18 August 2010
Input Tax Credit and method of calculation of Input Tax Credit 1. What is ‘Input Tax Credit’?
Credit of input tax available against output tax liability under the Act.
Input tax credit or set-off is the allowance of input tax against the tax payable on sales and purchases.
Its relevance in computation of VAT is as follows:
Tax payable on Sales and purchases of goods Rs …
Less: input tax or set off tax (eligible) Rs … ---- VAT payable Rs … === It reduces the Tax Payable and gives effect to the scheme of VAT.
The credit or set off would be subject to:
the permissible circumstances; and the restrictions and conditions,
as laid down.
2. Is Input Tax Credit available for the entire “input tax”?
Allowability of Input Tax Credit depends on the distribution pattern of goods i.e. whether the goods are sold or stock transferred or given free of cost as gifts and like. Detailed provisions for computation of Input Tax Credit are contained in the Act and Rules. Generally, Input Tax Credit is wholly allowable if inputs / eligible capital goods are used in manufacture of goods sold within the state or sold in the course of inter-state trade or export. Same would apply for finished goods.
3. Is Input Tax Credit available on Purchase Tax paid?
Yes, purchase tax paid by a person will be admissible as Input Tax Credit if the goods are sold within the state or are used in the manufacture of taxable goods within the state or are sold in the course of inter state trade or in the course of export.
4. Who can avail Input Tax Credit?
Only Taxable Person can claim Input Tax Credit. A Registered Person cannot claim Input Tax Credit.
To illustrate:
Nature of Person Can claim Input Tax Credit?
Taxable Person Yes Registered Person No Unregistered Person No Any other person No Works Contractor under general scheme Yes Lessor Yes
5. Is there a negative list of goods against which claim of Input Tax Credit is not allowable, even if such goods are for use in course of business and are purchased from a Taxable Person?
Yes.
A Taxable Person will not be eligible to claim Input Tax Credit in respect of tax paid on purchases of the following goods, unless he is dealing in the same in the course of his business:
1. Automobiles including commercial vehicles, two wheelers, three wheelers and spare parts for the repair and maintenance thereof; 2. Petrol, diesel, aviation turbine fuel, liquefied petroleum gas and condensed natural gas; 3. Office equipment and building material; 4. Furniture fixtures including electrical fixtures and fittings; 5. Air-conditioning units, air circulators and refrigeration units except where air-conditioning, air circulating or refrigeration is essential for sale / storage of taxable goods or in the manufacturing process of taxable goods; 6. The provisions of food, beverage and tobacco products, unless the Taxable Person is in the business of providing food, beverage and tobacco products.
In addition, Input Tax Credit will not be available on tax paid on purchase of the following goods:
(i) Civil structure and immovable goods or properties; (ii) Weigh bridge, except when installed inside the manufacturing premises for use in the manufacturing process of taxable goods; (iii) Goods used in manufacture, processing or packaging of tax free goods specified in Schedule A of the Act; (iv) Goods used in generation, distribution and transmission of electrical energy unless such generation, distribution and transmission of electrical energy is for captive consumption. (v) Goods used for personal consumption or gifts.
6. What happens if a Taxable Person stock transfers goods purchased from within the state to another state? In such cases, Input Tax Credit will be restricted. Input Tax Credit would be available only to the extent by which the amount of tax paid in Punjab exceeds 4% on purchase value of goods if the goods are subsequently branch transferred out of Punjab. (This 4% is referred to as retention)
Illustration
M/s. Singh & Co. makes local purchases of 33,750 (which includes Rs. 3,750 as VAT). These are then transferred to their branch in Delhi. Calculate the value of Input Tax Credit available to M/s. Singh & Co. (Assume VAT rate of 12.5%).
