Presented By CA Swatantra Singh,

Presented By CA Swatantra Singh, B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

Input Tax Credit

Input Tax Credit • ITC u/s 9 is available on making the eligible purchases – Holding of tax invoice without making the purchase is not enough • If, under some circumstances, the local purchases are assessed as central purchases, Input Tax Credit would be denied – To illustrate – K.G. Khosla’s case and DCM case • Therefore, first ensure that goods are actually been purchased and, second, this is a local purchase

Input Tax Credit

What is VAT • Watz VAT? • Value Added Tax (VAT), as the name itself suggests,is a tax on • value addition at each stage of production - distribution chain. • This tax, in its purest form, is a destination based , consumption tax. • It encompasses all economic activities . • (3) At each stage of trade, value addition is taxed and tax is paid on all • Purchases whether inputs, or capital investment . • (4) At each stage, there is collection of tax by government but , it is • rebated at the next stage. • (5) VAT system of taxation is considered to be superior to other • systems of taxation as it avoids/ reduces cascading effect of • indirect taxes. • (6) It is also simple to administer and has self – policing mechanism.

CHARACTERSTICSOF SALES TAX • Lack of Uniformity. • Multiplicity of Rates • Heavy reliance on the First-point tax. • Cascading effect of the tax. • Pyramiding influence on prices. • Biased against commodity having larger value-added at the earliest stages.

BASIC CONCEPTS OF VAT • VAT is a form of Sales Tax collected on consumer expenditure. • It removes any tax on Business investment. • Input is Purchase and Output is Sales. • Input and Output are common to Manufacturers and Traders. • Zero is a Rate of Tax in VAT. • If transaction is Zero Rated, Seller is eligible for Input Tax Rebate. • Exempt means no Input Rebate is given

INPUT TAX REBATE • Manufacturers and Traders to get input tax rebate against sales are made by them. • Export Sales are eligible for input tax rebate • Branch Transfers / Consignment Sales eligible for credit subject to certain limits. • Input Rebate is confined only to tax paid on Purchases made WITHIN the state only.

RATES OF TAX • Common Rates of Tax • Basic Four Rates of Tax (1%, 4% , 12.50% and 20%) • Minimum Rate. ( Bullion, Gold, Silver, Precious Metals and stones) • Low Rate. ( Food Grains , Declared Good and industrial inputs) • High Rate( Liquor, Petroleum Products) • General Rate ( All other Goods)

Operation of VAT Raw Material producer –Sale value 100 Gross VAT – 12.50 (12.50% of 100) Net VAT – 12.50 Manufacturer – Sale value 200 Gross VAT - 25(12.50% of 200) Net VAT - 12.50 (25-12.50) Wholesaler – Sale value 300 Gross VAT - 37.50 (12.50% of 300) Net VAT - 12.50 (37.50-25) Retailer – Sale value 400 Gross VAT - 50 ( 12.50% of 400) Net VAT - 12.50 (50-37.50)

Operation of Sales Raw Material producer –Sale value 100 Gross Sales tax – 12.50 (12.50% of 100) Net Sales Tax – 12.50 Manufacturer – Sale value 200 Gross Sales Tax – 25 (12.50% of 200) Net Sales Tax - 25 Wholesaler – Sale value 300 Sales tax - NIL Retailer – Sale value 400 Sales Tax - NIL

Registration • Every Dealer is required to register under the act if he fulfills any of these conditions : • His taxable turnover in the preceding year exceeded the minimum exemption limit. • His taxable turnover in the current year exceeds the exemption limit. • He is liable to pay tax under CST,1956. • A Dealer is exempted from registration if he deals exclusively in goods which are exempted under VAT.

TIN NO. & TIN Design (1) Automatic registration of existing taxpayers under VAT by allotment of TIN without making application or payment of any fee (2) Website query system developed for generating TIN from old R.C. No. • (3) 11-digit TIN made user friendly. • v 2-digit state code , • v2 check digits, • v7-digit serial no. split into two parts: • v 2-digit district code • v5-digit old R.C. No. retained.

