In pursuit of knowledge

Indirect Taxes

ITC and its scheme, procedure, documentation as well as issues of concern under Andhra Pradesh VAT Act, 2005

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 Pradesh.

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 dealer.

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% and 12.5%.

Ineligible goods

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.

Ineligible transactions

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 goods.

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 taxable goods

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 Input Tax.

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 purpose.

Ineligible dealers

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 XY 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.