Purchase value of goods dispatched by branch transfer = 33750 – 3750 = Rs. 30,000 Retention of ITC – 4% of Rs. 30,000 – Rs. 1,200 ITC available = Rs. 3,750 – Rs. 1,200 = Rs. 2,550
7. How do I calculate the Input Tax Credit available to me if I am selling locally as well doing branch transfers?
For this purpose, you would need to first check whether it is possible for you to identify goods / inputs used in manufacture of goods which are stock transferred. If that is possible, you need to identify input tax in relation to such goods. (Specific identification basis). In such case, the Input Tax Credit will be allowable as follows:
Input tax paid on such purchases - 4% of purchase price representing such goods
In case, it is not possible to so identify, you would need to apply following formula:
Retention of Input Tax Credit against branch transfers = IP x BT x 4 ¬¬¬ (GT + BT) x 100
where IP is purchase value of goods in respect of which ITC is considered BT is value of branch transfer GT is value of total turnover excluding turnover of tax-free goods
This is referred to as Proportionate Basis
Illustration
A manufacturer makes Rs 6 lacs worth of local purchases comprising:
Rs 4 lacs worth of purchases of commodity ‘x’ with a local tax rate of 12.5% Rs 2 lacs worth of purchases of commodity ‘y’ with a local tax rate of 4%
Using these purchased stocks, he manufactures and sells commodity ‘z’ for Rs. 10 lacs comprising:
Rs 5 lacs worth of local sales at 12.5% Rs 3 lacs worth of sales on inter-state basis (against C-form, @ CST rate of 4%) Rs 2 lacs worth of branch transfers outside Punjab (against F-Form)
The total tax liability and Input Tax Credit are as under:
Calculation of Input Tax Credit Amount (Rs) Purchases of inputs (excluding tax) Comm ‘X’ @ 12.5% (Tax Rs. 50,000) 400,000 Comm ‘Y’ @ 4% (Tax Rs. 8,000) 200,000 Input Tax n the above purchase 58,000 Less: Adjustment of Input Tax Credit for branch transfer (4,800) Net Input Tax Credit 53,200
Calculation of Output Tax Amount (Rs) Taxable sales in Punjab @ 12.5% 500,000 VAT on taxable sales 62,500 Sales against C-Form 300,000 CST on sales against C Form (@4%) 12,000 Branch transfers against F Form 200,000 Total output tax (VAT+CST) 74,500
Net tax payable is therefore Rs. 74,500 – Rs. 53,200 = Rs. 21,300
Value of purchases used for branch transfer is calculated as follows:
Proportion of branch transfer in total sales = value of branch transfer / value of total turnover i.e. 200,000/ 10,00,000 (500,000+300,000+200,000)= 20%
Proportion of purchases used for making branch transfer = 20% x 600,000 (400,000+200,000) = 120,000
Retention of Input Tax Credit against branch transfers = 4% x 120,000 = Rs. 4,800
a) Input tax is calculated as under: 12.5% x 400,000 + 4% x 200,000 = 58,000
b) Credit is available on the actual tax paid on inputs in Punjab, irrespective of the rate of output tax
c) Full Input Tax Credit available for sale against C-form
Alternatively, the above retention of Rs 4,800 can also be calculated as follows:
ITC retention = IP x BT x 4 = 600,000 x 200,000 x 4 = Rs 4800 (GT + BT) x 100 1,000,000 x 100
8. What if a person makes tax-free as well as taxable sales?
In case a Taxable Person sells tax-free as well as taxable goods, Input Tax Credit shall be available only for the input taxes related to the taxable goods either on specific identification basis or proportionate basis.
9. How would Input Tax Credit be apportioned in case a person makes tax-free as well as taxable sales?
The amount which can be claimed as Input Tax Credit is to be calculated by the formula
IT x T GT + BT Where —
IT is the total amount of input tax for the period less reverse tax. T is the total value of taxable sales (ie excluding tax-free sales) including branch transfers made by the Taxable Person in the return period, zero-rated sales & inter-state sales. GT is the total value of all sales (ie including inter-state sales) during the return period but excluding tax. BT is value of branch transfer
Illustration
A business has a total sales turnover of Rs 15 lacs and purchases worth 9 lacs in a month. The details of sales and purchases are as under:
a) Rs 9 lacs worth of purchases comprising:
Rs 5 lacs worth of purchases with a local tax rate of 12.5% Rs 2 lacs worth of purchases with a local tax rate of 4% Rs 2 lacs worth of inter-state purchases
b) Rs 15 lacs worth of sales comprising:
Rs 8 lacs worth of local sales at 12.5% Rs 2 lacs worth of tax-free sales Rs 3 lacs worth of sales on inter-state basis (against C-form) Rs 2 lacs worth of branch transfers outside Punjab (against F-Form)
Let’s assume that the inputs are common and not readily identifiable against each category of sales.