Composition Scheme • If the turnover of dealer exceeds the taxable quantum but does not exceed the prescribed amount , then he can opt for composition scheme. • Rate of Tax under this scheme is 1% . • Such dealers are not entitled to claim input tax credit. • They are not entitled to collect tax from customers. • They are not entitled to issue tax invoices. • They are required to hold and retain tax invoices as well as retail invoices for all their purchases.

Composition Scheme • If the turnover of dealer exceeds the taxable quantum but does not exceed the prescribed amount , then he can opt for composition scheme. • Rate of Tax under this scheme is 1% . • Such dealers are not entitled to claim input tax credit. • They are not entitled to collect tax from customers. • They are not entitled to issue tax invoices. • They are required to hold and retain tax invoices as well as retail invoices for all their purchases. • A dealer is not eligible for Composition scheme if he meets any of the below mentioned criterion: • Is registered under the CST Act • He purchases goods from unregistered dealer • Procures goods from outside Delhi • Sells or supplies goods to any place outside Delhi

Tax Credit on Opening Stock • Any Opening Stock as on 1st April’05 is eligible for tax credit subject to the following conditions: • It should be held in the respective state only. • Statement in a prescribed form is furnished with the deptt. within a stipulated period . • In case of Raw/Packing material it is purchased after a given date • No tax credit shall be allowed on Finished Goods that were taxable at last point. • Any dealer who has opted under Composition Scheme will be required to pay tax on the trading stock, Raw materials, Packaging materials and Finished Goods held in stock as on 1st April’2005.

Invoices Vs Tax invoice • Under VAT invoices hold a primary place as these are the basic documents on the basis of which the whole system has been designed .There are two kind of Invoices : • TAX INVOICE • RETAIL INVOICE • A tax invoice can be issued ONLY by a registered dealer. • Any dealer who elects to pay under Composition Scheme or makes Central sales or Exports is not required to issue a tax invoice. • Tax Credit can be claimed by the purchaser only if he holds a valid tax invoice. • A tax invoice shall be issued in Duplicate –The original one for the Purchaser and the duplicate for the seller

Mandatory particulars of Tax Invoice • The word “Tax Invoice” in a prominent place • The name, address and registration number of the selling registered dealer • The name, address and registration number of the purchasing registered dealer • Serial No. of the invoice and the date on which it is issued • Description, quantity, volume and value of goods sold and services provided and the amount of tax charged thereon to be indicated separately • The signature of the selling Dealer or his servant, manager or agent, duly authorized by him. • The name and address of the printer and the 1st and last serial number of the tax invoices printed and supplied by him to the dealer. • If an invoice has been issued under the provisions of the Central Excise Act ,it shall be deemed to be a valid tax invoice only if it contains all the particulars prescribed above. • In case of computerized invoices a series number should be maintained for all invoices , the duplicate copy should be maintained securely , and in such a case the dealer becomes the printer himself.

Retail Invoice • A retail invoice is issued by registered dealers for all sales valued above Rs.25 • Retail invoices shall be issued in duplicate –the original for the purchaser and duplicate for the seller • Retail invoices are also issued in case of interstate sales , interstate branch transfers and exports • The words Retail Invoice/ Cash Memo/Bill in a prominent place • The name ,address and registration number of the dealer ,if registered. • In case of sale in the course of inter state trade or commerce, the name, registration number and address of the purchasing dealer and the type of statutory form, if any ,against which the sale has been made. • A pre-printed serial number and the date on which the invoice has been issued • Description, quantity, volume and value of goods sold and services provided inclusive of the amount of tax charged thereon • The signature of the selling Dealer or his servant, manager or agent, duly authorized by him.

