In Pursuit of Knowledge

Input Tax Credit under APVAT Law

It is not possible to have VAT law, without the concept of ‘input tax credit’ (hereinafter referred to as ITC) embedded into it. One has to understand properly all the implications relating to ITC. Unless the concept is clear, there are bound to be innumerable problems and avoidable litigation. The business plans will also be upset, in case, the expected ITC is refused by the assessing authority. It is true that the dealers dealing in the goods, in respect of which ‘set off of tax’ has been granted under General Sales Tax Act, by various Notifications have some exposure to such a concept. But ITC under APVAT law is not comparable with those provisions in the GST Act. ITC under APVAT law has its own procedure, conditions and restrictions. The A.P. State Legislature has passed the A.P. Value Added Tax Act, 2005 (Act No.5 of 2005) (in short Act). The Act has also received the assent of the President of India. The Act and the Rules made thereunder came into force with effect from 1-4-2005.

Section 2 (19) defines ‘Input tax’ as follows:

“Input tax’ means the tax paid or payable under the Act by a VAT dealer to another VAT dealer on the purchase of goods in the course of business”.

There are basically two categories of dealers under VAT law, i.e., VAT dealer and TOT dealer. Under Section 2 (43), ‘VAT dealer’ means a dealer who is registered for VAT. Sub-sections (1) to (6) under Section 17 deal with the registration of a VAT dealer. It is clear from the above definition of ‘input tax’ that input tax is applicable only to purchasing VAT dealers. Hence it is not applicable to a TOT dealer. It is a tax paid or payable by a VAT dealer to another VAT dealer on his purchases of goods in the course of business. Both the purchaser and the seller must be VAT dealers. There must be purchase of taxable goods. Such goods must be purchased in the course of business and for use in the business. Burden lies on the claimant of ITC to prove that the goods are purchased in the course of business.

Section 13 deals with ITC to be allowed to a purchasing VAT dealer.

Sec. 13 (1) : ITC shall be allowed as per the conditions prescribed if any. It is the tax charged in respect of all purchases of taxable goods during the tax period, if such goods are for use in the business of the VAT dealer. ‘Tax period’ means a calendar month or any other period, as may be prescribed. (Sec. 2 (36). In respect of goods specified in Schedule VI, no ITC shall be allowed i.e., All liquors, diesel, petrol, AMS & ATF, which are taxable at special rates. Purchaser of Schedule VI goods is not eligible for ITC. But as per section 9, seller of Schedule VI goods is eligible for ITC, subject to the conditions in section 13.

TRANSITIONAL RELIEF

  • Sec. 13(2) (a): If the dealer is registered as VAT dealer as on 1-4-2005, he is entitled to claim credit of the sales tax paid under the APGST Act on the stocks held on the said date, subject to conditions if any prescribed.

  • See Rule 37. If on 1-4-2005, any VAT dealer has in stock ‘any goods’ on which sales tax had been paid, he shall be entitled to claim credit of sales tax excluding TOT paid under the APGST Act, if such goods are purchased not earlier than 12 months prior to the said date (purchased between 1-4-2004 and 31-3-2005).

  • Goods in respect of which purchase tax under APGST Act has been paid are also eligible for such credit (Rule 37(2)(f)(iii).

  • No sales tax credit shall be given in respect of the goods in Schedule I (exempted) and Schedule VI (Special rates) to the Act (Sub- rule (2)(c).

  • No sales tax credit shall be allowed in respect of the goods listed in Rule 20 (2), except as otherwise provided therein. (Negative or ineligible list of goods).

  • The sales tax credit allowed shall be subject to the conditions in Rule 20 – (Sub Rule (2) (d) of Rule 37).

  • If the invoice shows sales tax amount charged, it can be claimed and in respect of Sixth Schedule goods (VAT system goods) under the APGST Act, the tax amount shall be arrived at by applying tax fraction – Sub- rule (2)(f)(i). “Tax fraction” means the fraction calculated in accordance with the formula “r/r+100”, where ‘r’ is the rate of tax applicable to the taxable sale-Rule 3 (i).

  • Where sales tax amount is not shown separately in the invoice, 90% of the purchase value has to be taken and the tax amount has to be arrived at by applying tax fraction to such value – Sub-rule (2) (f) (ii).