The total tax liability and Input Tax Credit are as under:
Calculation of Input Tax Credit Amount (Rs) Inter state purchases 200,000 Purchases made in Punjab (excluding tax) @ 12.5% 500,000 @ 4% 200,000 Input Tax on purchase made in Punjab 70,500 Less: Reduction in Put Tax for proportion of tax free sales (9,400) Input Tax Credit eligible for setoff (A) 61,100 Less: Adjustment to Input Tax Credit for branch transfer (B) (3,733) Net Input Tax Credit 57,367
Calculation of Output Tax Amount (Rs) Taxable sales in Punjab @ 12.5% 800,000 VAT on taxable sales 100,000 Tax free sales 200,000 Sale against C Form 300,000 CST on sale against C Form @ 4% 12,000 Branch transfers against F Form 200,000 Total output tax (VAT + CST) 112,000 Net tax payable is therefore, Rs. 112,000 – Rs. 57,367 = Rs. 54,633 Working Notes:
a) Input tax (I) is calculated as under: 12.5% x 500,000 + 4% x 200,000 = 70,500
b) Input tax apportioned to taxable sales = (IT x T) / (GT + BT) = (70,500 x 1,300,000) / (1,300,000 + 200,000) = 61,100
c) Retention of ITC against branch transfers: = (IP x BT x 4) / (GT + BT) x 100 = (70000 x 200000 x 4) / (1,500,000 x 100) = 3,733
d) Net ITC available = 61,100 – 3,733 = Rs 57,367
10. Is Input Tax Credit available on petroleum products?
In case of:
furnace oil transformer oil mineral turpentine oil water methanol mixture naphtha and lubricants
Input Tax Credit is allowed to the extent VAT paid in excess of 4%, provided they are used for:
a) production of taxable goods; or b) captive generation of power.
11. Would I be entitled to claim credit for CST paid on purchase of goods?
No there is no entitlement for CST paid.
12. Will Input Tax Credit be allowed if goods are exported out of India? Sales in the course of export out of the territory of India, are zero rated. On such sales no output tax is payable though the input tax paid on the purchases related to such sales is available as input tax credit/ refund.
13. Is any adjustment required to be made to Input Tax Credit once claimed? Yes, Input Tax Credit requires adjustment in case of modification in sale or sale price e.g. by issue of debit note or credit sales returns, discounts in case is referred as it has effect of reducing Input Tax Credit claimed earlier, it is referred as reverse input tax note, affecting input tax.
This would apply in the following circumstances:
1) Credit note for output tax received from the seller for VAT charged 2) VAT on goods returned after claiming credit 3) VAT on goods used for non specified purpose after availing credit 4) Taxable Person subsequently registers himself as Registered Person – in that case, Input Tax Credit availed on stock of goods held on date of registration as Taxable Person 5) Input Tax Credit availed on goods exported outside India for which a refund is claimed 6) Goods which could not be used for specified purposes 7) Goods in stock at the time of closure of business
14. What if raw materials or semi-finished goods are sent outside Punjab State for further processing?
In such a case, Input Tax Credit shall be reduced by 4% of the value of goods (debited) so sent out for further processing. However, when goods are received back, the Input Tax Credit so debited can be taken as credit.
15. How does one calculate actual amount of Input Tax Credit for a tax period?
Broadly stated, the steps would be as follows:
Input tax, eligible for credit … Add / Less : Adjustments, if any … ___ … Less: Reverse input tax … ___ Input Tax Credit Available … ===
16. What conditions do I need to fulfill to claim Input Tax Credit?
In order to claim Input Tax Credit you must fulfill the following other conditions:
b) You must have the original VAT invoice issued to you by a Taxable Person; c) You must maintain an input tax register comprising the records of all purchases of goods eligible for Input Tax Credit and all adjustments thereto; and d) You must maintain an output tax register comprising the records of all sales of taxable goods and all adjustments thereto.
17. How do I claim my Input Tax Credit?
When you compute your self-assessed tax liability for a tax period, you can claim Input Tax Credit in respect of input tax paid in the said tax period. This can then be set-off against the output tax liability for the tax period in accordance with the provisions of the Act and Rules.
18. Will there be a compulsory audit of my returns before allowing Input Tax Credit?
No. You can file your return and claim Input Tax Credit on self-assessment basis. Audit of returns shall take place in selective cases for which due notice shall be sent by the VAT authorities.