Input Tax Credit INPUT TAX CREDIT ON CAPITAL GOODS • Capital goods means plant, machinery and equipments used directly or indirectly in the process of trade, manufacturing or works contracts in Delhi. • But, ITC is not available on goods specified in Sch.VII. • Goods must be purchased within Delhi from a registered dealer, supported by a valid tax invoice. • ITC is available in three equal instalments and first installment is in the tax period when it is purchased. • If capital goods are transferred out of Delhi within three years, than 2% of the purchase price will be reversed. When the goods are received back in Delhi, ITC could not be reclaimed since rule 7(2) refers to non-capital goods and sec. 9(6) of the Act. A big issue for works contractors.

Input Tax Credit INPUT TAX CREDIT ON CAPITAL GOODS • Depreciation will not be claimed on the amount of ITC availed by the dealer, i.e., on the principal amount. • Tax credit in respect of capital goods shall also not be allowed if such capital goods are used exclusively for the purpose of making sale of exempted goods specified in the first schedule. • If capital goods are used partly for the purposes of manufacturing and/or trading taxable goods or making exports and partly for other purposes, the amount of the tax credit in relation to such capital goods shall be reduced proportionately.

Input Tax Credit ADJUSTMENT IN INPUT TAX CREDIT • If the invoice raised by the seller/contractor is passed by buyer/contractee for a lesser amount, and the amount is subsequently adjusted in output tax by contractor u/s 8, the seller must issue to the buyer a debit note, issuance of which is mandatory. • The buyer/contractee shall adjust his ITC on the basis of such debit note • Where goods are returned/rejected by the buyer, he will reduce his ITC in relation to those goods, in the T.P. when goods are returned/ rejected. Double taxation if goods are returned after 6 month

Input Tax Credit PROPORTIONATE REDUCTION IN INPUT TAX CREDIT • Where a dealer has purchased goods, which are to be used partly for the purpose of making sales referred to u/s 9(1) and partly for other purposes, then amount of tax credit shall be reduced proportionately. • To illustrate, X purchased raw material for Rs. 1,00,000 plus tax of Rs. 12500/- for manufacture of taxable as well as exempted goods. At that time, he estimated that the raw material would produce 80% taxable goods. In such case, his input tax credit will be restricted only to 80% of Rs. 12500/, i.e., Rs. 10000/-.

Input Tax Credit PROPORTIONATE REDUCTION IN INPUT TAX CREDIT • If goods are subsequently used for different purposes, then the reduction shall be made in the tax period when so used. • What is the difference between 9(4) and 10(2) • Method of reduction should be fair and reasonable; otherwise the Commissioner is empowered to reject the method or prescribe another method.

Input Tax Credit PROPORTIONATE REDUCTION IN INPUT TAX CREDIT • Valuation: • If commodity wise register maintained – At the purchase price • Otherwise – On the basis of the purchase price of such goods immediately preceding their use for other purposes or their FMV, w.e.i. higher

Input Tax Credit STOCK TRANSFER TO OTHER STATES • The amount of the tax credit shall be reduced by 2% of the purchase price (1% in case of bullion) if the goods or goods manufactured out of such goods are to be exported from Delhi by way of transfer to a (i) non-resident consignment agent; or (ii) non-resident branch of the dealer; • ITC will be reduced only in relation to those goods where it is claimed or is claimable, i.e., no reduction shall be made in respect of those goods which are purchased from local unregistered dealers or in the course of inter-State trade.

Input Tax Credit STOCK TRANSFER TO OTHER STATES • What is the difference between 9(6) and 10(3) • At what value goods to be transferred – At cost or at FMV? It should be the cost since reversal to be made on the basis of purchase price • Valuation of stock transfer: • If commodity wise register maintained – At the purchase price • Otherwise – On the basis of the purchase price of such goods immediately preceding their use for stock transfer or their FMV, w.e.i. higher

Input Tax Credit STOCK TRANSFER TO OTHER STATES • In addition, Form F shall also be obtained • Where the goods so transferred are received back in Delhi either in the original form or in some other form, tax credit already reduced can be reclaimed in the tax period when goods are so received.

