Input Tax Credit – KVAT

[Mourya Srinivas]

The KVAT Act, 2003 which got implemented in 2005 brought a sense of relief by avoiding cascading effect of multipoint levy and made taxes borne at each stage of delivery chain.

The KVAT law provides the tax credit on the basis of invoices and debit notes on fulfillment of some procedural requirements of filing the claim for deduction in the return period.

Some important terms to know in relation to ITC under KVAT

1. Output VAT (Sec 10): - Tax payable on taxable sale of goods in the course of business or on sale of goods on behalf of dealer by an agent.

2. Input VAT (Sec 10): - The definition of Input tax is an inclusive one. It includes:

• KVAT charged on inputs used in the business.
• KVAT charged on the goods purchased by the dealer/agent.

3. Input Tax Credit (Sec 10): - Input tax can be adjusted toward the payment of output tax. This set-off is called Input Tax Credit.

• ITC can be utilized towards the liability of any other month or quarter under this act.
• Input tax deduction is not available when a tax invoice or debit note or a credit note in relation to a sale is not been issued.
• When ITC exceeds the Output tax payable, the excess shall be adjusted or refunded as may be prescribed.

4. Net tax (Sec 10): - Output tax – Input Tax deduction

Input Tax Restrictions (Sec 11)

1. Input tax shall not be deducted in respect of

1. Tax paid on purchases related to sale or manufacture or processing or packing or storing of exempted goods exempted u/s 5, except when such goods are exported.
2. Tax paid on goods as specified in Fifth schedule when such goods not used for

i.Resale or,

ii. Manufacture or any other process of other goods for sale.

3. Tax paid on goods notified by Government or Commissioner s.t conditions a may be specified.
4. Tax paid on capital goods other than falling under clause (2) or (3) except as said in Sec 12
5. Tax paid on goods used as inputs in the manufacture or processing or packing of other taxable goods dispatched outside state.
6. Tax paid on petroleum products when used as fuel to motor vehicles except when used as fuel in the production of goods.
7. Tax paid u/s 3(2) on purchase of fuel.
8. Tax paid u/s 3(2) on other goods

• Until output tax is payable on such goods or
• Other goods in which such goods are used, except when said goods are exported.

9. Tax paid on goods purchased by a dealer who is required to be registered but not registered.

b. Input tax shall not be deducted by an agent unless the principal is a non-resident

c.  Input tax shall not be deducted by any dealer executing Works Contract,

i.In respect of amount payable to sub-contractor as consideration, that is claimed as deduction

ii. In respect of charges not involving transfer of property in goods, that is claimed as deduction

Input tax w.r.t Capital Goods (Sec 12)

1. Allowed to a RDwhen the capital goods are used in the sale of goods which are exported.

Allowed to any other dealer when the said goods are used wholly or partly in the business of taxable goods.

2. Deduction is allowed only after commencement of commercial production or sale of taxable goods or goods which are exported by the RD.

Pre-registration purchases (Sec 13)

ITC w.r.t pre-registration purchases are allowed only for the past 3 months purchases provided no goods are sold before registration. However if tax is payable for the past year the ITC should not be denied.

Special rebating scheme (Sec 14)

Deduction is allowed on the goods specified in Sec11(a)(5) and (6) to the extent of input tax charged @ a rate higher than 4% or any lower rate as may be notified by the govt.

Change in use or tax payment scheme after deduction of input tax (Sec 19)

1. When the input tax is deducted by a RD on the goods and such goods

• are not used in the course of the business or
• lost or
• destroyed,

then the input tax deducted shall become repayable in the subsequent period to the period in which they are put into use of some other purpose.

2. When such goods are used for the sale of taxable goods or exports prior to the change of use, then the input tax repayable shall be calculated on the prevailing market value of the of such goods at the time of change of use.
3. If a RD opts for composition scheme after deducting the input tax, then the input tax repayable on the goods held in stock on that date shall be payable in the period following that date and it will be calculated on the prevailing value of such goods on that date.

Input tax Deduction on exports and interstate sales and to SEZ units and developers (Sec 20)

1. Input tax w.r.t-

1. Any goods exported
2. Any interstate sales

Shall be deducted from output tax payable s.t conditions as may be specified.