  • Inventory of all such goods has to be taken without fail by 7-4-2005 – Sub-rule (2)(e). Claim in form VAT 115 has to be filed by 10-4-2005 – Sub-rule (2)(h). However in exceptional circumstances, claim may be preferred before the Deputy Commissioner of CT concerned before 30-4-2005. (However the dealers were permitted to file up to 30-6-2005)

  • The amount eligible as credit shall be claimed as credit in six equal sums from August, 2005 to January, 2006 – Sub-rule (3). It has subsequently been extended to March, 2006 by amending the sub-Rule.

  • All documents relating to the claim of sales tax credit shall be retained for four years from 1-4-2005 – Sub rule (2)(i).

  • Excess claim of sales tax credit shall be recovered – Sub-rule (4).

  • ITC ON OR AFTER 1-4-2005:

  • Sec. 13(2)(b): After the commencement of the Act, on registering as a VAT dealer, ITC is to be allowed, in respect of the goods purchased, if such goods are in stock as on the effective date of registration and if such purchases were made not more than three months prior to such date of registration. (For understanding ‘effective date of registration’, see Rule 6 and the examples thereunder).
     

  • WHEN TO CLAIM
     

  • Sec.13(3)(a) : ITC can be claimed under Sub Sec. (1) on the date, the goods are received by the VAT dealer, if he is in possession of tax invoice. Sec. 2 (35) defines ‘tax invoice’ as a sale invoice containing such details as may be prescribed and issued by a VAT dealer to another VAT dealer. This is the primary document and the proof for the claim of ITC. See rule 27 for more details about ‘tax invoice’.
     

  • ITC or sales tax credit can be claimed under sub-section (2) on the date of registration, if he is in possession of documentary evidence therefor. (Section.13 (3) (b):
     

  • Claim shall be made on Form VAT 118 within 10 days from the date of receipt of VAT registration by the newly registered VAT dealer. Claim shall be based on the invoices issued by a VAT dealer. ITC allowed on form VAT 119 shall be claimed on the first return itself. The authority issues VAT 119 within 10 days of receipt of VAT 118 – Rule 20 (1).
     

  • Rule 16(1) (b): ITC shall be claimed only on receipt of the tax invoice.
     

  • Rule 27(2): A VAT dealer who has not received a tax invoice may require the selling VAT dealer to provide a tax invoice.
     

  • Rule 27(4): ITC shall be claimed only against an original tax invoice.
     

  • Rule 27(6): If the purchasing VAT dealer loses the original tax invoice, the selling dealer shall provide a certified copy of tax invoice. Under Rule 27 (7), a request for such certified copy shall be made within thirty days after the date of the sale. Under Rule 27 (8), such selling dealer shall comply with the request within fourteen days after receiving the request.
     

  • INELIGIBLE OR NEGATIVE GOODS
     

  • Sec. 13(4): In respect of the prescribed taxable goods, a VAT dealer is not entitled for ITC. Rule 20 (2) enumerates the goods, which are not eligible for ITC, at clauses (a) to (p). These include motor vehicles, air conditioning units, natural gas, coal etc. Important: If such ineligible goods are subsequently sold without availing ITC, no tax shall be levied on a VAT dealer on his sale, as he was denied ITC on the purchases. VAT dealer shall maintain a separate account for the purchase of ineligible goods.
     

  • INELIGIBLE TRANSACTIONS
     

  • Sec.13 (5) : ITC is also not allowed on the following transactions:-

  1. Where a VAT dealer-cum-works contractor pays tax under sec. 4 (7) (b) or (c) or (d); i.e., who opts for composition. These clauses relate to payment of tax under optional scheme i.e., payment of tax @ 4% on the total value of contracts executed for State Government/local authority, payment of tax @ 4% of the total consideration received or receivable for any specific contract and payment of tax at the rate of 4% of 25% of the consideration received or receivable or the market value fixed for the purpose of stamp duty whichever is higher, respectively.

  2. Transfer of business as a whole. See Rule 36. Transfer of a business from one VAT dealer to another VAT dealer is exempt subject to the conditions therein.

  3. Sale of exempted goods except when they are exported to a foreign country. Schedule I enumerates goods exempt from tax. If exempt goods are exported, ITC can be claimed.

  4. Exempt sale. Sec. 2(13) defines ‘exempt sale’ as a sale of goods on which no tax is chargeable, and consequently no credit for input tax related to that sale is allowable. Goods may be taxable but the sale may be exempt from tax. Sale of exempt goods is different from exempt sale.

  5. Transfer of exempt goods to the agents/branches in the other States, otherwise than by way of sale. These transactions fall under Section 6-A of the CST Act, 1956.