Input Tax Credit GOODS INCORPORATED IN OWN STRUCTURE • If goods are used for construction of or incorporation in civil structures and immovable goods or properties not constituting part of the works contracts, ITC shall be denied on such goods, e.g., cement, bricks, tiles, etc. • If goods which have been purchased by a dealer were intended to be used for the purposes specified u/s 9(1) but are subsequently incorporated into the structure of a building owned or occupied by that person, the tax credit claimed in respect of such purchases shall be reduced in the tax period during which such incorporation takes place.

Input Tax Credit GOODS LOST OR DESTROYED • Where any goods or goods manufactured out of such goods are lost or destroyed, the credit taken in any earlier tax period shall be reversed in the tax period in which goods are claimed to have been lost or destroyed. • However, input tax credit should not be denied on normal loss arising during the course of manufacture.

Input Tax Credit Can ITC be claimed on the strength of ‘Retail Invoice’ instead of ‘Tax Invoice’ – if all other conditions are satisfied – • The answer depends whether the provisions of section 50(2) are directory or mandatory. • If mandatory, ITC could be claimed only on the basis of tax invoice.

Input Tax Credit Can ITC be claimed in the tax period subsequent to the tax period when goods were actually purchased, without filing an objection, on the ground – • He do not have in procession the Original Tax Invoice when goods were purchased :Should state the amount of purchase and claim ITC in subsequent months • He forgot to claim ITC in the original tax period :Since it is an error or mistake – Objection is required

Input Tax Credit-Traders • Input Tax Credit can be claimed in respect of • Purchases meant for local taxable sales, ISS and Exports out of India • Capital goods used in the process of trade such as weighing machines, computers, delivery rickshaws, etc. • Not available in respect of furniture/furnishing of office • Schemes, distribution Gift articles, etc.? • Reversal of input tax credit on account of credit notes? • Evaporation Loss? • Stock transfers to agents within Delhi ?

Input Tax Credit-Traders • Free Offers to the Customers – ITC on Purchases • Deter. u/s 84 dt. 31.10.2005 – L.G. Electronics – Gifts (T-shirts, TV, AC, Phone, etc.) to customers through scratch cards – debited to sales promotion – No ITC • However, in our opinion, where gifts are given along with the main product - Necessary for completion of sale contracts – 2+1 shirt (or) Bucket with detergent (or) Mosquito machine with mats (or) Car + Accessories – Supply of free items is part of sale contract – ITC should be available • To be debited to “purchases” instead “sale promotion” • Post sale gifts – No ITC/benefit of Form ‘C’ available

Input Tax Credit-Traders • Credit Note resulting in reduction of purchases – Need reversal of ITC by the purchaser even if output tax has not been reversed by the seller u/s 8 – Circular No. 2 dated 7.8.2008 • However, Judgments to be referred for contrary answer: • Andhra Agencies vs. State of A.P. (2009) 19 VST 1 (SC) • Priya Agencies vs. CTO (2008) 14 VST 293 (Ker)

Input Tax Credit-Traders • Goods Lost – ITC on Purchases • Evaporation of oil – No ITC on oil evaporation – Commissioner Ruling u/s 85 – Same opinion by P&H High Court recently Bharat Petroleum Ltd. • The same analogy might be applied to all trading losses. For example – • loss of cement in transit • Waste/scrap generated at the end, e.g. confectionery powder, vegetable/fruit waste at the end of the day • Measurement/weighment difference in purchase vis-a-vis sale

Input Tax Credit-Traders STOCK TRANSFER WITHIN DELHI In accordance with Notification No. F.4(3)/P-II/Noti/ VAT/2005/1158 dated 2nd December 2005 - • The principal in Delhi will raise tax invoice on agent; & • The agent will claim ITC on the basis of such tax invoice. However, if that is so, even without substantial provisions: • Tax will have to be paid by the principal even without affecting sale and adjustments to be made at the time of return of unsold stock by the agent; • ITC will be claimed by agent without making purchases.