2. A registered dealer who is a developer of any SEZ or a unit in SEZ, then the input tax shall be deducted from output tax payable by dealer or refunded s.t conditions as may be specified.

Some other restrictions to the ITC which can create an issue are:

1. When there is both taxable and exempted sale [other than export] then ITC is proportionate.
2. No credit under Composition scheme.
3. In case of stock transfer, input credit available after deduction of 2% of ITC.
4. Principal contractor not eligible for ITC paid by sub contractors.

Issues under ITC

1) Effect on ITC, when a dealer changes from regular scheme to Composition scheme -

The ITC on the inputs pertaining to the stock may be reversedStock to include RM, WIP and FG

2) When restricted goods (Schedule V) are used as inputs to manufacture, what happens to ITC?

There would be no restriction as to ITC.

  3) Whether the ITC on items given free with the product, is also eligible?

  In normal business there is nothing free. It is just an allurement and therefore ITC would be available.

4) Whether the ITC on goods sent as Stock Transfer is eligible.

ITC would be eligible to the extent of whatever is paid more than 2% provided Form C has been issued.

5) What happens to ITC when inputs are at 14.5% and outputs are at 5%?

Accumulated ITC is to be carried forward till the refund is applied/ given by the respective state law.

6) If a RD eligible to claim input tax credit fails to claim such credit or deduction in the returns, original or revised, what happens to such credit?

No, as it brought out in Infinite Builders and Developers – Kar HC that deduction is to be claimed at the time of return. Therefore credit to be availed in month of invoice and considering that revised return only upto 6 months.

7) Can a dealer claim input tax deduction even when the selling dealer has not paid his liability?

Yes. The purchasing dealer can claim input tax deduction even when the selling dealer has not discharged his liability unless there is collusion or fraud established.[Gheru Lal Bal Chand v State of Haryana and Another, 2011 (9) TMI 492 - Punjab and Haryana High Court]

8) If a dealer in the course of manufacture produces a by-product which is exempt, can he claim the input tax deduction?

Under the provisions of Sec 17 and Rule 131(3) of the KVAT Act, input tax as relatable to exempted by-product sales turnover shall be restricted.[CCT, Uttarakhand, Dehradun v Eastman Agro Mills Ltd 2013 (4) TMI 242 - UTTARAKHAND HIGH COURT ]

9) Can a dealer undertaking manufacture on a job work basis claim input tax refund on the consumables purchased?

Refund of the input tax paid on the consumables used by the dealer undertaking manufacturer on a job work basis is not admissible. However, sections 11, 12, 14, 17 and 19 of the KVAT Act do not suggest that such input tax paid on purchase of goods used in the manufacture on job work basis(exempted transaction under KVAT) shall be disallowed

10) Is a dealer eligible for input tax deduction for the purchases made before registration under KVAT?

No. Sec 24 of the KVAT act provides for suo moto registration of such dealers and notwithstanding such suo moto registration, input tax paid u/s 3(2) does not qualify for deduction.

11) Can a RD claim input tax deduction on capital goods which is put to use for sale of exempted goods in the course of export out of the territory of India?

Yes, the RD can claim Input tax deduction.

12) Can a RD claim input tax deduction on capital goods which is put to use for sale of exempted goods or non taxable transaction and switches over to dealing in taxable goods?

Yes, if the switching over is happening within 12 months from the date of purchase of capital goods and such capital goods is put to use wholly or partly for taxable transaction, input tax deduction shall be eligible.

13) Can a RD claim input tax deduction on goods sold in the course on inter state?

No. Nevertheless, if the exempted goods are manufactured and sold interstate for the purpose of export, the benefit of input tax is admissible.

Some Good Practices.

1. Procurement from within the State where sales are within the State.
2. Not to procure from black listed dealers and debit/ recover from them the tax.
3. System to ensure full credits availed by way of proper initial entries.
4. Make payments in time and file returns in time.
5. Integrating VAT into ERP or reconciling between ERP figures and return figures.
6. Get an audit for optimizing of ITC.
7. Ensure every letter from dept. is replied providing sufficient documentation on record.

Acknowledgement to CA Roopa Nayak for vetting this article.