19. Is there a one-to-one correlation between my output tax liabilities and Input Tax Credit?
There is no one-to-one correlation between Input Tax Credit and output tax. However, in case a Taxable Person is selling tax free and taxable goods or is engaged in branch/consignment transfers, he may have to apportion the input taxes against the different categories as explained earlier in this chapter, and then claim the available Input Tax Credit in the prescribed manner.
20. What is the treatment given to Input Tax Credit in excess of output tax plus purchase tax?
The excess Input Tax Credit shall be dealt with as follows:
It shall be adjusted against the tax liability, if any, under the CST Act of the tax period at the option of the Taxable Person; Excess, if any, shall be adjusted against outstanding tax, penalty or interest, if any under the Act or the CST Act; Any amount of credit remaining after above adjustments shall be carried forward to the next tax period or the same shall be refunded, as per applicable provisions.
21. I have omitted to claim credit, what is the remedy?
You can rectify the return and claim credit, subject to fulfillment of conditions including time limit for rectification.
22.If I am a Registered Person and obtain registration as a Taxable Person, can I claim Input Tax Credit on stocks held on that date?
If such stock is sold within 30 days, you would be liable to pay TOT. Otherwise, you will have to pay VAT on sale of such stocks
23. What are the consequences of any false claim?
If found, upon audit/cross verification, that a false claim for Input Tax Credit is made, it can be recovered. In addition, you would be liable to pay penalty etc. (please refer Chapter 13).
22. Is Input Tax Credit available in respect of TOT?
No.
Input Tax Credit on Transitional Stock 1. What is the treatment of ‘tax-paid’ stock held during transition
Tax paid under the PGST Act on stock of goods other than capital goods held on the date of transition to VAT is allowed as Input Tax Credit. This is however subject to the following key conditions:
a) The goods must have been purchased during the period not exceeding 12 months prior to the transition date from within the state of Punjab; b) The goods must not be those that are liable to sales tax at the point of last sale under the PGST Act; and c) The goods must be used for the purpose of sale, or for use in manufacturing or processing or packaging of taxable goods in the State. d) The rate of tax applicable for calculating Input Tax Credit is the rate of tax prevailing on the day preceding the appointed day or the rate of tax on the day of purchase of goods under the repealed Act or the rate of tax under this Act, whichever is lowest. e) Input Tax Credit available is to be proportionately adjusted in equal installments over a period of one year beginning after three months from the appointed day.
2. Who is eligible to claim Input Tax Credit on stock held on 1 April 2005?
Persons registered under the PGST Act and subsequently registered as a Taxable Person under the Act on 1 April 2005, are eligible to claim Input Tax Credit on tax-paid stocks held on 1 April 2005, except the stock purchased from exempt unit.
Persons registered under PGST Act and subsequently registered as Registered Person, or those whose registration has not been continued under the Act are not eligible to claim such credit.
3. If I am so eligible what are the conditions imposed for the claim?
The following conditions need to be met for stocks to be eligible for Input Tax Credit:
b) The stocks should have been purchased from a dealer registered under PGST Act; c) The stocks should have been purchased within twelve months prior to 1 April 2005 d) The stocks should have already suffered sales tax in Punjab (goods chargeable to tax at first point) and the claimant is obliged to prove the same, OR in respect of which, no deduction from gross turnover was claimed under the PGST Act and/or Rules; e) The claim should be backed by a valid tax invoice and other evidences, which shall be retained for a period of 6 years from 1 April 2005; and f) The stocks should be for resale or use in manufacture/ packaging of ‘taxable’ goods under the Act.
4. Would I get Input Tax Credit for CST paid on such stocks?
No. Only sales tax paid under the PGST Act is eligible for Input Tax Credit.
5. How do I claim Input Tax Credit on such stocks?
To claim Input Tax Credit, you were required to submit a statement of taxable goods held in stock on 1 April 2005 in the prescribed form and manner, to the designated officer, within forty-five days from 1 April 2005.
The statement to verified by the designated officer within sixty days of its filing for determining the claim.
6. What documents do I need to possess to claim the credit?
You need to possess purchase vouchers issued to you by the registered seller evidencing the purchase of goods held on stock on 1 April 2005, and your books of account where purchases of such stocks are recorded.