  • INTERSTATE TRANSFER OF TAXABLE GOODS
     

  • Sec. 13(6): In the case of transfer of taxable goods to the branches/agents in the other States, ITC is allowed for the amount of tax in excess of 4%. For example, the input tax is paid @ 12.5%. Where the same/finished goods are transferred to the other States, ITC is allowed to the extent of 8.5% from out of 12.5% paid to the seller – VAT dealer. Further under Rule 20(8)(b), in respect of the 4% tax portion relating to the goods taxable at 12.5%, ITC is further allowed after applying the formula A X B/C, where ‘A’ is the Input Tax, ‘B’ is the taxable turnover + export sales + inter-state sales and ‘C’ is ‘B’ + inter-state stock transfers.

  • LIMITATION ON QUANTUM OF ITC

  • Sec. 13(7): Where tax is paid under sec. 4(7) (a) by a works contractor under regular scheme (without opting for composition) at the rates applicable to goods used, ITC shall be limited to 90% of the related input tax.

  • Sec. 13 (8) : Where the goods purchased are partly used for business and partly for other than business, ITC has to be limited to the extent it relates to the goods used for business. Burden lies on the dealer to prove that the goods are used for business purposes.

  • INELIGIBLE DEALERS

  • Sec. 13(9) : TOT dealer and casual trader are not eligible to claim ITC.

  • Sec. 13(10): Dealer covered by Explanations III and IV of sub-section (10) of section 2 are not eligible for ITC against or relatable to sale of scrap etc., whether by auction or otherwise. Under Explanation III, Central and State Governments are dealers. Under Explanation IV, there are 11 categories of dealers such as municipalities, railways, APSRTC etc.

  • Sec. 13(11) : Any VAT dealer, who purchases taxable goods from the said dealers covered by Explanations III and IV are eligible for ITC, on producing documentary evidence that tax has been charged.

  • START UP BUSINESS

  • Rule 9(4): Dealer registered as a start up business under sec.17 (6) (b) may claim ITC on each tax return for a maximum period of 24 months prior to making taxable sales. Under sub-rule (8), the Deputy Commissioner may at his discretion grant further time up to 12 months for making first taxable sale.

  • EFFECT OF CANCELLATION OF REGISTRATION

  • Rule 14 (4): Every VAT dealer, whose registration is cancelled under Rule 14, shall pay back ITC availed in respect of all taxable goods on hand on the date of cancellation. In the case of capital goods on hand, ITC to be paid back has to be calculated based on the book value of such goods on that date.

  • ZERO-RATED SALES

  • Sec.8 : Inter-state sales of taxable goods, exports falling under section 5 (1) and (3) of the CST Act,1956 and local sale of goods to any unit located in Special Economic Zone (SEZ) are zero-rated, subject to the conditions contained in sec. 10 and 14. As per sec. 2(47), ‘zero rated sale’ means a sale of goods in the course of inter-state trade or commerce, exports to outside the territory of India including sales in the course of export and sale of goods to any unit located in the SEZ. See Schedule II for zero-rated transactions. In respect of these transactions, though no output tax is payable, still ITC is allowed to the selling dealer. ‘Output tax’ means the tax paid or payable by a VAT dealer on the sale of goods to another VAT dealer or any other person vide section 2(22).

  • As per sec. 10(1) any dealer, who is not registered or does not opt to be registered as VAT dealer shall not be entitled to claim ITC for any purchase and shall not be eligible to issue a tax invoice.

  • As per sec. 14, a VAT dealer making a sale liable to tax to another VAT dealer shall issue at the time of sale, a tax invoice in such form as may be prescribed.

  • PAYMENT OF TAX

  • As per sec. 4(3), every VAT dealer shall pay tax on every sale of goods taxable on the sale price at the rates specified in the Schedules III, IV and V subject to the provisions of section 13. As per Rule 19(3), the tax payable by a VAT dealer for a tax period shall be calculated by the formula ‘X-Y’, where X is a total of the VAT payable in respect of all taxable sales made by during the tax period and Y is the total ITC eligible in the tax period. Vat payable minus ITC is the net tax payable during the tax period; i.e., calendar month.

  • TAX HOLIDAY UNITS

  • As per sec. 69(1), a dealer availing tax holiday as on 1-4-2005 shall be treated as unit availing tax deferment. Such unit is eligible to issue a tax invoice and to claim input tax credit as per sub-sec. (2).

  • BURDEN OF PROOF

  • Under sec. 16(1) burden lies on the dealer to prove that he is eligible for ITC.