Input Tax Credit-Manufacturers Input Tax Credit can be claimed in respect of :- • Purchases meant for manufacture of goods meant local taxable sales, ISS and Exports out of India including raw material and consumables • Facilities, such as bulbs, exhaust fans, shoes, etc. used in the manufacturing plant • Status of goods manufactured at Third Party Unit – (i) With material (some material supplied by Mfr. and (ii) without material (purely labor)

Input Tax Credit-Manufacturers • Input Tax Credit can be claimed in respect of • Capital goods used in the process of manufacture such as plant, machinery, tools, equipments, weighing machines, etc. [ Judgments applicable to purchase against form C squarely applies – except goods listed in Sch. VII ] • Normal Manufacturing Loss • As per the Advance Ruling by the Commissioner, where scrap generated out of goods manufactured is exempt, then tax credit on the raw material shall be reduced proportionately.

Input Tax Credit-Manufacturers STOCK TRANSFER TO OTHER STATES • Where the goods so transferred are received back in Delhi either in the original form or in some other form, tax credit already reduced can be reclaimed in the tax period when goods are so received. • Where a dealer, who is engaged in manufacturing of taxable as well as exempt goods, transfers certain goods to other States, then • He will first reduce the ITC proportionately in relation to the exempted goods; then • He will further reduce the amount of ITC as calculated in (i), in relation to stock transfer to other States.

Input Tax Credit-Job Workers • A person, who is exclusively engaged in the business of labour/job work (other than a manufacturer), is not eligible for ITC on purchase of consumables or capital goods, merely because he is liable to pay tax on sale of any waste/ scrap goods generated during the process of labour job. To illustrate, a job worker is exclusively engaged in the business of labour job of cutting iron sheets (supplied by the customer) into circles. He sells scrap, generated in this process, and pays VAT due to the Govt. Even than he is not eligible for tax credit on purchase of any consumable or capital goods used for carrying his labour job.

Input Tax Credit-Contractors • Works contractors can claim ITC on following purchases:- • Raw Material • Consumables which do not get destroyed • Packing Material • Capital Goods other than those specified in Sch. VII • Contractors are deemed either as trader or as manufacturer • VAT paid on hire charges and consumable which get destroyed can not be claimed as ITC since these are allowable deductions as labour and services and are exempted sales. • ITC on temporary shed/yard/office? • Relations between contractor & sub-contractor – (a) If pro-perty is tfd. directly on principle of accretion – (b) Otherwise

Input Tax Credit-Service Sector SERVICE SECTOR ALSO ENGAGED IN SALE LIKE HOTELS • Input tax is available on those purchases (including rent) which are relatable for making sale by the dealer. • Where goods (including capital goods) are used partly for making sale and partly for providing service, ITC will be available proportionately, e.g., common generator used in the restaurant as well as rooms. • Capital goods used exclusively for providing services is not available for ITC, e.g., equipments used in Jim, Swimming Pools etc.

Input Tax Credit-Right to Use LESSER (Transfer Of Right To Use Goods) • As per Determination by Commissioner u/s 84 in Digitech - Benefit of Input tax credit is not available to leasing company on its purchases even if its sales are taxable in Delhi VAT • Matter is pending before DVAT Tribunal • If that is so purchase from other States against Form C, paying 2% CST

Input Tax Credit-Right to Use LESSER (Transfer Of Right To Use Goods) • Right to use goods, i.e., leasing is covered under the DVAT/CST and is covered in the definition of sale; • Whenever, goods are purchased by the hirer for the purpose of leasing, the local tax paid on purchases should be eligible for ITC against output tax payable on lease rent; • Goods which are purchased and hired by the hirer shall be treated as stock in trade and not non-capital goods.

Presented By CA Swatantra Singh,