7. At what rate do I get the Input Tax Credit on such stocks?
Input Tax Credit on such stock to be allowed on the basis of the tax rate:
prevailing on the day preceding the appointed day; or rate of tax applicable on the day of its purchase under PGST Act; or the rate of tax under VAT
whichever is the lowest.
8. Do I get Input Tax Credit for the entire tax paid on the transition stock?
If the tax on the stock is charged separately on the bill, your Input Tax Credit shall be the lower of the entire tax paid under PGST, or the tax calculated at the VAT rate applicable on 1 April 2005.
However, if the tax has not been charged separately, the input tax shall be calculated as per the following formula:
¾ P x R 100 + R
Where
“P” is purchase price of eligible goods held in stock “R” is rate of tax rate prevailing on the day preceding the appointed day or rate of tax applicable on the day of its purchases under PGST or rate of tax under the Act , whichever is lowest.
Illustration 1
M/s Ram Swarup and Co possesses stock of goods worth Rs 1,08,000 on 1 April 2005. The invoice issued to them by the registered seller shows the amount of tax charged as Rs 8000 (tax rate being 8%) separately. The tax rate prevailing on the appointed day for the same goods is 12.5%
The eligible Input Tax Credit on the stock held by M/s Ram Swarup and Co is the lower of:
a) Rs 8,000; and b) (Rs 108000 – Rs 8000) X 12.5% = Rs 12,500.
Therefore, the Input Tax Credit allowed is Rs 8,000.
Illustration 2
Mr Hari Ram possesses stock of goods worth Rs 1,00,000 on 1 April 2005 (tax rate on the day of purchases being 8%). The invoice issued to him by the registered seller does not show any amount of tax charged separately. The tax rate prevailing on the day preceding 1 April 2005 for the same goods is 6% and the corresponding rate under VAT is 12.5%.
The eligible Input Tax Credit is calculated as follows:
The rate to be applied to compute the credit amount shall be the lowest of
a) Rate on the day of purchase – 8% b) Rate on the day preceding the appointed day – 6% c) VAT rate – 12.5%.
Therefore, Hari Ram shall be eligible for ITC
= ¾ X100,000 X 6 = Rs 4,245 (100+6)
9. Do I get the Input Tax Credit in a single installment?
No. The allowed Input Tax Credit shall be proportionately adjusted in equal installments over a period of one year beginning three months after the Appointed Day.
10. Are there any restrictions on availing of the Input Tax Credit in case I use my stock for making consignments or branch transfers?
Yes. In case you consign or transfer the stock of goods in a particular tax period, the Input Tax Credit (in respect of the transition stock) for that tax period shall be reduced by an amount equal to:
ST x BT x 4 N x (GT + BT) x 100 where –
ST = Value of tax-paid stock of goods on the Appointed Date. N = Number of tax periods in a year (this would be 12 for monthly tax payers and 4 for quarterly tax payers) BT = total value of branch transfer of taxable goods GT = Total value of all sales including branch transfer during the tax period
Illustration
M/s Baldev Trading Co possesses tax-paid stock of goods worth Rs 100,000 on 1 April 2005. The invoice issued to him by the registered seller shows the amount of tax charged separately. The tax rate under PGST for the goods is 8% and under VAT for the same goods is 12.5%. The company pays tax on a monthly basis.
Compute the reduction in Input Tax Credit and the eligible Input Tax Credit for the tax period assuming that during the tax period beginning after three months from 1 April 2005, M/s Baldev Trading Co makes local sales of Rs 1,000,000 and makes a branch transfers of Rs 500,000.
The eligible Input Tax Credit on the stock held on 1 April 2005 is calculated as follows:
Tax paid on transition stock = 8% of Rs 100,000 = Rs. 8,000
Tax eligible for set-off during the tax period is 8000/12 = 667
Reduction in the Input Tax Credit(for branch transfers) is calculated as follows:
ST = Rs 100,000 BT = Rs 500,000 N = 12 GT = Rs 1,000,000.
Retention of Input Tax Credit = ST x BT x 4 = 100,000 x 500,000 x 4 = Rs 111.11 = Rs 111 (approx) N x (GT + BT) x 100 12 x 1,500,000 x 100
Eligible Input Tax Credit for the month after reduction on account of branch transfer is therefore, Rs 667 - Rs 111 = Rs 556.)
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