The main aims in introducing
VAT are to create common Indian market in the country, to remove the cascading
effect to achieve neutrality, to curtail tax exporting to the other States etc.
The basic difference between the General Sales Tax and the Value Added Tax is
the Input Tax Credit (ITC). Governments have claimed that by giving ITC, there
will not be any cascading effect. But ITC permitted by various State Governments
is comparable with a pot with full of water in it and a small hole below. It is
sad that even after three years of introduction of VAT, the States have not
allowed full Input Tax as credit. Let us see what is happening in Andhra
Scenario in Andhra Pradesh
Input tax is the tax paid by
one VAT dealer to another VAT dealer in the State on the purchase of taxable
goods for use in the business. There is no separate mention of capital goods
in the Act. There is mention of only taxable goods.
Either such entire Input Tax
is given credit or a portion of such Input Tax is given credit. This is what
is known as ITC. Thus ITC may be either equivalent to or less than the Input
Tax depending on various circumstances and conditions.
ITC is allowed only to a VAT
For the purpose of claiming
ITC, the claimant-dealer shall be in possession of original tax invoice. It
has to be claimed only when the dealer is in receipt of both the tax invoice
and the goods.
ITC has to be separately
calculated in respect of the goods taxable at different rates; i.e., 1%, 4%
You will not get ITC on all
the goods you purchase. There are certain ineligible or negative list goods on
which you cannot claim such as motor vehicles, air conditioners, natural gas,
naphtha, coal etc. However if such ineligible goods are sold without availing
ITC, then you need not pay any tax, as you were denied ITC on the purchases.
You have to maintain separate account for the purchase of ineligible goods.
Goods specified in Schedule
VI are taxable at special rates. These are not vatable. These goods are
petrol, diesel oil, AMS, ATF and all liquors. Purchaser of these goods is not
eligible for ITC. Seller of these goods, who is liable to pay tax as the first
seller is however eligible for ITC subject to conditions prescribed.
CST paid on inter-State
purchases of taxable goods and Turnover Tax paid in the State cannot be
claimed as Input Tax.
If the VAT dealer executing
works contracts opts for composition scheme, he is not eligible for any ITC.
When the goods sold are
exempt (Schedule I goods), then ITC is not permitted. However if such exempt
goods are exported, it is permitted.
If the sale itself is exempt,
then also ITC is not allowed. Goods may be taxable but the sale may be exempt
and sale of exempt goods is different from exempting the sale of taxable
Where exempt goods are
transferred to other States (transactions falling under Section 6-A of the CST
Act) then also ITC is not allowed.
Inter-State transfer of
These are the transactions on
which no output tax is payable under the VAT Act. Hence Input Tax Credit is
restricted. Where taxable goods either in the form of finished goods or in the
same form in which they are purchased are transferred to the branches/agents
in the other States, in respect of inputs taxed @ 12.5%, ITC is allowed to the
extent of 8.5% from out of the said 12.5% tax paid to the selling VAT dealer.
In respect of the remaining 4% Input tax portion, A x B/C formula has to be
applied for arriving at the ITC. In respect of the common inputs taxed @ 1%
and 4%, also, ITC has to be arrived at by applying the said formula. In this
formula, A is the Input Tax, B is the taxable turnover plus zero rated
transactions and C is B plus inter-State stock transfers and sales of exempt
goods. By applying this formula, the quantum of ITC would be less than the
Where there are sales of
exempt goods and taxable goods, then also the formula A x B/C has to be
applied separately for the goods taxable at different rates.
Limitation of quantum of ITC
Where a works contractor pays
tax without opting for composition scheme, he is eligible for ITC of only 90%
of the Input Tax. Where a works contractor has both compulsory scheme and
optional scheme during a tax period, he has to apply A x B/C formula.
Where the goods are used partly for business purpose and partly for other
purposes, ITC has to be limited only to the extent they are used for business
TOT dealers and casual
dealers are not eligible for ITC.
Central and State
Governments, Local authorities, APSRTC etc., are also not eligible.
However a VAT dealer
purchasing goods from the Central and State Governments, Local authorities
etc., is eligible for ITC by proving that tax has been paid by him to the
seller. For example Railways selling scrap charge tax to the purchaser. Such
purchaser can claim ITC by filing proof of payment of tax.
Zero rated sales
An exempt sale is entirely
different from a zero rated sale. While an exempt sale does not permit
claiming ITC, a zero rated sale allows ITC.
These are inter-State sales
of taxable goods, Export sales falling under sections 5(1) and (3) of the CST
Act and sales of taxable goods to the units located in Special Economic Zones.
In respect of all these sales, no output tax is payable under the VAT Act, but
still ITC is allowed because they are zero-rated.
Tax is payable by applying
the formula X (-) Y, where X is a total of the VAT payable in respect of all
taxable sales made during the month and Y is the total ITC eligible in the
month. Thus VAT payable minus ITC is the net tax payable during the tax
period; i.e., calendar month.
There are no Tax Holiday
Units under VAT system. All Holiday units are compulsorily converted into
deferment units wef 1-4-2005. Such units have to first apply X–Y formula and
then defer only the net tax due if any.
If the dealer so chooses, he
may adjust any excess ITC against any tax payable under the CST Act for the
same tax period.
Specific inputs are those goods which are traded as such or which are used as
raw materials for the identifiable taxable finished goods, which are sold. In
the case of such specific inputs meant for specific outputs, ITC can be
claimed in full without applying the formula A x B/C.
Common inputs are those
goods, which are used for making sales of exempt goods, taxable goods and
stock transfers to the other States. In such case, formula A x B/C has to be
applied. For example in a cloth shop, there are sales of cloth, which is
exempt and there are sales of readymade garments, which are taxable. Readymade
garments are specific inputs and ITC can be fully claimed on those goods.
However plastic and jute carry bags are used for delivering both cloth and
readymade garments. Such bags are therefore common inputs. Hence Input tax
relating to such bags has to be taken as credit by applying the said formula.
The monthly turnover return
is in Form VAT 200. Every dealer having sales of exempt goods or inter-State
stock transfers and claiming ITC has to file Form VAT 200 A along with VAT 200
duly calculating the ITC as per the formula. Based on the annual figures he
may adjust the ITC by filing Form VAT 200B along with the March return.
Issues of concern
It is apparent from the
scheme that the Government is anxious to protect revenue by placing
restrictions, conditions and limitations and by specifying ineligible dealers
and ineligible goods etc., with a view to limit the claims of ITC. Whether
such steps would really create common Indian market in the country or remove
the cascading effect to achieve neutrality is a big question.
Experience of the dealers is
that the whole process of calculation of eligible ITC is complicated and
cumbersome. Any excess claim of ITC by mistake is visited with imposition of
penalty, without relevance to the fact whether is it intentional or not.
Denial of ITC on coal,
naphtha and natural gas, which are essential raw materials in the manufacture
of other goods has been causing concern.
VAT is distinguished from
General Sales Tax by ITC only and placing so many restrictions and limitations
on ITC may not make it better than GST.
Disputes on specific and
common inputs are on the increase. Where the dealer claimed full ITC by
stating that they are specific inputs and specific outputs, the department has
been disputing such claim and is restricting by applying the formula.
ITC is not allowed on the
construction material used to construct buildings where the claimant is not a
works contractor. Substantial investments made to construct factories and
buildings are kept outside the purview of ITC. What exactly is construction
material has not been defined.
Coal is kept in the negative
list with retrospective effect in December, 2005. The dealers are required to
pay back ITC availed for 9 months which has upset their business plans.