INPUT TAX CREDIT
Q.1. What is input tax credit?
A.1. Input tax credit is the amount of tax paid by the dealer on purchases for which the dealer is entitled to claim a credit.
Q.2. How and when input tax credit has to be claimed?
A.2. The input tax credit has to be claimed in the tax period in which a dealer records tax invoice and can be adjusted against tax liability of the dealer on all the sales effected during the said tax period.
Q.3. How does input tax credit work within the overall VAT scheme and whether tax credit is available against liability of tax under CST Act?
A.3. In order to understand how the input tax credit works, following illustrations would be useful:
A Purchases during the month @12.5% 1,00,000 12,500
B Local sales during the month @12.5% 1,20,000 15,000
C Output tax payable 15,000
D Less: input tax credit 15,000
E VAT payable 2,500
A Purchases during the month @12.5% 2,00,000 25,000
B Local sales during the month @4% 1,00,000 4,000
C Inter State sales @4% 1,00,000 4,000
D Total output tax liability (B+C) 8,000
E Input tax credit admissible 25,000
E Negative balance of input tax credit carried forwarded to next tax period (B-E) 17,000
Can input tax credit of an item be adjusted against output tax on other items?
There is no ?one to one? correlation between input tax credit and output tax of an item. Input tax credit on all items purchased in a tax period can be adjusted against total tax payable during the tax period.
Which purchases would be qualified for input tax credit?
Input tax credit will be available for the taxable goods purchased for the purpose of:
- Sale or resale within the State
- Sale in the course of inter state trade or commerce
- Sale in the course of exports
- Use as raw materials, processing materials or processing materials in the manufacture of taxable goods
- Use as packing of goods
- Sale to SEZ/EOU
- Transfer out side the State
Are there any prohibited goods for which input tax credit will not be admissible?
Yes. Input tax credit will not be available for crude oil, Lignite, Petrol and High Speed Diesel besides purchases unrelated to goods under sale.
How input tax credit will be available in case of branch transfer?
Input tax credit would be available in case of branch transfer after deducting 4 % as under:
- In the case of reseller: 4% of the value of the goods so transferred
- In the case of manufacturer: 4% of the value of the goods used in the manufacture of goods so transferred.
Whether input tax credit will be available for works contract or transfer of rights to use etc.?
Yes, the input tax credit will be available in case of works contracts (except capital goods) but it would not be available for transfer of rights to use goods.
Whether input tax credit will be admissible for capital goods also?
Yes. Input tax credit will be admissible for capital goods used in the manufacture of taxable goods. Capital goods must be used continuously for a full period of five years within the State. How ever, no input tax credit would be admissible for capital goods purchased for the use in:
- Manufacture of tax-free goods
- Generation of electricity including captive power
- Works contract
Whether input tax credit will be available for fuels used in generation of electricity including captive power?
No. Input tax credit will not be available in such case.
Whether input tax credit will be available for fuels used in motor vehicles?
No. Input tax credit would not be available in such case also.
Whether input tax credit will be available for purchases of motor vehicles?
No, unless vehicle is purchased for resale.
Whether input tax credit will be available on inter state purchases or imports?
No. Input tax credit will not be available on inter state purchases or imports. Only purchases within the State are qualified for input tax credit.
Whether input tax credit is available for the purchases made from a person who is not a registered dealer?
No. However, purchase tax paid on such purchase is admissible as input tax credit.
Whether input tax credit would be available for the purchases made from a dealer paying lump-sum tax?
No. In such cases, input tax credit will not be admissible
Whether input tax credit will be admissible for the purchases made before registration?
No. In such cases also, input tax credit will not be admissible.
Whether input tax credit will be available for the purchases made from the dealer whose registration is suspended or cancelled and his name is published on website of the department?
No. In such case, no input tax credit will not be admissible for the purchases made from such dealer subsequent to publication of the name of the defaulting dealer on website.
What are the other cases/circumstances in which input tax credit will not be admissible?
In following cases/circumstances input tax credit will not be admissible:
- where tax is not charged separately
- the original tax invoice is not with the dealer
What is the mechanism for claiming tax credit by Commission Agent and Principal?
In the normal trade practice, the transaction between the commission agent and principal is not sale purchase transaction. Therefore, no tax invoices can be issued for such transactions. However, for the purpose of claiming tax credit, such transactions shall be deemed to be sales and purchase transactions between the commission agent and principal and they will issue tax invoices to other wherein, they will show the amount of tax paid/payable on such transaction. Commission agent or principal as the case may be, can claim tax credit on the basis of such tax invoices.
Whether any proof would be required to claim input tax credit?
Yes, input tax credit could be claimed only on purchases from dealers registered under VAT. The original ?tax invoice? must be preserved carefully. If original tax invoice is lost, duplicate ?tax invoice? will be required. Indemnity bond will be furnished for obtaining duplicate tax invoice.
Can input tax credit be adjusted against CST payable on inter-state sales?
Yes, but after adjusting input tax credit against the output tax payable under the VAT if there is any balance of tax credit, such credit shall be adjusted against the CST payable as explained in ?Illustration 2? in A-3 above.
What are the provisions for refund of input tax credit?
Input tax credit will be refunded as under:
- In case of excess input tax credit carried forward, tax credit will be refunded not later than 2 years from the end of the year
- In case of export, input tax credit will be refunded within 3 months from the end of respective tax period
Whether Entry Tax paid by the dealer will be admissible as input tax credit?
Yes. Entry Tax paid by the dealer will be available as input tax credit.
Whether any penalty will be payable for claiming excess tax credit?
Yes. Penalty equal to tax credit can be imposed.
NOTE: This data is taken from Gujarat Commercial Tax Website, rules shown here can be different in other states So kindly refer to your State VAT Website.