  • OFFENCES & PENALTIES

  • Under sec. 16(2), where any document is filed in support of ITC, which is false, he is guilty of an offence punishable under section 55.

  • Under sec. 55(2) any VAT dealer, who issues a false tax invoice or receives and uses a tax invoice, knowing it to be false, shall be liable to pay penalty of 200% of tax shown on the false invoice.

  • Failure to issue a tax invoice is punishable with a penalty of Rs.5000 or 100% of the tax whichever is lower for each offence as per sec. 55 (1).

  • Violation of sec. 14 (failure to issue tax invoice) and sec. 16 (issuing or producing a document in support of false ITC claim) shall result in punishment with imprisonment for a term which may extend to three months or with fine or with both, under sec. 58.

  • REFUNDS

  • Sec. 38(1): Amount representing excess ITC is to be refunded to the exporter within 90 days of the claim.

  • Sec. 38(2): In respect of dealers, other than exporters, refund of excess ITC is to be granted at the end of the second year after 1-4-2005. Thereafter such excess credit will be refunded every year. However certain modifications are made which are discussed in the paper on ‘Salient features’.

  • CST TRANSACTIONS

  • Rule 35(7) : A VAT dealer making inter-state sales may adjust any excess credit available under the Act against any tax payable under the CST Act, 1956 for the same tax period. From out of the CST payable, excess ITC, if any may be deducted and net tax paid in the same month.

  • CST paid on the purchases from the other States by the VAT dealer cannot be claimed as ITC.

  • Turnover tax paid cannot be claimed as ITC.

  • CALCULATION OF ITC

  • Rule 20(3): In the case of a dealer who makes sales of all taxable goods in the month, whole of input tax goods may be claimed as credit.

  • Rule 20(4): Where the dealer buys and sells the goods in the same form, ITC can be claimed in full. If common inputs are used in making taxable and exempt goods, the dealer shall repay ITC related to exempt element of common inputs after making adjustment in the tax return for March for the period of 12 months.

  • Rule 20(5): Where taxable sales value is 95% or more, full ITC can be claimed. Where taxable sale value is 5% or less, no ITC shall be claimed. Such dealer also must make an adjustment in the month of March.

  • Rule 20(6): Where it can be established that specific inputs are meant for specific outputs, ITC can be separately claimed. However in the case of common inputs, ITC has to be claimed by applying the formula A x B/C. Similar adjustment has to be done in the month of March.

  • Rule 20(7): Where a VAT dealer makes taxable sales and sales of exempt goods and where inputs are common, ITC has to be claimed by applying the formula A x B/C. “Taxable Sale” means a sale of goods taxable under the Act and under the CST Act and shall include exports under sec.5(1) and 5(3) vide sec. 2(37). Adjustment in the
    month of March has to be made in this case also.

  • Rule 20(8): Where a VAT dealer makes sale of taxable goods and also exempt transactions of taxable goods, ITC to the extent of 8.5% portion can be fully claimed in respect of the goods purchased by paying 12.5% tax. In respect of purchases of goods taxable at 1%, 4% and for the 4% tax portion in respect of goods taxable at 12.5%, the said formula has to be applied. The said adjustment in the month of March has to be made. As per Rule 3(e) “Exempted Transaction” shall mean the transfer of goods outside the State by any VAT dealer otherwise than by way of sale (stock transfer falling under section 6-A of CST Act).

  • Rule 20(9): Where a VAT dealer makes sales of taxable goods, exempt sales and exempt transactions of taxable goods, the same procedure as in the case of Rule 20(8) has to be followed. As per sec. 2(13) “Exempt Sale” means a sale of goods on which no tax is chargeable and consequently no credit for input tax related to that sale is allowable.

  • Rule 20(10): Adjustment in the month of March in all cases has to be made in Form VAT 200B. On filing of such Form, the excess ITC claimed shall be paid back or the balance ITC eligible can be claimed in the return for March. Formula A x B/C as mentioned therein has to be applied.

  • Rule 20(10)(e): Any VAT dealer opting any method of ITC calculation specified from sub rule (5) to sub rule (9) shall be required to be under only one method for 12 months period ending March. However the method of adjustment in March shall be on the basis of latest option exercised by the dealer up to March.

  • Rule 20(11): The Deputy Commissioner concerned may impose any conditions or a particular method for a VAT dealer for the apportionment of ITC where the VAT dealer makes taxable and exempt sales and or exempt transactions.

  • Rule 20 itself has provided Illustrations for calculating the eligible ITC as per each sub- rule mentioned above.