic Unit shall be exempted for 10 years from date of production. There after it shall pay tax @ 3.5% for further 3 years. No ITC of this tax shall be allowed.
 The exemption granted to electronic units is not based on fixed capital investment , hence it can shift its premises during exemption period without losing exemption
(ETC order dated 19.07.10 in case of Bal Krishan Gupta Advocate)
ITC claim by exempted unit
 As per sub condition 2 of Conditions of Exemption , no ITC is admissible to exempted unit. Only refund of tax can be claimed for purchases made by exempted unit. But no refund is admissible if tax free goods are manufactured from raw material.
 Further no notional ITC is admissible to exempted unit on purchases made from another exempted unit (New Sub Condition 7 inserted) vide notification dated 06-01-2010 made applicable from 01-04-2005.
Input Tax Credit : Misc. Issues
Reversal of ITC
: on stock on closure of business 13(9)
: if refund claimed in respect of ITC on exports 13(8)
(Note: Unlike Rule 19(2) for capital goods used job work or tax free goods And Rule 21(6) for taxable goods becoming tax free, where if reversal if ITC results –ve tax, it shall be deemed payable, there is no such provision in case of reversal of ITC on closure of business or refund claimed in respect of ITC on goods exported)

ITC is non transferable, except where ownership of business of a person is entirely transferred.S 13(11)

 Adjustment of ITC on debit or credit note issued on invoice book only. S.13(10)
Input Tax Credit :Onus to prove
S.13(15)
 Onus to prove that
- VAT Invoice on the basis of which input tax credit is claimed is genuine
- and is issued by a taxable person
shall lie on the claimant
- To avoid genuine hard ship the government should start the system like 26AS applicable in Income Tax for TDS.

Conditions for availing ITC (Rule 18 and 21(3))
 If Original VAT Invoice in possession issued by a taxable person
 That Original Vat Invoice is issued by the person from whom the goods have been purchased. It means in case of endorsement of bill and consignment note, ITC not available ?
 Tax charged has been separately shown
 Maintenance of proper records of purchases, eligible for ITC and adjustment there to in chronological order.
 Vat Invoice should have been issued under bonafide transaction.
It means goods should actually have been sold and bought between seller and buyer.
 Original Vat Invoice should contain all the information required under Rule 54
 Certificate of registration of person issuing the invoice should not have been cancelled
 ITC available against original invoice only, otherwise determination by officer required (Section 13)
Input Tax Credit on Duplicate Invoice Rule 18 and Rule 26
 In case original vat invoice is lost, destroyed or mutilated
 Application in VAT 7
 Duplicate copy of VAT Invoice to be furnished along VAT –7
(Whether duplicate copy includes photo copy ?)
 Indemnity Bond in VAT-8
 Designated Officer to cross check the transaction and be satisfied about genuineness of transaction
 Order allowing ITC to be passed with in 60 days from the receipt of application.
 Taxable person shall avail the ITC after the receipt of order.
 Note :If order is passed in different financial year but received in different financial year, ITC to be claimed in the financial year in which order is received. So if above procedure is adopted at the time of assessment, ITC already taken shall have to be reversed and ITC shall be claimed in the year of receipt of order.
Input Tax Credit on Entry Tax (Section 13A)
 ITC for Entry Tax shall be allowed under section 13A
ITC on tax deposited late by the seller
Tax late deposited by the seller firm, ITC to be allowed to appellant purchaser
Samana Costpin Ltd 2008 11STM372
ITC on Loss on evaporation
If goods which have been purchased are not available and output tax is not attracted, there could be no deduction of input tax in respect of such goods. Provisions in Rule 21 making input tax credit inadmissible
where goods are lost or destroyed or damaged, can not be held to be contrary to the scheme of the Act.
BPCL 2009 12STM463 P&H
ITC on tax paid by unregistered seller
Buyer held not entitled to ITC on tax paid by Police Lines, BSF on condemned vehicles because these departments are not registered under PVAT Act, 2005
2009 12 STM 424 PVAT TRI.