Setoff to be taken

This query is : Resolved

Nagesh Naik (Querist)
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03 December 2011 Sir

I Nagesh Naik working in Ltd Company in Mumbai.

In Mumbai we are paying vat under regular scheme.

Our internal Auditors told us that we cant taken VAT set off for the material booked under Safety Material Purchase & Consumable Purchase Accounting Head.

In Fixed Assest item we are taking setoff for the material which is used at Site. But as per the Auditors that also we cant take.

Kindly help me in the matter.

Nagesh Naik

Nagesh Naik (Querist)
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07 February 2012 Sir,

In Machinery Hire Charges we are paying Service Tax. When we deduct the TDS is it applicable on Full Amount(Hire Charges + Service Tax) or only on Hire Charges

Kindly do the needful.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 Got it! Let me break down both your questions separately for clarity:

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### 1. VAT Setoff on Safety Material Purchase & Consumables & Fixed Assets

**Context:**
You’re paying VAT under the regular scheme in Mumbai and your internal auditors say you **cannot take VAT input credit (setoff) on materials booked under:**

* Safety Material Purchase
* Consumable Purchase
* Fixed Asset items used at site (even this is disallowed as per auditors)

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**What’s the general rule?**

* **Input VAT credit** is allowed only on goods used in the course of business, which are intended for resale or incorporated in the final product (or fixed assets under certain conditions).
* **Consumables and safety materials:**
Typically, input VAT on consumables or safety items can be claimed if these goods are used for business purposes and not for personal use.
* **Fixed Assets:**
Input VAT on fixed assets generally can be claimed as input credit, unless specifically disallowed by the VAT law or notifications.

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**Possible reasons for denial by auditors:**

* Some VAT laws exclude input credit on certain categories like food, beverages, or items considered as non-stock or personal consumption.
* Safety materials and consumables might be categorized under non-creditable items if not used directly in manufacture or business operations, depending on the local VAT rules.
* Fixed assets VAT credit might be disallowed if the assets are used for non-business or exempted activities.

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**What should you do?**

* Check the exact provisions under **Maharashtra VAT Act** (or the relevant state VAT law).
* Review the list of **non-creditable goods** or any restrictions on input credit for consumables and safety materials.
* Confirm if the fixed asset VAT credit is denied due to usage or classification issues.
* If necessary, consult a VAT consultant or tax advisor with your purchase bills and usage details for a detailed opinion.

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### 2. TDS Applicability on Machinery Hire Charges + Service Tax

**Question:**
When deducting TDS on machinery hire charges where service tax is paid, is TDS to be deducted on:

* (a) Hire Charges only, or
* (b) Hire Charges + Service Tax?

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**Answer:**
According to Income Tax rules:

* **TDS under Section 194C or 194J** (depending on the nature of payment) is generally deducted on the **amount payable excluding service tax**.
* Service tax is a **pass-through charge** collected on behalf of the government and does not form part of the income of the service provider.
* Therefore, **TDS should be deducted only on the hire charges (excluding service tax)**.

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**Summary:**

* TDS on hire charges = Deduct on hire charges amount only, exclude service tax.

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If you want, I can help you draft formal queries or get you links to relevant legal provisions. Would you like me to do that?

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